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1.4. A Focus on Practice

Hospitals are part of a larger health care system in the United States, which has been shaped by a complex and often contradictory public policy structure. Fundamentally, health care policy debates revolve around this basic question: What is the appropriate political and economic structure for the promotion of health and health care in the country? Whether this is a centralized system with single-payer prices set by committee, a decentralized system with prices determined by a market, or anything in between, the debate tends to abstract away from actual hands-on medical practice. This abstraction is a dangerous oversimplification. All the value in any conceivable system is only realized in the actual delivery, when hands touch patients. Everything else is prelude. The closer we get to this all-important transaction, the more immediate the returns on our investment will be.

Pundits gloss over the health care delivery process because they assume that if incentives (prices, rewards, costs) are set correctly, the rest will follow as people rationally respond by consuming more of this, less of that, and so on, reaching the desired allocation of resources and consumption. This faith is unfounded. “Correct” incentives are necessary but insufficient for efficient operations. Different firms routinely respond to the same market environment with very different internal organizations, policies, and practices. For example, the Toyota Motor Corporation revolutionized the way production is managed globally, with no significant differences in the prices or incentives it was facing relative to competing automobile companies. Granted, Toyota served a Japanese market (smaller in volume, but still demanding high variety) and was located in more rural settings where cynical models of management and labor did not hold sway. These differences may have facilitated, but cannot fully explain, the rise of the Toyota Production System, now known as “lean” or “just-in-time” production. Rather, a combination of individual genius (and near fanaticism) by one individual, Taiichi Ohno, a supportive management structure, and two decades of trial and error led to innovations that greatly enhanced the efficiency and competitiveness of Toyota. The company simply found a better way to do things. This sort of process innovation makes it possible to do more with existing resources or to achieve the same level of output using fewer resources.

In general, external incentives influence, but do not determine, outcomes. What takes place within the hospital, and how well internal processes are managed, governs how efficiently and well patients are served. Simply put, there are many ways to manage internal processes, and some ways are better than others. It is this observation that motivates this book. We seek to provide a framework for identifying the causes of inefficiencies and the path to improvement for hospital operations.

The potential social gain is significant. Hospital expenditures (including inpatient and outpatient hospitals, Emergency Departments [EDs], and ambulatory surgical centers) account for 36.3% of total health care expenditures in the United States (Exhibit 1.5). Improving these operations can have a major impact on the total social cost and benefits of our health care system. It is commonly assumed in consulting circles that if a system grows up in an ad hoc fashion, bringing some rationalization to its design can easily reduce costs by 10% or more. Applying this logic to the $2.1 trillion in health care expenditures in 2009 (of which 36.3% are spent on hospitals), we estimate that rationalizing hospital operations has the potential to achieve annual savings of at least 10% of 36.3% of 2.1 trillion, or $76 billion. We expect that the actual upside potential is significantly higher, because in the authors’ experience internal processes in a typical hospital are less mature than those in most other industries.

Exhibit 1.5

Exhibit 1.5. How to spend $2.1 trillion.

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