Massachusetts General Hospital: Cabg Surgery (a)

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Today, governmental, corporate and individual customers increasingly are resisting insurers' attempts to pass on rising healthcare costs. Healthcare providers' costs meanwhile are escalating in the face of an aging population, expensive technologies and therapies... Both payers and providers must determine their true competencies and find ways to remain profitable despite leaner margins. In 1994, Massachusetts General Hospital (MGH), with its $1 billion budget and its dozens of thousands visits per year, is urged to find a new business model to resist cost pressure… In other words, how MGH could lower its costs while enhancing the quality of care provided?

Financially speaking, evidence shows that MGH's cost structure is so important that it hampers dramatically its profit margin. Considering Exhibit 1, the ratio of after adjustments on Total Operating Revenues does not even go beyond 2%. In fact, even if the whole industry faces huge cost pressures, it seems that MGH is underperforming compared to its local competitors (the Boston area does not count less than 9 other major hospitals). Many patients stay longer in the hospital and often receive more tests and expensive medication than they actually need. Exhibit 6 and Exhibit 7 show that patients spend on average 2 to 4 days more at MGH than anywhere else. If we look at the Charlson Index for Brigham & Women's, Exhibit 7 also shows that the severity of illness does not account for a higher mean length of stay (LOS); we may infer that we are dealing with a structural problem in terms of capacity management. Moreover, 80% of the MGH's CABG patients are on the Diagnosis-Related Groupings (DRG) payment method, which means that the hospital receives the same fee from the government for all patients diagnosed, regardless of how costly the patient is to treat or how long she stays in the hospital. Hence, MGH cannot adopt any different pricing policy to improve its...
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