What Can Hospitals Learn from the Manufacturing Industry?
In a recent Wall Street Journal article, Dr. Donald Berwick, a Harvard Medical School faculty member, questions the status quo and calls for hospital re-engineering using methods that the manufacturing industry has been using and perfecting over several decades.
Hospitals in the UK have been putting these practices into use since 1998 when the National Health Service decided to reduce patient waiting times for surgery and outpatient clinic visits.
Thirty years ago the labor component for manufactured goods was in the 25-30% range. Now it is closer to 5-10%. By comparison, many hospitals currently incur about 40% of their costs in labor. Also, U.S. hospitals today are faced with multiple pressures:
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Increasing patient loads
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Decreasing reimbursement levels
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Increasing hospital operating costs
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Shortage of qualified healthcare staff
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Limited hospital facilities
Under these conditions, hospitals have developed extensive experience at implementing cost cutting campaigns to maintain profitability. While these efforts have made a difference, profit margins continue to shrink from year to year. And with the planned reductions in Medicare payments through the year 2004, many hospitals are wondering how they can continue to cut costs enough to be able to stay in existence.
Over the last 30 years, manufacturers in the U. S. have had a similar experience. Substitute intense marketplace competition from innovative competitors (including Japan) in place of reduced Medicare payments and the result is similar to what manufacturing has been faced with. Their focus was on major cost cutting initiatives and the manufacturing industry went through wild swings of downsizing, rightsizing, reorganizations, etc. However, during this time, many innovative programs were initiated including: Total Quality Management (TQM), Process Re-engineering, Lean Manufacturing, Six Sigma, and Constraint Management.
As a result, many manufacturers are more focused on improving their overall throughput. The way in which they are doing this is to transform their efforts from a functional perspective, where the emphasis was on optimizing individual departmental efficiencies - to a process perspective, where the emphasis is on optimizing the process for the entire organization. They are now able to identify pinch points that are limiting overall performance and develop strategies that exploit them for significantly improved revenues and profits. In essence, their focus has shifted from cost cutting to revenue enhancement. From cost savings efforts, a dollar saved flows to the bottom line as a dollar of profit. But when pinch points are turned into leverage points, a dollar invested can produce a multiplication factor of 3X, 6X or more in profits on the bottom line.
This methodology is particularly beneficial to hospitals because there are substantial fixed costs due to facility and equipment investments. In order to best prepare for future declines in Medicare and Medicaid revenues, hospitals should best utilize the intervening time to shore up their revenue stream and increase profits, while continuing to identify improved cost-effective techniques of delivering healthcare services.
Chet Kagel
HPK Group, LLC
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