Saving Money, Saving Lives

by Jon Meliones

Reprint r00612
 NOVEMBER – DECEMBER 2000

Reprint Number

RICHARD WISE & DAVID MORRISON Beyond the Exchange: The Future of B2B R00614

HBR Special Report: Making M&A Magic

ROBERT J. AIELLO & MICHAEL D. WATKINS The Fine Art of Friendly Acquisition R00602
RONALD N. ASHKENAS & SUZANNE C. FRANCIS Integration Managers: Special Leaders for Special Times R00604

DAVID KENNY & JOHN F. MARSHALL Contextual Marketing: The Real Business of the Internet R00608

DAVID ARNOLD Seven Rules of International Distribution R00603

RENEE DYE The Buzz on Buzz R00606

HOLLIS HEIMBOUCH Racing for Growth: R00607

An Interview with PerkinElmer’s Greg Summe

FORETHOUGHT
Napsterizing B2B, Chief Privacy Officers, ASPs, and More
HBR CASE STUDY
DIANE L. COUTU Too Old to Learn? R00605
FIRST PERSON
JON MELIONES Saving Money, Saving Lives R00612
HBR AT LARGE
DOROTHY LEONARD & WALTER SWAP Gurus in the Garage R00609
BEST PRACTICE
DOUGLAS M. McCRACKEN Winning the Talent War for Women: R00611
Sometimes It Takes a Revolution
TOOL KIT
FREDERICK H. ABERNATHY et al. Control Your Inventory in a World of Lean Retailing R00601
DIFFERENT VOICE
BILL PARCELLS The Tough Work of Turning Around a Team R00613
BOOKS IN REVIEW
CHRISTOPHER LOCKE Smart Customers, Dumb Companies R00610
 FIRST PERSON

A noble mission doesn’t guarantee financial solvency. That’s

why the chief medical director at one hospital needed to find
a way to keep the mission lofty and the bottom line healthy.
His tools: reams of data, a fresh approach to teamwork, a
sense of humor – and the balanced scorecard.

Saving
Money,
M Y EPIPHANY CAME AT SEVEN O ’ CLOCK
on a hectic November evening in
1996. I was the attending physician
As I watched Alex and
her parents, I thought back
to similar scenes I had wit-
Lives And then it struck
me. I saw with perfect
clarity the reason that
in the intensive care unit at Duke Chil- nessed over the years at DCH was struggling
dren’s Hospital (DCH) in Durham, DCH, a 134-bed pediatric
by Jon Meliones to meet the needs
North Carolina. A six-month-old named hospital located on the fifth of its customers – our
Alex lay in a crib in the ICU with a stiff floor of Duke University Hospital. Here, patients and their parents. And I knew
plastic tube in her throat. Awake and 800 employees care for patients in our what had to be done to make things
moving after heart surgery, the tiny girl neonatal intensive care unit, pediatric right. The problem was that our hospi-
was ready to come off the ventilator. As intensive care unit and pediatric emer- tal was a collection of fiefdoms: each
Alex squirmed and tried to breathe, the gency room, bone-marrow transplant group, from accountants to adminis-
ventilator forced more air into her lungs. and intermediate care units, as well as trators to clinicians, was focusing on
Her exhausted parents grew distraught. in our subspecialty and outreach clin- its individual goal rather than on the
“Why can’t she come off the ventilator?” ics. When I came to DCH in 1992, we organization as a whole. We would be
her mother asked.“Because we’ve had to had a $4 million annual operating loss; a far more effective organization if we
cut back on night staff,”replied the busy it had grown to $11 million by 1996, could stop that from happening. Most
nurse.“There’s no respiratory therapist which forced administrators to cut back companies in the United States had this
available.” Alex was uncomfortable. She on resources. As a result, some caregiv- insight 20 years ago, but the nonprofit
received medication to help her sleep ers felt that the quality of clinical care world remains, for the most part, un-
and to keep her from fighting the venti- had deteriorated. Parents’ complaints aware of it. I realized that DCH needed
lator until the therapist arrived in the increased. Some dissatisfied doctors to start thinking less like a money-
morning. But her parents didn’t sleep; threatened to send their patients else- losing nonprofit and more like a prof-
they were too confused and upset. where. Frustrated staff quit. itable corporation.

Copyright © 2000 by the President and Fellows of Harvard College. All rights reserved. 5
F I R S T P E R S O N • Sav i n g M o n ey, Sav i n g L i v e s

A sense of mission, of course, is criti- ple’s minds and hearts, inch by inch, it had improved customer service,
cal to any organization’s identity. The day by day. In 1997, the chief nurse ex- driven organizational change, and
institutional mission of a hospital is to ecutive, nurse managers, and I began boosted bottom-line performance in
promote the health of the community. working together to start turning the leading companies like AT&T, Intel, and
But during difficult periods, it’s easy to organization around. First, we discussed 3M. Our goal was to become the health
lose sight of the big picture and focus our current realities with the entire clin- care leader in the balanced scorecard.
solely on your fiefdom’s specific goals. ical team. We opened the meetings by Our balanced scorecard aligned the
Clinicians – that is, doctors and nurses – talking about our goals for our patients. hospital’s goals along four equally
want to restore their patients to health; “We want patients to be happy,” the important quadrants: financial health;
they don’t want to doctors and nurses customer satisfaction; internal business
think about costs. agreed,“and for them procedures; and employee satisfac-
Hospital administra- to have the best care.” tion. We explained the theory to clini-
tors have their own cians and administrators
mission – to control Chief Medical Director Jon Meliones like this: if you sacrifice
wildly escalating realized DCH needed to start thinking too much in one quadrant
health care costs. less like a money-losing nonprofit and to satisfy another, your
Cost cutting in a more like a profitable corporation. organization as a whole is
vacuum traumatizes thrown out of balance. We
patients, frustrates We also described could, for example, cut costs to improve
clinicians, and ulti- our pressing financial the financial quadrant by firing half the
mately cripples the challenges. staff, but that would hurt quality of ser-
hospital’s mission. We showed the clin- vice, and the customer quadrant would
The decision to cut icians our raw data. fall out of balance. Or we could increase
a respiratory ther- The average length of productivity in the internal business
apist from the night shift, for example, stay at DCH was eight days – 20% longer quadrant by assigning more patients
affected Alex and her parents as well as than the six-day national average. The to a nurse, but doing so would raise the
their insurance company, which had to average per-patient cost was $15,000 – likelihood of errors – an unacceptable
pay an additional $2,000 to cover the cost more money than we were bringing in. trade-off. Our vision, which became the
of the ventilator and ICU care. The deci- If we continued to spend at the same new mission statement, was to provide
sion also left the clinicians feeling pow- rates, we would be forced to cut clinical patients and families with high quality,
erless, since decisions regarding clini- programs, staff, and beds. The quality of compassionate care within an efficient
cal practice were being made without patient care and our reputation would organization.
their input. Such trade-offs between then suffer, and we would fail to meet
quality of patient care and cost control the needs of our community. Taking Our Medicine
cause intense conflict for health care Confronted with this grim picture, Developing and implementing a bal-
professionals. In worst-case situations, the clinicians began to understand that anced scorecard is labor intensive be-
efforts to improve profit margins actu- if we wanted to save our programs and cause it is a consensus-driven method-
ally have the opposite effect – they chase our patients, create an environment in ology. To make ours work required
away customers, cost executives their which staff are fulfilled, and keep our nothing short of a pilot project, a top-
jobs, and put the entire hospital at risk jobs, we would all have to readjust down reorganization, development of
of financial ruin. our individual missions and start paying a customized information system, and
attention to costs. If the hospital didn’t systematic work redesign. The most dif-
Regaining Our Balance show a margin, clinicians wouldn’t be ficult challenge was convincing employ-
Considering the magnitude of the able to fulfill their mission. Thus, we ees that they must work in different ways.
issues we faced – a $7 million increase in adopted the now-familiar mantra in At first, doctors and managers saw
annual losses in four years – it’s hard to health care: no margin, no mission. attempts to move them into teams as
believe that we ever turned things It was also clear that the adminis- a shift in their power base. Nearly every-
around. But we did, by changing peo- trators needed to be highly involved. one complained that applying a sys-
To bring the administrators’ and the tematic approach to cost management
Jon Meliones, MD, is the chief medical clinicians’ missions into alignment, was “cookbook medicine.” It took a good
director at Duke Children’s Hospital in we turned to a practical management deal of persuasion, persistence, and
Durham, North Carolina, and a professor approach that had worked well in nu- reassurance to get some individuals to
of pediatrics and anesthesia at Duke Uni- merous Fortune 500 corporations: the buy into our process. One cardiologist
versity Medical Center. He can be reached balanced scorecard method. Developed routinely stormed out of meetings
at [email protected]. by Robert Kaplan and David Norton, when we talked about cost per case.

6 harvard business review November–December 2000

ILLUSTRATION BY AMY NING

To keep the hospital afloat, clinicians and administrators learned to

We knew that changing people’s work together. Using the balanced scorecard, they dramatically cut
minds would be hard work. But once costs without sacrificing the quality of patient care.
people saw how successful the balanced
scorecard approach was in one area of stood the importance of applying sys- First, we reorganized the roles that
the hospital, we reasoned, it would be tems to medicine – such as surgeons – individuals play in the ICU. We moved
easier to sell the methodology through- became our first champions. So we from mission-bound departments in
out the rest of the organization. So we started the balanced scorecard in one which people identified only with their
decided to launch a pilot project. Some very important microcosm of the hos- particular jobs (“I am a manager,” “I am
physicians were much more willing to pital – the pediatric intensive care unit, a nurse,” and so on) to goal-oriented,
change than others. Those who under- which I lead. multidisciplinary teams focused on

harvard business review November–December 2000 7

F I R S T P E R S O N • Sav i n g M o n ey, Sav i n g L i v e s

a particular illness or disease (“We, the

ICU team, consisting of the manager,

A Look at the Numbers the nurse, the physician, the pharma-

cist, and the radiologist, help children
with heart problems”). We called these
Using the balanced scorecard method, Duke Children’s Hospital’s
teams clinical business units – what
cost-per-case average fell from nearly $15,000 to $10,500 and its
other industries call business or oper-
margin soared from an $11 million annual loss to a $4 million gain.
ating units. The lead physician and the
lead administrator shared responsi-
bility in these teams. Together, they
reviewed financial information, pa-
Cost per case
tient and staff satisfaction data, and in-
formation on health care trends and
initiatives.
$14,889 The various clinical business units
worked together to organize “care coor-
dination rounds” and brainstorm solu-
tions to difficult patient cases. They cre-
$13,411 ated a patient’s care plan – a document,
shared with the parents, that records
everything from treatment recommen-
$12,550 dations to post-hospital care.
$12,440
The teams also developed proto-
cols we call clinical pathways – a set of
best practices for various treatments.
For example, a respiratory therapist,
a nurse, and a physician developed a se-
$10,500 ries of steps a nurse could follow to
remove a patient from a respirator with-
out having a therapist present. As the
clinicians developed new pathways,
1996 1997 1998 1999 2000
they shared their successes with the
entire organization so we could all learn
from their experience.
By developing and promoting proto-
cols like these, we improved care dra-
matically. For example, we knew that
Net margin babies recovering from heart surgery
had trouble feeding and that parents
needed to learn how to help them.
Before we had formed the pathways,
we would wait until the day of discharge
$4 to teach parents how to do so. Once
people started sharing their expertise to
develop the pathways, we learned that
there was no reason to wait so long and
moved the training to the day after
surgery. Patients were able to go home
-$6 much sooner, and their hospital costs
were cut by 28%.
-$8
We developed more protocols by
-$11 comparing patient data. A study of 20
heart patients, for example, revealed
1997 1998 1999 2000 that treatment costs varied dramat-
ically. One child received two days’

8 harvard business review November–December 2000

 Sav i n g M o n ey, Sav i n g L i v e s • F I R S T P E R S O N

worth of antibiotics; another received head of the intensive care unit, I’d cared tomer surveys that parents felt frustrated
seven days’ worth for the same condi- for and transferred 1,500 patients. What by not knowing who their child’s attend-
tion. One child underwent ten labora- was going on here? A closer look at the ing physician or nurse was at any given
tory tests; another had only three, and data revealed that they reported on only time. So we simply put identification
so on. As a group, the clinicians went the 70 patients who had died, not my cards on the doors, naming the attending
over each case, comparing notes and total caseload. doctor and primary nurse. Our customer
reviewing the medical literature. They Clearly, we needed to approach the satisfaction scores rose sharply.
decided which tests were unnecessary data in a new way and turn it into use- We made other changes, too. For the
and eliminated them. ful information. Unless we did, we financial quadrant, for example, we re-
Within six months, our balanced wouldn’t know where our potential cost viewed the most significant data points,
scorecard approach in the ICU was savings were. We didn’t know, for exam- such as the number of patients admit-
garnering impressive results. We re- ple, that babies were needlessly kept on ted, treated, and released, and the cost
per patient. The clinical busi-
ness units reviewed cases of
Within six months, our balanced scorecard approach patients whose diagnostic, sur-
reduced the cost per case in the ICU by nearly 12% gical, pharmacy, and postoper-
ation costs had been the high-
and improved our patient satisfaction by 8%. est, and tried to determine why.
In many cases, our research
duced the cost per case by nearly 12% $2,000 ventilators at night, nor did we showed us new ways to do business. For
and improved our measured patient know how much that decision was example, we learned that children often
satisfaction by 8%. In fact, our pilot proj- costing the hospital. So for every clini- stayed longer than necessary in our
ect was working so well that we imple- cal business unit, we created a mea- $1,700-per-day ICU, in which the nurse
mented it in pediatrics, then in all of surement system for each of the four to patient ratio is 1 to 1 or 1 to 2. That was
the other areas of DCH, within a year. balanced scorecard quadrants. because the patients weren’t quite
We didn’t use a cookie-cutter approach; To measure our progress, we asked ready to move to the regular pediatric
rather, leaders in each unit customized our IT department to help us develop floor, where the ratio of nurses to pa-
the scorecard template for their spe- our own database and cost-accounting tients is 1 to 5 and the cost is $700 per
cific areas. system. Using information pulled from day. So we created a six-bed, $1,200-
Over time, even the physician who national databases, we determined na- per-day transitional care unit, where
had angrily left our initial meetings tional averages for indicators such as the nurse to patient ratio is 1 to 3. Pa-
began to find ways to lower his cost per length of stay and complication rates. tients could stay there until they could
case without compromising patient (In 1997, custom development was our be moved to the general floor. Not only
care. For example, instead of keeping only option. We’ve since installed did our cost-per-patient numbers drop
some patients awaiting surgery in the StrategicVision software from SAS to but also our patients’ families got to
hospital, he discharged them overnight support our extensive data manage- spend more time with their recovering
to a nearby hotel, lowering the total ment, trend analysis, and performance children.
cost by $1,000 per day while making the reporting needs.) The system logged Overall, the results we’ve achieved at
patients and their parents much more each patient’s treatment history and DCH by using the balanced scorecard
comfortable. costs for everything from a $15 hypoder- have been stunning. By increasing the
mic needle to a $5,000 heart-lung by- number of clinical pathways and com-
A Measure of Progress pass operation. The system also tracked municating more with parents, our cus-
Like most hospitals, DCH collects a tre- the average waiting times for admis- tomer satisfaction ratings jumped by
mendous amount of data. We rigor- sion and discharge, blood culture cont- 18%. Improvements to our internal busi-
ously detail things like length of stay, amination rates, and so on. ness processes reduced the average
number of staff, cost per case, and so on. The new system helped us find ways to length of stay from 7.9 days in 1996 to
But we were culling very little useful improve our performance in each of the 6.1 days in fiscal year 2000, while the
information from the data – and some of four quadrants. Many of the steps we readmission rate fell from 7% to 3%. And
it was false. For example, the first report took were small, but cumulatively, they employees noted a 45% increase in sat-
card on my own performance showed made a big difference. For example, our isfaction with children’s services and
that I had discharged 70 patients with clinical pathways included a “patient care with the way the entire administrative
an average length of stay of 29 days guide” for parents that explained in lay team performed its job.
and an average cost per case of $70,000. terms what they could expect to happen Impressive results occurred on the
Taken together, these numbers deserved on a daily basis during their child’s hos- financial front, too. The cost per patient
a grade of F. I knew that since I’d been pital stay. We also learned from our cus- dropped by nearly $5,000 – a fact not

harvard business review November–December 2000 9

F I R S T P E R S O N • Sav i n g M o n ey, Sav i n g L i v e s

lost on parents, insurers, and our own anced scorecard approach presented us get. For that reason, we encouraged
senior leaders. By FY 2000, we had gone with huge management challenges on employees to use their own perfor-
from $11 million in losses to profits of a daily basis. In the early stages, we mance as the primary benchmark. Still,
$4 million, even though we were admit- often found it difficult to keep discus- if they wanted to see how their perfor-
ting more patients. We achieved a re- sions on target. We spent nearly a mance compared with the hospital as
duction in costs of $29 million over month debating whether a certain goal a whole, or with a national average, they
these four years, without staff cutbacks. or target belonged in
Our methodology has proved so suc- the internal business The cost per patient dropped by nearly
cessful that the entire Duke University process quadrant or
Hospital now uses it as a framework. the customer satis-
$5,000 – a fact not lost on parents,
With the balanced scorecard we have faction quadrant. We insurers, and our own senior leaders.
drastically improved our margin and learned to limit those
achieved our hospital’s mission. discussions – it was too easy to get could review those data points as well.
embroiled in semantics and lose our We learned to set our targets conser-
Lessons Learned focus on patients and staff. vatively at first: an annual 10% reduction
Yes, DCH has navigated a tremendous We also found that people became in the length of stay was something
turnaround, but I don’t want to suggest demoralized if we compared their per- most of us felt comfortable reaching
that it’s been easy. Adopting the bal- formance to an abstract or too-lofty tar- for, but a goal of 20% would have been

Survival Strategies
The challenges faced by Duke Children’s Hospital are by no means unique to the health
care industry. Indeed, many organizations find themselves in similar situations. They
fear that focusing on costs will compromise their higher mission of serving the commu-
nity – but in fact, a strong bottom line will make fulfilling their missions that much
easier. If you’re trying to turn your organization around, you may want to adopt the
operating principles we followed to make DCH a thriving business.

Communicate, Communicate, Communicate Chart Your Path

• If
your organization is in trouble, be honest. Make it • Startwith a pilot project; succeeding in one department
absolutely clear to everyone in the company that will pave the way for organizationwide change.
survival depends on cost management.
• Set
conservative goals at first; you’ll gain the confidence
• Listento what employees are saying; they know their needed to set more aggressive targets.
jobs better than you do. Instead of issuing orders, ask
• Focus on a few key goals; changing everything at once
them, “What can we (as an organization) do?”
leads to failure.
• Share the pulpit. People with other expertise can help
• Turndata into information. Work with your information
build consensus.
technology people to ensure that employees can correctly
• Change people’s roles; instead of identifying with an in- interpret measurements and statistics.
dividual job (“I am a nurse”), employees should identify
• Let
employees compete with their own performance, not
with goal-oriented teams (“We, the ICU team, work
with some abstract competitive or statistical target.
together to help children with heart problems”).
• Offerconstant feedback. Frequent evaluations help keep Never Stop
the organization on track.
• When mapping your business to the balanced scorecard,
• Publicly celebrate every employee and team success. don’t get sidetracked by semantics.
• Cultivateyour sense of humor – people will respond • Be willing to experiment; learn from failures.
if you can laugh at yourself. • Constantly revise and improve practices.
• Encourage strategic thinking at all levels.

10 harvard business review November–December 2000

 Sav i n g M o n ey, Sav i n g L i v e s • F I R S T P E R S O N

too intimidating. As we became more I started a newsletter, “Practicing sive power of meaningful information.
successful, we set more aggressive Smarter,” so staff members could share I spent hours with members of our IT
targets. best practices and keep one another department, telling them what the staff
And I learned that there’s a fine art to apprised of their progress. We honored was telling me – trying to slice and dice
communicating with professionals who “team members of the month,” started our enormous mountains of data into
know more than you do about their par- on-line discussion groups, and spon- useful information. When we finally pre-
ticular subject and who are passionate sored a series of staff brown-bag lunches sented people with accurate tracking
about their work. You can’t just order and open forums. These approaches measures about their personal perfor-
them around. You have to get inside may sound simple, but they really did mance, they were fascinated – and anx-
their heads and figure out what they’re help to change our culture. For the first ious to improve.
going through. time, employees felt that their opinions
Before 1996, I thought I was a decent mattered. It’s been four years since we set out to
communicator. But over time, I’ve had I discovered how important it is to improve performance at Duke Chil-
to learn to listen carefully not only to share the pulpit during dramatic orga- dren’s Hospital, and changes are still
what people are telling me but also nizational changes. Not only did I re- happening. We talk about our score-
to what I’m saying to them. Today spect the chief nurse executive, the card constantly; we’re fine-tuning what
I know that I can’t make a point in a con- managers, and the administrators as works and discarding what doesn’t.
Whenever a clinician comes up with
a better pathway, we spread the word
There’s a fine art to communicating with through our newsletter and on our bul-
professionals who know more than you do letin boards.
Of all the changes that have occurred,
about their particular subject and who the most telling are the ones we see in
our patients. Consider the case of Ryan,
are passionate about their work. a four-month-old who recently recov-
ered from heart surgery. At 8 PM, Ryan
versation by talking in the abstract. partners, but I knew that they could was breathing with a ventilator – just
I have to say something that person- communicate more effectively with as Alex had – and his parents kept vigil
ally matters to the other individual. their own constituencies than I ever by his crib. But unlike Alex’s parents,
I learned not to say things like, “Duke could. Ryan’s parents knew exactly who was
Children’s Hospital is losing $11 million Even in the most earnest conversa- responsible for their child’s care, what
per year.” Rather, I opened conversations tions, I’ve found that having a sense of his care entailed, and that he’d soon be
with a question, such as “How impor- humor is essential. For example, I devel- transferred to an intermediate care
tant do you think it is to have a therapist oped a Letterman-style list of the “Top unit. At 9 PM, Ryan began breathing on
on this unit to work with your patients?” Ten Reasons for Using the Balanced his own. The nurse skillfully removed
When they said it was important, I’d Scorecard,” poking fun at myself in the plastic tube and gently placed him
follow up with “How can we work meetings. Once, I even walked through on his mother’s lap. For me, seeing Ryan
together to manage our costs so we can the hospital dressed up as the eminently sleeping peacefully in his mother’s arms
preserve the therapist’s job?” poke-able Pillsbury Doughboy. Keeping was a rewarding end to a long, hard, but
I learned that little things make a big things light made it easier for us all to ultimately satisfying journey.
difference when it comes to morale endure the tremendously challenging
building. We created all kinds of com- course we’d set for ourselves. Reprint R00612
munication and feedback mechanisms. I learned, too, to respect the persua- To place an order, call 1-800-988-0886.

harvard business review November–December 2000 11