Healthcare Operating Costs –
Effectiveness or Efficiency?
by Walt Tomenga and Terry Myers

Imagine a world where hospitals continually decrease administrative costs while simultaneously providing the highest quality results. Picture a hospital that reduces expenses 30%, reduces the time it takes to complete a task by 70%, reduces the investment in inventory by 50%, and submits 99% of its patient billings “accurate” the first time. If this sounds to good to be true ask an executive of any company that has implemented lean thinking. These results have been accomplished and even exceed, in some instances.

In the 1980’s and 90’s manufacturing executives faced many of the same dilemmas hospitals face today – lack of space, increasing demand for quality, and pressure to reduce costs. Their world was changing. Customers were demanding a new pricing formula. The old way was Cost + Margin = Price.
Now it’s Price – Margin = Allowable Cost.

During those years, some executives complained about unfair market conditions and suggested that their circumstances were the results of unfair competition and unreasonable customer expectations. Some even insisted, and received, increased government action to limit competition.

Still others took a wait and see response. They continued to work hard at doing the same old things and congratulated themselves when their efforts incrementally improved productivity, sales, costs, and customer satisfaction. Today, if these companies exist at all, they are the ones moving off shore. From their point of view, they have eliminated all the waste, driven down costs, and now they have surrendered to producing in a less threatening environment.

Yet another group of executives concluded that they were witnessing a permanent shift in the competitive landscape. The same old way of doing business was actually the cause of their problems. They accepted new requirements and looked for new answers. They found the answers in a concept that is referred to by many names (currently called Lean Thinking), but meaning the same thing – “Business Simplification.” They discovered that business simplification reduced labor cost to less than 5% of the product’s expense, and the time it took to make a product by 70%. They also increased the accuracy of their data, inventory, and billing statements to over 99%.

Business simplification is a philosophy that focuses more on operational effectiveness rather than efficiency. It recognizes that focusing on individual efficiencies can adversely impact overall effectiveness, and it gives a false sense of accomplishment that produces only short-term gains.

The successful companies focused on the entire “value stream.” As they created new relation-ships with suppliers, they enjoyed additional long-term improvements in order time, costs, inventories, and errors. They learned the skills that provided even greater flexibility to respond to customer’s needs. Thus the new linkages provided resources to increase market share and customer loyalty. Focusing on effective-ness led them to levels of efficiency higher than anyone thought possible.

Right about now many are thinking – this is interesting, but it won’t work in hospitals. Or, we tried it once and it didn’t work for us. Let us assure you – it does work in hospitals and medical organizations. The recent article re-printed in the February 13, 2004 The Friday Mailing by Jeff McAuliffe, Tom Moench and Joan Wellman titled, The Lean Enterprise Meets Health Care only scratches the surface. In fact, a Google search for “lean health care” reveals many articles on the successes hospitals have had with business simplification processes.

It has been our experience that when organizations say, “We looked into it and it won’t work for us, or we tried that once, or we’re already lean;” means that they really don’t understand the philosophy business simplification. It’s not an event. It cannot be delegated. It’s a proven – top to bottom – management philosophy and system for operating organization. It requires a total senior management’s commitment, and the re-education of key people in an organization. Equally important it requires experienced and skilled outside coaching to assure that it is executed correctly, quickly, and without any major disruption.

Business simplification is a natural fit for the healthcare community where everyone – patients, professionals and staff – want to be treated as a person, rather than as a number. In fact, it begins with the question, “What is value to the patient, professional and staff?” Then it goes about eliminating or minimizing wasteful activities and cost that that does not contribute value.

Further, business simplification is all encompassing and holistic. It integrates Six Sigma, TQM and other improvement methodologies into a proven management process and philosophy to drive-down overhead, maximize DRG margins, eliminate scheduling problems, and reduce space needs, while simultaneously improving service effectiveness. Most importantly, it discourages any investment in computer systems and technology until there is a clear linkage between people, process and value.

Like manufacturing executives in the 80’s and 90’s there will be some hospital executives who will say, the current crisis of increasing demand and inadequate income will pass. Some will try to wait it out and work hard doing the same thing while being content with incremental improvement. Others will lobby for more government intervention and control. Some will need to feel threats of public and private payers before taking action. The danger is that by the time they discover that doing the same things, yields the same results, and it will be too late.

Meanwhile, progressive executives will accept the new standards and look for new operating solutions. They will embrace business simplification, recognize its long-term benefits, and discover the power of effectiveness. Patients, professional and staff will embrace it. Make it your priority.

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Presented by Three Dimensional, LLC.
For more information contact Walt Tomenga or Terry Myers at 515-240-1510 or info@3-dllc.com