Cost Management 

Mike Alkire

The late Japanese industrial engineer Shigeo Shingo once said that "the most dangerous kind of waste is the waste we do not recognize."

Shingo was one of the world's leading experts on manufacturing practices and co-creator of the Toyota Production System, a method to "remove anything which does not advance the process, and everything that does not increase added value." The company's recent quality stumbles aside, Toyota achieved a great deal of success using this strategy-called the "Toyota Way"-as its guiding light.

For close to a decade, health care has looked to Toyota for best practices, with many providers actively employing these principles for ferreting out waste, with tremendous success. But as a whole, the healthcare system has yet to find its "way." Our industry remains far from consistent, and variation and waste continue to be major problems. PwC puts the opportunities for eliminating wasteful spending as high as $1.2 trillion annually, or about half of our total healthcare expenditure. In other words, we're wasting every other dollar we spend in health care.

Defining Waste

To a COO, waste might be excess staffing or a less-than-fully-productive labor force. For a chief medical officer, hospital-acquired conditions and readmissions are examples of waste. And supply chain executives often think of waste in the context of overuse or misuse of medical and surgical supplies. The reality is, they're all correct.

What causes hospitals to be less effective and efficient than they could or should be? A new and unique "Waste Dashboard" provides a useful perspective for answering this question. Developed through years of data collection and work for and with health systems nationwide, this tool reflects an enriched understanding of the operational elements that make up an acute care hospital.

The tool points to 12 common causes of waste:

  • Staffing inefficiency
  • Excessive use of premium staff
  • Suboptimized skill mix
  • Medication errors
  • Pharmaceutical selection and utilization
  • Unnecessary testing
  • Product selection/contract noncompliance
  • Inappropriate level of care
  • Inappropriate length of stay
  • Hospital-acquired conditions/infections
  • Inadequate turnaround/cycle times
  • Excessive readmissions

Each of the categories can be placed into one of the following buckets:

  • Inefficient labor management
  • Product overutilization or misuse
  • Failure to leverage appropriate supply contracts for best pricing
  • Harm (to include excessive complications, length of stay, and readmissions)

The purpose of the dashboard is to help hospitals take a holistic look at their overall performance to understand where waste is created, where there are interdependencies in the waste elements, and most important, how to remove it. Behind the dashboard is drill-down capability into the different areas of waste, including by service line and DRG.

Knowing the big categories of waste and the dollars at stake is a good start, but it's not enough. Hospitals need to implement practices to tackle waste in each of these areas. However, removing waste from the system is easier said than done. According to a recent survey of 730 hospital representatives, including C-suite executives, materials managers, and product line directors, the top two barriers preventing waste reduction through appropriate resource utilization are misaligned incentives between hospitals and physicians and a lack of data systems to measure performance and connect care.

This group also cites four specific strategies to successfully maximize resource utilization:

  • Standardization of treatment protocols and physician order sets
  • Improvement of hospital-physician alignment
  • Use of clinical data sets to identify resource optimization opportunities
  • Formalized cost savings goals built into incentive plans

Innovative Strategies

A number of health systems are already performing innovative work to reduce waste.

Banner Health, a Phoenix, Ariz.-based system with 23 acute care hospitals and multiple other care facilities and services across seven states, has developed an impressive process to evaluate resource use and standardize care practices, particularly in high-volume populations. It has created about a dozen clinical consensus groups. Each group is led by a physician-often a chief medical officer-and a nursing leader. Clinicians from multiple disciplines are also included.

The groups gather comparative data from various sources to compare their approach to care delivery with that of top performers nationwide. The goal is to develop clinical practice guidelines that can then be adopted across the health system. If the benchmarking data indicate an action is not recommended, an alert is built into Banner's electronic health record suggesting it be labeled as "not supported." If a physician wants to continue the action, he or she is required to provide a thorough explanation as to why in the patient record.

Through this process, Banner is saving:

  • $1 million/year through more appropriate use of an abdominal adhesion barrier used in Caesarian sections.
  • $850,000 a year through more appropriate use of CT scans on patients with community-acquired pneumonia
  • $800,000 to $1 million annually by reducing clinical practice variations in bowel surgery

Albuquerque, N.M.-based Presbyterian Healthcare Services, whose providers care for one in three New Mexicans, uses cost and quality improvement technologies to identify high-volume diagnoses for each of its business lines. In comparing costs per case with expected costs per case, Presbyterian found a number of opportunities in the high-volume cardiac surgery all patient refined DRGs (APR DRGs).

Presbyterian learned it was using an expensive anticoagulant for nearly 60 percent of its cardiac valve patients, compared with less than 1 percent of similar patients in its peer group. This drug added about $11,500 in expense per patient, but it wasn't adding any clinical benefit.

Given the well-known fact that physicians are data driven, Presbyterian needed actionable data that physicians could relate to, appreciate, and respect to effectively gain physician buy-in. Using severity-adjusted data that compared Presbyterian's performance with that of top-tier hospitals nationwide sparked meaningful dialogue, leading to reevaluation of clinical practice. Today, use of the drug is in line with top-performing hospitals and contributes nearly $2 million a year to the health system's bottom line without affecting clinical outcomes.

The Toyota Way has been compared to "squeezing water from a dry towel," with the ultimate goal being the total elimination of waste. Though squeezing that towel dry and completely eliminating waste in health care might be too tall of a task, we need to start somewhere. Defining the most intensive areas of waste and sharing best practices in waste reduction are integral first steps.

Mike Alkire is COO, Premier healthcare alliance, Charlotte, N.C. (


Publication Date: Monday, July 02, 2012

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