Medical practices are classic examples of the “high fixed cost” economic model. Costs considered “fixed” are those that remain constant regardless of fluctuations in patient or procedure volume. Included in these are: rent, salaries, and malpractice insurance, which account for the majority of a practice’s overhead.
In spite of the disadvantages associated with high fixed costs, there are ways of optimizing this model. When volume is increasing in an efficiently run business with high fixed costs, a large percentage of any new revenue produced is realized as profit (revenue is increasing disproportionately to costs). In contrast, if a practice is inefficiently run, as volume and complexity increase, inefficiencies can also increase, leading to higher fixed costs and lower quality. It makes sense for practices dealing with declining fees and increasing overheads to merge; merging creates opportunities to run greater volumes of patients and services over stable, lower, fixed costs.
Improving inefficient processes has proven to be an effective means of addressing both the increased costs and potential for lower quality associated with increased volume and complexity. However, it can be difficult to determine exactly which processes the practice needs to reengineer. To proceed with tackling this practice hurdle, it is helpful to study other industries that have high fixed costs similar to those of the medical practice. Doing so provides insight into possible approaches for solving a variety of problems. Many industries have faced similar environments—ones with increasing volume and decreasing fees—and have found solutions for addressing the problems that result. While our solutions will not be exactly the same as the ones that “worked” for other industries, the underlying science used to identify the causes of inefficiencies and develop solutions for eliminating them will be the same.
What Podiatry Practices Can Learn From Other Industries About Improving Efficiency
Let us review the shipping industry as an example. When faced with low profits, the industry’s “conventional wisdom” affirmed that the ships needed to become more efficient. Even when new, faster and more fuel-efficient ships developed, the negative economics of the industry did not change.
It was not until new research uncovered a key source of the industry’s low profit—inefficiencies “in port” as cargo was being loaded and unloaded—that a solution emerged. This had nothing to do with inefficiencies at sea. A key component of the shipping industry’s low profit was the length of time that ships were in port. Similarly, a medical practice with inefficiencies has slow processes, leading to decreased quality and profit. The fixed costs (rent, staff salaries, insurance, etc.), continue to mount regardless of how many patients the practice is seeing. The shipping industry finally solved its principal revenue problem by focusing on improving the efficiency of its “in port” cargo turnover. The solution included the innovation of roll-on, roll-off containers, which increased throughput and made the entire “in port,” loading/unloading processes faster, and thus, more efficient. The medical practice likewise must improve its information and patient throughput.
Medical practices experience parallels to the “in-port efficiency” dilemma faced by the shipping industry. Inefficiencies are often present in the processes of scheduling, treatment room turnover, physician documentation and collections, especially as a practice’s patient volume approaches capacity. As patient volume increases and a practice adds doctors or merges with others, the treatment room turnover rate becomes a limiting factor to practice efficiency and growth. Slow treatment room turnover results in longer waits for patients, and doctors lose valuable treatment time as they wait for rooms to “open up” for incoming patients.
Physicians typically “solve” this problem by adding capacity. This increases the square footage of their offices and/or the number of staff (akin to building more ships). Both push the already high fixed costs of their practices even higher and the profit percentages even lower. Our shipping industry example shows us how that industry solved a similar problem by focusing on throughput. The same laws and basic principles governing throughput are applicable to medical practices. Understanding them can provide us with more innovative and efficient ways of designing our processes and scheduling the use of our treatment rooms as well as the time of our physicians and staff.
What needs to become efficient in a medical practice is its “work flow.” This “flow” consists of the flows of information, internal and external communication, and patient/treatment movement. It begins with a patient’s initial phone call in which the patient makes an appointment and then moves through numerous, complex tasks in geographic areas both internal and external to the office. The final endpoint happens at the patient’s discharge and when the office receives payment for the care rendered.
The basic principles of physics impacting each step along the way include: waste (unnecessary activities that do not improve the final outcome), variation (the time to complete each step can vary widely), and choke points (where the flow from multiple processes converge and work backs up). The practice must direct solutions at eliminating each of these. Starting from scratch and rethinking each process with these basic principles of flow as the structure to work within, one will find innovative solutions. Critical to understand during the investigative process is that any “solutions” suggested that do not address at least one or more of these “first principles” of flow will add cost with no corresponding benefit.
What You Should Know About ‘First Principles’
Entrepreneur Elon Musk is a person who fully understands the need to start with basic principles such as flow when innovating. For those who are unfamiliar with his accomplishments, at age 47 Musk has innovated and built three multibillion-dollar companies competing in completely different fields: PayPal (financial services), Tesla Inc. (automotive, solar panels and energy storage), and SpaceX (aerospace). A fourth, the Boring Company, is on its way.
When faced with seemingly impossible challenges, Musk’s approach has been to draw on an ancient philosophy called “first principles.” To him, this means “boiling things down to the most fundamental truths and then reasoning up from there.” When Musk first envisioned Tesla, his goal was to create a longer range, less expensive battery. Conventional wisdom accepted that battery packs were very expensive and were going to stay that way, costing $600 per kilowatt hour.
Using a strategy based on first principles, Musk challenged this “wisdom.” Rather than starting from what already existed and attempting to improve upon it, he rethought batteries from scratch, breaking down the battery to its material components: cobalt, nickel, aluminum, carbon, some polymers for separation, and a seal can. He found one could buy these products on the London Metal Exchange for an expense equivalent to $80 per kilowatt hour. From this starting point, Musk’s company created a novel and less expensive way to build Tesla’s battery packs. According to him, “Once you’ve identified and broken down your problems or assumptions into their most basic truths, you can begin to create new, insightful solutions from scratch.”
Unlike Musk, the standard approach that most people use for implementing change, even a major one, is to start with what they already have and search for ways to improve upon it incrementally. However, as we have seen, the type of creativity and innovation that actually lead to major improvement do not employ this technique.
As a comparison, we can look back at the not-so-long-ago challenge to “speed up” air travel. When we had only the propeller engine and were incrementally improving it in an attempt to go faster, we only got so far. We would never have achieved the completely innovative jet engine by incrementally improving the prop plane. An innovation such as what led to the transformation to jets requires restarting and creating an entirely different concept. Most of the major challenges that doctors in private practice face require this same type of innovative thinking—problem solving that incorporates the idea of rebuilding from the beginning. It is not necessary to hold onto past decisions that were based on previous environments. This is the type of thinking that happens to be the foundation of Elon Musk’s multiple innovative successes.
Whether you are practicing solo or in a large group, “first principles” is the place to start when attempting to make major improvements in efficiency or take on any new challenge. Over the past decade, medical practices have experienced significant increases both in volume and complexity. To support this new level of volume and complexity, business processes in most practices are in need of this type of redesigning from scratch. To do so, one must start with these most basic truths, utilizing the laws of physics to build new and more effective processes.
One last piece of advice from Elon Musk: “It is important to view knowledge as sort of a semantic tree—make sure you understand the fundamental principles, i.e., the trunk and big branches, before you get into the leaves or there is nothing for them to hang on to.”
Dr. Hultman is the Executive Director of the California Podiatric Medical Association He is a Consultant for Medical Business Advisors and the former CEO of Integrated Physician Systems (IPS). Dr. Hultman is the author of Reengineering the Medical Practice (1994) and The Medical Practitioner’s Survival Handbook (2013).