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January 17, 2012

Operator: Excuse me, everyone, and thank you for your patience in holding. We now have our speakers in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of the presentation, we will open the floor for questions. At that time, instructions will be given if you would like to ask a question. I would now like to turn the conference over to Sean Berenholtz. Mr. Berenholtz, please begin.

Sean Berenholtz: Hi, everyone. Thanks so much for joining us this afternoon. It’s always a pleasure to have an opportunity to interact with you guys. You know, one of the areas, as you guys know, the topic today is building the business case for quality, and one of the things that we all have been struggling with since well before the inception of this national CLABSI project, but overall with quality improvement, is how do we build the business case that appeals to the administrators within our organization, and how do we get those resources that we need. And obviously building that business case is an exceedingly important part. But yet, like developing safe health care systems, this is a science, no doubt about it, and that science has been advancing over the years and it needs to continue to advance.

Today we’ve reached out to one of our colleagues in the School of Public Health, Bill Ward, to help us gain some additional lenses and begin to think about how we may be able to work with our own organizations and leaders within our organizations to build a business case to support this work. Bill is the Director of the Master’s of Health Administration degree program at the Johns Hopkins Bloomberg School of Public Health here in Baltimore, among many other titles. Bill has more than 30 years of experience in health care finance and operations. He’s been both a chief financial officer and a hospital chief operating officer. He teaches courses in finance, in management, and accounting at the Bloomberg School of Public Health, also at the Hopkins School of Nursing, and the University of Maryland School of Nursing, and the Singapore Management University. He has written numerous articles and has lectured widely on a variety of health care finance and operational subjects, and he is currently writing his third textbook.

We met Bill over 10 years ago now working with the VHA, which is a large health care purchasing consortium, where we had the transformation of the intensive care unit that began in that VHA collaborative. Early on in the partnership with IHI is where that original ventilator bundle and the CLABSI bundle originated that ultimately led to the Michigan ICU program and now the national CLABSI program. So we have come a long way over the past 10 years, and Bill has been beside us along the entire way, helping guide us and providing us with the mentorship and the lenses that we need to begin to build this business case. So I am exceedingly excited. We’re probably way overdue, truthfully, for having Bill to have an opportunity to share with you his thoughts on building the business case for quality. Bill?

Bill Ward: Hey, thanks very much, Sean, and actually you read that exactly the way I wrote that so I owe you the $25.

Sean Berenholtz: I’ll take it.

Bill Ward: I knew you would. When Sean said he reached out to me, I’ve got to tell you, he’s got long arms because I’m in Lima, Peru, right now working with the Hopkins International crowd and seeing health care from a really different perspective.

But what we’re going to talk about today, as we take a look at slide number 2 and framing the business case, is a couple of things that are sort of foundational. The first is how do hospitals work because they are peculiar that way and understanding it leads into the notion of how you would make the business case. The second thing we want to talk about is how revenues and expenses behave because if you’re talking about the business case, you’re talking about revenues and expenses, and we need to understand how they behave in order to talk about what is likely to happen based on an initiative that we’ve decided to pursue. And so coming out of that, we’re going to figure out how to connect the dots from improving quality to improving the bottom line. And then we’ll look at how you make the valid business case. There are several facets to that business case, and oftentimes, people think very narrowly. And the literature seems to do this as well. You know we’re going to reduce costs, but there’s a lot more to payoff in terms of the business case than reducing costs, and we’ll understand what those various aspects are. As we get to the end, we’re going to take a look at Grandma because I think that one of the easiest ways to figure out how things work and how things are impacted is to put it in terms of a case, and so we’ve got the case of little Grandma who checks into the hospital and has a little bit of difficulty, and that helps explain how a program can work for you, how a comprehensive program to improve patient safety, improve quality can really drive improvement. And then we’re going to look at the literature. I have cuts from four different articles. I’m not going to spend a whole lot of time. We’re certainly not going to read through the articles, but what I want to do with you today is point out how to react to the clinical literature because it’s by and large almost all incorrect when the clinical literature talks about making the business case. So we’re going to make you sort of wise consumers, if you will. And then the last thing I’ve got, and I’m going to try to get to this as quickly as we can, is a little financial model that is very simplified, but you can put your numbers into it, personalize it for your institution, and move forward with some of the numbers already sort of created for you. And so that will be the thing that we end on.

So let’s begin and take a look now at the process of hospital care on our third slide, and what happens here is it really is about orchestration. You do become a band leader, so to speak, and you’re trying to juggle the skills and the expertise and all of that sort of stuff in order to get the patient cared for, get him in, get him taken care of, and get him out the door. We sometimes think of health care as an encounter, but it isn’t. It’s a process that patients go through, that staff goes through, and that requires a different way of thinking about it.

If you go to the fourth slide, it’s got the banner across it of “a system,” and that is really what we are. We are a system that’s interconnected. The challenge we have is that most managers manage compartments. They don’t manage the system. Even at the chief operating officer level, we still tend to focus on departments and not the system, not the process of care.

In fact, if you go to slide five, which has a picture of a spider web on it, the spider web is the perfect analogy to a hospital. With the spider web, all of the strands of spider silk are interconnected so that if a fly lands on that web, every single part of that web vibrates and those strands of spider silk communicate with the spider that lunch has arrived, but they also work collaboratively to capture lunch and keep hold of it until the spider can get over there and either eat it or package it up for later and so on. So it’s the perfect model of interconnectedness, interdependency, collaboration, and communication in one setting, and that’s what a hospital is about. And if we remember the spiders as we’re going about providing the analysis, if you will, of how does something affect us, how does putting in a rapid response team, how does that affect the bottom line, or how does it affect the bottom line if we invest money in screening and in surveillance. You have to look at every strand of silk on that spider web because every department in your hospital is going to be impacted by that initiative. And what you want to do as you make the business case is you want to understand what the financial ramifications for revenues and for costs, what those ramifications are for everybody, not just the one place but the entire institution.

So if we go to slide six, we’ll start taking a look at how our revenue is performing. This one is a fairly quick one. There are basically two ways you get paid. You get paid either fee for service, and there’s not a whole lot of that left anymore. We’ve seen around the world where fee-for-service systems incentivize doing more stuff for patients, keep the patient a little bit longer. I was in Bermuda about 2 years ago, 3 years ago, on a project. Their length of stay is about three times the U.S. average because they’re on fee-for-service revenue. They’re now moving towards case-based, and that’s the second form on our slide here. Based on DRGs, you get a flat payment, and it doesn’t matter how long you keep the patient or how quickly you get them out. You get the same amount of money. There’s an incentive there. If you can move the patient out quicker, you can get another patient and their revenue.

So let’s take a look at slide number seven, which is titled, “How Hospitals are Paid,” and it’s got the numbers laid out, and these are hypothetical so these numbers are way off of reality, but the logic and the theory does touch with reality and is right. So here we’ve got three cases and we’re going to say that these are a 9-day, a 10-day, and an 11-day length of stay just for the simplicity of the math, and that in the 9-day, case number one, we rack up $7,000 of charges on the bill. We’re going to get paid $8,000 for that case because we were able to get them out efficiently, and we are reimbursed on a DRG basis per case, not per patient day, not fee for service. But if we allow that case to slide to either 10 days or 11 days in length of stay because of a mistake, and that’s not necessarily clinical mistakes, this can be operational mistakes. For instance, you’ve got me scheduled to go to surgery tomorrow morning, but for some reason somebody brings me breakfast. That’s an operational mistake. That’s, in my view, not a clinical mistake, but it sure as shooting delays my length of stay now by a day or so. So let’s say stuff like that is happening, whether it’s clinical or operational, and you go from 9 days to 11 days, and there are now $9,000 worth of charges on that bill. Well, guess what? You’ll still only be paid $8,000. It doesn’t matter. The nice thing about DRG-based payments from a payer standpoint is they’re able to control what they are paying, and they have dumped the risk back to the providers. But the nice thing from the providers’ side is if you can clean up your act and be more efficient, you keep getting the payment per case, you can do more cases and get more revenue.

So let’s switch to slide eight and take a look at how hospital costs behave. Basically there are three kinds of costs: Fixed, variable, and semivariable. We’re going to talk about it in pieces. We’re going to talk about fixed and variable first. The fixed are the ones that it doesn’t matter how much volume you have, you’ve got the cost. Think about a magazine subscription for your waiting room. It doesn’t matter whether you’ve got 100 patients a month or 10 patients a month, you’re paying X amount of dollars per month for that subscription. Then you’ve got variable costs. Let’s say you give people something every time they come in; you give them a cup of coffee. Well, the coffee expense is variable. If 100 patients come in, you’ll spend more on coffee than if only 20 patients come in.

So fixed and variable, volume-related, and as we go to the next slide, number nine, what we see is a table of numbers, and we look at the kinds of expenses that we have: Salary and benefits, supplies and so on, interest and depreciation. Of the 100 percent of the monies that we spend, 65 percent of that is labor. And labor is largely a fixed expense, so maybe of the 65 percentage points, 60 of them are fixed, and only 5 percent of them are variable with volume, and that 5 percent is likely to be things like overtime, a little bit of agency, some travelers, maybe you’ve got some per diem or a float pool, something like that. Not a lot that’s variable. I mean, think about this, the only way that you can get nursing costs to be variable is to send them home and not pay them, and they’re not going to come back, by and large, if you don’t pay them. The market is just that way, so most of that cost is fixed.

Then let’s go down and take a look at depreciation and interest, which are not insignificant amounts. I mean, they’re not the biggest, but they’re not insignificant, and they are entirely fixed. You’ve got to pay the interest on your debt, or you get to meet Tony Soprano in a really unappealing way over that. And the same with depreciation: You either do the depreciation the right way or you get to join the Enron folks out at a federal penitentiary for violating accounting rules, fraud and abuse, and a whole bunch of other nice things. You do get a new striped suit out of it, but I don’t think most of us would want that. Then you get to supplies and services, and let’s say that supplies and services are one-third variable, and I think that’s a large assumption. What that says, then, is of all of your costs in the hospital, you are on the order of magnitude 90 percent fixed and only 10 percent variable. It means your costs can’t react to downturns in volume. It also means that with the costs being fixed, if you add more cases, you don’t necessarily add more cost.

And that brings us to slide number 10 to talk about semivariable costs, and these are costs that are sort of group-of-patients associated. So you’ll have one cohort of staff that deals with 10 patients. If you have an 11^th, you had to add another whole cohort of staff. They are fixed then they vary wildly when volume changes significantly, and then they get fixed again. They resemble stair steps, and that’s why they’re called step costs sometimes. You see this on slide number 11, 12, and 13, and we’ll go through them fairly quickly. Eleven just gives you the layout. For 10 patients, you need one group of staff. If you’re going to go up from 11 to 20, you need a whole second group of staff.

On slide number 12, what we see is where we tend to be. We tend to be where that dot is, between the vertical risers. Our costs are going to be fixed over another group of patients, and they’re going to be fixed if we go down in volume.

As we go to slide 13, it just magnifies the size of it so it’s a little bit easier to see and conceptualize what happens. As our volume, which is represented by the horizontal line, as our volume moves to the right and increases, our costs stay flat, but our revenue goes up because revenue is 100 percent variable with cases. Now, some of you CFOs might say, ‘Well, wait a minute now. We’ve still have 30 percent that’s fee for service.” Great – 70 percent of your revenue goes up. That’s still an enormous number, and in the U.S. average, I think the average for DRGs at this stage in the game is about 61 or 62 percent of all reimbursement, and that includes the safety net hospitals which don’t use DRGs – but all of that 62 percent is DRG based. That means you’re looking at 60 cents on the dollar. That’s wonderful. You want your volume to rise. Conversely, if you let mistakes and errors creep in and your volume goes down because you’re taking longer to get patients through, your revenue is going to go away really fast but your expenses aren’t. If you talked to hospitals that have done turnarounds in the last 10 or a dozen years or so, or 15, something like that, all of them have stressed volume growth. It’s the secret to it. In any fixed-cost business, whether it’s airlines or whatever, in a high fixed-cost environment, you pump volume.

Now let’s take a look over the course of the next six slides or so, starting with number 14, how we go about connecting the dots. And the first thing we’ve got to deal with is there’s this minefield of question marks between reduced infections on the upper left and improved profits, lower right. And we’ve got to find our way through that, and so slide by slide, we’ll deal with that.

Next slide, we look at if we reduce infections, we reduce length of stay. I mean, think about it, if the patient isn’t sick, they go home, next patient comes in. And that’s what happens on slide 16. When we reduce length of stay, we can increase bed turnover. Accountants like turnover. Any kind of asset that turns over faster means that it’s working more productively. They like that for inventory, for receivables, and they’ll like it for beds too. So the beds turning over faster. We’re increasing your bed turnover. Means you’re getting more admissions, and, remember, every admission is a payment. When that happens, and we see it on slide 17, we wind up increasing our revenue because we’ve got the increased cases but controlling our costs, and cost control is not that difficult. The secret to cost control is to recognize it’s fixed. You have to consciously try to spend it. Just don’t do that. The fact that you get 1 percent more volume doesn’t mean you have to add 1 percent to your staff. Your staff is fixed. You’re not going to add anything to deprecation. You’re not going to add anything to interest. What are you going to add to overhead, another accountant? So your costs are largely fixed, your revenue is rising, and you’re back to what we looked at with that earlier slide with the diagonal line of revenue and profit. And when you increase your revenue and control your costs, what you see on slide 18 is that you improve your profits. You can’t fail at this. There’s the old expression about low-hanging fruit. This is not low-hanging fruit. This stuff is on the ground, in a box, gift-wrapped with a fancy bow and your name on the gift tag. You can’t mess this up. If you improve quality by doing anything, whether it’s infections or medication mistakes or patient falls, if you improve quality and you don’t get a positive financial result because of it, you’ve either calculated the numbers incorrectly or you haven’t looked everywhere you need to look. It is impossible to improve quality and not improve financial standing. They go together inseparably. The one leads to the other. In fact, I tell some audiences that I talk to about dashboards and stuff, if you unload the financial stuff from your dashboard, the leading indicators are the quality. If the quality goes up, your financial performance goes up. In fact, I’m going to be talking to a bunch of trustees in New Jersey next month about that very thing, that if you look at quality, that’s what you want to look at. It leads to financial improvement.

And if we go to slide 20, it’s not like this is new. Ben Franklin is with us today in spirit only, but he’s with us, and when he talked about an ounce of prevention being worth a pound of cure, what he’s talking about there sort of flipped over to our environment where we’re talking about reducing hospital-acquired infections or whatever it happens to be. The ounce is prevention is what we invest in the initiative to do that. The pound of cure is the payoff that we get from the additional throughput and the additional cases. And as we’ll see in a little bit, we’re going to look at the real tangible side of this in terms of the institution, and we’ll even look at the intangible pieces of it, too, but we’ll be looking from an institutional standpoint.

If we go down to slide number 21, what I want to talk about is the public health standpoint. Now, Sean mentioned I’m with the Hopkins Bloomberg School of Public Health, and so while we are concerned and while I am particularly concerned about how hospitals deal with infections, there’s also a public health aspect to this, and it may not be what you think it is. It’s not a case of an outbreak. It’s a case of the ability to be cared for. Think about this, you’ve got a whole bunch of patients out on the left hand of that slide and they’re wanting to get into your hospital and be cared for, so as part of the admission process they try to get into the hospital. But you’ve got infections, you’ve got medication mistakes, patients falls, whatever it is, blocking them from getting out on the right-hand side. So while some of them get in, go through on that bottom arrow and get discharged to home, others of them get in and get stuck. They get hung up in the system, and when that happens some of those patients on the left don’t get in at all. Think of the beds in the step-down unit that are backed up because we’ve got several patients with hospital-acquired infections. Our ICU is backed up. The OR may be backing up but, for sure, the ER is backed up. So I’m complaining of chest pain, and they want to drive me to Johns Hopkins but Hopkins is on bypass, divert because there is no way to empty their ER to those beds that are now clogged by mistake and errors. I need to be driven to a different hospital. Maybe that’s 20 minutes away. I’m eating heart muscle in addition to time. That’s a public health problem, but it’s also a hospital operational problem because the hospital is on divert. They are not taking in revenue. In Maryland, the average per hour I’ve talked about. I was talking to a friend of mine about, I don’t know, a week ago, 2 weeks ago, and the average in Maryland is something like $8,500 per ambulance. Now, I’m sure those numbers are different across all of the 50 States and D.C., and they’re going to be different in every single community, but there is money on those ambulances that we don’t get because we’re backed up, and we need to improve that. I’ll give you a little sort of word picture. Let’s say you’re sitting at home, and it’s mostly wintertime and so you’re sitting there in your family room with your spouse or your loved one, whichever it happens to be, and you’re looking out and it’s snowing. And it’s really sort of Currier and Ives. You know how it gets nice and still and quiet and the snow is accumulating, and you’re sitting there. And upstairs on the second floor, one of your kids decides to go to the bathroom and so they go the bathroom and they get done and they flush the toilet, and about a nanosecond later, you hear them screaming at the top of their lungs, “Mom, Dad! The toilet’s backing up!” So you get up out of your chair, you go racing up the steps and you get eye-level with the second floor landing just as the tsunami hits from the backed-up toilet.

And my question to you is this, do you go to Home Depot and buy a bigger toilet bowl or do you call Roto-Rooter and rotor-root out the pipes? And the answer is we often go to Home Depot. We build bigger ERs because our ERs are clogged. What we should be doing is calling Roto-Rooter to clean out the beds so we can empty the ER into them, but we have a tendency to go and buy a bigger toilet bowl. The only thing that’s going to do is instead of 40 patients waiting for 6 hours, we’re going to have 60 patients waiting for 6 hours. It’s just not the right way to deal with it, but quality, which can improve throughput and can improve clinical effectiveness and clinical and operational efficiency clears those pipes. That is the Roto-Rooter of hospital practice.

So let’s move on to slide 22 and just kind of set the stage with this one, that if you do the improvements in quality and patient safety, what can happen are five really nice things: Cost efficiency; some real cost reduction, we’ll talk about cost reduction in a second; some revenue enhancement; some balance sheet improvements, even. I would be willing to bet that none of you talk to your finance people about balance sheet improvements when you’re trying to make the business case, and yet that’s part of it. And then some intangible improvements, hard to put a number on, but they’re out there anyway and you at least ought to be talking about them. So in terms of cost efficiency, what happens with that is when you improve your infection rates, you’re going to get increased capacity. Remember, you’re moving the patients through faster so they’re not sitting in the bed. That bed is now available for another case, so increase in case capacity. You increase your work output. The more admissions you get, the more discharges you get, and that’s a nice output. There’s no change, however, or virtually no change in total cost. Your unit that was staffed by 36 nurses is still staffed by 36 nurses, but now instead of 40 patients being cared for, let’s say, just some quick math, you’re taking care of 44 patients, and that’s more revenue because of those more cases. So you take the same cost and you divide it across a larger work output, and you’ve got reduced cost per case. I don’t know of a CFO on the planet that doesn’t like to think about cost efficiency. If you talk to them about we’re reducing our cost per case by 6 percent or 5 percent or whatever percent, they’re going to love you. They like that. They like that, but you’ve reduced the cost per case. You haven’t reduced total costs, and you should be very careful how you talk about that. You’ve reduced cost per case but you haven’t reduced total cost. You’ve just spread it across more patients.

If you want to take a look at real cost reduction, you go to slide 24, and what happens there is you get an increase in capacity again because you’ve improved throughput, but let’s say there’s no change in work output. Let’s say you’re in a situation where nobody is waiting to come in, and so instead of needing a 16-bed ICU, you only need a 12-bed ICU. So what you can do there is you can reduce your staffing level. Now, I’m not a real big believer in reducing staffing. Too much of the literature talks about lower ratios yielding higher mortality, morbidity, more complications, and so on, but if you really don’t have the patients then you can make some reductions. And so you take workload reduction – how much did you reduce? In my little example, we went down by four beds from 16 to 12, divided by the 16, so that says you got a 25 percent reduction. And on the next line, the bottom line of that slide, it says that that equals the potential percentage of staff reduction. Underline the word “potential.” It doesn’t mean that you can achieve it, and it doesn’t mean that you want to. It just means that you could potentially have a unit that’s smaller staff-wise by 25 percent, but you may not be able to achieve that. Consider, let’s say that unit is staffed with one unit clerk. How do you get rid of 25 percent of a unit clerk? Is that the right arm that you send home, the left leg that you get rid of? So be very careful. Identifiable versus achievable is at play here. And the other thing to be said is there are some things that you may not be doing right now that you could devote those freed-up resources to go and do that might actually improve quality even further. But the potential is there, and it’s not the kind of thing that you just want to turn your back to. But real cost reduction is different from the phony kind of cost reduction that everybody sort of hypes these days. You know, here’s where the thing breaks down. We will say something like this: We have a patient in the ICU, and that ICU bed costs $1,500 a day. If we can get that patient to the floor, that’s only $1,000. Well, we just reduced our cost by $500. The answer is, you didn’t. You didn’t, because you didn’t close the ICU bed and send the patient home, so there is no real cost reduction, and we’ll talk about that when we get to the literature in a bit. But that’s one of the principal problems that we have: We are attempting to do cost reduction when what it really is is staff reduction. When you do staff reduction, you become dysfunctional. When you do staff reduction, and you can look at some of Jack Needleman’s work, when you do that, you become dysfunctional and your length of stay goes up. So yeah, you’ve reduced your cost, but what you don’t see is what happens to your revenue -- X-number of weeks and months -- down the road. Husbands understand this very well. I will do something one night at home, and my wife will explode on me and be very, very upset, and I’ll say, “What’s going on? What’s going on? What’s going on?” All of a sudden, I find out that 3 weeks ago, I didn’t take the trash out the right way, and she’s been sort of harboring it. So there’s this temporal disconnect between not taking the trash out 3 weeks ago and something I did tonight. We do that with cost reduction. We’re very comfortable with the cost reduction which we do in the here and now, but what we lose sight of is the fact that over that stretch of 3 weeks or 4 weeks or a month, we’ve slowly increased our length of stay to the point where we start losing revenue. And length of stay, by the way, this is sort of off the topic but really important: Do not measure length of stay in days; measure it in hours. So if you move from 92 hours of length of stay, which is 4 days by the way, to 100 hours of length of stay, which is also 4 days, you just compromised your capacity by eight percentage points, and that drives down your revenue. But you’re not going to see that because both of those, 92 hours and 100 hours, are going to round out at 4 days length of stay. Finance is looking at it, saying your length of stay is the same. We need to cut some more because our revenue stream is hurting. So be very careful about talking cost reduction. It isn’t going to happen.

Let’s go to slide number 25 and take a look at what does happen to hospital throughput. So when you improve the infection rate, when you do anything quality -- we’ve got to say that for all of these slides -- when you do anything to improve quality, you’re going to increase patient throughput. And again, it’s that connect-the-dots thing that we looked at before. You’re going to be able to take care of more patients. You’re going to reduce the potential for case cancellations in the ORs. You may, if you’re not reducing a bunch of cases now, be able to take more cases because you’ve got expanded capacity. “Well, wait a minute, Bill. We didn’t build more ORs.” No, we didn’t build more ORs, but we built more beds so you can empty more ORs, which means you can flow patients faster through the ORs and take more cases in. You reduce divert hours in the ER, and we already talked about that being about $8,500 an ambulance. Who knows what it is per hour? Just take a look at how many ambulances you don’t get per hour or how many ambulances you don’t get in a month because you’re on divert because you’ve got some quality problems on the inpatient side. You know, when you increase your ER visits, you increase your admissions. A lot of our admissions come right through the ER. But when you get that, you also get increased follow-up visits. The patient who is ambulanced to you following an automobile accident who’s got a fractured ankle and a couple of other broken bones, they’re not only going to be there for their admission but they’re going to be there for the physical therapy to get them back on their feet again. Same with a heart attack. They’re going to come back to your institution because you’ve captured them, and they’ll come there for the cardiac rehab and maybe some nutritional stuff and all of that. So there’s spinoff business from the ER that we often don’t think about as part of the revenue capture, if you will, associated with improvement. So those increased follow-up visits are really important. And then lastly, all of that in terms of more business, translates into more revenue without a lot of cost added, and it means more cash flow. And cash is king. I mean, there are a number of examples in the U.S. There’s one in Baltimore I think of all the time. Provident Hospital in Baltimore was making a profit every single year, and yet went bankrupt and finally closed because they ran out of cash. Cash is important and so a program that supports improvements in quality of care, that allows you to see more hospital throughput eventually generates additional cash flow and cash, as they say, is king.

There are also balance sheet improvements that we see on the next slide, number 26, that if you improve your infection rates and so on, you are maximizing your brick-and-mortar investments. I mean, think about this, an ICU bed costs about $2 million, maybe $2 million and a little bit of change on top of that. How many patients do you want to benefit from that bed each month? And if your length of stay in the ICU is 5 days and you can get it down to 4 days, you’ve just increased your ICU capacity for free by 20 percent. Wouldn’t you like to do that, and wouldn’t you like to be able to say to Finance, “Hey, we were just able to add 20 percent to our ICU capacity, and by the way, Biff, it didn’t cost us anything.” I think Biff will like that. You’ll have additional funds that are available for capital purchases. Remember, that cash flow that you’re getting by the increased hospital throughput, cash is what we use to buy equipment. And so the toys that we like to use, the high-tech stuff, more and more we’ve got money available to acquire that stuff, and that’s important to do because oftentimes what we find with the financial condition of so many hospitals being as tight as it is, that there isn’t enough money to support the capital budget. And so when that happens, and this is from experience as a hospital COO dealing with capital budgets and the fact that so many people are asking and so few people are getting, what happens is you almost wind up with a competition. And you can get some really bad feelings about that. It’s sort of like, “Gee, how come Radiology gets all the equipment and I don’t get anything over here in Dialysis?” Or, “How come Anesthesia gets new machines, and I’ve got these old ventilators that I need to replace, too?” So you want to avoid that sort of stuff, and one of the best and easiest ways to do that is to expand the pot of money, the cash, that’s available to support budgeting for capital equipment. And the last part of this is you reduce the need for cash or for borrowing to increase your capacity. So let’s say you’ve decided that we want to expand our Oncology program, and what we want to do is we want to build a new entry portal for Oncology, and we want to spruce up the clinic. I was down here in Lima yesterday, touring some hospitals, and one of the things that they’re looking at is how do we improve the appearance of the hospitals because they ain’t the prettiest, let me tell you. And one of the things they are looking at are how can we change the entry so that it’s a welcoming kind of entranceway and sort of says, “Hey, we know what we’re doing. We’re ready to go.” And so maybe you’ve decided you’re going to do that with your Oncology program. Where does the cash come from? Do you have the cash or do you have to go borrow the money? Or if you decide you want to renovate one of your nursing units and go from semiprivate to private rooms to reduce the chance of transmission, where does that cash come from? Well, the answer is that cash is either going to come from cash you’ve got, or you may need to go and borrow. And a lot of hospitals are finding it difficult to borrow these days given the current market condition, in terms of debt and their ability to repay that debt. So those are the tangible things that we can sort of hang our hat on, and I think all of them want to be included in any business case that we put together.

We want to talk about the cost efficiency impact. We want to talk about the potential, potential of cost reduction. If there’s nothing there, you leave it out. But we want to talk about that. We want to bundle that together with some notion of hospital throughput, and keep this in mind, the hospital throughput is likely to be seen outside of your department so if you’re doing something in the ICU, the ER may be benefiting from it. You want to talk to that strand on the spider web and find out how they’re doing. So when you do this sort of stuff, you want to be talking collaboratively and collegially with all of your cohorts, all your buddies, to say, “If I do this, what effect does this have on you?” And in fact, with email these days, that’s the easiest thing in the world to do. You lay out what it is you’re attempting to do and send it to everybody with the question at the end that says, “What impact will this have on you and what will it do to your volume, your revenue, and your cost?” When you get all that, then you’ve got your package, and then you talk about balance sheet improvements. If you’re able to move more patients through the bed, call Finance and say, “How much does a bed cost to acquire? How much would it cost us to buy another two Hill-Rom beds for our ICU and create the space and so on?” And they say, “Oh, it’s $2 million in the ICU, $2.3 million.” Whatever it is, great. Add that to your rationale as well. We’re able to do this and avoid that cost. Cost avoidance is an important element of the business plan.

And then, switch down to slide number 27, we go from the tangible to the intangible benefits. And there are lots of things that go on out there that we need to be aware of, but it’s awfully difficult to put a dollar value on it. One of them is malpractice. By what amount do our premiums go down if we do X, Y, and Z to improve care? Well, that’s tough. But we do know, I mean, and this is going back, the first time I saw this issue was maybe 15 years ago, maybe a little longer than that, that as you improve quality, you reduce your malpractice exposure. Well, that’s hard to put dollars on, but put it down. List it. The second thing is satisfaction scores. You know, we’re doing a lot with Press Ganey and all that sort of stuff about how the patients like their experience, and all that’s wonderful. What about your staff? Do they like working there? Would they go there? What about the physicians? What about the family members who visited and the friends who visited? What did they think about the place? Because all those people are going to buzz about it as they go through the day to day. So if they liked it, they’re going to tell four or five people. If they didn’t like it, they’re going to tell 20 people. If your staff doesn’t like it, they’re going to go someplace else, and if the doctors don’t like it, they’re going to admit someplace else. We all know they are mobile that way, so it has an impact on your reputation and your market position, and that’s really important. And for those hospitals that have said, “Well, I don’t know that I have a lot of patients who would come in if I emptied my beds quicker,” if you start advertising, start the marketing campaign about your quality, you’ll get those patients. I mean, what would it be like? I don’t know if any of you have ever seen this. You drive by a factory and you see a sign that says, 472 days since a lost time accident. What would happen if you put a sign up in your hospital that said, 25 minutes since our last hospital medication error? You know, to punch up the notion that at our hospital, you’re going to be safe.

So let’s go to slide 28 and we’re going to use Grandma here to illustrate how this works with a sort of real-world case. So Grandma is here. She’s 66 years old. She’s a Medicare patient. That means she’s DRG reimbursed, and there are others that are not Medicare that are DRG reimbursed, but that’s how she is. She’s got two little grandkids, the apples of her eye. She loves to bounce them on her knee and all that sort of stuff, but she’s got some underlying problems. She’s diabetic. She’s got some hypertension. She’s obese. She doesn’t smoke, so it’s sort of like, you know, 25 percent of the news is good and 75 percent isn’t so good. And she comes into the hospital for an elective CABG procedure. Now that’s about a 7-day length of stay, something like that, okay? But on the third, excuse me, on the fifth day of Grandma’s stay in the hospital, Grandma spikes a fever of 103 degrees. We have given Grandma the gift that keeps on giving: An infection. From the 9^th day to the 15^th day, Grandma is on a vent. She is in really bad shape. At this point, you call in the kids from out of State, that sort of thing. Finally, Grandma is off the vent on Day 15. She languishes a little bit longer, and then on the 22^nd day she’s transferred. She’s not discharged to home. She’s transferred to a long-term acute care facility. Now, that’s terrible. That really is.

But look at it from the financial standpoint as well. It’s not just terrible clinically. It’s terrible from a business standpoint. Grandma is going to get reimbursed, or you’re going to get reimbursed for Grandma about $13,000. But if you got Grandma out in the 7 or so days that she should have seen as her length of stay, you could have gotten two other Grandmas with $13,000 each for them for CABG procedures. You could have done $38,000 worth of revenue instead of just under $13,000 worth of revenue, but you didn’t reduce any costs and you didn’t increase any costs. Your costs have been flat throughout all 22 days of Grandma’s stay. The revenue opportunity isn’t what you’re taking advantage of, though. You’ve got it out there. There are two patients that are waiting to come in. They could pay you each $13,000 apiece, and you’re going, “No, no, no. I’m only going to get 13 from Grandma, but I’m going to keep her for an extra 14 days.” It makes no sense. So clinically it’s terrible, financially it’s terrible, and just from a humanistic standpoint, Grandma needs to get back to her grandkids, and she’s not getting there and that’s not a good thing.

So let’s finish up by taking a look at some of the literature here. As we look at slide number 31, a lovely headline that we saw a couple years ago, “MRSA Screening of ICU Patients Can Reduce Hospital Costs.” Wrong! It can’t because the costs are fixed. What it reduces is the charge on the bill. The insurance companies love that. Insurance companies love that, but you’re not going to reduce costs. The problem with this is when we keep saying this stuff, and this is why the clinical literature in some cases is almost damaging, as we keep saying this to hospital executives, see here it is in the New England Journal, here it is in the whatever, in JAMA, wherever it happens to be, and I’m not picking on those journals on purpose. There are a couple of them and they are pretty good. But as those articles say to hospital executives, “Improving quality will reduce your operating costs,” and we don’t deliver because the costs are fixed, it leaves a bad taste in the mouth. And so if you keep coming to me, promising me the moon and delivering nothing, I don’t want to see you coming to my office anymore. It’s sort of like, “Excuse me, I’m out to you.” Or as Bernie Mack used to say, “You’re dead to me.” I don’t want to talk to you about it. And yet we keep foisting this stuff on people that MRSA surveillance is going to reduce costs. It doesn’t, but it does have a financial benefit: Revenue. You get the patient out in 7 days, for instance, instead of 27 days. You just picked up a whole bunch of cases that you can get the revenue for, for which you don’t need to really add much in the way of cost.

On 32, it’s a very recent article, talks about the Michigan Keystone project – “The Business Case for Quality: Economic Analysis of the Michigan Keystone Patient Safety Program in ICUs” -- and I know most of the authors. This article talks about using activity-based costing to figure out how much it costs if a patient has an infection versus not having an infection, and that’s legitimate. That’s good to do, but that’s cost association and not cost behavior because if you don’t associate the cost with a patient who’s got infection because they didn’t get the infection, guess what? You still have the cost. So when you see people using activity-based costing or some of these others, or you see them using the black box of their cost allocation system in the hospital, be very, very careful. You are going to make a bad decision. What you need to ask is this question: “If this is so, how much does the cost go down by?” And the answer is: It won’t. I remember a number of years ago, and I will not identify who the physician was, from the upper Midwest who said he had saved his institution, a good sized institution, he reduced costs by $32 million by implementing an infection control program -- and he didn’t. He didn’t. When you looked at their P&L, their costs stayed the same, but their revenue went up a whole bunch because he was able to move more cases through the system. So be real careful when you see articles talking about cost association. That’s really what it is: Cost association not cost behavior.

You see that in the next two articles where in the first one, “The Savings Illusion” – slide number 33 – “Why Clinical Quality Improvements Fail to Deliver Bottom-Line Results.” They talk about the fact that it’s the cost structure, the structural arrangement of cost that is largely fixed and so it’s not going to go anywhere.

And the 34^th slide is the Nick Graves article, “Examining Costs, Mind Your P’s and Q’s.”  What he talks about there is that second highlighted quote, “Seek the opportunity costs.”  And what opportunity cost is for us in this context is the revenue. What could you have done with Grandma’s bed if you hadn’t had a sick Grandma in it for 22 days? And the answer is you could have generated two additional $13,000 payments. That’s the secret to this.

And then in our 35^th slide, what we have is a little calculator. I would use your own numbers for it, but you look at, walking down the page, what’s the average length of stay for a patient with a CLABSI? And some of the data that I’m using is hypothetical, and others of it is gotten from a couple of Web sites. But about a 29-day length of stay. If you can get that down to 5 days without an infection, that says in this little example that you’re saving 24 days of stay. Okay, 24 days improvement. If my average length of stay is 5 days, 4.8 days, that means I will get five incremental cases if I can clean that bed out. And if I normally get about $7,100 worth of net revenue, and you’re going to have to go and talk to Finance to get that number. But if that’s the case, that means that the potential incremental net revenue opportunity for every avoided CLABSI is $35,000. How many do you have a year that you could avoid? And if the answer is “It’s 100,” then that’s $3.5 million. The revenue side piles up very, very quickly, very quickly. I was working with a hospital in Maryland a few years ago. They implemented a rapid response team. I think they increased their cost by $150,000, rough order of magnitude, and it’s been a few years so I’m a little rusty on the numbers, but they generated $9.8 million in additional revenue. The revenue side is a rapidly moving stream. The cost side goes nowhere, like molasses running uphill. You can’t get much out of the cost, but you sure can out of revenue.

And so that comes to the end of the slides, where slide number 36 just says “Questions and Answers.” So if you have any questions, I would be happy to entertain them at this point.

Operator: Thank you very much. At this time, we’ll open the floor for questions. If you would like to ask a question, please press the star key followed by the one key on your touchtone phone now. Questions will be taken in the order in which they are received. If at any time you would like to remove yourself from the questioning queue, press star, two. Again, that is star, one to ask a question. We are holding for questions. We have a question from Jackie Daley in Maryland.

Bill Ward: Hi, Jackie. Hello?

Operator: Jackie, please make sure your line isn’t on mute.

Jackie Daley: Sorry, can you hear me?

Bill Ward: I can. How are you, Jackie?

Jackie Daley: I just had a question related to infection control. We’re not usually a revenue-generating department, but we talk about cost avoidance. Is that an appropriate term, or should we talking more like opportunity costs with infection control?

Bill Ward: I think of you as an indirect revenue producer because what you want to be thinking about is the opportunity cost or the revenue that can be generated if you are able to do things that reduce infection. So, for instance, let’s say for the sake of argument you invested $50,000 in a surveillance program to make sure everybody washed their hands. That’s going to pay off in a lot of revenue. You’re actually not taking cost out. You’re spending more, but what’s going to happen is you’ll stop the spread of infection from staff to patient, and when you do that your length of stay comes down and you backfill with those additional patients. In Maryland -- I think I heard you say Maryland, right? -- in Maryland, all revenue is ultimately case-based revenue because of the reimbursement system that the cost commission uses in the State of Maryland.

Jackie Daley: So then I guess we should avoid the term cost avoidance?

Bill Ward: You know, I think I would because I would talk about what you can deliver. Cost avoidance is relatively speculative. I drove my car down the street without a blindfold, so I’m speculating that I missed 25 cars. Whereas to talk about the fact that what you’ve been able to do in shortening length of stay, getting off divert. Now, you want to talk to all the different departments, Jackie, so you want to talk to the ER, the ORs, the step-down units, the ICUs and so on. What have you been able to do to their dwell time, that’s one way to talk about it sort of generically, how much time they are holding patients who can’t move on, and then that in turn, if they don’t have to hold them, they can fill. And if you can fill, there’s revenue going with it. Think about traffic. Tonight on the way home, all of you are going to be trying to make a left turn at some point in time in an intersection, and at the lights there’s going to be an arrow for the left turn. And you’re going to be stacked up there in a line of cars, and maybe you’re the eighth car back and the arrow turns green, and you don’t move. And then the first car moves but the second guy doesn’t move, and then the third guy looks at the second and he goes, “Oh, he’s moving.” And so what happens is, picture these cars – they were bumper to bumper when the light was red, and as it’s turned green, they’re starting to stretch out. They’re further and further apart, and what happens is by the time you get to move in the eighth car, you don’t get through the turn signal. If you all moved at the same time, you would have. And so the delays, the gaps between the cars are the mistakes and errors we make that you can get rid of, Jackie, if you are able to properly do infection control and eliminate these infections. You will have tightened up the space between the first patient and the next patient into the bed, and in so doing generated additional revenue.

Jackie Daley: Thank you. That was a very good analogy. Thank you.

Bill Ward: Great. And I’m sure you’ll remember it every night as you’re driving home, too.

Jackie Daley: I go through that every day. Thank you.

Bill Ward: You’re welcome.

Operator: Again ladies and gentlemen, if you’d like to ask a question, please press star, one now. Sir, I’m showing no further questions at this time.

Bill Ward: Okay, well let me just remind you that there is a 37^th slide that asks for your feedback on today’s phone call, and that’s always helpful to everybody to get to understand what worked and what didn’t work and so on. And then I would leave you with the advice of the great philosopher Nike: Just do it. Implement improvement programs, and they will pay off. And sometimes if you go to Finance and you say, “Can I please do this?” Like, let’s say Jackie decides to hire another infection control practitioner. She can go to Finance and say, “Can I please do this?” And they’re going to go, “No, we don’t have the budget for it.” There’s an old Jesuit expression: “It is sometimes better to beg forgiveness than ask permission.” By the time she does it — by the time they find out she’s done it -- she’s likely to have adjusted the length of stay and generated far more revenue than that infection control practitioner would ever have cost. So don’t be afraid to do the right thing, and have a great day.

Louella Hung: Thank you so much. Thanks, everyone.

Operator: Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may now disconnect.