Do you know your "innovation fulcrum?".

Imagine you are the vice president for medical affairs of a hospital that has four, highly successful and profitable surgical service lines, including cardiac, spine, laparoscopic, and trauma surgery.

The hospital also has a growing outpatient wound care service and a hyperbaric therapy service. The wound service has been breaking even, but hyperbaric is losing money. As the wound service expands, requests are made by other facilities to transfer wound patients for inpatient care and hyperbaric therapy.

The hospital sees this as an opportunity to increase admissions, surgical volume and hyperbaric therapy volume. A financial analysis reveals positive contribution margins for both the inpatient wound service and the hyperbaric service with creation of the new inpatient wound service line. The wound service seems a clear winner, both from the standpoint of strategic fit and financial gain.

Eighteen months later, the number of wound admissions has increased, as well as the volume of wound-related surgery. In addition, the hyperbaric service has grown and is profitable.

However, the hospital is seeing a dramatic drop in overall revenue. There is a decrease in the number of spine and laparoscopic surgical cases. The length of stay of trauma patients is increasing. There are more add-on cases in the operating rooms and fewer ICU beds available for cardiac patients.

Operating room turnover time is increasing. Costs are rising. Surgeons are angry. Nursing and ancillary staff turnover is up. At a meeting of the senior leadership group, you are asked to work with a team of surgeons and nurses to facilitate a redesign of the operating rooms, focusing on turnover, scheduling and add-on cases.

How do you respond?

Process problem?

Like many senior leadership groups, the one in our hypothetical hospital believes the problem lies within their system processes. Something must be wrong with the operating room processes. If these system processes are fixed, the problems will be solved.

Yet, is the problem with system processes or is it with their new wound service line? It is profitable, so the problem must lie elsewhere. Is the redesign of the operating room processes the correct approach to take?

What the leadership fails to see is that by adding the wound service line, their hospital has lost its "innovation fulcrum." As described by Mark Gottfredson and Keith Aspinall, an institution's innovation fulcrum is that point at which the number of products or services it offers strikes the right balance between customer satisfaction and operating complexity. (1)

How did this occur? Traditional financial analysis, while yielding positive contribution margins, failed to factor in the link between increasing the number of service lines and the complexity costs.

For our wound service line, the complexity resulting from sicker patients, who required ICU care, who required anesthesia transport to the operating room, and who where infected with multi-resistant organisms requiring them to be placed in isolation was not factored into the financial analysis.

This increased complexity increased the need for lower nurse to patient ratios, more ICU beds, less staffed beds and longer OR turnover times due to delays in anesthesia transports.

This complexity, in turn, meant less capacity for elective surgical admissions, less capacity to accommodate trauma cases that needed staged surgical procedures (increasing LOS), and an increase in add-on cases.

All this brought staff frustration, increased turnover and loss of high contribution margin cases (cardiac and spine surgery). Ultimately, costs increased and revenue declined. Complexity built upon complexity, creating a domino effect and tipping the balance of previously well-balanced and successful service line offerings.

Finding balance

Armed with this knowledge, how do you find your innovation fulcrum and how do you keep it in balance?

The first step is to analyze a low complexity or "average" case for your business. Establishing a baseline allows you to see beyond the complexity of multiple service offerings and to understand the underlying processes, resources, and ultimately costs and revenues involved in delivering that service. (1)

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For example, our hypothetical hospital might choose to establish elective coronary artery bypass grafting (CABG) as the baseline case to analyze. It would then analyze the processes involved in delivering an elective CABG, including:

* Elective scheduling

* Insurance authorization

* Pre-operative preparation of the patient

* Operating room time

* Post-op ICU care

* Step-down care

* Ancillary service utilization

* Discharge

* Billing

* Payment

By understanding the processes and the resources required to deliver the service, costs and incremental revenue may then be determined. Once you establish the cost and revenue of providing the baseline service, you add back, one at a time, the service lines that are valuable to your patient base, such as spine and laparoscopic surgery.

As with the elective CABG, this will create a decision analysis framework, allowing you to track the effect through your value chain processes. By doing so, you continue to estimate the costs of adding complexity, as well as the incremental revenue that will be gained. The numbers you produce may not be exact, but they will give you an estimate of the impact of adding complexity.

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By completing these estimates, you can map out the impact on revenue of adding complexity to your offerings. As seen in Figure 1, the total inpatient profit per day rises as each service line is added back in. When wound is added, complexity increases, costs increase, higher profit services decline, and total profit per day declines.

When revenue drops dramatically, it is a sign that complexity has negatively impacted the system and the innovation fulcrum has been tilted out of balance. The number and type of service offerings prior to the increase represents the innovation fulcrum.

Ridding your organization of complexity is the first step. Preventing complexity from creeping back in and unbalancing your innovation fulcrum is equally as important. It requires revisiting your portfolio of services and analyzing the complexity underlying the processes to deliver those services, and the costs associated with the complexity.

Finally, as Albert Einstein once said, "Everything should be as simple as possible, but not too simple." Businesses cannot remain stagnant. Your innovation fulcrum will shift and change over time, as the needs of your patients change.

The key to success is to maintain a strategic focus that analyzes both the financial impact, as well as the impact of adding complexity and the impact on other business units and the entire system, as you contemplate adding service lines to meet the changing demands of the health care marketplace.

David P. Tarantino, MD, MBA, is executive medical director of Shock Trauma Associates, P.A., a 50+ physician, multispecialty practice associated with the University of Maryland School of Medicine. In addition, he is the chief executive officer of The MD Consulting Group, LLC, a health care management consulting firm in Baltimore. He can be reached by phone at 410-328-2036 or by e-mail at [e-mail]

Reference

1. Gottfredson M, Aspinall K. "Innovation Versus Complexity: What is Too Much of a Good Thing?" Harvard Business Review. November 2005.

By David Tarantino, MD, MBA

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