By November 13, 2008 4 Comments Read More →

BIDMC’s Lean Response to the Economy

Running a hospital: It’s the economy

You might have seen in the news that hospitals showed record profits in 2007, according to Modern Healthcare.

U.S. community hospitals enjoyed record profits in 2007, posting $43 billion more in revenue than expenses and creating the largest single-year jump in profit margins in at least 15 years, according to figures released by the American Hospital Association.

Net revenue at the 4,897 community hospitals grew 6.7% to $626 billion in 2007, while aggregate expenses grew 5.7% to $583 billion. Although both rates of growth slowed compared to 2006, expenses grew slower than revenue—a trend that has held since 2002—producing an overall profit margin of 6.9% for 2007. Community hospitals include nonfederal, short-term, general and specialty hospitals.

Even for a “non-profit” organization like a hospital, some level of profit is required to buy new equipment and offer new services for the future. I’m not playing the “profits are bad” game, believe me. 6.9% is a relatively high profit margin for hospitals — I thought they were historically about the same as what you could get keeping money in the bank. It’s a good thing there’s often a mission-based or philanthropic cause behind many hospitals, because it really isn’t the biggest money maker out there. $43 billion in profits might sound like a huge number, but not when spread across the whole industry across the country.

It’s easy to look at those profits and ask “why aren’t you doing more to improve quality or service” But, that question is based on the mindset that better quality costs more. With Lean, hospitals are proving that process improvement leads to the elimination of waste, which both improves care AND lowers costs. This process improvement methodology is very different than traditional cost cutting (slashing budgets or cutting heads).

We can only hope that hospitals saved away some for a rainy day, because times are getting tight. I hear reports from different hospitals that it’s full-blown “cost reduction” mode as financial forecasts are down, way down, for 2009. I’ve heard hospitals report that surgery volumes (a big money maker for hospitals) are down 20% as people postpone anything the least bit optional or elective.

In his typical open and transparent style, Paul Levy, the CEO of Boston’s Beth Israel Deaconess Hospital shared some communication to his staff about the financial crisis and their response on his blog.

Lean will continue to be a part of their strategy and they are working to avoid layoffs, some excerpts:

On supplies, we will bring the very successful multidisciplinary process that physicians and hospital managers have used in the OR Supply Committee to standardize supplies and streamline purchasing to other areas of the hospital – specifically to procedure areas across the hospital, where we use a lot of devices and supplies. The OR Supply Committee has shown us that we can save millions annually while improving safety and outcomes – we will do the same in procedural and other areas.

Finally, we will continue to run LEAN rapid improvement events and respond to BIDMC SPIRIT call-outs to look for ways to make enhancements in our processes. We have learned that these events and ideas not only improve the work environment, but also often result in financial savings.

I know of one other hospital, first hand, where the CEO told his managers and leaders that Lean is the single best method for them to use to eliminate waste and improve processes during down times. It wasn’t the old story about, again, slashing budgets and cutting heads. This is a great opportunity for hospitals to truly improve their performance, using Lean, in a way that benefits everybody — patients, hospital, employees all.

What are you seeing or hearing in your hospital? Are your leaders doing more to talk about Lean during these times?

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Mark Graban's passion is creating a better, safer, more cost effective healthcare system for patients and better workplaces for all. Mark is a consultant, author, and speaker in the "Lean healthcare" methodology. He is author of the Shingo Award-winning books Lean Hospitals and Healthcare Kaizen, as well as The Executive Guide to Healthcare Kaizen. His most recent project is an eBook titled Practicing Lean that benefits the Louise H. Batz Patient Safety Foundation, where Mark is a board member. Mark is also the VP of Improvement & Innovation Services for the technology company KaiNexus.

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4 Comments on "BIDMC’s Lean Response to the Economy"

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  1. Anonymous says:

    Very timely… the NY Times had an article about this today too.

    NY TIMES LINK

  2. Anonymous says:

    From that article:

    Shands HealthCare, a nonprofit Florida hospital system, cited the poor economy and lower patient demand when it announced last month that it would shutter one of its eight hospitals and move patients and staff to its nearby facilities.

    The 367-bed hospital that is closing, in Gainesville, lost $12 million last year, said Timothy Goldfarb, the system’s chief executive. “We cannot carry it anymore,” he said.

    Some other hospitals, while saying they have not yet seen actual declines in patient admissions, have tried to curb costs by cutting jobs in recent weeks in anticipation of harder times. That includes prominent institutions like Massachusetts General in Boston and the University of Pittsburgh Medical Center, as well as smaller systems like Sunrise Health in Las Vegas.

    “It’s safe to say hospitals are no longer recession-proof,” said David A. Rock, a health care consultant in New York.

    This is like factory closures… I can understand the need for layoffs if volume is really down. I doubt hospitals are going to keep employees on like Toyota does at their truck plant during a downturn… things will pick up again? Right?

    Wait… why can’t hospitals do what Toyota is doing?? You blogged about that Mark, can you post a link about Toyota’s respect for people… it’s interesting to see how hospitals are throwing people away…. much to learn.

  3. Anonymous says:

    My CEO has used this as a catalyst to gain buy in and move forward with our lean implementation.

    Unfortunately our system is raising prices significantly (despite a healthy bottom line) to make up for our losses on Wall Street. Mark, I know how much you love when people raise prices due to bad management. So short sighted and irresponsible.

  4. Mark Graban says:

    2:21 anon;

    I assume you’re from a public manufacturing company, then, not a hospital?

    I guess my view on the price increase depends… if they’re just ignoring the market and assuming that higher prices means more revenue and more profits, then that’s bad. If they are reacting to what the market will really pay (if they had been underpricing) then it might not be such a bad move.

    You think it’s a bad move… so they must be ignoring the market (meaning customers, not the stock market)?

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