St. John’s Hospital, a medium-sized hospital located in Seattle, Washington, was established in 1894 with a primary mission of caring for the sick and downtrodden. The hospital had grown and developed as a solo facility until 2000, when it merged with a suburban hospital, St. Agnes. This merger caused many changes in the organizational structure of both hospitals. A corporate office was established and located approximately halfway between the facilities. The president of St. John’s, Abhishek Ghosh, was promoted to the position of corporate president, and the president of St. Agnes became the senior vice president.
The early 2000s was a busy time for the corporate office. By 2002, it had 45 employees. The hospitals diversified their organization by purchasing a number of urgent care centers, physician office practices, and skilled nursing facilities. Ghosh was certain that integration would create stability and financial success. However, the urgent care centers and the skilled nursing facilities barely broke even, and the physician office practices lost almost half a million dollars per year. As the years progressed, it became increasingly critical for the hospitals to generate enough cash flow and profit to subsidize the other parts of the corporation.
Both hospitals did reasonably well in the early 2000s, but with reductions in Medicaid and Medicare reimbursements, their margins narrowed. By 2003, both hospitals were earning less than a 2 percent net profit margin, and the prospects for 2004 seemed worse. In 2003, patient revenues did not cover expenses for the first time. After seeing these figures, Ghosh called an emergency executive session. Those in attendance included the presidents of both hospitals, Ghosh, and corporate legal counsel. The only item on the agenda was to figure out what to do to get back into the black.
The first to speak was Joe Alexander, who at that point had served as corporate counsel for four years. He had been a staunch promoter of total quality management (TQM) since it had been introduced in 1993. However, because the system had not prospered recently, he and many others had become discouraged with the principles of TQM. Something stronger was needed to reenergize the hospitals and corporation. A few weeks prior to the meeting, Alexander was pondering this dilemma as he opened the afternoon mail. Among his many letters, a bright mailer caught his eye. It was an invitation to a local seminar on hospital reengineering. He had read material about reengineering in Fortune and other popular magazines and knew that prominent companies like Taco Bell and AT&T claimed they had experienced huge improvements as a result of their reengineering efforts. The local seminar cost only $250, so he decided to attend. He finished the seminar the day before the emergency executive session.
I just came back from a seminar that may be the ticket to saving our hides, said Alexander. Reengineering has been widely used in many industries to radically improve firms’ costs, quality, and speed. I wish we had learned more about this opportunity earlier; we might not have wasted so much time on TQM.
Tell us more about it, said Ghosh.
Well, it’s a way to improve processes. Everything we do in an organization involves processes. Reengineering involves designing and implementing the most efficient, needed processes. It dramatically lowers costssome say as much as 30 percentand improves quality.
Additional discussion ensued, during which the decision was reached to put Alexander in charge of an effort to reengineer both hospitals.
With great enthusiasm, Alexander took the corporate chief financial officer (CFO), Yoon Tae Chong, to another conference to learn how to implement this great process innovation. They wanted to be thorough, so they worked with an external consulting firm and developed a series of principles on which to focus. Alexander presented them to Ghosh for approval.
Alexander stated, Thank you for the opportunity to develop this process. I think with our team and these guiding principles we can really reduce our costs and strategically position ourselves for competitive advantage.
Ghosh said, Tell me again the seven principles you developed.
Alexander responded, First, process-oriented organization, benchmarks set as achievement goals, and blank sheets (biases are too strong among established people). After those three, standardization between the hospitals and employee-led teams (which are the most efficient structure because they reduce the need for middle managers). Then we shift to three key areas of focus: access, materials, and delivery of care. And finally, dealing with union issues de facto. I just need your approval to get moving and to get Yoon to help us start saving money.
Joe, I think you’ve done a wonderful job, replied Ghosh. Get to work and let’s get this hospital system in shape.
Alexander quickly began to organize an implementation team. He brought in Second Chance Consulting Inc., and with the CFO, selected 36 employees from each of the two hospitals to design changes. These employees were divided into three groups. One group was put in charge of access, one in charge of materials, and one in charge of delivery of care. The consultants set benchmarks of 20 percent reductions in costs in each area. Alexander was concerned that staff in the key areas might be resistant to changing their processes, and he wanted a fresh perspective. He therefore asked that all of the people invited to participate be assigned to areas outside their own. He also decided not to include any of the hospital managers and department heads, believing they would not represent the best for the hospital as a whole.
The teams spent a total of six weeks intensively designing new standardized processes that could be implemented across the two hospitals. At hospital roadshows, corporate personnel talked about the great changes that the teams were designing. Staff were told that the changes would save the hospitals from ruin and reverse their fortunes.
However, some expressed skepticism. As the date of implementation neared, the hospitals’ administratorsperturbed by what they considered a show of disloyaltytold managers that those who did not support the effort should look for other work. Dissent immediately went underground, and the administrators believed they finally had all managers on board.
At the end of the six weeks, leadership drafted a detailed battle plan to reengineer the organization. Four from each team were retained to implement the designed solutions. The rest of the team members disbanded. Each employee involved in designing the changes was given a laptop computer as thanks for her work.
The first action was to eliminate two-thirds of the nursing middle managers. This change was projected to yield savings of $2 million per year. It was instituted to promote team-based authority among the nursing units, although many nurses feared that quality and communication would suffer. Other changes soon followed. The cafeteria was eliminated; patient food menus were minimized; a new position combining food service, housekeeping, and transportation was created; and the admissions staff was cut by half, among other major changes.
Hospital executives required that employees implement changes, but managers and rank and file found that many were impractical. Some issues caused by the changes were not addressed, such as admitting Medicaid patients after half of the admissions staff had been eliminated. Access to the hospital slowed to a crawl because many Medicaid patients had to wait for verification of benefits. The elimination of the cafeteria forced employees to bring in food or leave for meals, reducing employees’ work time. The minimization of patient food menus was a disaster. The three same menus were rotated over and over, and dinner on Wednesdays was always the same: corned beef and cabbage. Patient complaints about food skyrocketed.
The hospital unions also complained and refused to cooperate. The new position required a lot of cross-training, and the union demanded wage increases for each new skill employees had to acquire. Most new positions increased existing personnel’s wages by about $1.00/hour. Materials management was decentralized, and 18 new people had to be hired as a result; this change seemed to increase, not decrease, costs.
Although the changes clearly were not producing positive results, managers were reluctant to express their concerns to hospital administrators. The executives remained positive and were certain that the changes would save their hospitals. Alexander continued to be a big supporter of reengineering and cited sabotage and bad attitudes as reasons for the lack of success. His focus was to stay the course and fully implement the plan. He reminded managers that loyalty and commitment were required to move forward.
After a tumultuous year of implementing the changes, the hospitals’ financial losses accelerated. Costs did not decline significantly, but the number of patients declined. Employee and patient satisfaction were at an all-time low. St. John’s board of trustees became concerned and began to question the organization’s direction.
1. What problems arose during the reengineering at St. John’s?
2. How could the executives have improved the process of change at St. John’s?
3. What next steps would you have recommended to the corporation’s board?
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