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In Depth January 7, 2010, 5:00PM EST

Hospitals: Radical Cost Surgery

A hospital that slashes costs—and delivers high-quality care as it innovates? Yes, it exists

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Brevig found that reduced blood transfusions during surgery curbed infections Brian Smale

By Catherine Arnst

Under Brooks, Providence has revamped long-accepted regimens Brian Smale

A typical room. Brian Smale

All the post-heart-surgery equipment comes in with the patient. Brian Smale

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The room stands ready to receive monitoring devices and whatever might be required. Brian Smale

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The open-heart patient arrives from the O.R. Brian Smale

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Walk into most hospitals, and you'll see patients scattered about the halls on gurneys or wheelchairs. They're waiting to be moved from intensive care to a standard ward, or to an X-ray room, or to physical therapy. Each journey adds to the patient's discomfort and increases the risk of infections and other complications. Tally up a single patient's migrations over 24 hours, and they may consume as much as half a day of staff time.

Walk into Providence Regional Medical Center, in Everett, Wash., and you will see a hospital trying something different: It brings the equipment to the patient. In 2003, Providence opened one of the few "single stay" wards in the nation. After heart surgery, cardiac patients remain in one room throughout their recovery; only the gear and staff are in motion. As the patient's condition stabilizes, the beeping machines of intensive care are removed and physical therapy equipment is added. Testing gear is wheeled to the patient, not the other way around. Patient satisfaction with the "single stay" ward has soared, and the average length of a hospital stay has dropped by a day or more.

This is just one of many changes—some radical, many quite small—that have enabled Providence Regional to join a special subset of American hospitals: those that do not lose money on Medicare patients.

Almost 60% of U.S. hospitals report losing 20 cents on the dollar for every elderly patient that comes through their doors. They make up the difference by charging the under-65s a far higher fee. But Providence breaks even on the elderly, even though Medicare pays about $1,000 less per enrollee in the hospital's region than the national average. The hospital accomplishes this feat while winning a doctor's satchel full of national awards for top-notch care, placing it among the elite 5% of all U.S. hospitals.

High quality at a low price. Every other industry strives for that combination, but a hospital that does both is all too rare. Providence and its cost-efficient brethren demonstrate that quality care can be delivered at an affordable price, provided hospitals can be persuaded to rethink decades-old practices.

The crazy world of hospital economics does not offer a lot of incentives to change. Both Medicare and private insurers reimburse on a piecework basis—known as fee-for-service—that encourages hospitals to treat more, prescribe more, and test more. Economists refer to this arrangement as a "value-blind" payment system since no premium is paid for quality.

Consequently, hospitals have no financial motivation to invest in productivity-enhancing computer technology, management experts, or efficiency research—and by and large, they don't. Columbia University economist Frank Lichtenberg calculates that productivity growth for the hospital industry has increased at less than half the rate of the general economy.

There are no proposals in either the House or Senate reform bill to scrap the fee-for-service system. As a result, the Congressional Budget Office expects the legislation to do little to halt the medical inflation that has pushed health-care spending to 16.2% of the gross domestic product. Because hospitals are among the largest employers in many congressional districts, their political clout protects them from reforms that would cause any real financial pain.

But even under a value-blind system, there are ways to "bend the cost curve," an oft-stated goal of President Barack Obama. The nonprofit Institute for Healthcare Improvement last year identified 70 regions around the country, out of a total of 306, where high-quality care is delivered at a reasonable cost. One of those regions is Everett, home of Providence Regional.

Providence is the only hospital in this coastal city of 98,000 people located 20 miles north of Seattle. It is the third-largest hospital in Washington, with two campuses serving 25,000 overnight patients a year, and operates the second-busiest emergency room in the state. It's building a $500 million, 368-bed tower, due to open next year, that will double its capacity.

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