Hospitals and Supply Chains

Stephen DeAngelis

August 30, 2010

Recently Enterra Solutions has been doing some consulting with a hospital that is part of a larger hospital system. Hospitals, like other businesses, are looking for ways to improve their operations and get a handle on costs as well as improve their customer service. If you live in the United States, you know that the health care system, as a result of recent legislation affecting health insurance coverage remains, under a microscope. Tensions within the healthcare system are enormous. Patients and insurers want providers to offer services at the lowest possible costs. Providers want to ensure that they get fair compensation for the services they render (and they need to cover overhead expenses that include personnel costs, administrative services, malpractice insurance, and infrastructure — including expensive medical equipment). Although medical breakthroughs continue to be made, many of those breakthroughs tend to increase rather than decrease costs. That is particularly true as efforts are made to extend the lives of elderly patients who often suffer from multiple maladies and require extensive care. A story rebroadcast on CBS’ 60 Minutes last Sunday noted that care for the elderly had the potential of bankrupting the U.S. Government if costs aren’t contained. Lost in the debate, according to Scott Allen, is the fact that improved hospital management could make a significant difference in keeping health care costs in check [“No waiting,” Boston Globe, 30 August 2009]. He writes:

“The modern hospital is a storehouse of technology and training unmatched in human society. These lifesaving institutions are often the biggest employer in town, making them – justifiably – the pride of their communities. But hospitals are also the black holes of the American health care debate. ‘Death panels’ and fear of federal bureaucracy may get more public attention, but poor management at many of the nation’s 5,700 hospitals is a vastly more important reason that US health care costs are the highest in the world, and why the quality of care that we get for our money isn’t far better. Hospitals waste 20 to 30 cents of every dollar they collect, and most lag behind the neighborhood Rite-Aid in adopting basic business practices such as computerized record-keeping. What’s more, they make lots of mistakes, hastening nearly 100,000 patient deaths a year, according to one major study. Awash in internal politics and inefficiency, hospitals have overtaken prescription drugs as the main reason insurance bills go up each year – and the major reason that more and more people can’t afford insurance at all.”

Allen admits that hospital operations are extremely complex and that that complexity “has long frustrated reformers.” He’s hopeful that could change. He continues:

“In recent years an efficiency expert – originally trained in the Soviet Union, land of legendary inefficiency – has been proving that hospitals don’t have to be wasteful and inflexible. Eugene Litvak, now a professor of health care management at Boston University, looks at hospitals and sees systems that aren’t even trying to be efficient with people’s time or money. If hospital executives concentrated on moving patients smoothly through the hospital the way that the local Applebee’s restaurant moves diners, he believes, they could make hospitals better places to work, safer environments for patients, and cheaper to operate.”

Patient flow is the reason that supply chain analyst Steve Banker commented on Allen’s article [“The Logistics of Flowing Patients,” Logistics Viewpoints, 22 June 2010]. I will intersperse Banker’s comments with mine as I review Allen’s article. I always appreciate someone, like Banker, who sees connections where others might not. In this case, Banker sees connections between healthcare systems and supply chains that might not be obvious to others. As Banker writes, “Better logistics practices, particularly in the area of how patients are flowed through a hospital, could lead to significant improvements.” Allen continues:

“[Litvak] can point to a dramatic proof of his ideas. Over the past six years, Cincinnati Children’s Hospital, one of the country’s premier hospitals, has worked with Litvak to streamline the flow of patients from the emergency department waiting room to post-surgical recovery areas. The payoff has been dramatic. Doctors now care for more patients in less time; there are fewer aggravations and logistical conflicts for staff and patients alike. The hospital says the improvements in efficiency have given it a boost in capacity equivalent to a $100 million, 100-bed expansion and boosted income from treating patients by even more. Doctors and nurses – many of them initially skeptical – generally like the system, too, because their schedules became more predictable. And Children’s officials say the changes have also made their hospital safer by reducing the times when nurses and doctors are under extreme stress.”

Those are significant payoffs by any measure. Allen notes that “virtually every other major industry has adopted the principles of operations management, … but the health care industry, 17 percent of the US economy, has been a big holdout.” Banker remarks, “If hospital executives concentrated on the logistics of moving patients smoothly through the hospital, they could make hospitals better places to work, safer environments for patients, and cheaper to operate. The manufacturing, retail and 3PL sectors have all adopted advanced supply chain management principles.”

According to Allen, “leading thinkers of the health care reform movement agree that the ideas put forward by Litvak and a few others have extraordinary potential. If all hospitals adopted aggressive ‘flow management’ programs, … it would free up enough beds and other medical resources to care for all of the nation’s 46 million uninsured people.” Litvak’s claim reeks of hyperbole (not every hospital is as busy as those found in major urban areas, for example), but he can be excused since he is trying to make an important point. Allen explains:

“Litvak’s ideas are ‘the best near-term play for changing health care delivery in a way that would meaningfully reduce spending and improve quality,’ said Dr. Arnold Milstein, medical director of the Pacific Business Group on Health in California, the nation’s largest health care purchasing coalition. ‘As a country, we are at this point really starving for improvements in care delivery that not only improve quality, but equally important, make health insurance more affordable.’ Of course, the US health care system is frustrating proof that just because something is a good idea doesn’t mean it will happen. The American approach to health care has always been to focus overwhelmingly on the search for cures while devoting far less energy to practical matters like finding the best way to get cures to patients. Americans spend twice as much on health care as other industrialized nations with little evidence that the care here is better, and with little being done to stop the escalating costs. Litvak, who learned a lot about bureaucratic inertia from his years as an economist in the former Soviet Union, said that persuading hospitals to adopt his efficiency recommendations has been like cutting through sour cream. ‘You get no resistance,’ he says, ‘but you also get no slice.'”

Allen reports that “in the world of operations management, Litvak is among the leading experts on flow.” Although it is easy to understand why it is important to keep food flowing in restaurants or parts flowing in a manufacturing process, it is not as easy to see how flow plays a critical role in healthcare. But as Allen notes, “Good flow keeps costs down and customers happy.” Customers, in this case, are also called patients. Allen explains why the flow of patients matters.

“In hospitals, nobody expects – or even wants – ‘fast’ care, but everyone in the building benefits when the flow of patients from one part of the system to another is smooth. Backups in one part of the hospital can cause backups in others, leaving, for example, patients sitting for hours in the waiting room or highly trained surgical teams cooling their heels with no patient. A smoothly flowing hospital saves time and money, but it also reduces stress on the staff and the risk of mistakes.”

Highly trained surgical teams are also expensive teams. Keeping them idle inevitably increases costs of individual procedures because that down time must be covered to pay expenses. Every inefficiency in the system, in fact, must be covered and that can cause costs to rise. Allen continues:

“Unfortunately, the typical US hospital is a model of bad flow: The average emergency room wait, for example, is four hours. The problem is actually quite simple, Litvak says. Nearly every department is run separately, making today’s hospital a nest of competing kingdoms rather than a smooth-running, cooperative organization. Hospitals often have limited power over doctors, who can schedule patient appointments without regard to the hospital’s needs. Effectively, one of the most important industries in America is in the hands of people who, for all their talents, have little expertise at running a business. As a result, Litvak says, American hospitals only think they’re overcrowded because they have a chronic problem managing their flow. Patients simply pile up at certain times. In 2006, for instance, US hospitals were typically only 65 percent full, far less crowded than the 84 percent occupancy in Britain and the 90 percent occupancy of Canadian hospitals. But when US hospitals get much more than 65 percent full, the whole system starts to become stressed. Then, to boost their capacity, hospitals expand, at an average cost of $1 million per new bed.”

You start to get a sense of why complexity has created a gap in management practices in hospitals. A number of people associated with the Cincinnati Children’s Hospital had intuitively sensed that patient flow was at the heart of better care. When they looked into the problem, this is what they found:

“Cincinnati officials discovered that the busy nights were caused, not by the random distribution of accidents and illnesses in Cincinnati, but by the way the hospital assigned operating room time to surgeons for scheduled surgery. Since a child who has just received a new liver needs near constant attention, this was no small matter, raising the risk that the child’s vital signs could plummet while the nurse is off caring for other patients.”

According to Allen, hospital executives tried several approaches to try and correct this patient flow problem. He reports:

“For several years, Cincinnati Children’s officials, with [Chief Executive James M.] Anderson’s enthusiastic backing, tried to get their patients flowing better through the building. They tried hiring more staff to work in the emergency department at certain times. But Anderson’s team realized that, to make dramatic steps forward, they needed to analyze the whole hospital, not just individual departments. That’s when two doctors, [Frederick Ryckman, a prominent transplant surgeon,] and the vice president for quality and transformation, went to a talk by Litvak as part of an Institute for Healthcare Improvement program in 2004. ‘We were just blown away. If what he says is true, oh my God. Isn’t it exciting?’ recalled Dr. Uma Kotagal, the vice president. Or, as Ryckman put it, ‘He might be brilliant, and he might be nuts.’ Litvak, who cut his academic teeth analyzing the Soviet telecommunications industry, may have seemed an unlikely avatar of efficiency, but he had the advantage of not carrying the baggage of medical traditions that can crush the spirit of innovators. And so, armed with a branch of mathematics known as queuing theory, Litvak began to rearrange Cincinnati Children’s Hospital. He told administrators that a lot of the delays throughout the hospital traced back to the lack of control over operating room time. He recommended that some operating rooms be set aside for emergencies only so that scheduled operations would not be disrupted. He also suggested that administrators take charge of assigning times for nonemergency surgeries to spread them out evenly. And he asked that surgeons notify the intensive care unit if their patients would need ICU care after the operation, giving the nurses time to plan. Litvak promised that the efficiency measures would increase the number of surgeries that Children’s could perform with the same resources. Over the next four years, the data proved him right. Cincinnati Children’s estimates that these and other streamlining measures will allow the hospital to generate an additional $137 million in revenue this year from treating more children with the same levels of staffing in surgery and other departments.”

Talk about a good return on investment. I’d say that generating an additional $137 million in revenues with same levels of staffing is amazing. I’ve stressed time and again that getting someone from a different discipline to look at a challenge is a good way to promote innovation. As Allen notes, Litvak had the “advantage of not carrying the baggage of medical traditions that can crush the spirit of innovators.” Allen continues to stress the point that culture can crush innovation:

“Dr. Milstein, the director of the Pacific Business Group on Health in California, said hospitals have resisted efficiency ideas because they could. ‘It takes a saint to say, “Well, even though the market is not very competitive, I am going to quintuple the level of difficulty for my managers”‘ by pressing for big efficiency improvements, explained Milstein. There is also a deep cultural reason that ‘efficiency’ hasn’t caught on in America’s hospitals: Many doctors and nurses just don’t care about ‘efficiency’ for its own sake. They got into the business to help people, and tend to cringe when administrators start going on about cost-cutting. But Litvak’s work blows up the easy doctors-vs.-bean-counters formulation, showing that the bigger threat to patient safety and medical staff sanity is the current disorganization of American hospitals.”

Allen concludes his article by reporting that “some hospitals are taking a harder look at the efficiency lessons from other industries.” He notes that “Boston University Medical Center, guided by Litvak, reduced the number of elective surgeries that had to be rescheduled from 700 a year to seven” and, as a result of such successes, “Litvak is gearing up to train far more hospitals in his methods, setting up a nonprofit that will run independently from Boston University’s Program for the Management of Variability in Health Care Delivery.” Caring for patients sounds a lot more compassionate than looking for efficiencies; but, as Banker concludes, “Supply chain management matters too.” At Enterra Solutions, we believe that our rule set automation techniques can significantly reduce the complexity gap that currently plagues hospital patient flow as well as help with other health care system inefficiencies. That story has yet to be written; so stay tuned.