Last week, I began what I hope will be a series of posts on Virginia Mason's experience with lean process improvement and the effects it has had on their care delivery and their financial bottom line.
Most of the commentary around the web about Virginia Mason's initiative has been about the prospective profitability of their move. Many reports I read claimed that, while their outcomes improved along with the quality of care, their bottom line was taking a hit. The main reason for that is also the main reason why our health care system is hemorrhaging cash and medical expenses are spiraling out of control. If you want to look at exactly why our health care system is so broken and backwards, Virginia Mason's experience will tell you.
One of the key discoveries Virginia Mason was able to make while performing a "lean analysis" of their operations, was that many of the high-tech diagnostic procedures they were performing weren't adding any value. So they actively discouraged their providers from asking for those tests, thereby stream-lining the process, reducing the times patients had to come to the hospital, and saving money for the payers along the way. The only problem is that those unnecessary diagnostic procedures are one of the best sources of revenue hospitals have. This is because Medicare reimburses hospitals and physicians based on their view of what the cost of providing those services is. They don't reimburse hospitals based on how much value the procedure creates. Add the fact that most private insurance companies simply follow Medicare's reimbursement model, with a small increase in reimbursement levels and you have a situation where almost all of the payers in our market pay little attention to the value of the services when determining how much they're going to pay for them.
Any diagnostic tool that involves a huge piece of expensive machinery (like MRIs and CT scans), is therefore compensated very well by Medicare, because Medicare views the tool as very expensive to operate (which it is). But Virginia Mason found that those tools often don't add value to the process, so they drastically reduced the number of MRIs and other "high-capital" tests they were performing. Which led to a dramatic drop in their revenue. Ever wonder why American hospitals have more MRI machines than found in practically every other country on Earth? Because Medicare (and thus all insurance companies, too) pays a lot for MRIs. Other countries don't have as many because MRIs often don't add a lot of value.
Luckily for Virginia Mason, they have hopes that they'll be able to renegotiate insurance company contracts that reward them for the savings they'll be able to deliver to payers by not performing as many expensive low-value tests. And, they think that their stream-lined process is going to increase their throughput enough so that even if they don't make money off MRIs anymore, they'll make so much money by treating more and more patients more and more effectively, that they won't miss the lost revenue.
But.... the big elephant in the room is that Medicare makes up 30% of their revenue and renegotiating a contract with them is next to impossible. As long as Medicare's reimbursement methodology stays as inflexible and as backwards as it is, it's going to be very difficult to provide incentive to hospitals to move to leaner processes that cut waste. In the current environment, hospitals make all their money off that waste!