Save $1 Trillion in Healthcare Costs with Lean and the Toyota Production System
I blogged earlier about the Obama administration's announcement that the healthcare industry is promising $2 Trillion in savings (reduced cost increases) over the next 10 years. Hooray, we set a goal.
The announcements were light on how to do this… generalities such as “increase hospital efficiency.” Again, sounds great, but how? It's not going to come from traditional means like asking people to work faster or by laying off scores of people (since we're trying to save jobs in this economy, as well).
The $2 Trillion number is pulled out of thin air, it seems, so grant me the same latitude for a moment.
Hospitals in the U.S. (and around the world) are proving that you can improve quality, safety, and service with “Lean” or Toyota Production System improvement methods and management systems. Oh yeah, and we're reducing costs too. This isn't speculation, this is already happening.
For example, ThedaCare sometimes gets credit for reducing costs $10M a year (source). ThedaCare, at about 5000 employees, is a large-ish sized hospital.
Let's do the math…
There are about 6000 hospitals in the United States.
$10 Million x 6000 = $60 Billion a Year savings x 10 years
= $0.6 Trillion
Even with all of their success, it is likely that ThedaCare has not reached their full Lean improvement and cost savings potential, so they, and other hospitals, could do better. They aren't perfect yet.
I promised $1 Trillion in my headline. How would I get to that number?
Norman Bodek often cites a Japanese benchmark (Toyota and Canon) that leading companies generate $4,000 a year in cost savings PER EMPLOYEE thanks to employee suggestion and “kaizen” systems (source).
So back to the math….
At a hospital of 5000 employees:
$4,000/employee x 5000 employees = $20 Million a year in savings
$20 Million x 6000 hospitals x 10 Years =
That's ONE TRILLION dollars that I just saved. Ahem, or promised (or really just speculated about). Now the industry can come up with the other have through other “improvements,” such as paying doctors less and squeezing suppliers (not real improvements, by the way, just passing the buck). Lean savings are real savings.
That's the real potential of Lean methods, principles, philosophies, and management systems. It takes time to get there. ThedaCare has been at it for six years. So the rest of our hospitals need to get started…. say, now!
Before you attack me, I admit my numbers here are just speculation — but grounded in some reality with some liberties taken with my estimation and extrapolation (but, hey, like the government, I mean well, so cut me some slack). But as we have the “how” discussion, I hope Lean is a big part of that picture.
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Hey Mark and others,
ThedaCare did it in six years. How long before most hospitals would expect to see that degree of realized gains?
Don’t forget about physician offices, surgical centers, and insta-cares.
Oh, by the way, Thedacare is really 4 small hospitals.
I think the bigger issue is for health care leaders to recognize the magnitude of opportunity that exists for improvement. Although I am a health care outsider, when I look at other industries–let’s take Mercury Marine in the outboard motor business or Harley Davidson in motorcycles who are both just down the road from ThedaCare–their operations bear little resemblance to what they were 20 years ago. They have transformed themselves. I don’t perceive an awareness of this potential in the health care sector. Right now the early adopters seem to be held up more as objects of fascination rather than models for rejuvenation. …Am I being too harsh??
Oh, and Mark, I’m okay with a little top down math. Yes, we could quibble with the details, but your point is made.
Yes, Dale, my math is very very fuzzy… but I think there’s more validity than the White House numbers. They aren’t shared how they pulled $2 Trillion out of thin air, other than it sounds good.
You make a good point about the opportunity for transformational improvement. A lot of people in healthcare can’t imagine doing anything other than tweaking their existing processes and systems. They think small incremental improvement of 2 to 5%, when Lean methods (properly implemented) offer radical improvements in processes and results (50% cycle time savings, 25% space savings, etc.)
Hospitals like ThedaCare (and other early innovators in Lean healthcare) can certain show glimpses of what’s possible. Hopefully, that’s inspiring to other hospitals.
To Andrew’s question… yes, it’s a multi-year effort to get “ramped up” with Lean, but I know of hospitals with dramatic first year savings.
One hospital (in just one department) had almost a $500,000 labor cost savings in the first year. This number becomes huge when extrapolated across the whole hospital (this was a “good” department, not the worst by far, before Lean).
Other hospitals have saved/avoided spending MILLIONS by using Lean to improve processes, workflow, and space utilization — allowing them to CANCEL multi-million dollar planned expansion efforts that were seen as necessary before Lean.
Lean isn’t easy, not at all, but it’s a method that allows for improvements without relying on “more people, more space, and more money.”
I hope lean is part of the picture for us for a lot of reasons. What do we need to do to make that happen?
It looks like the details of the approach include reducing demand by reducing govt payments for discretionary procedures. No Republican could ever propose- for fear of appearing heartless. Of course, we’ve seen that reducing demand doesn’t always reduce costs.
[…] is 15.2% of our GDP. Ah, so past solutions didn’t work… or did we save “Trillions” because we’d be at 18% of GDP without the previous fixes? Ah, things like that can […]