in search of better hospitals

BeST cAre, BeSTPrAcTice

IN SearCH Of

better HOSPItalSWhat do better performing hospitals do that other hospitals do not? Sikander Shaukat and Naeem Younis examine best practice.

Change is endemic in healthcare — as elsewhere. The groups and types of patient and their needs, medical services and the landscape of providers evolves continuously. Of all industries, healthcare needs business strategy more than any other — economic performance and misaligned demand and capacity directly affect patient safety.

A strategy delivers economic well-being, provides the framework for managing the evolution of the hospital’s services, and the basis for managing the business risk. Strategy takes a forward-looking perspective on what patient groups a hospital chooses to serve viably, with a selected set of services, while taking account of who else provides or is likely to provide these services to that group of patients and how.

Healthy strategiesOver the last year, the London-based strategy consulting firm, Value Dynamics, interviewed either Directors of Service or Heads of Strategy in ten hospitals across the UK’s National Health Service (NHS). The hospitals included community, mental health and district general hospitals. We also interviewed other NHS institutions that provide best practice and regulation to the industry. Reports published by specific institutions were also examined. The objective was to identify best practice, what it is that marks the best hospitals from the rest.

Our research found that the better hospitals had seven characteristics:

01

Understanding strategyThe better hospitals recognise that business strategy is not another word for operational optimisation. They recognise what business strategy is and spend effort in developing this and institutionalising strategic

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SIkANDER SHAUkAT AND NAEEM YOUNIS in SEARch of BETTER hoSpiTAlS

competence in their organisations. In contrast, poor performing

hospitals assume running hospitals strategically involves measuring bed occupancy, and seeing medical services and patients as activities. These hospitals are subsequently less robust when both economics and demand fluctuate. They are unable to suitably adjust their portfolio.

Poor performing hospitals are project and operations driven, confusing this with business strategy. While there is an awareness of strategic management ideas and labels, there is little knowledge of the mechanisms that drive performance, and so these hospitals lack skills in putting these concepts into day-to-day practice. For example, while patient demographics and the local disease profile are sometimes fast changing, managers concern themselves with income per unit of bed and throughputs.

These hospitals lack both understanding of and actions related to the characteristics of patient’s needs in the future, the evolving nature of medical services, competition and the collective impacts of each. Essentially, they lack the projection and foresight to understand the possible impact on the future of actions and events happening today.

02

Understanding good stewardshipThe well performing hospitals did not abdicate all the planning to governmental health commissioners alone, waiting to be told what to do each year. They took it upon themselves to do their own planning. They saw that a critical part of good stewardship of a large organisation is to have a clear perspective based on conditions, where the organisation needs to go and how it plans to get there. This enabled them to knowledgably negotiate with national level planners.

03

Understanding customersThe better hospitals recognise that customers are the business. In the NHS generally, there is an assumption that hospitals provide a free service. This is simply not the case as every patient, and the population overall, is a paying customer through their

taxes. Whereas in other industries, including private hospitals, firms are desperate to attract customers and keep them engaged with the business for as long as possible, the assumption in the NHS is that it is better to remove customers as quickly as possible from the premises.

Hospital managers, particularly in poor performing hospitals, think of their business in terms of activities (and therefore costs) first and foremost. In every other industry, including the railways and utilities, there is a recognition that the businesses exist to serve their customers, even when these are sometimes relegated behind analysts and shareholders.

04

Understanding purposeWell performing hospitals deliberately set out a purpose. Purpose can only come from an examination of whom the hospital serves and with what product or services. This happened even when some of the services were mandatory and defined by commissioners. In other words, it is about choosing a role in the grand scheme of the needs of the chosen group of customers or patients, and what specific services the hospital uses to fulfill all or part of these needs.

In strategy this is known as positioning and is vigorously defended by continuous environmental scanning. Political parties are very adept at doing this. Purpose is not set in isolation and is evolved during strategic analysis. Hospitals which are pre-occupied with operational optimisation, overwhelmed by issues of capacity and productivity, can not usually conceive of the need for a sense of purpose and positioning.

05

Understanding the market Well performing hospitals usually carry out a market assessment for each of the services they provide. This involves a clear analysis of patient group size and its growth or decline rates, the needs of the group and the trajectory into the future of each of the needs. Surprisingly, they even recognise competitors as alternative providers of the same service.

Poor performing hospitals also carry out analysis, but tend

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efficiency. Instead, they continued to optimise bed utilisation and length of stays while becoming more and more unprofitable.

06

Understanding their portfolio Well performing hospitals look at their set of services based on a portfolio approach. While some services are mandatory and may be loss leaders, other services are taken on to generate profits to offset the loss leaders. In some cases this is taken further with services operating at exceptional levels. The hospitals tender for even more profitable work for these services.

The relative strength of each service was measured through national comparisons. However instead of copious metrics being measured, key outcomes that provided a sound, all-round business level assessment were used, such as waiting lists, turn aways, re-admissions, effective treatment, all per unit of cost (we would suggest per unit of income is also used). Most hospitals can also usefully benchmark overhead and fixed costs on a national level.

In many cases in the poorer performing group, interventions that had been applied elsewhere or at previous employers, were tried out in the hospitals, only to find they do not work or have the same returns in a different context.

Seeing their incomes depleting due to the nature of the local patient population, demand changes and mergers, some poor performing hospitals have tried to take a portfolio and strategic approach to services. But, a portfolio approach delivers benefits over time and is not a quick fix. By the time some had reacted their finance facilities had dried up.

07

Understanding serviceWell performing hospitals have a more holistic view of customer experience than poorer performing hospitals. The under performers tend to simply present a questionnaire to patients asking them about how happy they were with their treatment.

The better performers recognise that operating at a good level of service quality reduces long-term costs. They also recognise that the parameters or filters patients use to judge

to use internal historical data of existing patients for their statistical correlations. They do not analyse the demographic changes of the whole of the local population they are servicing in a meaningful way, failing to interpret the underlying trends.

One of the hospitals we surveyed provided a burns unit to service a local military installation. The hospital had invested in this capability, but failed to develop contingency measures in case the military installation moved away. Neither did they develop a channel to stay abreast of developments within this group. The military moved away and the hospital was left with unused capacity and related fixed costs that affected the profitability of other services.

“A strategy delivers economic well-being, provides the framework for managing the evolution of the hospital’s services, and the basis for managing the business risk.”

Similarly, another hospital was clearly aware of the ageing population in its catchment area, but neither recognised nor took action towards the fact that young people were moving away. This created a greater concentration of elderly people with multiple chronic illnesses within the population. As the conditions of many became more acute, they found themselves in accident and emergency (A&E), putting further pressures on the service. Neither did they recognise that as a picturesque part of the country, more elderly people were moving from other parts of the country to the area to retire. This put more pressure on A&E leading to a higher growth rate, while at the same time the other services had a reduced take-up with the younger population moving out.

To add to their woes, the hospital did not have the strategic wherewithal to firmly negotiate with commissioners that a growing business area can never operate at optimum levels of



services have many other dimensions than how they were attended to when they became patients.

They recognise that customers’ ease of access to the service is important to them and this involves both waiting times to get service — such as elective treatments or attention in A&E. It also includes convenient access points — one reason people complain when A&E and ward facilities are closed down.

Most hospitals have not recognised that the perception of the service the patient is likely to receive is coloured by the reputation of the organisation and word of mouth. It is formed well before the patient arrives at the premises.

Many hospitals have not yet recognised that they need to measure three service qualities. The first isthe pre-formed impression of the organisation before the patient arrives at the premises. The second is the actual service received versus the pre-formed impression. The lastone is the service the hospital has designed compared to that actually received by the patient. The organisation then has to work on constantly aligning all three.

In addition, an area worth exploring is the service recovery costs to income and the complaints to the number of patients served and at what level management takes action on these.

What to do?Faced with hospitals at different performance levels, the standard responses are to initiate cost improvement programmes and to merge hospitals. The reality is that all approaches are fundamentally flawed if they are not accompanied by the requisite strategic thinking.

First, consider the rationale for mergers. In many hospitals, the rationalisation used for mergers is that it would create a larger budget organisation with more room for manoeuvre. Often, this involves the merger of two or three hospitals each of which has an impaired financial position. Using purely operational calculations of likely synergies, the mergers are justified. The logic is that the same work can be performed using less people and equipment when everything is part of one organisation, that is to say economies of scale in the process and related reengineering.

In the mergers we looked at the rationalising of services to a single location was never made clear as a goal. Surprisingly no strategic synergies were explored. For example does the merger give access to particular skills, certain specialisation, certain unique types of patients or unique equipment. Does it reduce competition or deliver vertical integration?

Neither was it considered that hospitals in the UK do not have economies of scale because

they have to carry redundant capacity and equipment and have to operate at certain mandated staff-to-patient ratios.

Another oversight was that a larger organisation would require a better management model and practices. It would need greater management skills and attention, improved financial management capabilities, larger and better supplier management skills, better and more staff and HR management skills, as well as better strategy design skills.

The reality was that because the medical services delivery architecture is evolving and disaggregating due to advances in treatment methods, the synergy calculations were not worth the papers they were presented on.

Scant attention was paid to the fact that in merging hospitals, the size of the fixed cost base was increased substantially, so these organisations would be unprofitable if demand fell. At the same time, the commissioners want to reduce demand! One of the basic tests in strategy is to test for the ratio of fixed to variable costs as a measure of strategic resilience and flexibility. This is especially telling when assessed in relation to the changing characteristics of the wider local population and their projected demand for services.

Another basic test of strategic resilience is to examine the size of the gross margin as a measure of strategic resilience to tariff reductions. Given the hospitals coming together were unprofitable, this should have rung

“A good reputation attracts capable staff and colours the perception of service quality.”

The better hospitals also recognise that infrastructure conditions represent a powerful signal of the quality of services on offer. The physical state of the hospitals and their facilities represents an important criteria of customer experience. Other important aspects of service are:— Empathy, courtesy, recognition,

contact and rapport give patients a level of comfort and assurance, creating trust. The better hospitals ensure that a nurse visited each patient every hour as a minimum standard.

— Knowledge the staff and medical professionals have about the condition of the patients and the treatments to be delivered to the patients and being able to answer questions in an informed manner.

— Behaviour of others either waiting to receive service or being treated, also colours a patient’s judgement about the service quality.

— Reliability of the service, the actual service quality being free of errors, mistakes and reworks was a key dimension for all hospitals.

— Measuring service levels and the adherence to these, though internally important, have little to do with how the customer sees a quality service. The importance of keeping the patient informed that the medical intervention is relevant, it will treat the condition, and the patient will not have to be admitted again, varied between the two groups.

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alarm bells. The UK’s Department of Health is currently reducing tariffs.

One of the well performing hospitals simply said that merging two financially poor organisations results in a larger financially poor organisation. They would not take such a step.

Cutting costsThe other popular response to under-performance is a cost improvement programme. When the pressure to reduce costs in non-performing organisations arrived they had no strategic framework as the basis of deciding where these would have the least impact. For example, they could not rapidly focus to where services were consuming the most investment or budgets and delivering little income and were not mandated or were negotiable. They could not point to those services where the organisation was less well placed to deliver outcomes per unit of cost and so could be outsourced.

The cost improvement pressure resulted in more knee-jerk responses exasperating an already deteriorating situation.

In a lot of cases the analysis and thinking on where to reduce costs was abdicated to external providers. This lost the opportunity to build a critical skill that should have been present in the internal DNA of the business negating the need for such programmes.

Most surprisingly there was little fundamental grasp that cost improvements cost money, sometimes

significant amounts of money, and the budgets for this did not exist.

The lack of insightful planning and taking related actions annually has meant that poor performing hospitals in particular often have to conduct major transformations every three years or so to ratchet themselves back to effective and efficient performance. These programmes monopolised the majority of time and energy of key management, and the resources of the hospitals, pulling them away from business as usual. This led to exceptional costs and even worse performance.

The key lesson from this research — for the NHS and other organisations — is simple: operational optimisation is not business strategy. Strategy involves offering a set of services after carefully assessing and adjusting to the evolving needs of the target patient group. Managing these services strategically and taking appropriate actions results in the continued economic well-being of the organisation. Within the NHS, to achieve this there needs to be a shift in recognising the patient as a customer and designing clarity of purpose for the organisation. Service quality reduces costs and builds reputation, but has many more dimensions than an end-of-stay survey. A good reputation attracts capable staff and colours the perception of service quality.

the authorsnAeem YouniS [email protected] is a Founding Partner of Value dynamics. He has over 15 years of professional experience working with leadership teams across both the public and private sectors, helping clients solve complex business challenges, develop effective business strategies, improve business performance and make better decisions. SikAnder SHAukAT [email protected] is a Founding Partner of Value dynamics — an advanced strategy advisory firm. An alumnus of london Business School, Shaukat has over 30 years of experience in setting business strategy, developing businesses and in customer management for multinational companies.

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