We’d be fine if you just Paid us More


    Hospitals prescribe increased reimbursements from insurers to aid recovery of sickly health care system

    Hospitals need to learn to reduce costs. You can't just ask for more money to cover your rising costs. It's a frequent topic on this blog, the Toyota Production System idea that:

    1) The price is set by the market, not by you

    Granted, healthcare is a really screwed up and complex market. But, the lesson still holds that SOMEBODY ELSE (someone external) sets the price for you and you have to live with it. That's true if it's manufacturing, consulting, or healthcare. You can't go by the old notion of “my costs are X, so I'm going to tack on my profit margin and that's my price.”

    2) The only way to ensure a given profit is to reduce costs

    Profit Margin = Price – Cost

    If price is given, you have to control costs. And I don't mean with traditional cost cutting (which would include getting rid of people, outsourcing, and closing operations). You have to use lean — reducing quality AND improving care… which will lead to lower costs.

    Hospitals whine too much about how little they are paid. They need to get their controllable costs under control.

    13% of hospital costs are due to controllable waste.

    Source: Zuckerman, Hadley, and Iezzoni, 1994

    I bet that number has grown since 1994. I see so much waste in hospital processes, it's ridiculous. Different studies and experts estimate the percentage of non-value added time in healthcare processes and employee time at 40 to 50%. I believe it, based on my direct observations.

    Let's work on controlling costs (by improving quality and care). We really have no other choice. Healthcare money won't grow on trees. We can't afford to have healthcare costs rising 9 or 10% a year.

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    Mark Graban
    Mark Graban is an internationally-recognized consultant, author, and professional speaker, and podcaster with experience in healthcare, manufacturing, and startups. Mark's new book is The Mistakes That Make Us: Cultivating a Culture of Learning and Innovation. He is also the author of Measures of Success: React Less, Lead Better, Improve More, the Shingo Award-winning books Lean Hospitals and Healthcare Kaizen, and the anthology Practicing Lean. Mark is also a Senior Advisor to the technology company KaiNexus.


    1. Healthcare costs are NOT set by the market. This is a big flaw in the system perhaps, but currently, supply and demand arguments do not work.

    2. It’s not a free market, but it’s a market. We need to spend more time focusing on reducing costs and less time complaining about the “unfair” prices we are getting.

    3. Is health care the next big market where Lean concepts must be applied? Are there lean practitioners out there who will share histories and case studies with others?

      I just spent 2-1/2 hours yesterday to get a ~20 minute visit with a doctor, which is a 0.11 VA/NVA assuming all the 20 minutes was VA (which it wasn’t – the doctor was in and out of the exam room, making it more like 0.05 VA/NVA). And this is in a small community in central Iowa, so the driving time was only 15 minutes total to and from work.

      I would be interested in participating in a public CI activity for health care, if you know of any.

    4. I would find a new doctor. The health care system I’m in now highly stresses getting there on time and does a very good job of scheduling. I’ve seen them turn away patients that were 20 minutes late for thier scheduled appointment. Not a life threatening case, just an office visit that could be rescheduled. It’s some thing I highly value and as a patient I feel that I am never rushed during my visit.

    5. I love your blog, but ah’m gonna be a jerk about this.

      Health Care is not a free market system. It is not even close to being a free market system. The price is not set “by the market” except in the loosest possible interpretation of that term.

      Market pricing works when the product is relatively uniform, there are a pile of producers with excess capacity AND information about different producers and products are easily available.

      This does not describe the “market” for doctors, hospitals, medical devices, drugs or anything else.

      Heck – medicare is legally not even allowed to bargain with drug manufacuterers.

      Certainly there are ways that costs could be reduced, but there are so many structural, legal and market (not free market, but ologopolistic market) forces arraigned against them that under the current system of providing health care in the US there will be no significant decreases until either a major reorganization or the money simply runs out.

    6. Anonymous, I’m glad you like and the blog and I don’t have a problem with you taking issue with what I wrote.

      But once again… yes, it IS a screwed up market and I acknowledge your points.

      But, my main point is that we have to reduce cost (by improving quality) rather than just whining about the lack of control over the top line.

    7. For many products, the customer has choice in providers and in timing of purchase. With health care, there are instances where the individual customer’s choices are very limited. For acute or emergency care, the customer has minimal bargaining power or ability to make choices. It’s not an environment where market forces work, when one party literally has their life on the line.

      I can choose if and when to buy a car. I have minimal choice in deciding to have my inflamed appendix removed or my heart attack treated. The conditions under which I receive care have to be pre-established at that point.

      Furthermore, the US system usually involved three or four parties – the care provider, the care receiver, the payer (the insurance company) and sometimes the administrator of the payment system. Decoupling the payer function from the care receiver introduces some additional complications into the relationship.

      There’s a lot of opportunity for improving health care. The supply-demand situation is more complex and has special factors involved. Application of Lean practices will need to evolve in order to really see the opportunities in the entire value stream.


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