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Improving Your Way to Oblivion?

Philip Betbeze, for HealthLeaders Media, December 8, 2008

How do we improve ourselves personally?

Generally, people think about personal improvement in terms of cutting out smoking or other bad habits, getting more exercise, losing weight, or taking a class to learn something new. OK, that takes care of improving at the personal level.

How do we improve in business? Much of the work surrounding business improvement involves proven process improvement programs like "Lean" manufacturing techniques and "Six Sigma," which aim to take wasted effort out of the processes used to create a good or service. Oh, and by the way, while you're working out the waste, it's nice to be able to sell a product or service that people can't or don't want to live without—and for which they are willing to pay higher and higher prices. My college economics professor would call this taking advantage of inelasticity of demand. When you have such a situation, you have much greater freedom to raise prices and thus increase your profit margin—usually the entire point of being in business in the first place. From an objective viewpoint, one could argue that increasing your profit margin is the ultimate example of improvement.

Healthcare is a classic example of the type of industry that can take advantage of inelasticity of demand. People will spend huge amounts of money in the hopes of improving their health, after all. In 2007, healthcare spending was 16% of our nation's GDP—an unthinkable number even 20 years ago. Experts predict we'll spend 20% of our GDP on healthcare by 2016, and there's no end in sight to the increase.

One health system CFO friend of mine is happy to point out that he doesn't see a ceiling of healthcare demand anywhere south of 30% of GDP. You might be surprised, but he's not happy about that—just realistic. The fact that we might bankrupt ourselves individually and as a nation as we approach that level of spending on healthcare, in his mind, is just a fact—not something to celebrate or lament. After all, how much would you pay to keep your health? Or the health of a loved one?

Then why would anyone running any kind of healthcare operation—from the largest academic medical center to the corner drugstore—want to cut prices? Because unlike some of their colleagues, they actually walk the talk of nonprofit healthcare.

Healthcare should be the next gold rush. Of course, most of you know why in most of its subsectors it's not—government reimbursement. Which is why my panelists from HealthLeaders Media's Top Leadership Teams event are so focused on improving by cutting the cost of care. That's right, they see their long-term survival in being among the low-cost leaders—a counterintuitive concept in an industry that has the power of inelasticity of demand.

The money for healthcare reimbursement increases over time simply isn't there, says Jeff Thompson, the CEO of Gundersen Lutheran Health System in Wisconsin, whose facilities happen to be among the lowest-cost, highest-quality healthcare facilities in the nation, according to the Dartmouth Atlas Project. Thompson's view is that healthcare providers need to focus on marrying low cost and high quality in order to thrive not just in the here and now, but in the medium-to-long-term future. One way to do that, he says, is by forming partnerships with local employers and payers to reduce cost and improve quality. But Gundersen is trying all kinds of ways to be more efficient, from integrating healthcare services through its electronic medical record to changing contractors' incentives for building in change orders to bricks and mortar construction to using energy cost-saving byproducts from fermentation at a local brewery.

"Having good finances is just a tool," Thompson told me. "The ultimate prize is making the cost not only low enough to compete but to improve health of communities."

Amen, brother.


Philip Betbeze is finance editor with HealthLeaders magazine. He can be reached at pbetbeze@healthleadersmedia.com.
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