Six Sigma and Healthcare Finances
Submitted by Skip Morelock PhD, RN, NEA-BC
Introduction and Research Question
As hospitals seek to contain costs, capture and grow income streams, and reduce errors and variation in processes, it is important for a hospital’s financial performance to develop systems of quality control and improvement that can quickly identify problems in the various service lines and be rapidly deployed by administrative staff and frontline managers. This necessity is promulgated at least in part by the nature of the healthcare industry. Unlike the manufacturing sectors, healthcare typically involves more human interaction and many more interventions that are direct and personal. Essentially, a patient is not the same as a widget!
The application of Six Sigma principles to a healthcare organization can help the institution identify and correct problems in the delivery of healthcare. No area is exempt and processes can be examined from the moment a patient presents in the emergency department, through the admissions process, during the inpatient stay, and at discharge. All those points along the way there is potential for variations in process which can impact productivity, create billing errors, and reduce the organization’s revenue capture. To that end is where Six Sigma can assist a hospital to meet financial goals.
The research question being examined is “How Does Six Sigma Impact Hospital Finances?”. The rationale for this research is the ever changing landscape of healthcare and the potentially enormous impact of recent legislation designed to ensure that everyone has some type of medical insurance. This will affect healthcare in many ways from allocation of resources, a more diverse patient demographic, and increasingly stringent rules of regarding reimbursement including the control or elimination of never events and meeting predetermined quality metrics. These factors make cost control and financial performance even more critical to a hospitals long term success.
The search engines used for data gathering include LexisNexis and CINAHL. LexisNexis has a large database of business and finance articles while CINAHL concentrates mainly on both clinical and administrative healthcare issues, Key terms used to facilitate the obtained articles include Six Sigma, hospital finance, performance, cost capture, process variation. To obtain more focused literature and to eliminate extraneous articles, each search was unique in that if hospital financial information was sought, then an accompanying term would be Six Sigma. If Six Sigma information was the desired goal, then Lean was used to limit the search possibilities. This worked too well as that search rendered very little useful information which lends credence to the prevailing thought that the two processes, although developed and applied initially in two different organizations (Lean – Toyota and Six Sigma – Motorola) they are nearly inextricably linked today. If inpatient data were sought, the term outpatient would be used as an exclusionary term to filter out articles dealing primarily with outpatient issues. This can come at a cost however as some excellent information can often be gleaned from articles which, on initial presentation, seem either off topic or irrelevant. In addition, the search was not limited to peer-reviewed articles, but two doctoral dissertations were also included in the initial examination of literature.
Of twenty-two articles reviewed for inclusion in the literature review, twelve were selected for inclusion in this review. The articles represent studies from a variety of healthcare backgrounds, qualitative and quantitative studies, and case studies.
As hospitals compete for increasingly scarce resources, it becomes an imperative that these organizations adopt not only more efficient ways of managing their dollars, but to develop systems to help assess and benchmark performance. Brown (2010) found that Six Sigma techniques could be applied to every aspect of hospital performance from supply chain to nurse staffing. This broad application has the potential to create numerous opportunities to financial growth. Waymack (2004) felt that in the beginning, hospitals should first try to focus on the capture of monies which had initially been denied by either Medicare or other insurance entities for either vague or poor documentation. This article gives excellent examples of how hospitals have recaptured hundreds of thousands of dollars just by fixing documentation errors or employee retraining. The article also provides a financial roadmap for Six Sigma implementation in the hospital and the unique challenges that hospitals pose to implementation. Moosa and Sajid (2010) expound on Waymack and specifically enumerate Six Sigma deployment and when problems are most likely to occur in the process including problems which occasionally lead to abandonment of the program altogether. Even though the Moosa and Sajid article is ostensibly a critique of Six Sigma implementation, there is very little criticism in it. Rather, the article focuses on internal problems in the organization that led to failure to successfully implement Six Sigma and not that the Six Sigma system itself might be flawed.
At the most rudimentary level, Six Sigma impacts hospital finances by eliminating waste and defective performance. Llorens-Montes and Molina (2006) suggest that control of costs using Six Sigma techniques will ultimately improve any organizations finances. Certainly in most hospitals, there many processes which are redundant and only survive because of the attitude ‘it’s always been done that way’. Reducing or eliminating waste is an easy fix and can be rapid cycled into everyday performance. One medical center, rural at that, managed to save over $2,000,000 after implementing Six Sigma changes designed to eliminate waste and redundancy (Stuenkel & Faulkner, 2009). It would seem that correcting deficient processes would be a logical application of the Six Sigma process in healthcare and would likely generate the least controversy...unlike the pushback that changes to staffing matrices might foment. Yet Minich-Pourshadi (2010) feels that applying Six Sigma to tame labor costs is the best use of this in the healthcare industry. No doubt that labor and benefits eat up a significant chunk of a hospital’s operational budget, yet the ultimate success of Six Sigma is whether the process can be sustained even while being derided, criticized, even sabotaged by front line employees. In addition, labor agreements in many parts of the United States would create a tough sell situation for many hospitals Chief Financial Officers if they were to try to control labor costs by implementing Six Sigma too aggressively. Her article reiterates what the other articles say is that Six Sigma application will work to improve a hospital’s financial performance. What these articles do not address, at least not in a specific way, is how to manage the inevitable backlash that can occur when a persons’ or a department’s standard way of operating is interrupted. The ultimate success is the long term usage of the system and to have the basic tenets of Six Sigma hardwired into the organization. Logically, this requires buy in from not only administrative and management staff, but also front line staff. Another informative article by Hill (2005) also studied the impact of Six Sigma implementation on rural hospitals. He estimates that not only improved financial performance can be realized, but also can be a tool for increasing employee satisfaction and improving patient safety.
DelliFraine, Langabeer, and Nembhard (2010) conducted an extensive qualitative research project which analyzed the impact of Six Sigma impact on hospitals based on an analysis of various peer-reviewed articles published between 1999 and 2009. A Likert scale was used to assess the effectiveness of Six Sigma implementation in 7 areas. What their analysis found was that there was a general consensus that implementation of Six Sigma improved both operating room and emergency department throughput. The cost savings on the operating room initiative alone ranged from $350,000 to over $600,000 annually. The authors also found other cost savings when Six Sigma was implemented to address excess wait times and to improve best practices in direct patient care. Both of these have financial implications as well since decreasing wait times will permit more patients to be seen and initiating best practices to improve patient outcomes could result in shorter length of stays.
Corn (2009), describes in detail the degree of financial benefit that a hospital can achieve by adopting the Six Sigma methodology. His paper reviews two medical centers in Nebraska which were able to realize $300,000 in saving by adopting Six Sigma in the oncology areas alone. He postulated that greater saving would be realized once the system was implemented system wide. He reveals the ways Six Sigma can assist a hospital in decreasing costs are by eliminating variation in procedures, in effect, by standardizing them. This is the same way that Six Sigma helped Motorola in the 1980’s since by standardizing manufacturing, you reduce defective product. While hospitals are not exactly manufacturing centers, they do undertake interventions that can vary in many ways depending on practitioner preference. This particular article does acknowledge and address a hospital’s potential hesitancy in adopting this system. He feels that mainly the upfront expense is what drives hospitals to either decline to use Six Sigma or to adopt perhaps less effective methods of cost management. Carrigan and Kujawa (2006) also found that hospitals can improve their financial position by implementing Six Sigma in supply chain management. It is somewhat intuitive that this approach would have the greater chance of success since supply chain deals primarily with materials and not human capital...which is intrinsically more difficult to manage and direct.
As is evident from the literature, key to the long term success of Six Sigma is the hardwiring of the system into the organization. This requires quite literally a reengineering of processes which have been ingrained and entrained into the organization for years. Woodard (2004) found that even with favorable initial onboarding into a healthcare organization, there remained many obstacles to full adoption. The most prevalent is the belief that Six Sigma is a passing fad and that there will be other possibly less costly cost management measures that are on the horizon. In truth, Six Sigma does require a significant capital outlay to provide the extensive training and the cost of employee time to abstract the extensive amount of data that Six Sigma requires. Woodard is quite convincing however as she points out despite being initially costly, the savings that can be realized are difficult to ignore.
Synthesis of Study
What we know about Six Sigma is that its implementation can help hospitals improve their financial situation primarily by eliminating variation in process, redundancy in supply chain operations, and optimizing labor costs. Despite other programs which promise to improve a hospital’s financial performance, Six Sigma has had some semblance of staying power. From its inception in the 1980’s, to the application of its processes to healthcare beginning in the late 1990’s, it has proven to be resilient.
The articles selected reflect a variety of authors, countries, and health settings. All however conclude that Six Sigma can improve a hospitals financial performance. Others have gone further and have demonstrated that Six Sigma can potentially improve patient outcomes and standardize processes which can also improve the financial picture of a hospital. The articles, while enlightening, seem to be strongly biased toward Six Sigma and gave very little ‘air time’ to the concerns about Six Sigma implementation and the potential effect on employee or staff morale. The overriding theme is implement it and you will see positive results. The evidence showing the results is convincing at least according to the articles for this presentation. The author does note a lack of solid quantitative testing between Six Sigma and other quality management tools. Further opportunities for research would include a quantitative analysis of several quality management systems to see how much financial impact each of them has had on a hospitals finances. While Six Sigma is likely to prevail, this type of research is important as it lends credibility to any system which is being implemented. Consumers, including healthcare providers, are considerable more savvy than prior generations and from experience, will research a process if it is to be implemented at their facility. Another gap in the research has to do with the types of hospitals being examined. There were several excellent examples of rural hospitals adopting Six Sigma and the positive benefits they derived from its adoption, but the author did not uncover one quantitative or comparative study that critically examined Six Sigma in larger metropolitan hospitals or teaching facilities.
Effect on the Bedside Nurse
If a nurse has not heard of LEAN or Six Sigma, they soon will! The ultimate goal of Six Sigma is to improve the quality of patient care. The way that this works is by carefully examining existing processes using one of two Six Sigma models, and then eliminating the unnecessary or redundant steps. Research has shown that the fewer variations in a process, the fewer defects or errors. It’s not a panacea and the effects may not be dramatic initially, but incremental improvement is the initial goal. The Emergency Department (ED) is frequently the first place a Six Sigma project will be launched. It is not difficult to see why. The ED is the first contact that most patients have with the hospital and the experience in the ED can significantly influence a patient’s perception of the hospital. A long wait in the ED frequently portends dissatisfaction later. Many studies have shown a statistically significant link between ED wait times and overall patient satisfaction scores (Boudreaux & O’Hea, 2003). Another prime area for Six Sigma intervention is Health Information Management. The mis-coding of a diagnosis can have significant financial (and possibly legal) ramifications for a hospital. Six Sigma can help identify where in the process these errors are occurring or are more likely to occur. Process changes can then be put into place which may greatly reduce these mistakes. Front-line nurses will frequently be asked to participate in Six Sigma studies and implementation since they are the bedside experts and they know what processes work and which ones do not. The bedside nurse has nothing to fear from Six Sigma implementation and should welcome the valuable information that it can yield. We all want our patients to get better and sometimes we have to be open to trying new techniques in order to achieve enhanced quality and a better patient experience.
Boudreaux, E. & O’Hea, E. (2003). Patient satisfaction in the Emergency Department: a review
of the literature and implications for practice. Journal of Emergency Medicine,
Brown, A. (2005). Measuring a healthy hospital: metrics-based tools for improving operational
performance. Making It Work, Corporate Newsletter from Per-Se Technologies
Carrigan, M. & Kujawa, D. (2006). Six sigma in healthcare management and strategy. Health
Care Management, 25(2). 133-141.
Corn, J. (2009). Six Sigma in healthcare. Radiation Therapist. 18(2). 151-154.
Dellifraigne, J., Langabeer, J., and Nembhard, I. (2010). Assessing the evidence of Six Sigma
and Lean in the health care industry. Q Manage Health Care, 19(3). 211-225.
Hill, T. Performance management: improving and sustaining performance in rural hospitals.
Rural Minnesota Journal, 2(2), 113-126.
Llorens-Montes, F. & Molina, L. (2006). Six Sigma and management theory: processes, content
and effectiveness. Total Quality Management, 17(4). 485-506.
Minich-Pourshadi, K. (2010). Taking on the cost drivers. HealthLeaders, 14-25.
Moosa, K. & Sajid, A. (2010). Critical analysis of six sigma implementation. Total Quality
Management. 21(7). 745-759.
Stuenkel, K. & Faulkner, T. (2008). A community hospital’s journey into Lean Six Sigma.
Frontiers of Health Services Management. 26(1). 5-13.
Waymack, P. (2004). Light at the end of the tunnel for denials management. Healthcare
Financial Management. 57-66.
Woodward, T. (2005). Addressing variation in hospital quality: is Six Sigma the answer?
Journal of Healthcare Management. 226-236.