Medical Practice Sales, Appraisal and Financing

Medical Practice Sales, Appraisal and Financing

Article by Christopher Majdi, MS, CBA, CHBC, a process improvement consultant assisting Physicians and Health Groups nationwide. Transition Consultants is a Medical Practice Consulting and Medical Practice Sales firm.

Lean production (Lean) is a type of quality improvement methodology which has been implemented in many industries.  Its principles and practices also have been applied to health care organizations with success.  This has been accomplished with refinement for the nuances of health care.  Lean is a process management philosophy which has its roots in manufacturing and technology.

  1. Significance:Value
  2. Problem Addressed: Waste
  3. Process: Root Cause Analysis
  4. Sources of waste
  5. Solution: Cost Recovery
  6. Examples of Lean implementation in Healthcare



A significant component of Lean is the concept of value: the theoretical concept of value, the measurement of value, and the tangible processes behind delivering value.  Lean is unique in that it accounts for the reduction of waste in order to achieve both real and potential value.  Recovering this value can present itself in the form of saved costs or other tangibles.  Lean thinking dictates that the expenditure of resources for any purpose other than delivering value to the customer is considered to be wasteful.  The reduced expenditure of time, money, and resources is thought to bring additional bottom-line benefit to the customer. The customer-centric focus of Lean thinking is especially relevant to health care.  Broader levels of patient/customer satisfaction are constantly being sought.  This mode of thinking has been brought on by increased competition among organizations and the need to differentiate services.  It is recognized that providing complete customer satisfaction can be vastly beneficial to health care organizations.  Customer satisfaction can be an equally important measure of an organization's performance as the delivery of quality health outcomes.  This is a factor which is exemplified in Noriaki Kano's model.  Lean thinking dictates that processes and methods must be efficiently optimized with the needs of customers in mind in order for organizations to be fully effective.

Problem Addressed: Waste

Lean focuses on the maximization of process velocity through the reduction of waste.  It provides tools for analyzing process flow and delay times at each activity in a process.  The focal point is the separation of "value-added" from "non-value-added" work.  This is complemented by tools which aide in the identification and elimination of root causes of non-valued activities.  The primary problem addressed byLean is waste, which can affect value in a number of ways.  It may result in lower quality products, higher costs, less favorable customer experiences, excessive time or effort expended to complete goals, or fewer resources available for innovation which could provide potential value at a future date. Waste can be found in people, processes, tangibles, and other areas.  Eliminating waste through the lens ofLean production can help to achieve the goals of health care organizations.  There are eight generally identifiable centers of waste: overproduction, waiting (time on hand), unnecessary transport or conveyance, over-processing or incorrect processing, excess inventory, unnecessary human movement, defects, and unused employee creativity (United States Army, 2009).   There are variations on these categories of waste depending on the setting or industry.  For the purpose of health care Caldwell (2005) slightly refines these measures into seven categories of waste.  These consist of "in-quality/out-of-quality staffing or overcapacity, overcorrection, over processing, excess inventory, waiting, motion of patients or staff, and material and information movement (Caldwell, 2005, p. 46)."  Regardless of the differences in terminologies used, there are common centers of waste in health care which can be targeted for elimination.  These can be identified through Lean processes which focus on root cause analysis.

Process: Root Cause Analysis

A crucial process in Lean is the identification of waste through root cause analysis.  Root cause analysis in Lean involves a method called 5-Whys (Toyota Manufacturing Kentucky, 2003).  This method rapidly identifies root causes and aides in determining the relationship between multiple root causes.  It can be learned quickly and does not require statistical analysis.  This method is especially effective for an implementation team in the initial stages of problem exploration.  The application of this strategy involves asking a series of why-related questions to drill down into a problem area.  Asking progressive questions about a perceived difficulty forces team members to think critically about the actual sources of waste and inefficiency.  It is suggested that at least five questions (5-Whys) are posed to arrive at the root cause, though a root cause may be discovered in more or less inquires.

The following is an example of a 5-Whys exercise used in a hypothetical hospital setting:

(Q1) Why are patients being diverted to neighboring hospitals?
(A1) Because wait times for our hospital are exceeding industry norms.

(Q2) Why are our wait times exceeding industry norms?
(A2) Because patient volume is exceeding capacity.

(Q3) Why is patient volume exceeding capacity?
(A3) Because not enough hospital beds are available.

(Q4) Why are not enough hospital beds available?
(A4) Because hospital patients are not being discharged efficiently.

(Q5) Why are hospital patients not being discharged efficiently?
(A5) Because ER staff is not following best practices for proper discharge.

In this example, waste in the throughput process comes from incorrect processing.  Once hospital management determines the root cause they can implement further training, ensure compliance with existing standards, or eliminate other barriers.  In this case the hospital might consider implementing a training program to ensure that ER staff is following best practices for patient discharge.  The hospital might also conduct additional 5-Whys analyses to uncover other problem areas.  Once root causes of waste are uncovered, the elimination of waste or other related action plans can be executed.

Sources of waste

Sources of waste vary greatly by industry.  The majority of waste encountered by health care organizations occurs in flow and throughput.  As a result, Lean implementations in this field are primarily focused on the elimination of waste in staffing and staff/patient processes.  Unlike manufacturing industries most health care organizations have very little inventory.  Thus, some of theLean concepts related to inventory control are less applicable to health care.  Health care organizations typically spend a larger percentage of operating expenses on overhead and labor costs.  This can account for 50 percent of the operating costs while inventory is in the range of 2 percent (Caldwell, 2005). Understanding waste in throughput entails a comprehension of the relationships between process variables and costs.  Costs are not causes of waste but are indicators of interrelationships between processes.  While the ultimate goal of most Lean implementations is to recover costs as tangible benefits, eliminating costs without fully understanding processes is problematic.  Looking at the types of cost recovery is essential to determining an action plan.

Solution: Cost Recovery

The ultimate goal of most Lean implementations is to attain a tangible benefit, often in the form of a cost recovery.  However, not all process improvement opportunities will result in immediate returns.  The actual realization of a benefit depends on the nature of the improvement as well as the additional steps that management takes to achieve it.  Caldwell (2005) cites three types of cost recovery through the elimination of waste: Type 1, Type 2, and Type 3.  In a Type 1 situation the process throughput improvement will yield a direct cost recovery.  For example, a process improvement that reduces length of patient stay would recover costs in the form of reduced resources expended.  In a Type 2 situation, the process improvement saves time but does not result in cost recovery without additional hours worked per unit of service.  A provider may spend less time per patient because of reduced length of stay but scheduling will need to be adjusted in order to capitalize on the benefit to workflow.  Lastly, Type 3 yields savings in the form of immediate optimization of capacity.  In this situation a process improvement in an emergency room, for example, may allow a provider to see more patients in the same staffed time without additional action taken by management.  This is similar to a Type 2 recovery but with no changes to scheduling.  This can occur if the provider is willing to see more patients per unit of time and sufficient patient volume exists to achieve capacity.  Maximum velocity is achieved without additional action needed to be carried out by management.  These examples show that throughput improvement may not achieve an immediate benefit without other factors.  It also brings to light the fact that throughput improvement may yield different benefits such as recovered costs, time saved, or increased revenues.  Regardless of the actual benefit achieved and the way that it is realized, the ultimate outcome must increase bottom-line value and satisfaction to customers in some way.

Examples of Lean implementation in Healthcare

The study of actual Lean implementations in health care is essential to understanding their application.  One example of a successful implementation is outlined by Fairbanks (2007) at a medical center in Vermont.  This implementation dramatically improved overall throughput processes within the organization.  An implementation team was assembled and delved into all steps of the processes they were analyzing in order to determine the sources of waste.  They utilized various Lean steps and methodologies to conduct root-cause analyses and prioritize process improvements.  The team measured time involved, identified activities, and made rapid improvements through the elimination of non value-added activities.  A large part of their improvements involved the elimination of redundancy.  The topic of redundancy shows the importance of analyzing all processes, even those which are perceived to contribute to customer value.  Even though a particular function may provide value in an organization it is possible that a redundant function may exist which can be eliminated. In another case example Lean methodology was used to streamline the physical space and inventory areas of a Denver-area hospital (Gabow, Albert, Kaufman, Wilson, & Eisert, 2008).  The implementation team utilized the 5-S approach to organize physical work spaces within the hospital.  5-S is a Leanimprovement which incorporates visualization management to organize objects and supplies.  The five Ss stand for sort, set in order, shine, standardize, and sustain.  These steps involve tasks ranging from simple clean-up and organization to the implementation of detailed visual controls.  In a 5-S environment there is "a place for everything and everything in its place, when you need it (LeanInnovations, 2003)."  The Denver hospital used this approach in a series of projects focusing on individual offices, nursing stations, entire laboratories, and financial services departments.  These spaces were reorganized to achieve optimal work flow and good space management.  The successful outcomes included reclaimed physical work space, improved lab turnaround time, reduced time in locating equipment, and better processes which could improve patient care (Gabow et al, 2008).  The 5-s method is an excellent first step in implementing Lean programs in a health care organization.  Improvement of physical work space can positively affect mindset and mental perception of work. Another case example of a successful 5-S implementation involves a rural health clinic in Georgia.  Lean techniques were used in this organization to resolve problems with bottlenecks, turnaround times, customer satisfaction, and overworked nurses (Cross, 2009).  5-S is one of many Lean tools which can provide immediate benefit.


Lean is a multifaceted approach to quality improvement which has tangible benefits to health care organizations.  There are aspects which focus on reducing non value-added work and waste to achieve value in various ways.  Successfully implementing Lean in health care depends on the setting involved and the motivation of management and teams.  Health care encompasses a wide range of organizations and each has unique characteristics which must be considered in light of Lean processes.  Important considerations in implementing lean in any environment can be reduced to a few key points: Understanding the concept of value Understanding waste and its sources Learning how to determine and analyze root causes Prioritizing multiple root causes Devising methods to eliminate waste Determining ways to recover costs or achieve benefits Analyzing effectiveness and repeating steps if necessary In addition, it is important to note that eliminating waste through a Lean process may not immediately result in tangible benefit.  Management must thoroughly analyze action plans and make adjustments based on actual outcomes.  Additional steps may need to be taken following initial process improvements.  This is especially relevant in health care where process throughput improvement and staffing are areas which are commonly targeted.  These areas may involve more challenges when trying to extract benefit.  Freeing time for providers cannot always be capitalized upon without other capacity and throughput improvements.  Scheduling or work flow functions may need to be overhauled in order for providers to increase overall process velocity and maximize value per unit for time. It is also crucial to realize that humans are not machines.  Theoretical methods of quality improvement in Lean may not always be feasible to achieve at maximum levels.  The Lean methodology developed by Toyota is very cognizant of respect for people.  It is reflective of a collective culture and a holistic concept rather than a series of parts or steps.  This is a fact which cannot be overlooked by management and teams when planning an implementation.  People perform processes with normal human variation and improvements must be sensitive, appropriate, and sustainable.


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