This article is the second in a series examining the writings of well-known economic thinkers in light of the modern healthcare organization. The first article was on growth; this article is about capital.
In his 1867 book, "Das Kapital," Karl Marx said that capital was not productive, and productivity came from labor only. He further stated that owners only focused on profits. Is it possible that Marx could be right when it comes to the modern American hospital?
Clearly, focusing only on profits would be an unbalanced approach. But to completely ignore the importance of profits would also be unrealistic. While healthcare is a labor-intensive industry, hospitals also have tremendous capital investments in land, buildings and equipment. Many hospitals struggle to maintain and grow the revenue-generating capacity of their capital base. Will hospital productivity be negatively impacted in the future? The answer may depend on how well hospitals are able to measure and improve their productivity and profitability.
Are hospitals creating wealth? Understanding Economic Value Added
Hospital systems should begin to use the concept of "Economic Value Added" to see if they are creating wealth — or eating into their capital base. Simply stated, EVA can tell healthcare leaders whether a hospital's incremental net income is more than the cost of capital used to generate it. As hospitals find better ways to use their existing capital investments, their EVA will improve. (While EVA is widely embraced in a number of industries, it is not commonly used in the capital-intensive healthcare industry.)
Hospitals should also measure the productivity and profitability of their equipment. For example, how many times has a new piece of equipment been acquired while the existing equipment still had useable life and was not being used at optimum capacity?
Marx's negative view of capital notwithstanding, there are numerous ways to enhance the productivity and profitability of your hospital's capital, while growing value and improving EVA. You can begin by measuring the productivity of your existing capital — then develop a plan to improve it. Here are four ideas to help you improve your hospital's productivity and profitability:
1. Understand the difference between productivity and profitability. Many hospitals focus on productivity benchmarks as a driver of value. This approach can be misguided, because monitoring productivity is not the same as maximizing profitability. An example of this is an MRI unit that is only open 10 hours a day, five days a week, but has a backlog of days or weeks. Perhaps the hospital could extend hours to include evenings and weekends. If the incremental cost of running the unit is $50 per case, and the additional revenue is $1,000 per case, then opening for longer hours is clearly a wise financial move. Surprisingly, the decision to open for more hours might not be made because the hospital has a hiring freeze on FTEs, or because extending hours would hurt productivity standards. Sometimes you have to spend money to make money. In addition to higher profits, the hospital can increase patient satisfaction and loyalty by providing services at times that are more convenient for their patients.
2. Hospital executives should seek to improve their services by providing them at the times and places most convenient for the customer. An example of this would be to hold CT/MRI slots open for outpatient customers at noon. People who have to take time off from work would often prefer to have a procedure done at a time when they are not working. Many hospitals close their imaging service at noon so that the technicians can all take a lunch break at the same time. It would be better to rotate lunch breaks and keep the unit open when it is most convenient for the patient. Improved customer service will grow volume and increase profits.
3. Have lower-cost employees perform some of the work currently done by high-cost professionals. It is not uncommon to see an imaging technician handling all aspects of a patient visit, from greeting the patient, to answering the patient's logistical questions, to bringing the patient back to the room and helping them get on the table. In many cases, a tech assistant could handle these non-clinical functions, allowing the technician to spend more time scanning (generating revenue). Hiring tech assistants often allows for reduced slot times. This type of specialization of tasks has been used to increase productivity in the MRI/CT units of many healthcare organizations. Specialization also increases patient satisfaction, because each employee works on a smaller part of the patient experience. This makes training more effective. Reassigning some of the technicians' tasks to an assistant may increase employee count — but it will also greatly improve the profitability of the service.
4. Operate a healthcare system's product lines with a market-wide focus. An example of this is the hospital system that has imaging assets in 15 or more sites with an average use rate of 50 percent. The use rate for the separate units probably runs from 10 to 100 percent. The hospital should develop a comprehensive system-wide plan for these sites, including sharing techs and managers across facilities, load balancing volumes, and integrated education and marketing campaigns. It will then be important to measure the results of the whole system and each separate unit. Operating a product line such as imaging with a system-wide approach also provides branding and marketing opportunities. All units in the system should share a common focus on quality and customer service. Finally, the proper matching of responsibility and accountability is key to making the integrated system work effectively.
So, in contrast to the views Karl Marx held on capital and profits, hospital systems must seek to measure and continually improve the productivity of their capital base — because productivity is essential to the future growth and vitality of healthcare systems. As a healthcare leader, your focus on productivity can help ensure a profitable future for your organization.
Roger Johnson is the founder and principal of Ivy Ventures, LLC, a consulting firm helping hospitals grow outpatient service lines. Mr. Johnson has also served as CFO of MMR Holdings, a national operator of outpatient diagnostic imaging centers, where he also served on the executive committee and led financing, budgeting and management control initiatives. He was previously director of mergers and acquisitions and director of business development for Trigon Blue Cross Blue Shield (now Anthem BCBS), and has also served in the business department at the law firm of McGuireWoods, LLP. He can be reached at rjohnson@ivyventures.com.
J. Stephen Lindsey, FACHE, was CEO at HCA Henrico Doctors’ Hospital for 16 years. He has served as an affiliate professor in the MHA program at Virginia Commonwealth University. Mr. Lindsey is a principal of Ivy Ventures, LLC, a consulting firm that helps hospitals grow outpatient service lines. He is a fellow of the American College of Healthcare Executives. He can be reached at slindsey@ivyventures.com.
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