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 revenueâ€”a trend that has held since 2002â€”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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