Can hospitals recover losses and contribute to their margin?

Judging from wide reportage in the press there doesn’t appear to be a clear consensus. Dr Norman Swans’ question, ‘Can Australian health care be saved?’ on ABC radio is still pertinent today. Notwithstanding the difficulty of increasing hospital margins, Taylor Pearson’s blog post when related to hospitals provides a more nuanced and cautious approach.

Pearson defines margin, in a business sense, as the difference between how much you can sell a product or service for and how much it costs to produce or deliver it. The difficulty in healthcare is that the margin is hard to see. Healthcare is incredibly complex hence we use aggregated costs to help us function. Aggregation is a simplification of a complex situation.

Pearson’s argument is that we live in an incredibly complex world, a world too hard to comprehend and so we use maps, models and simplifications to help us cope. Eventually, we are able to find the gap between our model of reality and reality itself. Pearson calls the gap the ‘illegible margin’ because it is often difficult to see. However, finding previously unseen margin can be extremely valuable. The growth of smart phone usage bears testimony to this. Many apps on our phones that save us time and provide convenience have started multi-million dollar industries. Uber and Lyft are cases in point.

Although the maps, models, and simplifications that we use to find unseen margins in the short term may appear beneficial they may, in fact, lead to unforeseen outcomes in the long term. Pearson cites the examples provided by James Scott in his book, ‘Seeing Like a State’, which depicts how the decisions made by the first gatherers of big-data by the early modernist movement in Germany eventually led to the negative consequences of forest death – Waldersterben. You can read Pearson’s full article here.

Whatever is legible improves outcomes

Uncovering unseen margins provides us with legibility. Legibility gives us the ability to see what could not be seen before and measure it. Pearson has modified Drucker’s dictum that ‘whatever is measured improves’ to read ‘whatever is legible improves unless there are second-order consequences which undermine or destroy the original intention.’

In modern business, the failure case for legibility still prevalent today has been made by many writers. Dave McComb’s book, ‘Software Wasteland: How the Application-Centric Mindset is Hobbling our Enterprises’ is a case in point. However, Pearson makes the case as follows:

  1. Someone with authority and power looks at a complex situation.
  2. They don’t understand how it works because it’s hard to understand looking from the outside in.
  3. Rather than looking for other factors that might have caused illegibility, they attribute the failure to the system being out of control.
  4. They come up with an idealised plan for what the system should look like and claim it is superior and rational.
  5. They use their power to implement the plan.
  6. They fail miserably and blame it on the system they’re trying to fix.

On the upside, not every intervention fails. There is a case for legibility if one can keep a finger on the pulse.

Having one’s finger on the pulse

Any complex system is too difficult to fully comprehend. We must use simplification to gain some insight into what is happening. The danger is, however, when we believe that our simplified version if the full reality. We must be constantly vigilant to see if the simplification we use is the best simplification or whether a different simplification might be better. Tracking key performance indicators are not good or bad. But, they are simplifications. The error is when we confuse what is legible with the illegible reality of the business. In hospitals, it is difficult to get accurate procedure costs.  Research and practical experience tell us that at best efforts are variable. See Dan Harrison’s article in the Sunday Morning Herald and Faiz Gani et al (2016) report presented at the 11th Annual Academic Surgeon’s Conference in Jacksonville. The mistake is to think that aggregation is the best alternative.

Aggregation takes our finger off the pulse. It is a weak foundation to build upon. Take for instance inventory valuation. At the balance sheet level, there is often very little adjustments to be made when year-end stock takes are performed. However, at the operational level, there is much cause for concern, especially in hospitals where one item of the same value cannot be substituted for another item of equivalent value. This is what causes Fred Kimball and expert in warehousing and distribution to ask, ‘Is your inventory accuracy really as good as your auditor’s report?

It is better for hospitals to try and find the illegible margin in procedure costing instead. Pearson uses the German word Fingerspitzengefühl to depict an intuitive feeling for what feels correct. Whereas I have referred to this as creating a touch-to-know environment in hospitals.

Places to look for the illegible margin

Pearson says that if it were easy to find the illegible margin, it would by definition be more legible and thus not exist. I have highlighted ten opportunities to find hidden margins in hospitals in my book, ‘Hidden Hospital Hazards: Saving Lives and Increasing Margins’. Get a free copy here.

Want to Reduce Harm, Save Lives & Improve Hospital Margins?

Subscribe now to discover how to simplify the tracking, tracing and recording of medical consumables and devices used, in real time. Get your free copy of our eBook: Hidden Hospital Hazards.

Book Cover

Want to Reduce Harm, Save Lives & Improve Hospital Margins?

Subscribe now to discover how to simplify the tracking, tracing and recording of medical consumables and devices used, in real time. Get your free copy of our eBook: Hidden Hospital Hazards.