Don’t Worry About Hospital Cost Increases; The Patient Will Pay

Business ought to be all about the customer. A company should always focus on providing the value that the customer wants, which is what lean is all about.

And in a customer-driven mindset, the only valid reason for raising prices is that you believe you provide enough value the customer will be willing to pay the increase.

Too many companies justify raising prices by saying that their own costs, usually for materials, have gone up. (Mark Graban at the Lean Blog recently focused on this practice in the auto industry.) That is a bad attitude, partly because it shows no consideration for the customer, and partly because it ignores the possibility that process improvements can reduce expenses and compensate for higher material costs.

I recently read an example of this in an Associated Press story (here on the Chicago Tribune website). In this case, the culprit is a hospital.

An expansion at the University of Iowa Hospitals and Clinics will result in an increase in patient costs, but officials said they don't yet know how much…

The planned expansion is expected to cost from $700 million to $850 million.

The expansion will include a new children's care center and a critical care tower. The expansion will ensure that most of the hospital's rooms are single-patient.

In May, the Iowa state Board of Regents authorized the hospital to begin planning the expansion. At that meeting, a proposal to increase patient costs by 6 percent was approved to reflect increases in the cost of utilities, supplies and drugs.

University Hospitals Chief Financial Officer Ken Fisher said there's no way to tell how much patient costs will rise because the size of the project and how it will be financed have not been resolved.

Fisher said building now rather than later is a good move for the consumer. With construction costs increasing each year and favorable lending conditions, the project would be more expensive in the future.

"We know we're going to have to build. The question is when we ought to do it," he said.

Fisher said that by adding about 500,000 square feet, the hospital will be about the same size as other major academic hospitals.

"We're essentially trying to say we need to bring our basic footprint to that of other facilities," he said.

Fisher said the principal driver of patient costs is labor, consisting of 50 percent of the hospital's budget.

There is so much wrong here, I hardly know where to begin.

First is the overall attitude: Patient costs must go up because our costs are increasing. Even though patients may not get more for their money? And will patients get reductions if costs go down?

Moreover, the hospital CFO seems to be saying that whenever expenses increase, whether due to increases in drug costs, higher utility costs or expansion, all of the increase will be passed on to patients. Why? To preserve the hospital’s margin? Not a very friendly approach.

Next is the CFO saying expansion is necessary to match the footprint of other hospitals. What kind of justification is that? Why isn’t he saying anything about a need or demand for additional services? There may be such a demand, and building a children’s care center and a critical care tower may make sense. But that doesn’t necessarily have anything to do with the hospital’s footprint.

He also notes that the principal driver of patient costs is labor. I grant you that healthcare is a labor-intensive business. And adding new facilities and services may increase labor costs. The problem here is the unstated, underlying assumption that nothing can be done to make processes more efficient so that less labor (not to mention less everything else) will be required.

A further example of this is Fisher’s statement, "We know we're going to have to build.” Maybe they wouldn’t have to build if they used lean methodology to increase capacity.

Can somebody set these people straight?