The Path to One Trillion Dollars

President Obama said last week his health care reform plan requires about $1 trillion in health care savings over the next 10 years. In all the acrimonious debate around health care, we can all agree that saving that $1 trillion is vital. Without it, the non-partisan Congressional Budget Office (CBO) says the US is essentially bankrupt.

How can we save $1 trillion without significant care rationing? I propose our current methods to manage health care costs have failed. Admitting our failure helps by allowing us a refreshing opportunity to take a new path -- one that will surely save $1 trillion over the 10 years.

My research as a Visiting Scholar at Harvard Business School has shown that when industries transform, they never follow the beaten path. But in health care, we've followed the same old path since the 1970's. Embracing the mindset that "big problems need a big fix," we have consistently followed a path guided by "data up/implement down:"
  • Find a big problem and gather lots of data about it;
  • Pull together lots of experts;
  • Have lots of meetings to analyze the data, plan and predict;
  • Implement new solutions back down on the point of care.
Let's face it; following this path has failed us. And it's failed for good reason. Industries never transform through a big fix designed by industry experts. In fact, the evidence is overwhelming that the "big fix" path

My research shows that the paths of highly innovative, industry-transforming companies like Toyota, Intel and Southwest Airlines are quite different than the big fix path. Instead, they develop people to make rapid, "small fixes," very close to the work. Instead of moving more information up to isolated experts, they develop new critical thinking skills and rapid, state-of-the-art decision-making close to where the information is generated in the work place. I heard Toyota management put it best, "Solve the small problems close to you and the big problems go away."

That's the path I have been exploring in multiple health care organizations over the last 11 years and it will lead us to $1 trillion in health care savings. I call the path "adaptive design." After testing, improving and validating adaptive design at the point of care, I can confidently say, "It works." And the cost savings are enormous because we focus on what doesn't work.

Jonathan Schechter, Executive Director of the Charture Institute in Jackson, WY gave me the idea that there are three ways to identify what doesn't work in health care -- "positive waste," "neutral waste," and "negative waste." In my experience, we are sure to find $1 trillion in savings if we work adaptively to eliminate those three types of health care waste.

"Positive waste" is all the hard work we do on our current path that accomplishes nothing. In health care, everybody is working really hard to keep up with the constantly changing workplace, but the data up/implement down path leads to a dead end. We can't get enough data up fast enough, to analyze quick enough, to implement enough "big fixes" effectively enough to keep up, so our best-intentioned plans commonly end up being just another workaround or flavor-of-the-month.

But you can eliminate "positive waste" by following the adaptive design path. Here's some examples:
  • Working adaptively with a typical, 40-bed nursing unit in a moderate-sized, Midwest community hospital, management calculated $1.7 million in savings from more that 330 "small fixes" this unit accomplished in a little more than one year. Extrapolate that across the 945,000 registered hospital beds in America, you discover a potential $40,162,500,000 in savings.
  • In a Rocky Mountain community hospital, a financial consultant evaluated adaptive design results and discovered $41,800,000 in potential hospital savings over two years by eliminating wasted staff time, improving business office information, eliminating monitoring of a broken system, decreasing staff turnover, and increasing volume managed by current resources. Extrapolated to 5700 registered hospitals in the US, that adds up to two-year savings of $238,260,000,000.
  • A hospital nursing unit decreased staff turnover 50 percent in one year of working adaptively because it increased staff engagement. The cost of nursing turnover is estimated to be $9,750,000,000 per year. That 50 percent savings repeated nationally means $4,875,000,000 saved yearly by making the nursing workplace more workable for nurses.
  • One 368-bed Rocky Mountain community hospital pharmacy adaptively decreased their Volume Adjusted Drug Costs (VADC) by 2.3 percent while the eleven other hospital pharmacies in the system saw their VADC rise 10 percent. The pharmacy's drug cost savings of $1,900,000 extrapolated across 945,000 hospital beds nationally is $4,879,000,000.
  • A 271-bed community hospital managed their supply chain adaptively to save $2,000,000 per year for two consecutive years. That's one-year savings on 945,000 beds nationally of $6,974,000,000.
Now let's look at two other categories of health care waste driven by our antiquated, data up/implement down business model: "neutral waste" and "negative waste."

"Neutral waste" is all the hard work hospitals, physicians, insurance companies, pharmaceutical companies and technology companies do to leverage our overwhelmed "data up/implement down" methods in their favor. The methods don't improve the system, but they are certainly good business. For example, the National Academy of Science has determined that our current methods of health care information technology will not deliver on its promise to increase health care quality. That's about $50,000,000,000 of well-intentioned effort that will go to "neutral waste" this year.

Then there's "negative waste," which includes all the crooks that take advantage of our overwhelmed "data up/implement down" system by cheating it. For example, one company charged Medicare $5,000 per wheelchair for 1,000 wheelchairs when they only delivered one. That's a $5,000,000 wheelchair!

Negative waste accounts for many of the dollars that President Obama's health care reform program has pledged to save. We can all support eliminating the cheating of negative waste and it's worth hundreds of billions of dollars, but the complexity of our current system thwarts these efforts.

Now, let's run some CBO-like numbers on just the positive waste savings we have documented. The total per year savings are about $176 billion. Repeat that for five years and you have $880 billion. Now we are on the path! And by eliminating positive waste, it allows current resources to take care of more patients. We're getting close to our $1 trillion in savings while simultaneously providing more care!

Add in the opportunities presented by simplifying our health care system to make it easier to identify and eliminate hundreds of billions of neutral and negative waste and the savings increase exponentially.

I think we can update former Senator Everett Dirkson's famous 1970's quote for 21st Century health care: "A billion dollars here, a billion dollars there, pretty soon you're talking real money."

Working adaptively, we can get more patients closer to exactly what they need and simultaneously lower costs. That's the way to fix health care.

Dr. John Kenagy is a physician, patient and former Visiting Scholar at Harvard Business School. His book, Designed to Adapt: Leading Healthcare in Challenging Times, will be available October 1. For more information, see his website at