Success Story #4 Stanford Hospital and Clinics At the forefront of the quality revolution


Stanford Hospital and Clinics (Stanford) was applying the basic elements of Lean and Six Sigma long before those terms were invented. Their use of quality and process principles began in the mid-1980s, when changes in Medicare reimbursements and the advent of HMOs meant that healthcare providers had to start balancing fiscal concerns with their primary mission of providing high-quality patient care.

The pressures that sparked Stanford to adopt what was then Total Quality Management (TQM) have continued to intensify. For one thing, changes in technology have made medicine an increasingly capital-intensive enterprise. At the same time, revenue sources continue to tighten. California is a particularly competitive healthcare market, with large HMOs and employer groups exerting enormous pressure to keep costs down. Many hospitals in California began accepting contracts that were not covering their costs, a path that Stanford was reluctant to follow. The pragmatists argued, “No margin, no mission.”

Details on the Stanford Hospital and Clinics come to us through Karen Rago who worked there from 1977 to 2002, rising through the ranks from staff nurse to nurse manager to the Vice President of Program and Service Line Development. Stanford is a private, not-for-profit academic medical center and 650-bed hospital affiliated with Stanford University. They have a long history of fostering innovation, including the first heart transplant in the United States and the first successful heart/lung transplant in the world.

By the late 1990s, many of Stanford’s clinical specialties, like cardiac care, started to see patient volumes dwindling, a fact that alarmed both physicians and administrators alike. Like most healthcare providers, they needed more profit to sustain operations, revitalize reserves, and refund the capital budget. The solution they found was to ramp up their already existing improvement efforts to look for even greater improvements in speed and quality. Here’s their story.

The Business

Every business feels pressure to cut costs, but those pressures are exacerbated in healthcare. In fact, its business model is very different from what most people learn in their MBA programs.

For one thing, healthcare organizations cannot fully control their fixed costs. In California, for example, there are even laws mandating nurse staffing levels. For example, if there are 26 patients in the cardiac “step-down” unit (where patients go after leaving ICU), California says you should be using 8 nurses to care for those patients. A hospital can be cited for not maintaining the mandated levels. So even if Stanford figured out a way to provide high-quality care with only 6 nurses, they would be unable to take advantage of those changes.

The situation gets worse: as we all know, the growing influence of HMOs means healthcare organizations have less and less control of revenues. They can charge whatever they like for a service, but whether or not Medicare or insurance will pay that price or allow the patient to pay is an entirely different matter. For example, as Karen Rago explains, “Most contracts spell out how much they will pay per day per hospitalized patient. It doesn’t matter what we do for patients, what care they require, we only get that per diem. If a short-stay patient requires an expensive surgical procedure, we would take care of that patient even though we may never recoup those costs.”

Stanford worked with their managed care contracting group to get additional “carve outs” for special procedures and implantable devices (such as heart valve implants), so they stand a better chance of getting paid what it costs to provide many of their services, but the market forces that determine what they get paid are unlike those in other business environments.

Lessons #1 and #2 Ownership and Integration

To address the need to substantially cut costs, Stanford’s first foray into quality improvement in the mid-1980s was a short-lived effort called Service Improvement. It failed miserably because it encompassed ideas and approaches very alien to the staff. Stanford soon followed up by implementing Total Quality Management, which fared much better partly because of its emphasis on working in teams. This had two big advantages as Rago recalls: “I’d worked at Stanford long enough to know that nothing could get anywhere unless we got everyone to agree. And working in teams was one way to get people to come to agreement.” The other advantage, she adds, was that TQM got Stanford started down a path of involving operational people in the improvement work. These people had the knowledge needed to understand the situation, and they were part of deciding what changes would be made,” says Rago, “so changes were more likely to stick.”

But even the TQM efforts fell short of the organization’s needs. That’s when Stanford’s leadership decided to develop their own unique program called Operations Improvement (OI), which began in the late 1980s. The key change was that Operations Improvement took the place of the annual budgeting process—that is, the push to find improvements was tied in with the development of annual plans and budgets. Stanford didn’t simply mandate across-the-board percentages or arbitrarily cut out some functions. Rather, they looked at their operations, identified waste or excess, and applied what we would now call Lean and Six Sigma thinking and tools to eliminate that waste.

Development of OI addressed two key issues:

  • The benefits of embedding quality initiatives into the culture of the organization. Though Operations Improvement drew on concepts and tools used in TQM and Lean, it was something unique to and owned by Stanford.
  • The need to integrate “improvement” with “business goals.” To characterize even Stanford’s early efforts as simply “quality improvement” is somewhat misleading. The purpose was always to help reduce operating costs while maintaining or improving patient care. So improvement was never something done in addition to their regular work or done solely for the purpose of improving quality; it was how Stanford was going to achieve its business goals. Incorporating improvement thinking and efforts into annual planning and budgeting achieved this integration.

Preparation and Rollout

When OI began, the initial focus was on having individual departments identify savings opportunities (revenue enhancements were also considered, but the primary thrust has always been, and continues to be, on ways to cut costs or achieve other efficiencies). Several years into OI, however, it was expanded to include a cross-functional assessment of clinical care, taking a broad look at everything patients experience while they’re at the hospital.

To implement this broader view of OI, Stanford first trained a group of people within the organization to be full-time trainers, a move taken so that employees would be trained by people they knew. (Credibility is a big issue among professional staff, which is most of Stanford’s employee base.)

Stanford then looked around the organization and chose managers they thought would make good team leaders as participants in the first official wave of training. The pioneer class got a basic introduction to TQM (remember, this was in the late ’80s) in a three-day course that covered everything from fishbone diagrams to facilitation. In the first training session 100 staff and managers were trained to be team leaders or facilitators; by the end, approximately 1500 staff and managers had been trained in quality and Lean principles—about 30% of the employees.

Every year since OI was begun, the trained facilitators have run and/or coached between 10 and 16 cross-departmental teams. The official OI budgeting/improvement cycle begins in January when the teams come together. Prior to the OI kickoff, department managers solicit improvement ideas from their staff. The first two OI meetings are then spent brainstorming, sharing these staff-contributed ideas, and generating even more ideas. The teams continue meeting weekly through April to analyze and implement ideas, then the leaders of those teams meet with the CEO, CFO, and COO to report on ideas and projects. The executive team then completes the hospitals’ plans and targets in time for the beginning of their fiscal year in September.

From the start, these teams have known that the OI process means finding ways to cut costs, but there was an additional incentive to make their participation worthwhile: if they could identify improvement ideas that could provide a return on investment in three years or less, they could get capital and operating dollars outside the normal capital budget process. This incentive helped create pull for OI initiatives by convincing people that it was also an opportunity for gain, not something they were going to lose. “For example,” says Rago, “sometimes departments could add a new FTE nurse because they were accomplishing savings which more than paid for adding that position.”

As mentioned above, these cross-departmental teams originally existed only from January through April to come up with ideas and plans for the next fiscal year. Later, they were often maintained throughout the year as a mechanism for monitoring performance and identifying further opportunities. The teams would continue to meet monthly, share data (volume of patients, cost per case, reimbursements, etc.), and discuss any issues that needed immediate attention.


Stanford’s Operations Improvement strategy has been in place since the late 1980s, so it is difficult to represent the full scope of their achievements. Most managers can pull out documentation on dozens of projects that illustrate Lean Six Sigma principles ranging from eliminating medication errors (reducing defects) to redefining procedures by eliminating non-value-added work. Here are just a few benchmarks from the areas that Karen Rago knows best, cardiology and cardiac surgery:

ICU hours of care per patient day: Dropped from a starting point of 29.6 hours in the 1980s to 20.5 hours by 1995 and 19 hours by 2001

Material cost saved: $25 million per year (cash flow impact based on the reduction of supply expense per adjusted patient day indicators)

Cardiac surgery cost savings: $1.1 to $2.6 million saved per year

Cardiology cost savings: $4.4 million

Cardiac Bypass Graft Surgery savings: $2400+ per case

Where did all these gains come from? Projects focused on complexity reduction were described in previous chapters. But here’s one other example of the kinds of changes that made a big impact on cost: Until recently, all of Stanford’s supplies were kept in a huge basement stock room, which represented an enormous capital investment. When nurses needed supplies, they would either call down to the center and explain what they wanted to someone who may or may not be familiar with medical terminology. If it was a night shift, nurses could have ended up going down to the basement themselves to root for what they needed.

Then Nick Gaich, the Vice President of Materials Management and Customer Service, implemented a new process built around the Lean ideals of minimizing work-in-process and mistake-proofing work by eliminating the chances for human error. The new procedure was built around a computerized system that allows nearly just-in-time stocking of “service centers,” small supply rooms located throughout the facility. Each service center stocks a three-day supply of material for three to five specific hospital units. A nurse or a support services person enters requests into the computer, and the needed material is delivered to an appropriate mailbox in the unit within five minutes of order entry. The computer systems also communicates directly with the appropriate supplier(s), and the used material is replenished usually within the same day.

Now, the nurses (being paid $30-$40 an hour) can spend more time on patient care and less time running around gathering supplies. Support staff, trained in the materials system, perform the majority of the work. The huge basement stockroom, representing huge wasted capital, has been replaced by many smaller stockrooms that, in total, consume far less capital investment.

It saves money on self-stick notes, too!

Karen Rago remembers that it used to be a common sight to see nurses with rows of self-stick labels stuck to their name badges as a way to remember what supplies they needed to charge to patients. Going to a just-in-time electronic ordering system has not only eliminated the $60K/yr budget her unit had for lost material and supplies (the sticky label system was somewhat unreliable) but also reduced the hospital investment of inventory in excess of $250,000. It also enhanced net revenue by interfacing (real time) with the Hospital Billing system, so the patient charges are now more accurate and complete. The sticky label system was eliminated.

Lessons Learned

Over the nearly 25 years that Karen Rago spent at Stanford, four lessons stick out in her mind:

1. Moving to cross-departmental teams

The change to cross-departmental teams was critical, says Rago, because it eventually brought with it a very strong focus on entire service lines (known as “value streams” in Lean parlance). “When we reached the point of having service line teams, we would look at patient care from beginning to end, not just from each individual department budget,” she says. In effect, she adds, they were changing the process of care. The cardiac care team that Rago led included:

  • The chair of the surgery group as a co-leader (what they called a “physician Champion”)
  • The nurse managers from the units that cared for the cardiac surgery patients
  • The operating room manager for the operating rooms where they did cardiothoracic surgery
  • A clinical nurse specialist representing units that handled cardiac patients
  • A pharmacist, respiratory therapist, and physical therapist who cared for those patients
  • Social workers, case managers

In short the team included representatives from everyone who dealt with patients as they “flowed” through the value stream. This allowed Stanford to break down barriers and work toward common customer-centered goals.

“A key thing we did is have physicians co-lead the teams with a manager. That was the only way we had any credibility with other physicians and nurses.”

—Karen Rago

One rule set down at the very beginning was spawned by the kind of systems thinking incorporated into Six Sigma: no team could make a change that affected another department unless they had buy-in from that department. This wasn’t as onerous as it might sound at first: remember, they were using cross-functional teams, so it was likely that a representative from the affected department was in the room.

Rago recalls an example from the early days of a project aimed at getting wheelchairs to where they need them (which turns out to be a huge logistical challenge for many hospitals). The first time that a team came together to attack this issue, the changes didn’t stick. Results came only when the problem was attacked a second time by a cross-departmental team. “Instead of having the nursing director pointing fingers at supplies management, a supplies management representative was there at the table. So they understood how their department affected others. And they dug in there to help fix it,” says Rago. A side-effect of this collaboration, she notes, was that people were no longer constantly complaining about the same problem over and over again.

2. Increasing the availability and use of data

During the initial implementation efforts, it was difficult for people to get the data they needed. They even had to bring in an outside group to hand-count patient charts to determine, for example, how many of each kind of lab test was performed. Such data is essential for making decisions about whether procedures could be changed to reduce patients’ hospital stays without doing them any harm. Soon after the Operations Improvement program became operative, Stanford invested in a cost-accounting system that made such data much easier to gather. Rago also helped shape a group of staffers within the service line structure who were available to provide quick support to the OI teams.

At a fundamental level, having easy access to good data helped improve each team’s decision making. It was also critical because of the population that Rago was dealing with: “Physicians want to see data,” she says. “They aren’t going to be convinced otherwise.” Also, one of the biggest implementation challenges Stanford faced was when non-physician clinical staff identified changes to physician practices. “Getting physicians to change their practices is very difficult, and you have to have compelling arguments and data to support any recommendations,” says Rago.

Lastly, having “after” data was important in being able to show people what they had accomplished and provide a morale boost for continued improvement efforts.

3. Adapting the process to staff needs and working styles

As the head of the cardiac care units at Stanford, Rago spent her time working with both cardiology physicians and cardiac surgeons. She discovered early on that these two groups had very different approaches, and she had to adapt her approach to fit the audience: cardiologists, who spent their time in the clinics, liked to think in terms of process and teams. They would willingly attend weekly meetings and talk through their ideas. The cardiac surgeons, on the other hand, were much more independent and outcome oriented. Initially they were not prone to working collaboratively with other surgeons, and wanted to quickly reach decisions and move on. By accommodating these styles, Rago was able to get more accomplished.

4. Benchmarking

Every business faces questions around where to set its targets: How fast is fast? What kind of quality levels are possible? What helped Stanford identify priority areas for improvement and set realistic targets was their affiliation with the University Health Systems Consortium (UHSC), which started doing clinical benchmarking projects. Each member organization had to submit 30 cases related to a number of practice areas (such as hip replacements and coronary bypass grafts). UHSC evaluated all the cases and benchmarked the members against each other. They also identified which members exhibited best practices in each area, and shared those practices among the membership. Rago says it helped Stanford see where it was best-in-class already, and where they could learn from others.

Creating a Matrixed Organization

By the late 1990s, Stanford had become a fully matrixed organization. As Rago describes it, “What changed the most was that I and everyone like me went from being insular department managers to collaborating with our peers. In the early years, I would not have normally done a whole lot of problem solving with other managers. If I was having a problem with the lab, and 10 other units were having problems with the lab, then we had 11 problems with the lab. It wasn’t until we started working together across boundaries that we could recognize and start to fix major system problems.”

Rago credits Stanford’s leadership, and especially previous CEO Malinda Mitchell, with embracing the changes early on and carrying that commitment for many years. “It needed to be the way we functioned, not in addition to our other work,” she says. “Even though at first it meant some extra meetings, eventually our OI efforts started changing the mindset for how we thought and functioned. That’s when we started seeing the big gains.”

Lean Six Sigma for Service. How to Use Lean Speed and Six Sigma Quality to Improve Services and Transactions
Lean Six Sigma for Service : How to Use Lean Speed and Six Sigma Quality to Improve Services and Transactions
ISBN: 0071418210
EAN: 2147483647
Year: 2003
Pages: 150 © 2008-2020.
If you may any questions please contact us: