I have so much respect for the people at the Dartmouth Institute for Health Policy and Clinical Practice and the excellent work done there that I hate to quibble with their work. But I fear that Stephen S. Rauh, Eric B. Wadsworth, William B. Weeks, and James N. Weinstein have overstated an argument, and their view needs correction.
The problem is in a Perspective article in the New England Journal of Medicine, "The Savings Illusion — Why Clinical Quality Improvement Fails to Deliver Bottom-Line Results". (Aside, thank you, NEJM, for allowing public access to articles of broad public interest. When will others, like JAMA?) Here is the argument in a nutshell:
[The] management and organization [of the typical health care setting] create a rigid cost structure that is relatively insensitive to small changes in patient volume, resource use, or the severity of patients' health conditions. This fixed-cost dilemma leaves most health care costs insensitive to changes in volume and utilization, so clinical quality improvements typically create additional capacity rather than bottom-line savings. An examination of the different cost layers highlights the distinction between variable costs, such as supplies and medications, where reduced use produces true savings, and fixed costs, such as facilities and ancillary services, where the costs persist despite reduced use.
Because of the rigid cost structures, incremental reductions in resource use are unlikely to generate cost savings for either a health care setting or the health care system. The most meaningful way to achieve savings is to focus on overall reductions in utilization rates for health care services and to eliminate the associated unnecessary capacity.
The mistake the authors make is in presenting a static and incomplete view of cost savings and the financial interests of an individual firm, and also a narrow view of the societal advantages that are produced when an industry leader accomplishes cost reductions. Indeed, by their logic, no firm in any industry characterized by high fixed costs would ever invest in efficiency programs and measures.
Two years ago, I gave an example from my former hospital's ICUs. Our staff had accomplished a marvelous reduction in the rate of ventilator associated pneumonia. We admittedly reduced clinical revenues for that "book of business" as a result. If we had focused on that financial outcome, though, and chosen not to carry out the VAP reduction program, we would have been too limited in our view. By reducing lengths of stay, we were able to avoid a huge bolus of new fixed costs: The clinical capacity we created solved a growing congestion problem and enabled us to avoid the new fixed costs of an expanded ICU, along with the essentially fixed-cost staff, equipment, and supplies that would have been required for that addition. Every firm faces capital constraints, and alleviating those constraints is as important a financial focus as what might be a short-term reduction in income.
By the way, on the societal front, we could and did see more patients who would have otherwise gone to higher cost competitors. That is also a common result in many industries.