Theory of Constraints Handbook - James Cox Iii [606]
Investment (I) is the total capital invested in designing the physical sites and delivery system of the service for the patients. It includes the cost of physical facilities, equipment, tools, IT systems, HR system, and money spent to obtain market data to develop the services for the target market. This investment is depreciated over time as OE.
Totally Variable Cost (TVC or more frequently VC) is the cost of supplies and laboratory work paid for specific tests. Since this VC varies significantly for each patient or segment of patient population, it is subtracted when the patient treatment is completed. In health care, it is not possible to focus on each patient cost due to the high degree of variability. We usually look at a segment of population served, for example, the patient population by insurance companies versus by age groups or by specific procedures.
In the hospital setting, insurance is paid by International Classification of Diseases (ICD) code and if Medicare population requires a lot of laboratory testing and multiple supplies, and increased length of stay, the VC will increase compared to other populations.
The symbol I18 is used for investment that is depreciated over time, and the symbol i is used for inventory that includes medical, surgical, and office usable supplies. It can include all the unfinished treatment plans or unpaid bills from insurance companies that is similar to inventory waiting to be worked on. OE is all the expenses to deliver services including doctors and staff salaries, benefits, leases, equipment, utilities, insurances, supplies, etc. It also includes selling and general administrative costs. I is depreciated over time as an OE. Little i is the cost of supplies, lab work, and work-in-progress (WIP).
As in TA, one strives to increase Throughput while decreasing Investment and Operating Expenses. The normal relationships among the variables still hold.
NP = T – OE
ROI = NP/I
In health care, T can increase if we increase the velocity of understanding patient expectations, diagnose the problems accurately, create treatment plans (like design engineers), and execute the best treatment option for the patients in the shortest possible time (similar to multiple projects). The quality and reliability of patient care provided by the doctor is important in this concept because we will lose the time of our most valuable resource, the doctor, if we have to readmit the patient or we have to contact the referring doctor again and again to get the test results.
In health care, the management priorities are to:
Increase Throughput (T) > Increase in Investment (I) + Increase in Operating Expenses (OE)
In decision making and selection of patients in a for-profit health care organization, it is important to understand T/DU.
If the patient care takes too long from start to finish or a third party takes too long to pay, it will increase the OE, increase i, and decrease (T).
Staff turnover cost is viewed in terms of impact on total Throughput that is the effect on doctor time and collection of fees. To be a good decision, the hiring of staff must result in an increase in T (ΔT) that is greater than increase in OE (ΔOE) caused by the hiring of staff.
When referring procedures to other practitioners (similar to outsourcing), the decision must be made based upon overall impact on the NP of the practice at the end of the year. In decision-making, we take into account the cost of taking time off from the practice, tuition paid to develop specialized skills,