Attention, Investors
By Dave Carpenter
The Q-revolution Is Spreading
Quality has evolved from buzzword to strategic objective in recent years as not-for-profit hospitals have sought urgently needed improvements in the caliber of care and patient safety. Now, while the link between investments in quality and return on investment remains elusive, quality initiatives are starting to have profound effects on the way organizations conduct business. Higher spending levels are far from the only issue in flux.
From following smarter design strategies to overhauling pay models to adopting lean manufacturing principles and competing for patients in a different way, hospitals and health networks are redefining their business and financial strategies at a time of increased capital demands. Building plans, staffing decisions, service-line expansions, and capital and operational expenditures are all affected.
Even though the ROI of many quality initiatives is tough to measure and usually indirect or unproven so far, the investment community is watching the changes closely.
“As time goes along, the bottom line should be impacted more and more by quality,” says John Wells, senior director of public finance health care for Fitch Ratings.
Impact on Decision-Making
The effects of hospitals’ quality initiatives are profound, with the potential to change the fundamental financials of an organization in several ways:
• Operational and capital costs. The push for quality creates pressure to invest both hard dollars and staff resources in new projects and services, ranging from construction and renovation to service lines. Quality is driving a new set of costs.
• Process changes. Quality initiatives involve changing processes, which could influence a wide variety of business drivers, including risk management, staffing levels, board competence and requisite leadership skills. Organizations are changing flow and other processes and standardizing care to eliminate waste, speed care and track outcomes more closely, decreasing operating expenses and freeing up capital. Inspiration comes from business practices used in other industries, such as lean manufacturing.
• Influence on market share. Safety, quality and satisfaction are core elements of patient perceptions. Investments in quality may, ultimately, move market share.
• Payment and reimbursement. Moving market share is one of the goals of incentive-based pay models (pay-for-performance projects) that are catching on nationwide. There are now at least 115 private-sector programs connecting physician pay to effective care, and some Medicare reimbursements are now being linked to quality performance.
• Traditional ROI. The financial returns in quality are not obvious; yet, some investments can be subject to a more classic definition, such as purchasing some clinical and information technologies.
• Evidence-based design. Hospitals are investing more in evidence-based design as the biggest hospital building boom in a half-century continues. Organizations are increasing their capital outlays on new wings and facilities for such features as identical rooms, lighting and noise controls and other healing design elements to improve care and cut long-term operating costs.
Ultimately, hospitals’ core business processes are expected to change as a result of quality initiatives, which began in earnest five years ago after two Institute of Medicine reports exposed the abundance of fatal errors and other serious shortcomings.
More recently, says Nancy Foster of the American Hospital Association, more hospitals are making quality their major strategic direction, and many are making wiser choices about investments as a result.
“There are a lot of health care organizations coming to understand how critically important it is to be more effective in their quality improvement and safety improvement strategies,” says Foster, the AHA’s vice president for quality and patient safety. “They’ve been committed to it all along, but it’s been a matter of how high a priority it is.”
Focus on Technology
Technology is one central part of how not-for-profit hospital organizations are altering their business dynamics in the push for quality. Without question, it has gotten the most attention among quality-related changes. Scores of multimillion-dollar investments have been made in medical and information technology to improve care and, it’s hoped, to provide healthy returns on investment. “It’s been pretty well-established over the last five years or so that technology can help both quality and safety,” says Richard Clarke, president and CEO of the Healthcare Financial Management Association.
Yet, as with much else in the evolving quality crusade, optimism that technology investments will pay off fully can’t always be backed up by statistical evidence.
Besides the steep cost, many providers fear being early adopters and investing in systems that “won’t talk to anything else” because of the lack of standards, according to Clarke.
If the intent behind the technology investments is to improve quality, that’s only a hope at this point, says quality expert Kenneth Kizer, M.D., who until recently headed the National Quality Forum and is now CEO of health IT provider Medsphere Systems Corp., in Aliso Viejo, Calif. Kizer says that while safety-related investments in particular hold out great promise, there’s essentially no data linking higher spending to better quality of care.
“The investments are often for new CT scanners, MRIs and the like. But those investments are being made because there’s a good return—they generate good revenue for the hospital. The decisions aren’t being made on the basis of quality of care,” Kizer says.
IT Success at Montefiore
Among large, well-heeled organizations, Montefiore Medical Center in New York City testifies to the gains possible from investing heavily—more than $130 million since the mid-1990s—in IT development. Montefiore is now one of the most advanced users of the electronic medical records and computerized clinical systems. Not coincidentally, and unlike other New York hospitals, it also has operated in the black for 19 of the last 20 years.
Executives at the Bronx-based hospital say pharmacy errors have dropped by 90 percent since it got computerized physician order entry in 1998. The average length of stay also dropped from 10.6 days a decade ago to 5.1 days by streamlining processes and moving patients through the system faster, thus increasing admissions by an average 3 percent annually without adding beds. “That’s a tangible contribution to ROI,” says chief financial officer Joel Perlman.
One of its most important technology investments was $10 million spent to “clone” its database. The so-called Clinical Looking Glass program compares data from patients with diabetes, heart failure and HIV/AIDS in an almost unlimited number of ways to detect patterns and identify new processes to improve care. “We think this has played a huge role in persuading physicians that they have the tools to improve the way they practice, and that quality improvement is not a punitive process,” says Montefiore President Spencer “Spike” Foreman, M.D.
Such technology is critical in using evidence-based medicine to achieve clinical improvements, according to a recent Commonwealth Fund report on hospital quality. “The best hospitals not only collect data on outcomes and cost, but also pull apart the numbers on surgeries, tests and other procedures to identify each step in the process where less-than-optimal medicine is practiced,” the report states.
For institutions that can’t afford to build their own similar systems, Montefiore says it has created a way to share systems at far less cost. It offers IT in a consortium model called Emerging Health Information Technologies, saying it will share its operational capabilities for a fraction of what hospitals would spend on their own.
Evidence-based Design
Blair Sadler knows exactly what he’d look for if he were an investor or analyst assessing the prospects of an organization building a new hospital.
“I’d want to know if it was incorporating all the best evidence to build the most efficient and safe hospital possible,” says Sadler, president and CEO of Children’s Hospital and Health Center in San Diego. “Because if they are, the chances of them succeeding financially are extremely high.”
Support for evidence-based design principles is growing as its disciples tout more examples. Estimates indicate that facilities built with patient- and staff-friendly innovations improve not only care outcomes but the bottom line. Such features include oversized single rooms, special hand-hygiene stations in every room, double-door bathrooms, larger windows and healing gardens.
Are such facilities more expensive to build? Without question. But a study co-authored by Sadler, “The Business Case for Better Buildings,” found the one-time incremental costs of designing and building optimal facilities can be quickly repaid through operational savings and increased revenue, and result in sustainable financial benefits.
“The fundamental new perspective that boards and hospitals need to have is to look at the operating savings over a 30- to 40-year lifetime when compared with the one-time incremental capital cost,” Sadler says. “It is a slam-dunk business model.”
Paying for Quality
With momentum behind the pay-for-performance movement building, Stephen Shortell, dean of the School of Public Health at the University of California at Berkeley, returned from a February summit on pay for performance in Los Angeles convinced of the staying power of incentive pay efforts. “It’s a huge sea change in American health care that’s beginning to bubble up,” he says. Continuing doubts that it will take hold don’t much matter since Medicare reimbursements are to be linked to quality. “We’ve reached the tipping point [on] this idea of paying for quality and establishing a business case for it,” Shortell adds.
The California Pay for Performance Program is the largest such effort in the U.S., with 225 participating physician groups, representing roughly half the state’s 70,000 doctors. Seven large health plans have been paying bonuses for two years based on how often doctors provide patients with appropriate treatment or tests in ten key areas. A proposed expansion of the program this year would reward physicians for meeting more quality measures for effective care, not just carrying out a process, with incentive pay to rise from the current 1.5 percent to 10 percent.
Richard Lehrfeld, M.D., medical director for Blue Cross of California, one of the largest payers involved, says paying for quality encourages doctors to go into extra detail in their care.
“Now that we’re paying for quality, I get an awful lot of calls from doctors and medical groups saying, ‘How can we get better at this?’” he says. “You might say it’s a shame we didn’t get that response without money. But, hey, whatever it takes.”
Medicare Tied to Quality
Heralding the likely advance of pay for performance nationwide, the government has applauded the early response to its effort to encourage public reporting of quality data.
The Centers for Medicare & Medicaid Services announced in November that quality of care had significantly improved at hospitals participating in a Medicare pay-for-performance pilot project. CMS is using modest payment incentives to promote public reporting on ten quality measures for three medical conditions. Based on preliminary results, officials appeared poised to broaden the effort after the three-year Premier Hospital Quality Incentive Demonstration involving nearly 300 hospitals ends in September.
“We are seeing that pay for performance works,” says CMS Administrator Mark McClellan, M.D., who has led the government push for more quality measurement and pay for performance. “We are seeing increased quality of care for patients, which will mean fewer costly complications—exactly what we should be paying for in Medicare.”
Current efforts are rooted in the positive response to scattered earlier programs. In Illinois, more than a dozen hospitals participated in a program set up in the 1990s in which the payer Caterpillar provided an extra five to ten percent for meeting certain care benchmarks, recalls Guy Alton, former chief financial officer at Morris (Ill.) Hospital. “It made it definitely worth your while to participate,” says Alton, now CFO at Chicago’s St. Bernard Hospital. “It was a way for us to prove that we had a quality product and also get paid more for delivering it.”
The failure to standardize quality measures has slowed the effort, facing resistance from critics who contend that pressure to meet arbitrary standards will result in “cookbook medicine” as well as an overfocus on the measures that payment is tied to, to the exclusion of others.
Quality Processes
Technology and bricks-and-mortar may command more attention and dollars, but experts say gains from changing flow, services, support and professional processes can avert or at least delay the need for big capital investments.
Before their hospitals become overly crowded, and admissions delays and other snags develop, organizations can overhaul various processes and perhaps forestall the need for huge expansion investments, says Maureen Bisognano, chief operating officer of the Institute for Healthcare Improvement.
“All across the spectrum, we’re seeing improvements in processes that can improve safety and quality. And by doing that, you’re decreasing operating expenses,” Bisognano says. “An organization might invest in process improvement and some new methods like lean [processing] and dramatically improve throughput by 50 or 100 percent, which can hold off the need for new ultrasound machines and buildings.”
The nonprofit institute launched the 100,000 Lives Campaign in December 2004, identifying six quality-care improvement measures that it said could save as many as 100,000 lives a year if 2,000 hospitals adopted them. Now it’s targeting the operational and financial side, launching a project on how to reduce waste in health care by advocating process changes as well as the redesign of physical plants.
Opportunities to cut costs while improving quality are everywhere, says Donald Berwick, M.D., IHI president and CEO. “The average care system is just pumping out scrap at a very high rate. That’s where conventional ROI thinking ought to work … there’s big money in getting it right.”
A change in flow freed up capital for the Dana-Farber Cancer Institute in Boston. Overcrowded at some hours and underutilized at others, the clinic increased its hours and started seeing patients earlier and later, from 7 a.m. until 8 p.m., and on weekends, allowing it to treat far more patients without expanding.
“By evening … we were able to optimize the experience for the patient and the staff and get a far more productive use from our facilities,” says James Conway, senior consultant and former chief operating officer at Dana-Farber and a senior fellow at IHI. “Otherwise, we would have had to spend millions of dollars to build additional space.”
Health care organizations also are importing more ideas from other industries. Many hospitals and health systems are applying “lean” manufacturing principles to become more efficient.
The Toyota Way
Seattle-based Virginia Mason Medical Center has had a Toyota-style production system in place since 2002, adhering to a web of principles that essentially fine-tune work processes for maximum efficiency and quality and aim to reduce waste. Virginia Mason spends over $1 million a year to teach the Toyota Production System to all 5,000 employees and claims multimillion-dollar savings, higher productivity and greatly reduced defects and costs.
Denver-based Exempla Healthcare is also among those applying lean production principles, emphasizing the ability to improve processes, decrease waste and produce defect or error-free work. That, and its participation in the 100,000 Lives Campaign, have reduced the system’s mortality and ventilator-associated pneumonia rates. Although the overriding goal is to save lives, David Munch, M.D., chief clinical and quality officer at Exempla Lutheran Medical Center in Wheat Ridge, Colo., says the effort also reduces the cost of care.
“The public is becoming more aware of the lack of safety and the need for quality in hospitals, so we believe that will grow into a market,” Munch says. “We are banking a lot of our existence on the public’s willingness to shop for quality.”
The notion that higher quality and safety investments generate greater revenues and a bigger market share remains weak; no one has yet shown that patients transfer from one hospital to another based on quality scores, says James Reinertsen, M.D., CEO of The Reinertsen Group, a health care consulting group in Alta, Wyo. But, he adds that the idea that reducing harm and waste in a system will lower costs is proving to be very robust.
The bottom line, says Reinertsen, shouldn’t be the key measure when it comes to quality. “There’s enough of a driver to do this just because people are getting hurt or not getting the results they should be getting,” he says.
Dave Carpenter is a writer based in Chicago.
Credit Analysis and Quality
Quality may be next wave for investors, analysts
When it comes to analyzing bottom lines, quality is like apple pie for those who assess hospitals’ financial performance: Everyone likes it. But it isn’t getting carved very deeply just yet.
Credit analyst Martin Arrick explains that while there’s a “huge sense” that quality metrics are the wave of the future, the time has not quite arrived.
“Who wouldn’t want to be for quality? Quality means you’re doing a better job,” says Arrick, managing director of not-for-profit health care ratings for Standard & Poor’s (S&P). But, he adds, “at this point, today, the notion of how quality factors into ratings is more about the types of investments that organizations are making, both in processes and general IT.”
That approach rings true with Mike Allen, chief financial officer of Winona (Minn.) Health. His organization brings a record for commitment to IT and other quality-related spending to the table when it speaks with rating services, but he finds interest only to a certain point.
“My experience is that they want to know about quality initiatives, or want to know they are going on, but aren’t overly interested in much detail,” Allen says. “They tend to track on the big ones, like the CMS measures or Leapfrog, but not go much further.”
Analysts from the three major rating agencies, asked how quality factors into their credit analysis, say it is a key issue underlying their assessments even if they don’t grill CFOs about quality data measurements.
S&P, Arrick says, wants to know if a hospital system has electronic medical records or computerized physician order entry and whether it can demonstrate a return on its information technology investments. It looks at such key metrics as admissions trends, volume growth, medical staff demographics, recruitment efforts and residency programs.
The Q-word may be absent in those inquiries, Arrick says, but it is implied. “Am I measuring quality? No. I’m looking at the inference about why some people gain in the market and lose in the market.” If the pay-for-performance model is to work, he suggests, incentives may have to be at least five percent, not the two percent being tested by the government.
John Wells, senior director for the public finance health care group at Fitch Ratings, says quality is a consideration, but an indirect one for now.
“We expect hospitals to have best practices, and quality is one of those best practices. If they’re doing all of those best practices, we think that will flow through to the bottom line,” he says. But Fitch is asking hospitals more questions about their quality data and benchmarking because the industry is moving in that direction, Wells says, even though a uniform system will “probably take a long time.”
Lisa Goldstein of Moody’s says quality has long been embedded in not-for-profits’ capital spending, but the industry must agree on a common set of quality measures if pay for performance is to take hold. Nonetheless, she says, “Quality is a very good strategy to embrace.”
This article 1st appeared in the December 2099 issue of Trustee Magazine.
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