In 2000, Intuitive Surgical launched the first surgical robot, extending minimally invasive surgery into a new realm. Since its inception, the company has sold more than 1,400 vinci surgical systems, and continues to grow the business through system redesigns and procedure expansions. Currently, the largest volumes of procedures performed are prostatectomy, hysterectomy, and heart valves.

The benefits of minimally invasive surgery are many; better patient outcomes, shorter length of stay, and less blood utilization; and some feel that the addition of a surgical robot further benefits the patient. While the clinical benefits may be debatable, there is a level of demand from both physicians and patients. Doctors market their robotic skills in an effort to build their business by attracting those patients who feel robotic surgeons are more desirable. Hospitals must have a robot to recruit the surgeons who perform these state-of-the-art procedures, which in turn leads to higher surgical volumes.

For most hospitals, the $2 million investment is a sunk cost, there is no guarantee that the robot will attract a higher surgical volume. Surgeons may be on staff at various hospitals in an effort to expand their own patient base. Without a contractual agreement in place, a surgeon can easily move his or her surgical volume to a new hospital, for example, East Hospital buys a robot in 2005 to attract Dr. A’s business, in 2008 West Hospital buys the new generation robot and the Dr. A moves his entire robotics business to West Hospital, now East Hospital, to begin rebuilding that lost volume.

Thus, the discussion begins about the opportunity costs of the $2 million investment, such as investing in the necessary information technology, upgrading existing medical equipment, or even expanding bed capacity. Financing alone can be a challenge for some hospitals, if you are not a member of a larger network, or beneficiary of a trust or gift, a capital expense of this size may need to be financed. As will be seen later, the opportunity cost of capital must also be considered in this decision.

It is also important to consider other fixed costs, such as the service contract that starts in year two and costs about $150,000 per year; a hospital that performs 150 robotic cases per year will automatically incur an additional cost of $1000 per case. Specially trained manpower is also required for the surgical team. In this situation, management may have the ability to convert this from a fixed cost to a variable cost if the main OR is operating on a different budget and cross-staff coverage is expected during periods of low robotic volume. One last budgetary consideration is marketing, as mentioned, if the primary driver for the purchase is to attract market share, it will be important for patients to be aware of the hospital’s offerings.

Other variable operating expenses include the robotic instruments, special drapes, and other accessories that bring the total specific variable cost of the robot to about $1,500 per case, which exceeds the standard requirements for laparoscopic surgery. It is important to note that at this time there is no additional reimbursement from insurance payers to cover this cost. Therefore, there is an additional estimated cost of $2,500 to perform the robotic surgery (not including capital investment) to consider; for most hospitals, this additional cost will not be covered, resulting in a negative contribution margin. When evaluating the opportunity cost of capital, it is important to note that these procedures will not generate a profit for the hospital, so this project will have a negative net present value.

In conclusion, the decision to invest in a surgical robot is primarily based on the anticipated future need to recruit quality surgeons and the desire to retain or regain experienced robotic surgeons who will bring not only robotic but also non-robotic cases. It is these non-robotic cases that some institutions predict will offset negative investment. By partnering with surgeons in both the decision-making process and program design, hospitals can expect to retain existing volume and grow into the future.