The effects of lean implementation on hospital financial performance

Abstract

This study examines lean implementation's effects on hospital financial performance using survey and secondary data for a large sample of US hospitals. Using sociotechnical systems theory, a social context is identified that should motivate the use of lean process improvement tools (LPT) in a hospital setting and accentuate its performance benefits. Shah and Ward's employee involvement (EI) construct is adapted to a hospital setting to define a supportive social context for LPT, which is further shaped by organizational psychological safety (PS). The research model depicts PS as amplifying the effect of EI on LPT, which, in turn, influences a hospital's return on assets (ROA) via three potential pathways: (a) through enhanced revenues; and/or (b) through reduced hospital discharge costs; and/or (c) directly. The results show that EI engenders LPT and that this effect is heightened as PS improves. LPT is shown to positively impact ROA indirectly through higher revenues, but not through lower discharge costs. The findings reveal positive, indirect effects of EI on revenue and profitability at moderate/high levels of PS. Robustness is investigated using an alternate performance metric—hospital excess margin—with consistent results. Post hoc analyses explore potential mechanisms through which lean implementation may increase hospital revenues, including hospital throughput (discharges), readmission rate, experiential quality, length of stay, and overall patient recommendation. The analyses reveal that the impact of LPT on hospital revenue is potentially realized through higher hospital discharges. Overall, the study demonstrates that lean implementation as a sociotechnical system contributes to superior performance.