Curing Hospital’s Rising Costs
Start Focusing on Operations
In the 1980’s, while other industries such as manufacturing and retail felt competitive pressure to modernize their logistical systems, hospitals were subsidized to increase capacity and insurers payed whatever hospital demanded. The lack of competitive pressure to improve operations created an inefficient and often chaotic hospital system. Bottlenecks in hospitals shifted with the time of the day. Patients often arrived in the early mornings only to wait hours before checking in. Surgeons anticipated this and arrived after their scheduled times. Hospitals inadvertently batched their services, and created bottlenecks at almost every stage in hospital operations.
In the later 1980’s, healthcare organizations, including hospitals, insurers, and government, began efforts to reduce fees and incentive operations. Attempts to lower costs included mergers and acquisitions, downsizing/ cost cutting measures, and changes in payment plans. To offset the influence of Healthcare Maintenance Organizations (HMO’s), hospital mergers where thought to reduce costs but often just increased their bargaining power. To date, the most common form of cost cutting measures were changes in payment plans. Moving from a fee-for-service payment model and eventually to capitation, healthcare organizations tried to curb the fundamental economic principles that caused so many issues.
Economic Issues Leading to Poor Healthcare Operations
The economic issues of healthcare organizations stemmed from the existence of a third party (insurers) between patients and providers. Insurance created an economic environment that lead to moral hazard and demand inducement.
Moral hazard refers to the additional health care that is purchased when a person becomes insured. Under conventional theory, health economists regard these additional health care purchases as inefficient because they represent care that is worth less to consumers than it costs to produce. Patients would seek unnecessary and often costly treatment because they did not have to pay out of pocket for such expenses. For example, a patient may spend an extra day in a hospital bed because it is covered by insurance.
Demand inducement occurs because physicians are able to influence patient demand under a fee for service payment structure. changing incentive structures with the involvement of a third party payer, and empowering patients through information and education. This assumes the healthcare providers act to maximize their own profits without providing any extra benefit to patients. To respond to moral hazard and demand inducement, changes in the incentive structures with the involvement of a third party payers, and empowering patients through information and education, had to be made.
Healthcare operations were considered less important than fixing the economic issues facing the healthcare system. Changes to federal regulation including Medicare and Medicaid hardly ever took a large stance on incentivizing productivity and efficiency.
There have been efforts made to increase efficiencies however this was still done by changing payment structures. Lower costs were achieved by changing payment structures to incentivize fast patient turnover. From 1990 to 2000, the average length of stay for inpatient procedures declined 40% from an average of 7.5 days to 4.5 days. although through put for inpatient care increased, the bottleneck shifted to acute care departments such as operating rooms, Intensive Care Units (ICU’s) and Emergency Departments.
Hospital CEO’s have been too distracted to focus on day to day operations and logistics. At first, hospital executive responded to bottlenecks by adding capacity such as adding more beds or expanding operating rooms. This can be capital intensive and not worth the extra financial risk. Executives should consider hiring hospital consultants to fill in the much needed operational improvement. Hospital Consulting has become very popular as MBA’s and healthcare professionals use various techniques and analytics to improve hospitals and clinics.
Smoothing Healthcare Operations
Queuing theory and just-in-time processes are usually associated with a factory floor but its exactly what today’s hospitals critically need. Manufacturing industries have used these ideas for decades and many businesses derive their competitive advantage from their efficient operations. Service industries such as telecommunications and fast food have adopted principles to lower costs and increase quality. Now that hospitals are under more economic and political pressure to reduce costs, its time for adopting principles that lead to operational excellence.
There is significant advantages to changing the view of healthcare operations. Waiting times can be reduced, unnecessary capacity can be sold, assets can be optimally utilized. Most healthcare organizations will gain advantages by being able to do more with less. They can avoid costly investments and still increase their capacity.
Hospital CEO’s need to monitor the end-to-end processes of patients through the hospital system.
The basic rule to understand how patients flow through the hospital system starts with:
Little’s Law- the fundamental long-term relationship between Work-In-Process, throughput and flow time of a production system in steady state. (Inventory =Throughput × Flow Time)
When we convert the terms of little’s law to be relevant to healthcare we get : Patients in the hospital = average arrival of patients x average Length of Stay (LOS)
At first look this looks very simple, but operation experts use this law to understand how variability can effect a process. This law should be applied not only to the system as a whole but to small end to end processes.
Hospital Consulting Services from Operation Consulting Group
Operation Consulting Group applies proven supply chain management principles to hospitals and clinics. Hospital consultants can reduce costs by optimizing procurement, re-evaluating capacity needs, maintain optimized hospital scheduling, using hospital operational analytics.