Hospital CEOs manage staff time, inventory to cut costs

— -- Each of the nation's 5,700 hospitals must cut $2.6 million a year on average in costs in the next 10 years to meet the demands of President Obama's proposed health care reform, a daunting task when half of those hospitals lose money.

Criticism came from almost every corner leading up to Obama's speech before Congress on Wednesday night, yet many hospital CEOs aren't complaining, at least not publicly. They say that the hospitals they run are rife with inefficiency and that they are optimistic that the $155 billion in savings is do-able with the help of business disciplines, such as the Toyota Production System, lean manufacturing and Six Sigma.

"Efficiency has not been the hallmark of health care delivery operations," says Alan Aviles, CEO of New York City Health and Hospitals Corp. (HHC), one of the largest hospital and health care systems in the country, with $5.4 billion in revenue.

Those disciplines have been wringing costs from manufacturing for decades, and the cost-cutting has also delivered a counter-intuitive benefit. TVs and computers have gotten better as the cost of making them has declined. Similarly, hospital CEOs say, quality can improve as waste is eliminated.

The 11 hospitals under Aviles' command recently had storage rooms brimming with $10.2 million in supplies. Some of it expired, worthless, before it was used. HHC is moving to a just-in-time inventory system. Supplies now arrive as needed five days a week, which will slash inventory in half and provide a one-time windfall of $5 million.

Where HHC once stocked 20 varieties of rubber gloves of different colors and thicknesses, doctors must now choose from two, which will let HHC negotiate the price of the 132,000 cases it uses each year from $58 to $28 a case, a savings of almost $4 million a year on gloves alone.

Reducing waste

St. Vincent Indianapolis Hospital has made a 78% cut in the number of steps emergency department nurses take to get supplies, says President Kyle DeFur.

The number of pregnant women choosing Delnor Hospital in Geneva, Ill., had grown so much that it was considering spending $80 million on an expansion. But the disciplines of lean management found that patients were waiting hours after they were ready to be discharged. Delnor designated a nurse to handle discharges, which cut the average length of stay by 10 hours, making expansion unnecessary.

Manufacturers were able to boost quality by focusing on eliminating scrap and warranty costs. Delnor has used a similar tactic to cut down on other unnecessary hospital stays: It says it has not had a medication error in 15 months, which is significant when the Agency for Healthcare Research Quality says that patients who have an adverse reaction to drugs are hospitalized eight to 12 days longer.

Of course, cost-cutting done right is complex, and investors are awash in the depressed stocks of many manufacturers that have embraced Six Sigma, lean manufacturing or the Toyota system.

Simpler Consulting trains hospitals in the Toyota Production System. Simpler CEO Marc Hafer says hospitals are often stuck in inertia and may have leaders without the fortitude to implement change. Labor accounts for 70% of the cost of hospital care, Hafer says, which means some hospitals will resort to layoffs and reduce nurse-to-patient ratios before wasted time is slashed from a nurse's day to give each more time with patients.

There also are dilemmas unique to health care. Hospitals bill not for efficiency, but for tests and procedures that are often unnecessary, says Dr. John Mendelsohn, president of M.D. Anderson Cancer Center, and it's hard to argue that patients are the customers when Medicare or insurance pays the bills.

Places to save

That means there will be some heavy lifting to change the entire structure, but Hafer estimates that 90% of the time and cost in hospital care is wasted and $19 billion could be saved each year if all hospitals were to get serious.

Dr. Patricia Gabow, CEO of Denver Health, which provides health services to 25% of Denver's population, started employing the Toyota system four years ago. She says Denver Health has saved $27 million on supplies and increased productivity.

ThedaCare, which runs four hospitals and dozens of clinics in Wisconsin, cut the cost of its in-patient care by 25%, says CEO Dr. Dean Gruner, who estimates $20 million was saved before they quit counting. He says if all hospitals achieve similar results, $400 billion could be saved on Medicare and another $1.3 trillion on the non-Medicare side.

"Changes people fear, such as rationing care, are not necessary to meet the goals," Hafer says. "Improving patient outcomes and reducing costs are not tradeoffs — they complement each other."