Kaizen and TPS at ThedaCare

The following article appeared online at CFO Magazine, December 2009

Kean to Be Lean

Desperate to cut costs, hospital CFOs are turning to an unlikely source: the "lean management" principles championed by manufacturers.

Josh Hyatt - CFO Magazine
December 1, 2009

Even as they wait to see what impact health-care reform may have on their businesses, CFOs at the nation's hospitals and health-care groups are working hard to streamline their operations and drive costs down as profits slide.

To do that, they are open to any sources of inspiration. When ThedaCare, a four-hospital chain based in Appleton, Wisconsin, cast about for practices that it might emulate, it looked to a nearby company — Ariens, a manufacturer of snowblowers.

Ariens had embraced so-called lean techniques as it sought to fend off competition from Asian rivals, a business challenge that would seem to have nothing in common with that faced by hospitals. But ThedaCare found that what worked for Ariens could also work for its business; in fact, Ariens's CEO ultimately assumed a seat on a ThedaCare spin-off devoted to advising health-care systems about operational efficiency.

Reform efforts aside, health-care providers have been under pressure for years. Medicare has been steadily tightening up its reimbursement policies — eliminating payments for some hospital-acquired infections, for example, and inspiring private insurers to do the same. At most, Medicare reimburses hospitals for 80% of their costs — at a time when hospital costs are rising, partly because high unemployment is churning out fresh supplies of uninsured arrivals.

In July, as part of an agreement with the Administration to help pay for reform, hospitals agreed to forgo $155 billion in government reimbursements over the next decade. That translates into $2.7 million of annual cuts for each of the country's 5,700 hospitals.

"Hospitals need to eliminate anything that does not add value to the customer," says Mike Chamberlain, president of consulting firm Simpler North America and general manager of its health-care division. "They can't generate that amount of savings through easy measures. They need to undertake a cultural transformation."

The move to lean management is just such a transformation, and it certainly doesn't come easily. "People sometimes have a bad reaction to change," says Kevin Higdon, CFO of Elkhart General, a $600 million (in gross revenues) hospital near South Bend, Indiana. Elkhart has implemented lean techniques for the past two years.

As part of that process, it conducts numerous brainstorming sessions, which can acquire the feel of a corporate reality TV show: put a bunch of people in a room and see if they can come up with a useful idea before anyone storms out in frustration. "We've had people walk out," confirms Higdon. "But they come back. They stick with it."

The lean-manufacturing approach — which evolved from the Toyota Production System that W. Edwards Deming influenced — progresses in a never-ending series of kaizen (Japanese for "incremental improvements") intended to identify process failures. This involves methodically mapping out "value streams" (the most ROI-intensive processes), analyzing the root causes of any problems that come to light, and testing and documenting the effectiveness of potential solutions.

Elkhart General stages "Rapid Improvement Events" one week a month, assigning a different team of employees to figure out how to improve a process or eliminate waste. All told, the hospital has saved about $6.5 million.

Lean, Not Mean
The notion of applying a manufacturing mind-set to a medical facility will strike many as not only improbable but potentially dangerous (it may not help that Toyota just announced its largest recall in history). Are doctors and nurses to be thought of as assembly-line workers focused on efficiency and speed at the expense of care and compassion?

"A lot of the anxiety about lean comes from the fear that all of the methods from Toyota will be copied," says Mark Graban, a former industrial engineer who has worked in manufacturing as well as health care and who is now a senior fellow at the nonprofit Lean Enterprise Institute. "But hospitals are implementing lean methods to help them support what they are trying to do, not to make them into any less of a caring environment."

Lean has also made inroads into financial services, higher education, state governments, and retail. Starbucks has put together "lean teams" to improve its repeatable activities — rearranging store layouts to improve barista productivity, for example.

"Lean management focuses on improving processes, so its principles and practices are applicable to any business," says Bob Emiliani, a lean educator who works with senior managers. "There's a potential role for it any time there's a need to reduce costs, although to think of it solely as a cost-cutting method is a misinterpretation." (For lean's principles, see "Healthy Regimen" at the end of this article.)

Health-care facilities have any number of activities that consist of repeatable steps, such as registering, diagnosing, and testing patients. If there are inefficiencies that can be corrected, not only should costs go down but quality should go up. If nurses are spending just 30% of their time with patients, for example, a hospital may study what they are doing the rest of the time. They can then make it possible for those nurses to spend more time bedside, rather than hunting for equipment or tracking down doctors.