Wednesday, May 23, 2012

Focus and Leverage Part 117

This is my final posting of my series on healthcare and I encourage everyone to get a copy of Performance Improvement for Healthcare, because it is a classic.  This book is not just for healthcare providers because the lessons learned by reading it apply to all industry segments.  My congratulations to the authors for their brilliant work!!  Again, I will use quotation marks to indicate direct lifts from their book.

“Healthcare is expensive. This claim has become so commonplace that it seems no discussion about healthcare is complete without mentioning its cost. While the severity of the financial crisis in healthcare is reported widely in the United States, even countries with more socialized health systems are heavily burdened by high expenditures in treating patients. Whether it is a government, an insurance company, or an individual—somebody must pay, and ultimately, it is us as a society. An economist once said, “There is no such thing as a free lunch.” Had he been a patient, he might also have said, “There is no such thing as free healthcare.” On some level, we all pay for healthcare.”

“If costs are high and we all pay for healthcare, then it might follow that the primary issue facing healthcare is to reduce costs. While the impact costs have on healthcare delivery and outcomes is undeniable, concentrating primarily on costs is somewhat shortsighted. Reducing costs is not necessarily the same thing as increasing a hospital’s financial well-being: Financial viability includes revenue as well as costs. As long as revenues cover costs, the relevancy of costs diminishes because a hospital’s overall financial viability is ensured.”

“Rather than focus on costs only, perhaps healthcare systems should do something considered taboo—embrace that they are a business. And like all successful businesses, healthcare systems need to emphasize revenue beyond costs. If revenues increase, healthcare systems could reinvest the additional cash to provide better-quality care to their patients, expand coverage throughout communities, and increase profitability. After all, the potential to reduce costs is finite, limited by an organization’s budget, whereas the potential to increase revenues is infinite, restricted only by however the market is defined.”

“There is evidence from multiple disciplines to suggest that a focus on costs paradoxically can increase costs. This point is illustrated by the following: Consider a clinic performing a simple x-ray process. Suppose that there are three steps (each with one resource) that all patients must go through in the x-ray service process. And suppose that registration takes 10 minutes, the x-ray scan takes 20 minutes, and billing/discharge takes 5 minutes, as shown in Figure 2.14.  A “cost world” mentality would be to try to improve each component of the process to reap cumulative savings. Such thinking, as is widespread today, would have little difficulty justifying a one-time expenditure to implement a new billing system that saves two minutes, reducing the final step of the billing associate’s time (the rate for one minute equals the billing associate’s annual salary divided by the minutes he or she works in a year) multiplied by the number of patients seen by the x-ray clinic per day:”  (Note: I apologize for this gap, but I couldn't figure out how to place this equation correctly)

Figure 2.14

“If the payback period, return on investment (ROI), or net present value (NPV) were favorable, the new billing system would be approved. This example seems unexceptional and rather ordinary in today’s healthcare world.  However, the bottom-line impact of the new billing system is worth examining. The cost appears as an Operating Expense on the clinic’s bottom line, yet no positive effect can be found elsewhere on the bottom line—no new revenue is brought in as a result of the improvement because the same number of patients were treated as before, and the billing associate’s salary remains unchanged. Thus the ROI of the new billing system is negative.”

“If the capacity of the resources for each step of the process is analyzed using value-stream mapping—registration (6 patients per hour), x-ray scan (3 patients per hour), and billing per discharge (12 patients per hour before, 20 patients per hour after)—it becomes apparent that the x-ray scan step limits the number of patients that can be serviced overall, and therefore, this limitation determines the clinic’s potential revenue, as shown in Figure 2.15. No patients can flow through the entire system faster than the x-ray scan step can process them. Assuming that there is ample demand for the clinic’s services, improving the x-ray scan step of the process by increasing the number of patients who can undergo x-ray scanning per hour is the only way to grow revenue by changing the capacity of steps in this process.”
“The x-ray scan step is the only step that, if improved, will not just benefit that local clinic but also benefit the entire process globally. Improvements to this step allow more patients to be serviced by the overall system. This improvement would be reflected in the clinic’s bottom-line financial viability because not only would its cost be represented as Operating Expense, but an increase in profit also would be visible as well owing to the increased number of patients using the clinic’s services.” 

Figure 2.15

“Given that a manager’s attention is limited, improvement efforts should be focused on areas that have a global, system-wide impact in assisting a healthcare organization reach its goal. In the x-ray example, one way of measuring the process in relation to the goal of the clinic is the number of successful outputs, that is, patients with completed x-rays. This rate of output corresponds to the traditional definition of the Throughput of a system as developed in Constraints Management. The Constraints Management definition of Throughput will be reviewed later, but this meaning will be sufficient in this context.”

“As defined earlier, the factor in a process that inhibits it from reaching its goal and achieving more Throughput is called a constraint. In this case, since the constraint is a resource, the x-ray machine, the constraint is called a bottleneck. This example demonstrated that improving the billing system, a nonbottleneck, did not improve the Throughput of the overall x-ray clinic’s service process. Rather, it caused only a local improvement. Goldratt also stated, “An hour saved at a nonbottleneck is a mirage.” In other words, an improvement without a system impact is no improvement at all. For example, in an eight-hour workday, the x-ray clinic could service only 24 patients no matter whether the billing system is improved or not. Hence, speeding up the billing step does not affect the overall Throughput of the system.”

This completes my series on healthcare and it is my hope that my readers will spread the word about this book.  Our country and the world at large have needed this book for a long time because if the teachings within this book are followed, I am convinced that healthcare costs can be brought under control.  As I’ve said before, Performance Improvement for Healthcare is destined to be a classic!!

Bob Sproull

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