Digits Save Lives…and Costs by Improving Efficiency

Some hospitals, along with some health insurance companies, are using video technology to connect patients in outlying areas with specialists in urban centers. This video technology connects local and regional hospitals to large urban medical centers where most medical specialists practice medicine.

These video hook-ups provide information for both the specialist doctor and the patient. The specialist doctor has the benefit of a high definition video, both televisions and cameras, along with internet connected medical equipment and a nurse at the patient’s side to carry out instructions. The patient sees the specialist doctor on a video screen in the room.

The costs of these video systems have been declining. The typical system costs between $30,000 and $50,000. Thirty-five hundred hospitals now employ the system. These systems have a unit growth rate of 15% a year. They are about to become mainstream.

This innovation for both specialist doctors and patients offer us some good examples of cost reduction techniques.

We have examined several thousand examples of cost reduction efforts. There are four basic approaches to reducing costs:

  • Reduce the rate of costs you pay for people, purchases and capital

  • Reduce the costs that are not contributing to output because they are wasted or idle

  • Redesign the product or the process to reduce components and activities

  • Use fixed costs with more customers

The first two of these four basic cost reduction techniques improve the Efficiency of a cost Input. Efficiency measures the amount of Input required to produce an Output (Input ÷ Output = Efficiency). (See “Audio Tip #188: The Efficiency of the Input” on StrategyStreet.com.) For example, the number of labor hours required to produce a completed customer transaction.

If you reduce the rate of cost you pay for an Input, such as People, you reduce the effective number of people required to produce the Output. An employee making $20 an hour is effectively half of an employee who makes $40 an hour.

In our analyses of cost reduction techniques, we have seen seven major approaches to reducing the rate of cost:

  • Purchase in larger quantities

  • Reduce the quality of the Input

  • Change the components of the rate of cost

  • Use subsidies offered by third parties

  • Request the supplier to lower its price

  • Change the source of supply to a less expensive supplier

  • Bring some activities in-house in order to achieve a lower rate of cost

The video technology reduces the rate of cost in the hospital system. It helps the hospital reduce the quality of the Input used in treating the patient without hurting the patient. This reduction in quality is not meant to be pejorative. Rather, it focuses high-cost activities on high-cost people by shifting lower value activities done by high cost people to lower cost people. It reduces the rate of People costs by separating tasks into high and low cost activities. Once the low and high cost activities are separated, lower cost people can do some activities previously done by high cost people. With the urban hospital specialist in charge, a nurse can now do more of the onsite work previously done by higher paid internists. The technology also offers the system the opportunity to lower the rate of cost it pays for square footage at its medical centers. The medical facilities in outlying areas have a lower cost per square foot than do those in urban centers. The outlying location is not as convenient to many patients, so its price per square foot is lower. The video technology overcomes the problem of distance.

The hospital may increase the Efficiency of its Inputs by reducing the proportion of Inputs that are not producing any Outputs. Inputs, such as People, are unproductive when they are sick or idle. If the hospital can find ways to reduce sickness or idle time, the same number of People Inputs will produce more Output. The efficiency of the Input rises as the number of People required per customer transaction falls.

In our research into the techniques that companies use to reduce the costs that are wasted or idle, we have identified several recurring patterns. The company may:

  • assist the Inputs, such as People, in increasing its efficiency

  • shift demand to use otherwise unproductive resources

  • improve the accuracy of the forecast it uses to plan work

  • use short term sources to meet peak demand

  • speed the process to reduce otherwise avoidable wait times

The video technology reduces unproductive or wasted resources. This technology speeds the process for the patient and the local attending physician. Diagnosis occurs more quickly due to the fast access to the distant specialist. All the parties involved at the outlying hospital spend less time waiting for a proper diagnosis.

Of course, these are just a few of the cost reduction concepts we have observed. To date we have found more than 300 of these concepts of cost reduction. You may see more of them in the Improve/Costs section of StrategyStreet.

In our next blog, we will discuss how video technology might reduce the hospital’s cost structure by using the latter two of the four basic approaches to reducing costs.

Posted 11/2/09