UMass Memorial Health Care is a five-hospital system anchored by Central Massachusetts' main academic medical center. It announced this week that due to declining volumes and poor reimbursements it will eliminate between 700 and 900 positions. With the following words, CEO John O'Brien inadvertently proved a point made by Clay Christensen in the The Innovator's Prescription:
We are having confidential discussions with a potential buyer regarding the sale of our Hospital Labs Outreach Business. Reimbursements for lab tests have been falling dramatically for quite some time and insurers are directing their patients and physicians to use labs that are lower cost than our service.
And, in still another separate decision, UMass Memorial will seek a potential buyer for our Worcester-based Home Health and Hospice (HH&H). Despite the outstanding work of our staff, the HH&H associated with our Medical Center took in $2 million less in revenues than it paid in expenses last year and it is seeing a significant decline in referrals. Because our HH&H is part of an academic medical center, its cost structure is higher than community-based agencies.
My 2009 summary of Christensen's presentation was here:
The problem, he noted, is that the traditional general hospital is not a viable business model. He persuasively asserts that hospitals are expensive conflations of three types of business models: Solution shops that in other fields would be paid on a fee-for-service basis; (2) value-added process businesses that would be paid for on a fee-for-outcome basis; and (3) facilitated networks that would be paid for on a fee-for-member or fee-for use basis. He points out . . . that the agglomeration of many of these business lines and a desire to serve all kinds of patients results in a very high overhead burden rate -- roughly $9 for every $1 spend on direct patient care. He suggests that, within a general hospital, even the concept of focused factories has a tendency to be overloaded with overhead.
I want to point out a subtle difference between Christensen's analysis and the one offered by my friend and colleague at the MA Hospital Association:
"Hospitals across the state are under great pressure to reduce costs and improve efficiency in the face of declining volume, inadequate government reimbursements and a move away from fee-for-service payments for care," said MHA's President & CEO Lynn Nicholas, FACHE. "Because labor costs are two-thirds of hospitals' expenses, layoffs and reductions in services are inevitable and painful as the market adjusts.
We need to draw a distinction between tactical steps that are taken to deal with budget shortfalls and strategic steps that recognize the kind of structural change needed in the new health care environment. O'Brien said, "UMass Memorial Health Care is confident that these steps are necessary to transform our system for a strong and successful future caring for our patients and families." I hope so, but as I have noted:
The lessons here for high fixed cost academic medical centers are clear. Academic medical centers face all of the problems of two stressed industries -- academia and medicine. The future will belong to the efficient. Hospitals that are driven by their senior faculty and hopeful junior faculty to expand buildings and research facilities, that invest in high-cost but unproven clinical equipment, that do not engage in front-line driven process improvement, that fight transparency of clinical outcomes -- and that plan to depend on private and government reimbursements, government grants, and philanthropy to pay for all this -- will not do well. Those that limit capital investment in inflexible fixed assets, that focus on higher quality and reducing waste, that endorse transparency, that invest in the science of health care delivery as much as basic science, and that develop and implement treatment modes that take care to the patient rather than requiring physical visits by patients, will do well.
We are having confidential discussions with a potential buyer regarding the sale of our Hospital Labs Outreach Business. Reimbursements for lab tests have been falling dramatically for quite some time and insurers are directing their patients and physicians to use labs that are lower cost than our service.
And, in still another separate decision, UMass Memorial will seek a potential buyer for our Worcester-based Home Health and Hospice (HH&H). Despite the outstanding work of our staff, the HH&H associated with our Medical Center took in $2 million less in revenues than it paid in expenses last year and it is seeing a significant decline in referrals. Because our HH&H is part of an academic medical center, its cost structure is higher than community-based agencies.
My 2009 summary of Christensen's presentation was here:
The problem, he noted, is that the traditional general hospital is not a viable business model. He persuasively asserts that hospitals are expensive conflations of three types of business models: Solution shops that in other fields would be paid on a fee-for-service basis; (2) value-added process businesses that would be paid for on a fee-for-outcome basis; and (3) facilitated networks that would be paid for on a fee-for-member or fee-for use basis. He points out . . . that the agglomeration of many of these business lines and a desire to serve all kinds of patients results in a very high overhead burden rate -- roughly $9 for every $1 spend on direct patient care. He suggests that, within a general hospital, even the concept of focused factories has a tendency to be overloaded with overhead.
I want to point out a subtle difference between Christensen's analysis and the one offered by my friend and colleague at the MA Hospital Association:
"Hospitals across the state are under great pressure to reduce costs and improve efficiency in the face of declining volume, inadequate government reimbursements and a move away from fee-for-service payments for care," said MHA's President & CEO Lynn Nicholas, FACHE. "Because labor costs are two-thirds of hospitals' expenses, layoffs and reductions in services are inevitable and painful as the market adjusts.
We need to draw a distinction between tactical steps that are taken to deal with budget shortfalls and strategic steps that recognize the kind of structural change needed in the new health care environment. O'Brien said, "UMass Memorial Health Care is confident that these steps are necessary to transform our system for a strong and successful future caring for our patients and families." I hope so, but as I have noted:
The lessons here for high fixed cost academic medical centers are clear. Academic medical centers face all of the problems of two stressed industries -- academia and medicine. The future will belong to the efficient. Hospitals that are driven by their senior faculty and hopeful junior faculty to expand buildings and research facilities, that invest in high-cost but unproven clinical equipment, that do not engage in front-line driven process improvement, that fight transparency of clinical outcomes -- and that plan to depend on private and government reimbursements, government grants, and philanthropy to pay for all this -- will not do well. Those that limit capital investment in inflexible fixed assets, that focus on higher quality and reducing waste, that endorse transparency, that invest in the science of health care delivery as much as basic science, and that develop and implement treatment modes that take care to the patient rather than requiring physical visits by patients, will do well.
6 comments:
I think your point about distinguishing between strategy and tactics is a critical one. The two ventures cited, laboratory outreach and home health/hospice, are both examples of what I call the 'bandwagon phenomenon' on the part of hospital administrations desperately seeking to maintain the status quo. One or another such venture becomes 'de rigueur' (or 'du jour' more accurately), often based on ephemerally favorable reimbursements, and practically every hospital in the country jumps on it, ignoring long term signals such as the years-long progress of commoditization of laboratory tests - which make such an end result predictable.
It's time for administrators to realize they are in the middle of Christensen's disruptive innovation period and to look for truly transformative steps as you describe, not just the latest way to make a temporary quick buck.
I wonder if there is an AMC anywhere in the country that has even considered valuing excellent teaching ability, patient care and medical outcomes as highly as research and publishing in determining the potential for both compensation and academic advancement among doctors employed by AMC’s. In theory, there is no reason why two equally rewarding career paths couldn’t exist in parallel. The culture of research and publish or perish contributes enormously to unsustainable cost growth at both AMC’s and universities. Maybe it’s time for some fresh thinking here.
Yes, making process improvement academically interesting and important is an essential component to doctor engagement in an academic medical center. It would help if medical schools viewed it as such.
Many hospitals out there are really fearful of the reduce reimbursements and expected budget shortfalls.
Some are resorting to simple cost cutting - meaning layoffs (since labor is about 6o-70% of a hospital's cost base).
Others are using Lean and other methods to improve the system. Improving quality, safety, patient flow, etc. -- that leads to better financial performance as an end result. Increasing patient flow, to make better use of existing space, instead of doing construction is another way hospitals are using Lean to save money the "right way."
It will be interesting to see which path is more successful over the next few years.
As an outside observer it is extremely frustrating to see health care costs rise year after year, decade after decade and take an ever increasing share of GDP. And we don't even get good outcome results compared to other rich countries.
And the best these managers seem to be able to do by and large is cut nurses. It seems almost criminal how poorly we have managed our health care system in the USA. Granted lots of people are doing heroic work. The system is still performing hideously and those making excuses to retain the existing system seem to continue to be leading (decades after we should have stopped tolerating this outdated thinking).
In the airport this morning I spoke to a nurse from a southwest hospital system who is currently downsizing their workforce. She said something that really resonated with me. "I know they have to do layoffs but what is the plan to still do the work that has to be done?". It is a great question. The layoffs help the immediate fiscal need but how do these health systems help the employees deal with the changes in the work force? I agree with Mark that you must look at the work, remove waste and improve porcess long before you institute the work force reduction. The employees already feel afraid with the changes but to compound it with chaos will lead to decreased staff satisfaction and the opportunity for errors that can have an even greater impact on their bottom line.
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