The Productivity Fallacy

By Steve Smith

The scenario:

CEO: All of the departments are hitting their productivity numbers, admissions are on target and surgeries are on target, why is our margin not on target?

CFO: I guess we need to tighten up the productivity numbers.

What's wrong with this picture?  If hospital departments are hitting their productivity numbers, why is the hospital not achieving its desired profitability?  One likely scenario is that department-based productivity targets were set, and tightened, year after year. As we will see, this practice can push the income statement in the wrong direction.  The following examples come from my experience running Process Improvement, Radiology, and Patient Transport departments in a hospital. 

Patient Transport was a small department, I had a great manager for the department, and therefore did not pay much attention to it. As long as we were delivering timely service I was satisfied. I had to take a deeper look at the operations when we had an employee leave. I submitted the replacement requisition to the COO and she told me that I could not fill the position because my productivity was being updated in the next budget cycle and it would not support the hire. Frustrated with the situation, I took a deeper dive into how our productivity was measured.

I discovered that the Patient Transport Department productivity statistic was set based on the transport team salary paid per adjusted discharge. I had trouble wrapping my head around the denominator in this equation. We performed a function, Patient Transport. That function had very little correlation (which I would prove) to adjusted discharges. My team didn't even perform discharge transports, the nurses did that.

Patient transports had a tighter correlation with admissions and testing, but the ideal denominator to measure the work we do would have been the count of transports performed. That was a readily available number that actually tied out the unit of work performed.

The current productivity statistic we were striving to meet was set by the finance team, probably 15 years earlier when we did not have a transport tracking system, and without regard for managing to an operational process.  That statistic tied out well to billed revenue, but it had nothing to do with the job function we were asked to perform.

I met again with our COO and showed her my correlation analysis.  My analysis indicated that there was not a statistical relationship between the Patient Transport workload and adjusted discharges.  She couldn't have cared less.  She had her marching orders and was not going to fight any battles for me. 

I told her that was fine and I'd manage to the numbers I was given. My manager and I then had some work to do to figure out how we were going to manage to this new statistic. We drilled into the numbers and pulled our transport workload and compared it to our transport staffing. We found some opportunities to adjust schedules to meet demands. So, we updated our team's schedule. As a result of the schedule change, we started to meet the productivity statistic for adjusted discharges. In fact, we were consistently beating it. Even though it was an inappropriate number to be measured by, we were able to stay well ahead of it.

So what's the problem with this scenario? For those of you who have run operations in a hospital or any production environment, what happens to the next year's budget when you've exceeded expectations in the current year? That's right, the reward is that the screws get tightened, and the expectations for the following year are adjusted accordingly.

Here is where the game starts. As a department director, I didn't want to have my numbers adjusted next year. So, I started keeping the productivity numbers within a tolerance.  We started to keep staff when it wasn't necessary and pay them overtime to keep the productivity statistic at an appropriate level that would fly under the radar.  I hit my number but was costing the organization more in labor than was necessary because I figured out how to game the perverse incentive that had been created for us.   

Another example of misaligned standards occurred at this same hospital with Cardiac Diagnostics. We were working on a process improvement project for our Cardiac Observation Patients. We discovered several process opportunities such as delays in consults and delays in testing. With testing, we noticed the impact of delays increased based on admission time and day of the week. It wasn't hard to determine that the root cause was that the departments doing the testing or the physicians interpreting those tests were not available during the times they were most needed to progress patients without delay.

For example, patients admitted on a Friday afternoon may have to wait until Monday to get testing or to have a test interpreted. One may ask, "Why weren't these departments open for service?" The answer is that additional hours weren't in their departmental budget. They had a productivity standard to hit, and like my example with Patient Transport, they were going to hit it, regardless of the cost to the organization. With some lengthy negotiations, we were eventually able to optimize the Cardiac Diagnostics schedule to meet the needs of the patients.

Why do hospitals end up in this scenario?  It's because they're doing business as usual, and especially accounting as usual.  Setting up departmental productivity statistics and P&L statements feeds the silo-based mentality of the department managers and directors.  They've become experts at managing to the numbers in their budgets, but when those numbers are generated without regard for the organization as a whole, the incentives can become misaligned.

So, how does an organization create the appropriate, holistic incentives?  It starts by placing the patient at the center of the organization's value stream. 

The majority of a hospital's revenue comes from the patient. So, why shouldn't the costs (expenses, re-work, delays) associated with that patient be viewed relative to the patient revenue? The legacy financial structure of hospitals is one of the major barriers to making this happen. The most impactful way to fix it is to re-engineer the accounting department to move from the legacy structure to a Lean Accounting Structure where revenue and costs are tracked at the patient (value stream) level.