CASE STUDY – Implementation of cost cutting measures in hospital by a CEO

(This case study is related to cost management in hospital and is based on approach used by CEO to implement certain cost cutting measures in his hospital.)

Situational background

The CEO of a large hospital has been particularly concerned about increasing operational cost of the hospital and have decided to initiate some cost containment measures. As a process he put a 3 member group to work out recommendations to control operational cost. The group after thorough review came out with several recommendations. The CEO after going through various recommendations and using his own judgement decided to go ahead with 3 recommendations in first place. CEO being a believer of inclusive decision making decided to discuss it with key people in his organization.

Recommendations made(Details and rationale for each recommendation is given further below)

1. Changing the operation theater timings for planned surgeries from existing 9:00 – 16:00 to 11:00 – 18:00
2. Allowing cut strip medicines to be sold to patient and also accept it back for refund at the time of discharge
3. Replacing 25% of the oxygen cylinders with oxygen concentrators

Anticipating too much difference of opinions if discussed in large group, he thought of discussing it first with following key personnel who may be most affected

1. Head of surgery department
2. Nursing in-charge of OT
3. Pharmacy In-charge
4. In-charge of biomedical engineering department
5. Head of medicine department

Details and rationale of recommendations

1. Changing the operation theatre timings for planned surgeries from existing 9:00 – 16:00 to 11:00 – 6:00: 

One of the major expense was electricity bill and operation theatres has been responsible for a very high portion of the bill. The working group observed that state electricity board have segregated pricing on electricity usage depending upon which time of the day it is being used, as given in table below.

Electricity charges for commercial use

Time of the day	Base rate	Increase/Decrease in energy charges
22:00 to 06:00	Rs. 4.00 per unit	(-1.25 Rs. ) per unit
06:00 to 13:00		0
13:00 to 18:00		(-1.00 Rs.) per unit
18:00 to 22:00		+1.00 Rs. per unit

Currently the hospital’s operation theatre functions from 9:00 am to 4:00 pm for planned surgeries, with full capacity throughout the time. By changing it to a new time additional 2 hours of OT electricity will be billed at 75% of the current rate. After calculations, the group has stated that they will be able to reduce the overall electricity bill by 8%. 11:00 – 6:00 timings is suggested as till 6:00 pm is the official working time in the hospital.

2. Selling and refunding cut strip medicines: 

This recommendation was specifically to reduce cost to patients. The group observed that since the hospital has the policy of selling entire strip, most patients’ ends up buying extra medicine than required. The policy was intended to prevent medication errors due to incomplete labels on a cut strip. However, that group opines that pre-printed stickers can be used to label the cut strip to take care of this. Through a sample survey following data was compiled by the group to substantiate their recommendations

Speciality	n	Average bill amount (without medicine)	Average cost of medicines per patient	Total bill amount	Average cost of extra med per patient	Percentage saving to patient (if cut strip allowed)
Medicine	35	19,250	12,300	31,550	2,900	9.19%
Surgery	28	43,670	8,900	52,570	3,850	7.32%
Paediatrics	25	22,500	7,500	30,000	1,550	5.17%
OBG	30	20,850	6,800	27,650	1,300	4.70%

3. Substituting 25% of oxygen cylinders with oxygen concentrators: 

The group discovered that given the amount of oxygen they use, investing in oxygen concentrator may work as a cost saving measure in long run. Within 1 year, they will recover the cost by saving expenses on refilling the cylinders. Since, patient care cannot rely 100% of oxygen concentrator (as it has issues with battery charging and maintenance), group recommended to keep a mix and advised to replace 25% of cylinder requirement with concentrator.

Task for the readers of the case:

• Assess the rationality and feasibility of each cost cutting recommendation
• Anticipate effects of these decisions on the department given above.
• Identify how, different personnel called for meeting would react to each of this measures
• What kind of response should the CEO be prepared for from each personnel?

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