Invited Panel Discussion:Strategic Problems in Health Care Management

Session HC01DSI Athens, Greece - July 6, 1999

DiscussantWilliam P. Pierskalla, Ph.D.

John E. Anderson Professor and Former DeanThe Anderson School at UCLA110 Westwood Plaza, Suite B411

Los Angeles, CA 90095-1481Tel: 310-794-2100

email: william.pierskalla@anderson.ucla.edu

Challenges of Improving Health Care Delivery

A. What do Governments Want From Their Health Care Systems

B. Factors Driving the Increase in Costs

C. Strategic Research Issues

What Do Governments Want From TheirHealth Care System?

§ Equity in Access

§ Good Quality of Outcomes

§ Income Protection

§ Reasonable Autonomy forProviders

§ Reasonable Percentage ofGDP

§ Cost Efficient Delivery

§ Satisfaction of the People

§ Increasing Productivity

§ Improving Technologies

§ Freedom of Choice for Patients

§ Improving Health of the People

Do We Get What We Want? Main IssuesFacing Health Care Delivery in Many

Nations§ Gaps in Access to Services

§ Lack of Income Protection When Costly Medical Care isRequired

§ Unacceptable Rates of Growth in Health Care Costs

§ Inefficient Delivery Systems and Poor Performance

§ Varying Levels of Quality

§ Poor and Spotty Use of Technologies

§ Reduced Freedom of Choice

Economics of the Health Care Delivery(United States)

Average amount employers spend perfull-time employee, in 1989 dollars.

% change % change

1970 1989 1970-1989 1994 1989-1994

Wages and Salaries $24,768 $24,884 1 25,005 0.5Retirement Benefits 1,808 2,390 32 2,700 13Other Fringe Benefits 507 729 44 690 -0.5Health Benefits 656 1,722 163 2,343 36

Source: Employee Benefits Research Institute

Table 1: Real Per capita Health Care Cost and GDP, 1940-94

1940 $312 $7,797 4.0% --- ---1950 470 10,611 4.5% 4.1% 3.1%

1960 654 12,379 5.3% 3.3% 1.5%

1970 1,166 15,861 7.4% 5.8% 2.5%

1980 1,743 18,793 9.3% 4.0% 1.7%1990 2,788 22,193 12.6% 4.7% 1.7%

1994 3,110 25,623 13.7% 8.0% 4.8%

Level Annual Growth Rate

HealthSpending/

GDP Year Health GDP

Spending

Health Spending

GDP

Note: Spending and GDP are in 1990 dollars.

Source: David M. Cutler, “Technology, Health Costs and NIH,” Harvard University and NBER paper presented at the NIHEconomics Roundtable on Biomedical Research, October, 1995. (Data for 1994 added later by WPP.)

TABLE 2.9 AGE –SPECIFIC MEDICAL USE THROUGH TIME (Per Capita Spending)

1965 1970 1975 1980

<19 19-64 65+ <19 19-64 65+ <19 19-64 65+ <19 19-64 65+

HospitalPhysicianOther Total

$23 23 37 83

$87 49 80 216

$176 93 203 472

$46 36 56138

$153 76 108 337

$349 150 355 854

$74 55 82211

$269 124 174 567

$628 255 5931467

$127 91 129 347

$462 198 264 924

$1086 443 922 2451

Spending Relative to 19-64 Age Group’s Spending

1965 1970 1975 1980

HospitalPhysicianOther Total

<19

0.260.470.460.38

19-64

1111

65+

2.021.902.542.19

<19

0.300.470.520.41

19-64

1111

65+

2.281.973.292.53

<19

0.280.440.470.37

19-64

1111

65+

2.332.053.412.60

<19

0.270.460.490.38

19-64

1111

65+

2.352.243.492.65

Source: Fisher, C. R. “Differences by Age Groups in Health Care Spending”, Health Care Financing Review, spring 1980, Tables A-D

Trends in Cost Growth

InterventionsTIME1975 1985 1995

Causes of Health Expenditure Increases

§ Demographics

§ Income Level Increases

§ Insurance

§ Price Inflation / non Wages

§ Administrative Expenses

§ Factor Rents

§ Residuals =? Technologies

Table 2: Accounting for the Increase in Health Costs 1940-1990

Factor Increase Due To Share of Total

Total Increase 790% ---

Static Factors 399% 51% Demographics 14 2 Income 37 5 Spread of Insurance 100 13 Relative Price Change 147 19 Administrative Expense 101 13 Factor Rents 0 0

Residual (technology) 391% 49%

Source: David M. Cutler, “Technology, Health Costs and NIH,” Harvard University and NBER paperpresented at the NIH Economics Roundtable on Biomedical Research, October, 1995.

Health Expenditures as Percent of GDP

0

5

10

15

1960 1970 1980 1990 2000

Canada

France

Germany

Japan

UnitedKingdom

United States

OECD Health Data 1998

Total Expenditure per Capita in $ at Purchasing Power Parity

0

1000

2000

3000

4000

5000

1960 1970 1980 1990 2000

Canada

France

Germany

Japan

United Kingdom

United States

OECD Health Data 1998

Public Expenditure on Health as % of Total Health Expenditure

0

20

40

60

80

100

1960 1970 1980 1990 2000

Canada

France

Germany

Japan

UnitedKingdom United States

Region Major Characteristics Recent Changes

Europe,Japan andCanada

• Collective responsibility• Public sector prime player• Market minor player

• Increase in marketmechanisms

US • Individual responsibility• Market the prime player• Public sector minor player

• Increase ingovernmentmechanisms

Ø Systems are converging because the fundamental problem- once stripped from its cultural and political backdrop - is thesame. The fundamental problem is to deliver high quality careat low cost in an environment of rapid technological change.

Ø And, OR/MS has a rich tradition of addressing essentiallysimilar problems / trades-off.

Strategic Decisions:Focused Operations

§ Reduce Diseconomies of Scope due toCongestionl Create Homogeneous Production Units

l Reduce “job shop” aspects to more of a “flow shop”

l Utilize common knowledge resources and processes

Homogeneous Class of Patient

§ Uses severity adjusted Diagnosis RelatedGroups (4 severities for each of 477 DRGs=1908sDRGs)l resource use vectors for sDRG i and sDRG j:

l ri = (ri1,ri2, ... ,riR), rj = (rj1,rj2, ... ,rjR) and ak is the riskinesscoefficient for the kth resource

d a r rij k ik jkk

R

= −=

∑1

sDRG Clustering into p clusters

§ Maximize resource usage similarities for the sDRGs ineach cluster

§ Maximize resource usage dissimilarities among theclusters

§ p median problem where p are the number of differentclusters (wards) in a hospital

§ Solve with a capacitated clustering algorithm

§ Diseconomies of very heterogeneous “job shop” like scopeof resource usage illnesses are reduced and economies ofscale for similar illnesses are realized

Preliminary Results ofFocused Operations Study

§ Used data for 350 hospitals in Pennsylvanial Cluster low intensity patients together when possible

l Cluster high intensity patients together as a subset ofall patients

l Cluster mid-range intensity patients intohomogeneous clinically focused units

l Leave the smallest remaining number of patientsungrouped

Areas for the Future Research

Strategic

Conjectures

§ Economies of Scale Are Achievable in Administrativeand Some Ancillary Distributed Systemsl Purchasing

l Information Systems

l Technology Utilization

l Administrative and Process Effectiveness

l some in Laboratory, Pharmacy, Radiology

§ Economies of Scale Can Also be Achieved in ManyClinical Systemsl Coronary Artery Bypass Grafts

l Lens Implants/Lasik Surgery

Conjectures

§ Quality Advantages of Scale--May Also Be Achievedin Clinical Systemsl Reduction in Variation from Best Clinical PathwaysðReduced Mortality, Complications and Readmissions

ðReduced Testing and Lengths of Stay

l Hire Highest Quality of Personnel

l Latest and Best Treatment Protocols

l Effective Continuing Education for Staff

Strategic Research Questions and Needs

§ What are the capacities and resource needs in a health caredelivery system when we are able to obtain efficient patientscheduling, personnel scheduling, forecasting, high quality, etc. ?

§ How do occupancy levels and their variation affect costs andquality of care? Are there significant congestion effects on costand quality at near full capacity? And are there significantdiseconomies of scale at low capacity?

§ How does one design high-quality low-cost “packages of care”for changing populations and environments in vertically and/orhorizontally integrated large systems?

§ What are the optimal sizes for vertically or horizontallyintegrated systems?

Operational Research Questions andNeeds (continued)

§ Can optimizing systems be built to detect low quality,unnecessary, inadequate or improper care delivery by utilizingpatient management paths and clinical pathways and newquality of care measures? (new massive databases now comingon-line--patient records, costing information, personnelavailability, and skills, technology, demographics, institutionalcharacteristics, critical path and patient management protocols,etc.)

§ Can net revenue be optimized by the addition, deletion orsharing of services?

Operational Research Questions and Needs

§ Through design and care delivery changes, can majorimprovements in quality, cost and access be achieved insubsystems?l e.g., recent study found 2/3 of primary care nurses’ time spent on

non-nursing activities not needing RN qualification

§ Can delays (congestion) and omissions be eliminated by just-in-time scheduling?

§ Can set-up times for patients’ services be reduced?§ Can workloads be smoothed better via interactive patient,

personnel and facilities scheduling?

Operational Research Questions andNeeds (continued)

§ What treatment locations are “best” for what patients atwhat times?

§ What techniques, ideas and practices from operationsmanagement supply chain analysis can be utilized in healthcare delivery?

§ How can financial solvency of the institution bemaintained? (modeling of direct and indirect costs withprocess improvement analyses)

§ How does one recruit, train and retain good personnel ina cost focused HCDS?

OR/MS Research Topics

§ How can cybernetic models be built to optimize thesequencing and types of diagnostic tests and therapies inclinical pathways when there are rapidly changingprotocols and technologies?

§ How can adaptive process flow models be built tominimize complications in a rapidly moving, people skillsdependent, technology changing and relatively highturnover environment which operates 24 hours a day and 7days a week?