Haslam College of Business - Study: Process Excellence Impacts Hospitals’ Competitive Advantage

With the healthcare industry shifting to value-based payment models, hospitals face increasing pressure to balance strategic priorities and improve the effectiveness and efficiency of care delivery. Joint research from the University of Tennessee, Knoxville’s Haslam College of Business and Florida International University’s College of Business finds that a focus on process excellence can improve a hospital’s competitive position.

The study, “Benefits and implications of competing on process excellence: Evidence from California hospitals,” analyzed 288 short-term acute care hospitals from 2004 through 2011, examining actual changes in three key components of process excellence. Their research analyzed what happens when hospitals make improvements in these areas:

1. Cost per discharge
2. Average length of stay
3. Conformance quality, defined as compliance with healthcare standards

The paper, co-authored by Bogdan C. Bichescu, associate professor of business analytics, Randy V. Bradley, assistant professor of supply chain management, both with the Haslam College of Business, Antoinette Smith, associate professor of accounting at FIU’s College of Business, and Wei Wu from AGL Resources, was published in the August 2018 issue of the International Journal of Production Economics.

The analysis revealed that hospitals that lower costs per discharge and average length of stay achieve greater in-patient market share, while those that make improvements in conformance quality lose market share.

What does this mean for hospitals?

“It’s not ‘or,’ it’s ‘and,’ when it comes to the approach they can take to maintain their competitiveness in a saturated market,” said Bradley. “Over the long term, such decisions can strengthen a hospital’s competitive positioning and improve its ability to navigate legislative changes that increasingly favor value-based principles of healthcare management.”

Still, in the short term, the findings may indicate there is more of a burden on hospital administrators striving to meet patients’ health care needs effectively and efficiently while simultaneously addressing new regulatory standards and requirements.

“The finding that improving hospitals’ conformance quality tends to be associated with lower market share is alarming,” said Smith. “Improving this measure hinders a hospital’s ability to improve its financial position and to achieve its service-oriented mission of caring for more patients in the surrounding communities.”

The research also found:

• Improvements in conformance quality reduce cost per discharge – a 10 percent increase in conformance quality results in a $210 decrease in cost per discharge, which translates into a savings of approximately $1.89M per year for an average hospital that sees about 9,000 annual discharges.
• Hospitals that reduce cost per discharge see greater profitability – a 10 percent decrease ($2,950) in cost per discharge results in approximately a one percent increase in profitability.
• Cost per discharge reduces the negative effect of conformance quality on profitability and market share, so reductions in cost per discharge in other areas of a hospital can help mitigate conformance quality’s adverse impact in those areas.

Bichescu, Bradley and Smith agree that with the increased pressure on hospitals to improve conformance quality, hospital administrators should ensure they supplement initiatives to improve quality with strategies to drive down cost per discharge. Doing so will enable hospitals to alleviate the decline in market share and profitability that can result from an intense focus on conformance quality.

“These findings can help guide hospital administrators on the wider ramifications of operational decisions and underscore the need for a long-term strategic perspective on process excellence,” they conclude in the paper. “It should not be viewed as a cost mitigation mechanism, but rather strategically, as a critical source of competitive advantage.”