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Is it possible to reduce expenses and improve the quality of care? Acute care hospitals need to address both if they expect to succeed in today’s environment.

Hospital systems in the United States face two significant problems—decreasing productivity and neutral changes in quality outcomes. Starting in 1997, the Budget Reconciliation Act began reducing scheduled Medicare reimbursements to hospitals. Suddenly, responsibility for healthcare expenses began shifting to acute care hospitals, where management still finds itself grappling with the need to develop strategies to reduce hospital costs and improve the quality of patient care.

In 2006, the ability to maintain a competitive cost position will become more challenging. A portion of reimbursements will be at risk based on hospital performance as measured by quality outcomes. In addition, there are new threats to reduce Medicare reimbursement. Mixing decreased reimbursement with the need for improved quality outcomes puts more pressure on the system and places a concomitant squeeze on a hospital’s financial resources.

Productivity Ups and Downs
Recent productivity and quality data suggest that hospitals have been largely ineffective at capturing a return from recent investments on labor and nonlabor projects. Diverse incentives in the marketplace have forced hospitals to become hyperfocused on quality measurements, and the net result has largely been weak returns on quantifiable clinical outcomes and a loss of ground in the battle against unrelenting labor shortages.

A Catch 22 situation exists. While hospitals contend that the root cause of reduced productivity is attributable to the rising cost of providing healthcare for the uninsured population, national surveys show that the primary reason why people are uninsured is increasing healthcare costs.1

Labor productivity, or output per hour of all persons, is the most commonly used productivity measure. In the U.S. nonfarm business sector, similar to the hospital industry, labor cost represents more than 60% of the value of output produced. According to Figure 1, since 1996, productivity changes in business, nonfarm, and manufacturing sectors continues to be positive, ranging from 3% to 4%.2

On the other hand, as shown in Figure 2, hospital changes in productivity have steadily declined.3 Healthcare is the only major sector of the U.S. economy that has negative productivity.

Without positive changes in productivity, hospitals require more resources to produce the same number of services. To secure these additional resources, hospitals increase their charges. Increased charges are passed along to insurers who then send the burden of higher premiums onto employers. Employers ultimately either pass along the increased cost of healthcare to their employees or reduce the number of their employees in reaction to the healthcare expense crunch. This creates a vicious cycle where decreases in health sector productivity contribute to increases in the number of uninsured people, all of which further jeopardizes the financial stability of leading healthcare providers.

Quality or Productivity Focus
Economist Tor Dahl researched and compared two sets of nonhospital business units, those considered quality focused (Six Sigma) and those considered performance oriented (stable and consistent). His findings show that corporations that focused on quality encountered lower changes in productivity and lower net income. On the other hand, over the same period, the performance-oriented corporations that focused on increased productivity also produced high-quality products and services.4 In reality, increasing productivity is the best way for hospitals to control healthcare costs. To do so, the dollar value of hospital initiatives that increase productivity needs to exceed those initiatives that do not.

To reduce the number of adverse outcomes, hospitals have intensely focused on measuring and tracking quality indicators. Yet, the Medicare Payment Advisory Commission’s June 2005 report “A Data Book: Healthcare Spending and the Medicare Program” determined that a large number of patient safety adverse events in Medicare beneficiaries increased from 1995 to 2003.5 In short, the healthcare industry has been obsessed with assuring quality by measuring quality outcomes, without balanced efforts in improving quality by pursuing continuous quality improvement.

Computerized Physician Order Entry (CPOE)
Many hospitals are attempting to reduce medical errors through initiatives such as CPOE. With CPOE systems, hospital staff enters medication orders via computers that are linked to prescribing error prevention software. CPOE has been shown to reduce serious prescribing errors in hospitals by more than 50%.6 However, IT solutions such as CPOE are expensive to implement, and reducing medical errors should not be considered an IT project. There are no technical solutions for organizational problems.

While the imperative to implement CPOE is in the reduction of medical errors, only focusing on reaping error reduction improvements from CPOE is not enough to achieve dramatic gains in hospital productivity. Changing how patients are cared for is a critical element of CPOE implementation.

Indiana’s Wishard Memorial Hospital, an award-winning county hospital, is known nationally for its efficiency, excellent care outcomes, and state-of-the-art CPOE and patient database system. According to Chief Medical Information Officer Paul Dexter, MD, "Although we have proven that CPOE implementation can come before defined protocols and pathways,7 defining order sets8 prior to the implementation of CPOE does increase the likelihood that CPOE will be successful. However, having CPOE at your institution and using it effectively to improve productivity vs. quality requires very different strategies.”

One powerful method to improve hospital efficiency is for providers to agree on a common regimen of clinical interventions, which involves a significant learning curve for many physicians. While this is a difficult task to accomplish, it is critical to improving the organization’s success with CPOE. If physicians do not agree on a common regimen of clinical interventions, those intervention sets will need to be individualized. Individualization makes CPOE implementation much more complex and creates a situation where the hospital’s ability to facilitate productivity gains is limited to physicians. Since improving physician productivity has limited capacity to impact the hospital’s return on investment (ROI) for CPOE initiatives, it is vital for CPOE implementation to be structured in a way that impacts hospital productivity. After all, the hospital is the entity that funds the CPOE project.

Clinical Pathways
Large-scale implementation of IT projects such as CPOE requires changes in organizational management and behavior. CPOE itself will not take errors out of the system, which is why some CPOE implementation efforts have actually resulted in increases in medication errors.9

A dramatic improvement in hospital productivity from CPOE requires the organization to push forward with defining protocols and clinical pathways, an evidence-based method for treating patients with specific conditions. Uses of clinical pathways for patients admitted with chest pain and congenital heart disease have been proven to decrease hospital costs and lengths of stay.10,11

Clinical pathways can also reduce hospital variation in drug usage, allowing hospitals to take advantage of volume discounts on drug purchases that cannot be achieved when the hospital has to maintain a larger inventory of disparate drugs. Furthermore, clinical pathways support nursing in developing common patient care plans, which decrease the need for nurses to tailor care plans based on individual physician preference.

While these combined efforts can reduce healthcare costs via drug savings and increased staff productivity, success does not come without a substantial investment of time in securing physician consensus. And this approach to performance improvement is not the path of least resistance.

When physicians do not use the same practice methods, treatment costs can vary widely. For example, there may be two patients with the same condition, in the same hospital, treated by two different attending physicians. If those physicians treat their patients in two different ways, perhaps with different drugs and different protocols, then the hospital’s ability to deliver a superior standard of quality of care in a cost-effective manner is compromised.12 A clinical pathway provides a method for treating patients with common conditions under a single process, potentially eliminating waste and duplication of effort.

Reducing costs by reducing variation means using new management methods as well as using objective data to demonstrate the variation in resource utilization. Collaboration and networking between hospitals can speed up organizational learning. New management methods also mean defining and measuring the desired outcome and tracking the resources required to deliver that outcome. In the example of CPOE, the primary objective is not to implement a computer system but to streamline the practice of medicine and standardize processes so patient outcomes can be reasonably compared, further advancing the development of evidence-based practices.

CPOE is just the tool to support the end result, not the end in and of itself. It will take new management techniques to create these opportunities. For example, encourage the sharing of comparative and objective outcome information among physicians. Allow physicians to collaborate in the new work design. Redirect physicians to focus on how the delivery of care can be improved and yield higher productivity along with better outcomes. Identify the bottlenecks to quality care along with the performance glitches and then implement CPOE only as a means of supporting their efforts at standardizing care. Structuring CPOE as such, hospitals can then get the benefit of combining good management practices with IT investments, which dramatically improves the ROI in initiatives such as CPOE.

Managing Quality and Productivity
Similar to other business sectors, the healthcare industry—specifically hospitals—must be accountable for increased productivity. This paradigm shift requires a new hospital management model (see sidebar). If hospitals continue to create strategic objectives without a vision for specific operational targets to support them, then opportunities for gains in productivity will go unnoticed and unrealized. Over time, lost productivity will result in higher healthcare costs, and higher costs will result in services limited to those who can afford them.

When hospital leaders follow the examples of new management techniques used in other industries, they can achieve new levels of success. One way to begin the process is to identify the cost of the hospital strategy that will achieve the hospital mission. Then, measure the financial gap between the current and the required operating performance and identify what is required to close the gap. Isolate and prioritize the opportunity to specific services lines and functions.

Using a proven-effective performance management model, leaders can focus their operational opportunities through credible benchmarking data that identifies the top areas of functional and clinical excess. Then, they can track the movement of their action plan measures against their predefined goals. By managing both productivity and quality, hospitals can control healthcare costs and increase quality outcomes.

— Stephen Lothrop and Sarah Nickerson are consultants with The Healthcare Management Council, Inc., a benchmarking firm in Needham, Mass. For more information, call 781-449-5287 or visit www.hmc-benchmarks.com.

Performance Management Model
Too many hospitals manage productivity and quality separately, factors that lead to decreases in productivity. Improving productivity by managing waste out of the system and creating quality outcomes is essential. When hospitals change their management model to focus on productivity, they also see improvements in quality. Here’s how:

1. Identify a gap. Identify the organization’s strategic imperative for success and then measure the difference between current operating performance and the funding requirement of the strategic imperative. Communicate the gap throughout the organization.

2. Prioritize the opportunity. Triangulate on an opportunity for closing the gap by comparing department information (by function) and clinical information (by service line). You can achieve more buy-in when the opportunity for improvement is significant. See Figure 3.13

3. Engage managers. Communicate the strategic imperative and the operating gap. Show managers how the data that demonstrates the opportunity is constructed in the initial stages of the analysis so they can identify anomalies and be fully engaged in the performance improvement (PI) process.

4. Evaluate the implications. Senior management aligns the strategic gap with the identified opportunity from the benchmark. Communicate both the gap and opportunity to achieve the strategic imperative.

5. Generate alternatives. Provide networking opportunities between other hospitals to support idea generation. All hospitals are generating the same outcome with slightly different processes, so collaboration is the key to learning. Provide the tools that enable networking opportunities. Take into account published literature and compare the practice patterns of other physicians both within the hospital and in other hospitals.

6. Create action plans. Encourage managers to move forward and create an action plan. That is, define what the manager is going to do, what opportunity it would yield, who must be involved, and how it will affect other stakeholders.

Additionally, identify action plan measures to track progress against team goals and objectives. Unambiguous language is essential. Monitor compliance at the point of service. Provide for clinical flexibility, but make note of the frequency providers deviate from the pathway and track corresponding outcomes. It is the responsibility of the senior team to evaluate action plans for potential stumbling blocks or missed opportunities.

7. Create a dashboard. Track PI team progress and measure action plan impact on the entire organizational system. Capture critical data at the point of service and make it immediately available for evaluation throughout the organization. Delayed results are missed opportunities.

Poor quality is the result of a performance glitch. In any facility, if a product or service is not delivering expected outcomes, there is opportunity to increase productivity. This premise is based on the notion that a poor outcome (resulting in low productivity) costs more than a good outcome (resulting in high productivity). The difference between the two rests entirely on how a business is managed.

— SL, SN

References
1. The Henry J. Kaiser Family Foundation. The Uninsured: A Primer, Key Facts About Americans without Health Insurance. November 10, 2004.

2. U.S Department of Labor, Bureau of Labor Statistics. Productivity and Costs, Preliminary Fourth Quarter and Annual Average for 2004. Available at: http://www.bls.gov/lpc

3. The change in productivity was derived from The Lewin Group analysis of American Hospital Association Annual Survey Data, in American Hospital Association/The Lewin Group, TrendWatch Chartbook 2004. Available at: http://www.aha.org/ahapolicyforum/trendwatch/chartbook2005.html

4. Dahl T. The unfreezing of America. Cost Management. 2004;Nov./Dec.:16-22.

5. MedPAC Quality of Care for Medicare Beneficiaries. Report to the Congress: Medicare Payment Policy. March 2005.

6. Bates DW, Cullen DJ, Laird N, et al. Incidence of adverse drug events and potential adverse drug events. JAMA. 1995;274(1):29-34.

7. Critical pathways, also known as critical paths, clinical pathways, or care paths, are management plans that display goals for patients and provide the sequence and timing of actions necessary to achieve these goals with optimal efficiency. Protocols are treatment recommendations that are often based on guidelines. Like the critical pathway, the goal of the clinical protocol may be to decrease treatment variation.

8. Order sets are evidence-based orders keyed to a medical condition, disease, or major surgical procedure. When the user selects a hospital unit for the patient, the computer system automatically pulls up relevant sets of admission orders.

9. Koppel R, Metlay JP, Cohen A, et al. Role of computerized physician order entry systems in facilitating medication errors. JAMA. 2005;293(10):1197-1203.

10. Weingarten SR, Riedinger MS, Conner L, et al. Practice guidelines and reminders to reduce duration of hospital stay for patients with chest pain: An interventional trial. Ann Intern Med. 1994;120(4):257-263.

11. Turley K, Tyndall M, Roge C. Critical pathway methodology: Effectiveness in congenital heart surgery. Ann Thorac Surg. 1994;58(1):57-65.

12. Macario A, Lubarsky D. Why are hospitals enamored with clinical pathways? American Society of Anesthesiologists. ASA Newsletter. 1998;62(10):9-12.

13. Opportunity by Function and by Service Line. Available at: http://www.hmc-benchmarks.com

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