Toyota Way and Lean - Performance Excellence - Health Care Costs

Executive Summary

In this paper, we will explore the rise of performance excellence departments. Performance excellence is a somewhat newer concept for hospitals in which staff or processes are observed and studied with the aim of eliminating waste and improving efficiency. Originally designed from an auto manufacturing standpoint, the Toyota Way and Lean have been adapted to health care and are responding to the changes in health care reimbursement procedures that have been brought about with the passage of the Affordable Care Act. If they have not been implemented already, performance excellence departments are poised to become an integral and necessary part of the operations of any hospital that wishes to remain solvent in the current economic reality that is health care reimbursement.

Health Care Costs

        Hospital costs during 2010 in the U.S. constituted $814 billion or 31.4 percent of all healthcare expenditures (Goodman & Norbeck, 2013). Though inflation of actual health care costs has been historically low from 2008- 2011, most Americans still feel that health care costs are spiraling out of control (Klein, 2013). Perhaps this is due to the recent focus on health care or the increase in deductibles that Americans are now paying as insurers make attempts to control their own costs. The rise or perceived rise in the cost of health care will continue as national health care shifts into a consolidated healthcare system and programs like Medicare allow higher payments for services performed in hospitals as opposed to independent private practices (Goodman & Norbeck, 2013).

Rather than attempt to fully explain any one of the myriad of reasons for the costs of health care in America, for purposes of this paper, the focus shall be on the practice of “fee for service.” Up to the passage of the Affordable Care Act of 2010 (ACA), payments to hospitals or health care providers were made on a “fee for service” model. Fees were charged for each individual procedure or item. Arguably, this system easily led to overbilling as invoices were created based on the quantity of care provided, rather than the quality of care provided.

In an attempt to consolidate care, reduce costs for multiple billings and increase quality of care, the Centers for Medicare and Medicaid Services (CMS) created the Bundled Payment for Care Improvement Initiative (BPCI). According to CMS, Research has shown that bundled payments can align incentives for providers – hospitals, post-acute care providers, physicians, and other practitioners – allowing them to work closely together across all specialties and settings (CMS, 2016). CMS also recently announced that more than 500 hospitals and related health care organizations agreed to bundled payments for all the care associated with four dozen conditions and procedures, including stroke and joint replacement. Clearly, bundled payments will be the preferred future method of payment for medical procedures.

Hospital Attempts to Lower Costs

        As mentioned above, health care consumers on all levels are becoming aware of the true cost of health care. If they are not aware of the cost of procedures first hand, they are feeling the expense through the rise in health care plan deductibles. Hospitals have been under increasing pressure to make their prices more affordable to out of pocket payers. With the implementation of the ACA, many more people are able to seek health care as they are now insured whereas they previously were not. This may seem like a boom to hospitals and healthcare providers, however, the newly insured are insured by the government and thus hospitals are further subjected to bundled payments from the CMS. In addition to bundled payments, the payment model is also moving towards a “value based” system in which providers will be reimbursed for procedures according to a shared savings model. Shared savings arrangements differ, but in general they incentivize providers to reduce spending for a defined patient population by offering them a percentage of any net savings they realize. The Medicare Shared Savings Program is the most well-known and standardized example of this new model (Brown, 2016). Hospitals are also finding themselves caught between these new methods of reimbursement and their own rising costs of staff, equipment and facility costs. Traditional hospitals are also facing increased competition from specialty outpatient clinics that do not have the overhead expenses of an acute care medical facility. The only way that hospitals can stay solvent is to increase quality of care, increase patient satisfaction, and reduce overhead expense.

Performance Excellence

        Higher costs do not translate into better health care and, in fact, as once stated by Dr. Don Berwick, nearly 50 percent of what we do in healthcare is a waste (Galvan 2005). So, how do hospitals respond to the challenge of staying in business? A simple way may to be to reduce staff, but this is unlikely to occur in may locations as the need for health care services is growing exponentially. There needs to be trained staff to address the needs of the communities they serve. What many hospitals have done is revert to an old rule of business, reduce overhead expenses. How can this be accomplished? Many organizations have begun to look at the most basic tenants of their operations. Everything from par levels to employee efficiency. If an organization is to survive without lay-offs, it must function more efficiently on all levels. As we have discussed, hospitals are not necessarily the best models of efficiency or cost control, they have previously not have had to operate with efficient means. As a response to the call to change, many hospitals are creating “performance excellence” or similarly named departments. The mission of these departments is to seek out and change the ways in which hospitals operate. A special focus is typically the elimination of waste in all forms. The elimination of waste creates more efficient operations and an organization that can maximize its positive margins from reimbursement.