By Kevin Meyer
One of my pet peeves is the pervasively popular perception that increased spending somehow must improve the quality of the product. Too many people believe that most processes are zero-sum entities, instead of realizing that the churning that goes on in the process itself creates a continuum from incredible value at a high efficiency to mediocre performance at high cost. The examples are everywhere... one that really annoys me is the thought that increased spending on education creates improved educational quality as measured by student performance. The actual data points to many educational systems, including some that are public and must provide services to a wide array of student capabilities, that have high performance with very low per-student spending.
Providence Regional Medical Center in Everett, Washington is confounding traditional popular belief on the healthcare side of things. While most hospitals are complaining about low Medicare reimbursement rates and some are even going out of business as a result, Providence is doing a bit better.
Almost 60% of U.S. hospitals report losing 20 cents on the dollar for every elderly patient that comes through their doors. They make up the difference by charging the under-65s a far higher fee. But Providence breaks even on the elderly, even though Medicare pays about $1,000 less per enrollee in the hospital's region than the national average. The hospital accomplishes this feat while winning a doctor's satchel full of national awards for top-notch care, placing it among the elite 5% of all U.S. hospitals.
High quality at a low price. Every other industry strives for that combination, but a hospital that does both is all too rare. Providence and its cost-efficient brethren demonstrate that quality care can be delivered at an affordable price, provided hospitals can be persuaded to rethink decades-old practices.
Not too shabby - in the top 5% of U.S. hospitals in terms of quality of care, but making a profit even with lower than average reimbursement. Why isn't this more common?
The crazy world of hospital economics does not offer a lot of incentives to change. Both Medicare and private insurers reimburse on a piecework basis—known as fee-for-service—that encourages hospitals to treat more, prescribe more, and test more. Economists refer to this arrangement as a "value-blind" payment system since no premium is paid for quality. Consequently, hospitals have no financial motivation to invest in productivity-enhancing computer technology, management experts, or efficiency research—and by and large, they don't.
There are no proposals in either the House or Senate reform bill to scrap the fee-for-service system. As a result, the Congressional Budget Office expects the legislation to do little to halt the medical inflation that has pushed health-care spending to 16.2% of the gross domestic product.
So how does Providence create value and quality at a lower cost? By thinking a bit differently, and challenging the knowledge, experience, and creativity of their workforce.
Forty percent of its annual revenues come from Medicare, and an additional 13% from Medicaid. Commercial insurers account for only 39%. Dependence on Medicare has forced it to focus on taking costs out of its operation rather than maximizing revenues.
To get those savings, the hospital tries to standardize best practices whenever possible. "There is a tremendous variation in medical delivery that is not quality driven," complains Dr. James Brevig, director of cardiac surgery at Providence. Doctors and nurses are often reluctant to analyze and change their methods because it would mean revamping long-accepted treatments or routines. As a result, says Brevig, "there are no standards in hospitals. Why is that? It's crazy. No other industry is like this."
Standard work - a fundamental concept in lean manufacturing. And more changes.
The current CEO, 48-year-old David T. Brooks, a fast-talking Detroit native, took over two years ago. He says the administration is open to suggestions from any and all staffers. "We have scorecards for everything around here, which measure both quality and efficiency. If all we had were great clinical outcomes but costs kept rising, that just wouldn't be good enough."
The staff embraced the challenge to innovate. The nursing team came up with the idea of checking on patients every two hours without waiting for a call button, to see if they need help walking to the bathroom or moving about their rooms. Ten percent of fatal falls by the elderly in the U.S. occur in hospitals. This one change at Providence reduced falls by 25%, according to chief nursing officer Kim Williams.
Leveraging knowledge and creativity to create a multitude of small improvements. Kaizen, not failed kaikaku. The result?
The Centers for Medicaid & Medicare Services, which administers Medicare, tries to encourage fiscal restraint through its reimbursement rates, but hospitals consistently argue that these rates are too low. MedPAC estimates seem to support this position—it calculates that hospital Medicare margins were -7.2% in 2009.
Brooks says Providence's 2009 operating margins were 6%, despite its heavy dependence on Medicare.
High quality, and profit, with less spending. It just requires a focus on improving the process.