David E. Williams: This is David Williams, co-founder of MedPharma Partners and author of the Health Business Blog. I’m speaking today with Jeff Terry. He’s Managing Principal of Clinical Operations for GE Performance Solutions. Jeff thanks for being with me today.
Jeff Terry: Good morning.
Williams: Jeff, tell me about capacity management. Why is that something hospitals have to be concerned about?
Terry: Capacity management is important because it’s among the top two or three financial levers available for hospitals today and it’s becoming more important. However ACOs play out, however integrated health care plays out, capacity management is at the top of the list of things that folks must do to remain financially healthy and to deliver the best care for their patients.
Williams: My guess is a lot of people think that they have a capacity management strategy or they know about capacity management. Many people talk about utilization or occupancy, but I have a feeling you’re talking about something a little bit beyond that. Is that correct?
Terry: I’m glad you brought that up. Certainly occupancy is related to capacity management. The distinction I draw is occupancy tends to be a static metric, typically measured as midnight census. When we talk about capacity management, we mean something that’s holistic, that’s multi-variate and that’s temporal, meaning capacity management is about much more than just the inpatient franchise.
It’s about more than utilization in the ORs. It’s about more than the hospital itself. Capacity management is about how we manage our patient intake through the clinics, how we manage transport, and the roles and their impact in the hospital. How do we manage pre-admission testing across a system of hospitals?
For example: I’m going to have my procedure at the downtown Level One trauma center, but I live in the suburbs. Can I do my pre-admission testing in the suburban hospital that’s part of the system near my house? Well, if I can, that’s better for me and it’s better for the hospital. But it would take pretty sophisticated capacity management to make that routine possible.
So when we say it’s multi-variate, it’s all about dimensions, different functions, different facilities, different settings of care, and different types of patients. When we say it’s temporal, we’re talking about scheduling, care throughout the day, and all the different things that have to intersect to bring care to a patient; each task having its own fixed amount of capacity.
When we say it’s holistic, we mean it’s broad. We mean it’s all of those things. When you consider those things broadly, I think you can start to see where capacity management becomes such an important driver of patient experience and cost.
Williams: Let’s talk about cost for a minute. If hospitals free up more capacity, what impact do you think that would have on overall health care costs?
Terry: I think somewhere in the tens of billions for sure across the U.S. health care system. I think you could make an argument that it’s in the hundreds of billions, but only time will tell.
In an individual hospital there is between $2 million and $20 million of cost opportunity. That’s because labor costs are 50% or 60% of a hospital’s expenses, including the cost of facilities and operating space. Those are the big drivers of cost. Managing that huge fixed footprint that we all is about the most important thing we can do to manage our costs.
I think the risk, as you mentioned earlier, is people saying: “well we’re working on occupancy or we’ve worked on patient flow or we’re working on throughput.” Those are all related, but when we say capacity management, we mean all of those things and much more. New tools and new thinking is becoming available to transform the work that’s been done in the past.
Williams: I’ll admit that this next one is an unfair question, so I’ll excuse you if you want to avoid it.
In most industries, when you improve capacity management,then you have lower costs. Those costs decrease are passed on to the end consumer –whether that’s an industrial consumer or a person. My concern is that in health care, what might happen if there’s more capacity is you might have a situation of supply creating its own demand when you have third party reimbursement. Essentially the overall costs in the system might go up even if the unit costs for the hospital go down. Is that a fair thing to say?
Terry: It’s a great question. I, too am fascinated by the dynamics of motivation, economics and the supply side of health care.
Capacity management is something that’s gone from a “nice to do” to a “must do” for hospitals. So, if you’re a suburban hospital making a 15% margin, maybe things are okay. If you’re a hospital that a year ago was making a 3% margin and next year looks like if you do nothing different you’ll make a negative 2% margin, then capacity management becomes existential.
I think for the system, capacity management is becoming an existential issue. People ask, “how are we going to survive going forward?” Well, part of that plan includes better management and better utilization of our fixed costs. This is where capacity management comes in play.
I do think the savings associated with those costs, given the current pressure around reform and evolving systems of care, translates to overall savings in the health care system. On the other hand I don’t think they’ll have the effect of generating more demand.
Williams: What do you think is the profit potential for a hospital when they shift to a sophisticated capacity management system? You mentioned a hypothetical example of somebody going from plus 3% to minus 2%, maybe they can get back to the plus 3%. How dramatic is the potential?
Terry: Great question. Obviously it varies by size, setting and markets, but I think the potential ranges from the millions to the tens of millions.
We’ve worked with Mount Sinai in New York, which is a 1,200 bed quaternary care academic medical center; the whole nine yards. We worked with them for about three years. They now attribute about $120 million a year operating margin improvement to capacity management.
Now we’re working with Saint Luke’s in Houston. We’re about six or nine months into that work and they’re on track to see about $14 million a year of savings.
So you start to see therange there. The big variable in terms of return, is whether the hospital is one that’s in a growing market or one that’s in a market that needs to ‘right size’ capacity.
Figure two-thirds of our hospitals operate somewhere below 75% occupancy. When I say “occupancy” I mean utilization; broadly I mean capacity management. For those hospitals, the savings may be $5 million if they bring their fixed costs in line with demand.
For hospitals that are constrained -and figure this is 10% of our hospitals’ beds- (like Mount Sinai), they need to deliver care for more patients. Unfortunately they can’t afford to build fast enough. For those hospitals, the profit opportunity may be in the tens of millions, or in Sinai’s case even reaching $100 million. In their case it’s about bringing in more patients under the fixed cost that they already have.
Williams: Clearly you’re talking about capacity management as something that’s multifaceted. Can you talk about the key elements of strategy, technology and operations and how those go together?
Terry: It’s a great question. I like to think of capacity management as more of a Rubik’s Cube than a game of tic-tac-toe. It’s at least three-dimensional if not four or five, and that’s why it’s so difficult to manage.
You mentioned one framework, which is a great one: strategy, technology, and operations. In that framework, the first question we have to answer is a strategy question;:what is our plan for our capacity over the next several years?
As important as capacity is, as significant as our fixed costs are, you seldom find places that are looking three to five years out for capacity management. We like to think about that as scenario planning. What’s the best example of scenario planning? Well think about the Pentagon. Think about any country in the world that takes an action against any other country in the world. There’s a 3-ring binder somewhere in the Pentagon for what we’re going to do about that.
Well, in a hospital, we ought to have a similar set of 3-ring binders for what might happen if the hospital down the street closes What happens if our relationship with our cardiologist changes dramatically? What happens if the big system next door implements system-wide pre-admission testing and we haven’t?
Strategy is about thinking three to five years out, and figuring out what we might do in all the possible scenarios over that time horizon. That’s a big and important first step.
The second step is to identify what technology is available and what technology should be implemented in order to reach a better level of capacity management. Most folks are using RTLS –Real Time Location Systems– where the combination of radio frequency and infrared has made it much cheaper and much more accurate. This becomes important as we think about better managing our patients, their safety, and better managing our assets. What technology can be brought to our hospitals to enable them to reach the next level of capacity management?
Then there are the operational pillars. This is what really matters. This is where we make the change on the units to take advantage of whatever technology we’ve decided to implement. We begin to be prepared and begin to execute the strategy that we’ve selected: So strategy, technology, operations, great framework.
Another great framework is to think about governance, scheduling and process. I’ve mentioned different areas. We all know them; ED, OR, inpatient, oncology clinics, transplant clinics, preadmission scheduling, all these being different forums and venues.
How is each of them governed? How are decisions made about utilization? How are we interacting with physicians? Each of those must be managed and considered separately.
I think process improvement is pretty straightforward. Most folks know about that.
The third pillar of that framework is scheduling. Scheduling is the rocket science part of running a hospital. I think in general we underwhelm the sophistication required to manage the interaction of dozens of schedules, the sophistication it takes to care for any one patient as you move them through their care pathway.
Ultimately we have one framework; strategy, technology and operations. We have to then think about the framework in terms of our processes, our scheduling and our governance. When we bring all those elements together, we start to reach a higher level of performance and obtain savings.
Williams: What role does GE play in capacity management in health care and other industries? Can you give me any sort of a contrast? Is health care and hospitals just one segment among many or does it stand aside as being unique?
Terry: Well I think both. Certainly at GE we have capabilities that we’ve developed in other industries and brought to bear in health care. A great example of that is our tool for optimizing block schedules in the OR. Some of the science behind that was developed at the GE Global Research Center in Albany. This is of course the same place that the jet engine and the MRI were invented. The technology, this new algorithm for scheduling science, was developed to optimize rail scheduling. If you take the same researchers and some of the same intelligence and over a couple of years apply it to block scheduling in the OR, it works. I do think there’s a cross-pollination that GE is able to do.
I also think health care is unique. I recently wrote a blog about patient safety being harder than aviation safety. I think any way you slice it, because of the variation in the patient, the variation in the human, health care is the most difficult domain. Therefore there are unique aspects of it. We must blend great science, great compassionate care and the great art of medicine. I think that makes health care unique. So I believe it’s both.
Williams: I’ve been speaking today with Jeff Terry. He is Managing Principal of Clinical Operations for GE Performance Solutions. We’ve been talking about capacity management in hospitals. Jeff, thanks so much.
Terry: My pleasure. Thank you David.