Cutting Health Care Costs: Crucial Goal or Unwise Obsession?

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The increasing importance of healthcare organizational issues is evident from the fact that almost every issue of the Harvard Business Review (arguably the world’s most important management periodical) now has an article in this area. The latest, in the current (November 2014) issue, is “How Not to Cut Health Care Costs.” Written by Robert Kaplan, an emeritus Harvard Business Professor money chartand management guru best known for his work on the Balanced Scorecard, and by Derek Haas, Project Director and Fellow for Value-Based Health Care Delivery at the Harvard Business School and founder of Avante-garde Health (whose leadership team now includes Kaplan), it has some recommendations of interest to anyone in healthcare.

The authors give five examples of areas in which healthcare organizations go wrong in their quest for lowering costs. The first is reducing support staff. Of course the number one method organizations use to lower expenses is to reduce payroll (which in healthcare constitutes about two thirds of expenses). Downsizing even became a fad, though its negative consequences are well known.

Kaplan and Haas give a particular example of how such adverse effects can happen: Hospitals cut back on secretaries and doctors wind up doing more paperwork. As they point out, organizations often cut payrolls without really considering the actual costs and benefits. Next time your healthcare organization is faced with proposals for reductions in staff you might use this quote: “Arbitrary constraints or cuts in personnel, uninformed by an awareness of the underlying clinical and staff resources needed to deliver high-quality outcomes for a variety of medical conditions, can lead to long treatment delays, worse care and outcomes, and overstressed, frustrated caregivers.”

The second how-not-to-do-it example is underinvesting in space and equipment. For example, more operating rooms can do mean that doctors can do more surgery. The cost of idle space can be less than that of surgeons idled because they have no available resources. This is an interesting, though seemingly contrarian, idea.

The third “wrong way” is a narrow focus on resource costs. (Patient care supplies represent about a quarter of hospital expenses.) The authors note that hospitals primary mechanism in this area is to negotiating discounts on purchases, but suggest that they would do even better to manage how resources are used.

Number four is “maximizing patient throughput”. Currently there is an emphasis on reducing visit times, for example, though studies have shown that if doctors spend more time with patients outcomes are better. In addition, research has shown that more time spent preparing patients for operations means less problems afterward. The writers offer a simile: it’s as if an orchestra decided to lower costs by having the musicians play faster!

The final item is failure to use standardization and benchmarking. They recommend bringing doctors and other medical workers together to compare how procedures are done and providing more information to them on costs and alternatives. This is surely sound advice, and one could go further with it by adopting open book management. Engaging all employees is key to such efforts, but for that an organizational culture of open and honest communication is needed – but sadly that is often lacking.

On the whole, this article is a good contribution to the debate over health costs and provides worthwhile advice and idea. From a larger perspective, however, one can question the overriding emphasis on cost-cutting. By definition, waste is bad and efficiency is good, but obsessive concentration on saving money can actually be detrimental to organizations. And isn’t the real way to reduce medical costs to prove and promote wellness for everyone?

jim murphyJim Murphy has a solo consulting practice called Management 3000, focusing on organizational development and change management.  Being semi-retired, Jim is willing to provide very reasonably priced consulting, coaching or  project work for organizations aspiring to improvement in organizational culture, effectiveness and employee engagement. Formerly he led the Massachusetts Bay Organizational Development Learning Group, was Human Resources Director for the City of Boston Assessing Department, and served as a consultant with the Boston Management Consortium.  His consulting practice includes management coaching as well as research and writing on employee relationships, leadership, healthcare and collaborative practices.  Having produced newsletters for several organizations  and being a frequent content writer for the”Confident Voices in Healthcare” blog, he is interested in writing and research opportunities, as well as consulting and coaching.


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