Healthcare Costs Can Be Cut

Healthcare cost can be cut. So says a Pittsburgh Tribune-Review article by the same title on September 14, 2006. The examples from Virginia Mason Medical Center do demonstrate that healthcare costs can be cut, but is this enough?
The article cites statistics from Robert Mecklinburg of Virginia Mason Medical Center, that half of all health care dollars spent is wasted. This is $1 trillion wasted on poor quality care, safety issues and an incentive plan that rewards mistakes. This is waste that can be cut out through kaizen.
The ideal condition of a society is not to have the degree of illness, trauma and poor health as we do in the U.S. Our healthcare institutions are focused on firefighting rather than on fire prevention (healing the ill rather than preventing illness). This is by nature a very expensive way to keep a society healthy, with or without the 50% waste.
If we think deeply about the goal of healthcare organizations, it is to keep people healthy. This is not a question of cost. It is not a question of the quality of patient care. It is to avoid the need for patient care. It is a question of prevention. Yet if healthcare organizations succeed in this mission, their revenues will decline. I have heard hospital executives talk about applying the savings from Lean toward providing more indigent care or community outreach programs to promote daily good health, yet none of them considered the latter as a revenue model.
A Shmula blog titled The Profit Tree raised the point that the combination of increasing revenue and cutting costs is ideal. Mark Graban at the Lean blog said about the situation at the Ford Motor Company:
Lesson for me — don’t EVER be part of a company that isn’t growing. Shrinking is painful. As management, don’t let it get to that. It all falls apart if you’re not growing, no matter what the business.
Healthcare should be more about prevention than about medication and surgery. Of course like the poor, the sick will always be with us. The lesson for me is that if I were a healthcare organization my long-term plan would be to shift a large part of my revenue towards services aimed at prevention. It’s something that by nature you can provide at a much lower cost, and what customer wouldn’t prefer preventive care to surgery?

3 Comments

  1. Mark Graban

    September 16, 2006 - 7:28 am

    Cost is just one metric. It gets a lot of focus because, well, that’s how the business world, media, and society tend to look at things I guess. Lean healthcare is about 1) patients and 2) employees. For patients, safety, quality, time, and cost are important — wait, that sounds just like the classic manufacturing SQDC metrics. Safety and quality go together – which is good for patients AND it decreases cost.
    As long as “reducing cost” doesn’t mean cutting heads, slashing budgets, or the other things that manufacturing companies typically do, it’s OK to want cost reduction. You just don’t focus on cost reduction. If you focus on safety, quality, time — AND employee satisfaction, then cost drops.
    Focusing on cost is putting the cart before the horse.
    Now the whole prevention thing — that’s a whole other level of complexity, sort of like Toyota’s goal of a pollution free car. In the short-term, build the “polluting” cars as efficiently as you can, while also focusing on research in the long-term.

  2. Simon

    September 24, 2006 - 5:11 am

    I agree 100% with Mark. Of the three primary value stream metrics cost is the least important because it is dependent on the other two – lead time and first pass rate. Put this another way – if your lead time is long and your first pass rate is low there is no way the unit cost will be low. So, the focus of improvement is to reduce lead time (eliminate non value added steps) and improve first pass rate (eliminate sources of errors) – get those right and the revenue increases, cash flow improves, and costs come down. As Mark says – just focussing on costs is the wrong approach. If healthcare organisations are just in it for the money and put patient care and staff care in second and third place then they are creating a perverse incentive to maintain the status quo. This the THE MOST DANGEROUS situation to be in. If that is what’s happening in your organisation and you don’t like it then you’d be better to go and work for one that understand the Three Wins and are strategically focussed on achieving them. The win-win organisations who deliver better value-for-money will outcompete their greedy win-lose competitors – and people are not stupid – they will see it and when there is a choice they will choose. The greedies will go out of business howling, scratching, fighting and getting nasty – but they will go – and eventually peace will be restored. It happened in the car industry and it will happen in healthcare.

  3. LaMar

    November 12, 2007 - 3:02 pm

    With 2 – 4% margins there is no room for providers to shift revenues to prevention. The better solution is for payors to shift the same or more amount for prevention.
    You also assume that current providers are the best enabled to provide preventative care. It may be that other entitities can provide preventative care much more efficiently.