Less Margin, No Mission?


I've re-read this article a number of times: “Cancer clinics are turning away thousands of Medicare patients. Blame the sequester.”

It's a sad situation – the federal government, via Medicare, has cut the reimbursement to cancer clinics for chemotherapy treatment as a result of the across-the-board “sequestration” budget cuts. Root cause here? Lack of leadership in Washington D.C., perhaps, or blame the voters.

What's sad is that some cancer patients are being TURNED AWAY from the clinics due to the cuts because the doctors say the patients are “unprofitable.”

First, do no harm?

Cancer clinics across the country have begun turning away thousands of Medicare patients, blaming the sequester budget cuts.

Oncologists say the reduced funding, which took effect for Medicare on April 1, makes it impossible to administer expensive chemotherapy drugs while staying afloat financially.

Patients at these clinics would need to seek treatment elsewhere, such as at hospitals that might not have the capacity to accommodate them.

“If we treated the patients receiving the most expensive drugs, we'd be out of business in six months to a year,” said Jeff Vacirca, chief executive of North Shore Hematology Oncology Associates in New York. “The drugs we're going to lose money on we're not going to administer right now.”

Congress tried to limit the reimbursement cuts to 2%, but due to reasons better understood by Washington insiders (Medicare B vs D), some of the cuts are higher (but not made really clear in this article).

It seems any organization (or government department) should be able to take 2% out of their cost structure through Lean, Kaizen, and process improvement activities.

Is turning away patients the only response? Is it true they would be automatically out of business due to these cuts? (Again, how steep are they??) Are the cuts really a matter of survival or is that just posturing?

This CBS story says:

A one-month course of chemo for one patient could cost $10,000. Medicare reimbursement will now fall about $200 short.

The clinics can't figure out how to reduce their own costs by $200 to make up for this? Or, are the cuts really higher than 2%??

The clinics get reimbursed not only for the chemotherapy administration (6% payment above the med cost), but they also bill for visits and other services, yes?

In the  Toyota approach, a certain level of profit is not considered an entitlement. In the old “cost plus” model (used in healthcare and, say, the defense industry), your price was your cost plus some profit margin:  Price = Cost + Profit

If costs went up, prices were raised to maintain profit. Companies still try to do this today, saying they are “forced” to raise prices to customers because some component of cost (materials, labor, etc.) is higher. This article plays the “forcing” card — nobody is “forcing” the clinics to turn patients away. That's their choice.

Toyota has taught that Profit = Price – Cost  where prices are set by the market. In this case, the “market” of healthcare is really screwy and the government mandates prices, sort of like GM, Ford, and Chrysler used to just mandate price reductions on their suppliers, bullying them instead of working collaboratively like Toyota.

When the price is forced down, profit falls…. UNLESS you can also reduce cost.

In the Lean mindset, of course, we're looking to reduce waste, not just slash costs (which would traditionally mean layoffs in healthcare).

Is this possible here?

“If you get cut on the service side, you can either absorb it or make do with fewer nurses,” said Ted Okon, director of the Community Oncology Alliance, which advocates for hundreds of cancer clinics nationwide. “This is a drug that we're purchasing. The costs don't change and you can't do without it. There isn't really wiggle room.”

You might not be able to reduce costs, but you might be able to reduce waste to increase throughput, spreading out your fixed costs and lowering your cost per case (increasing your margin).

After an emergency meeting Tuesday, Vacirca's clinics decided that they would no longer see one-third of their 16,000 Medicare patients.

How did they decide this? What is the impact going to be on these patients?

Ironically, if the patients go to a hospital, the care might cost the government MORE money:

The care will likely be more expensive:  One study  from actuarial firm Milliman found that chemotherapy delivered in a hospital setting costs the federal government an average of $6,500 more annually than care delivered in a community clinic.

Another example of what a crazy “market” this is. See also “Doctors join hospitals, and prices soar.” The same patient value gets reimbursed differently.

Does anybody out there have perspectives on what's happening, what's being considered, and what the practical alternatives are?

I'm reminded of a hospital CEO I saw give a stern message to his leaders about 18 months ago: “We are never going to be paid more for what we do than we are paid today.” It was a rallying cry to work together to reduce waste and reduce costs — using Lean instead of layoffs.

I understand organizations need to make a profit or a surplus. That's where the phrase “no margin, no mission” is so often used. But what about the margin being just a little lower? Does that justify throwing patients aside?

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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. Mark, is it about sequestration or about the changes brought on by the Affordable Health Care Act? The current adminstration likes to play politics. For example, the FY14 budget being presented calls for more spending than last year, yet they have no qualms in floating trial balloons to the press about the consideration of more furloughs for executive branch agencies in FY14. Doctors came into the field as a calling, they want to continue that calling but when the business of healthcare interrupts that calling, you have more of a problem with the system than what lean can fix.

    • Everyone is blaming sequestration as a special cause.

      There’s a common cause (lack of leadership in DC and playing politics — both parties).

      Only in DC is a reduction in the planned spending increase called a “cut.” That’s craziness.

      Is “the business of healthcare” (meaning here, the government) interrupting that calling or are the cancer doctors choosing to interrupt it? It’s not like they aren’t being paid at all. Their margin has been cut. Lots of companies suffer through that and figure out how to get better instead of firing their customers.

      There seems to be a moral imperative to figure out how to treat those patients, rather than casting them aside.

      And, yes, there’s more that’s broken than can be fixed with Lean, Six Sigma, or any combinations.

  2. From what I’ve read Medicare pays the clinics the average price for the drugs, then adds 6% for administration expenses. So the clinics see the 2% cut as a 33% cut to their reimbursement, since they have to pay the same amount for the Chemo drugs. Or something like that.

    My bet is that the average clinic could cut enough waste to make up the difference anyway. Even if they couldn’t, not seeing those patients cuts their revenue by 100% instead of 33%, meaning their fixed costs are going to make up a bigger portion of all of the other patients. If their operating margins were so slim that they can’t handle the cuts to begin with, dropping those patients probably aren’t going to do them any good.

    Here’s another suggestion (warning: political viewpoint ahead): Let Medicare bargain for drug costs.

    • So they are paying the AVERAGE price… not the actual price charged to a particular clinic?

      The law, as described in the Washington Post blog I linked to, requires hospitals to offer discounts for certain populations, something that puts the clinics at a disadvantage.

      Non-profit hospitals will likely have an easier time bearing the brunt of the sequester cuts. A federal program known as 340B requires pharmaceutical companies to give double-digit discounts to hospitals that treat low-income and uninsured patients.

      You’re right, I forgot to blog about the fixed costs of a clinic. Seeing fewer patients causes different financial problems. Even if a particular patient is “unprofitable,” then casting aside those patients increases the cost per patient and drives down the margin for the remaining patients. When does the madness stop, when the doctor closes the clinic?

      I’ve read some commentary saying the clinics are throwing a political tantrum by refusing to see some patients, that it’s politics over economics.

  3. Mark,

    This pre-dates 340B, ACA and the sequestration. It is a symptom of the financing system that has evolved in healthcare, which still very much lives in the cost plus mindset. Because nobody can determine what their costs really are in a system that reimburses inadequately in some areas and over reimburses in others, it leads to irrational decisions about cost and charge and makes it about impossible to plan, budget or even know where your money is going.

    340B is a prime example- instituted to help hospitals pay for drug costs for Medicare/medicaid outpatient care only, but being used to cover costs for insured patients as well (see Charlotte Observer story from last week where Rep Grassley is asking for records to review this in 3 NC hospital systems.) The result is because hospitals are inadequately funded (in their view as a cost plus world), they look for other revenue sources. 340B rules allow this use, even if not the intended use. So the hopsitals are made to look bad, but are really just playing by the rules as they are wtritten. People can always find a way to game any plan.

    What this really reflects is that we have never agreed as to what our health care system should be( entitlement, free enterprise, public utitlity, etc) and so we try to do everything in every situation and the result is what we have- contorted and screwy. It is silo thinking at its worst- siloes of different revenue and cost streams devoid of thinking as revenue/cost for the entire value stream.

    The mindset transition from a revenue focus to a cost of care focus has not yet reached the critical mass yet that will get smart people to think differently…not yet, but it is happening.

  4. Don’t quote me on how the pricing works, but the issue is that the clinics can’t pass the price cut to the drug suppliers.

    The crazy thing is that sequestration is supposed to save the government money, but treating those same patients at hospitals will end up costing Medicare more, because hospitals are reimbursed at a higher rate. But that’s only if the local hospital can treat them. Some patients (those in clinical trials) may need to travel across the country to get their treatments.

  5. To me the real root cause of what ails health care is driven by the way the exchange of reimbursement happens. In almost every other transactional scenario, you purchase and pay a provider for a service he or she renders. There 100% cost transparency, if you feel the cost or quality of the service is to high you shop elsewhere. In healthcare there is almost no transparency because we as consumers of healthcare purchase care but do not reimburse providers, therefore we cannot hold provider accountable for pricing or quality. we also do not have the option to go to any provider we choose, all of these factors are dictated by the 3rd party payers. I believe Obama care only exacerbates this problem.

    I fear we are too deep into this mess to ever reverse it.

  6. Yes, this is a common construct that people want to use to explain the root cause.

    ‘In almost every other transactional scenario,…’ and that is where the difficulty of this construct starts. Healthcare is not like every other transaction because it is not a transaction….it is an investment. In a transaction, you know what you are paying and what you are getting and have judged it an acceptable deal. But like the mutual fund companies say–past performance is no guarantee of….. And like the mutual fund companies, health care cannot guarantee on outcomes.

    Health care is an investment in the economy, in the local community, in the ability of every enterprise in the community to function, and in people development. Try learning your way out of a problem when you are ill. Not a good atmosphere for improvement. Talk about respect for people?

    In a transactional world, it is acceptable if someone does without. In the health care world, if someone does without, they eventually show up at the hospital, and then we all pay. In most third world places, if you do show up and can’t pay, you do without. The developed nations at least recognize this otherwise. We just need to learn our way to a mechanism that achieves this within a cost structure we can live with.

    ‘Holding people accountable’ is a euphemism for coercing someone to do what you want them to do. In a Kaizen spirit, we would learn what is keeping that person from achieving the target condition. And to do that, we go to the gemba. And unlike most transactions, the health care gemba can be a hard place to go to. Determining cost, a non health care person determining quality, access– all difficult to find and see.

    The real problem may be that we don’t yet know what the important problems are and certainly have not agreed on what they are….yet.

    • I am a “free markets” capitalist / libertarian through and through.

      Healthcare, though, seems so very differently. Namely in that we all need healthcare at some point. It’s not something we voluntarily enter into — we do it to keep healthy (hopefully) or do it because we are sick or injured. It’s not a market we CHOOSE to enter.

      “In most third world places, if you do show up and can’t pay, you do without.”

      I guess to these poor souls who are Medicare cancer patients, we just became a third world country?

      I’m so disgusted that our “leaders” have put us in this B.S. position where we aren’t paying for people’s healthcare, but still pay or so much waste that we should be cutting 100% of, not 2% of.

      The lesson learned to me, I guess, is to work my butt off and hopefully make enough money so that I don’t ever have to rely on the government to pay for my healthcare or retirement. I hope that’s possible. It’s not possible for everyone, that’s for sure.

      Totally agree with you on the “accountable” term…


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