POM 5011: OPERATIONS MANAGEMENT TERM PAPER 2009/10

The Arnold Palmer Hospital

Founded in 1989, Arnold Palmer Hospital is one of the largest hospitals for women and children
in the U.S., with 431 beds in two facilities totaling 676,000 square feet. Located in downtown
Orland, Florida, and named after its famed golf benefactor, the hospital with more than 2,000
employees serves an 18-county area in central Florida and is the only Level 1 trauma center for
children in that region. Arnold Palmer Hospital provides a broad range of medical services
including neonatal and pediatric intensive care, pediatric oncology and cardiology, care for high-
risk pregnancies, and material intensive care.

Since its opening, the Arnold Palmer Hospital has experienced an explosive growth in demand
for its services. One of only six hospitals in the U.S. to specialize in health care for women and
children, Arnold Palmer Hospital has cared for over 1,500,000 patients who came to the Orlando
facility from all 50 states and more than 100 countries. With patient satisfaction scores in the top
10% of U.S. hospitals surveyed (over 95% of patients would recommend the hospital to others),
one of Arnold Palmer Hospital’s main focuses in delivery of babies per year, the hospital steadily
approached and then passed 10,000 births. Looking at Table 1, Executive Director Kathy
Swanson knew an expansion was necessary.

Table 1: Births at Arnold Palmer Hospital

Year Births
1995 6,144
1996 6,230
1997 6,432
1998 6,950
1999 7,377
2000 8,655
2001 9,536
2002 9,825
2003 10,253
2004 10,555
2005 12,316
2006 13,070
2007 (est.) 13,600

With continuing population growth in its market area serving 18 central Florida counties, Arnold
Palmer Hospital was delivering the equivalent of a kindergarten class of babies every day and
still not meeting demand. Supported with substantial additional demographic analysis, the
hospital was ready to move ahead with a capacity expansion plan and a new 11-story hospital
building across the street from the existing facility.

Thirty-five planning teams were established to study such issues as (1) their specific forecasts,
(2) services that would transfer to the new facility, (3) services that would remain in the existing
facility, (4) staffing needs, (5) capital equipment, (6) pro forma accounting data, and (7)
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regulatory requirements. Ultimately, Arnold Palmer Hospital was ready to move ahead with a
budget for $100 million and a commitment to an additional 150 beds. But given the growth of
the central Florida region, Swanson decided to expand the hospital in stages; the top two floors
would be empty interiors (“shell”) to be completed at a later date, and the fourth-floor operating
room could be doubled in size when needed. “With the new facility in place, we are now able to
handle up to 16,000 births per year,” says Swanson.

When Orlando’s Arnold Palmer Hospital began plans to create a new 273-bed, 11-story hospital
across the street from its existing facility, which was bursting at the seams in terms of capacity, a
massive planning process began. The $100 million building, opened in 2006, was long overdue,
according to Executive Director Kathy Swanson. “We started Arnold Palmer Hospital in 1989,
with a mission to provide quality services for children and women in a comforting, family-
friendly environment. Since then we have served well over 1.5 million women and children and
now deliver more than 12,000 babies a year. By 2001, we simply ran out of room, and it was
time for us to grow.”

The New hospital’s unique, circular pod design provides a maximally efficient layout in all areas
of the hospital, creating a patient-centered environment. Servicescape design features include a
serene environment created through the use of warm colors, private rooms with pull-down
Murphy beds for family members, 14-foot ceilings, and natural lighting with oversized windows
in patient rooms. But these radical new featured did not come easily. “This pod concept with a
central nursing areas and pie-shaped rooms resulted from over 1,000 planning meetings of 35
user groups, extensive motion and time studies, and computer simulations of the daily
movements of nurses,” say Swanson.

In a traditional linear hospital layout, called the racetrack design, patient rooms line long
hallways, and a nurse might walk 2.7 miles per day serving patient needs at Arnold Palmer.
“Some nurses spent 30% of their time simply walking. With the nursing shortage and the high
cost of health care professionals, efficiency is a major concern,” added Swanson. With the
nursing station in the center of 10- or 12-bed circular pods, no patient room is more than 14 feet
from a station. The time savings are in the 20% range.

“We have also totally redesigned our neonatal rooms,” says Swanson. “In the old system, there
were 16 neonatal beds in a large and often noisy rectangular room. The new building features
semiprivate rooms for these tiny babies. The rooms are much improved, with added privacy and
a quiet, simulated night atmosphere, in addition to pull-down beds for parents to use. Our
research shows that babies improve and develop much more quickly with this layout design.
Layout and environment indeed impact patient care!”

Like many other hospitals, and other companies, Arnold Palmer Hospital had been a long-time
member of a large buying group, one servicing 900 members. But the group did have a few
limitations. For example, it might change suppliers for a particular product every year (based on
a new lower-cost bidder) or stock only a product that was not familiar to the physicians at Arnold
Palmer Hospital. The buying group was also not able to negotiate contracts with local
manufacturers to secure the best pricing.

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So in 2003, Arnold Palmer Hospital, together with seven other partner hospitals in central
Florida, formed its own much smaller, but still powerful (with $200 million in annual purchases).
Healthcare Purchasing Alliance (HPA) Corporation. The new alliance saved the HPA members
$7 million in its first year from two main changes. First, it was structured and staffed to assure
that the bulk of the savings associated with its contracting efforts went to its eight members.
Second, it struck even better deals with vendors by guaranteeing a committed volume and
signing not 1-year deal but 3-5 year contracts. “Even with a new internal cost of $400,000 to run
HPA, the savings and ability to contract for what our member hospitals really want makes the
deal a winner,” says George DeLong, head of HPA.

Effective supply chain management in manufacturing often focuses on development of new

product innovations ad efficiency through buyer-vendor collaboration. However, the approach in
a service industry has a slightly different emphasis. At Arnold Palmer Hospital, supply chain
opportunities often manifest themselves through the Medical Economic Outcomes Committee.
This committee (and its subcommittees) consists of users (including the medical and nursing
staff) who evaluate purchase options with a goal of better medicine while achieving economic
targets. For instance, the heart pacemaker negotiation by the cardiology subcommittee allowed
for the standardization to two manufacturers, with annual savings of $2 million for just this one
product.

Arnold Palmer Hospital is also able to develop custom products that require collaboration down
to the third tier of the supply chain. This is the case with custom packs that are used in the
operating room. The custom packs are delivered b y a distributor, McKesson General Medical,
but assembled by a pack company that uses materials the hospital wanted purchased from
specific manufacturers. The HPA allows Arnold Palmer Hospital to be creative in this way. With
major cost savings, standardization, blanket purchase orders, long-term contracts, and more
control of product development, the benefits to the hospital are substantial.

Quality health care is a goal all hospitals profess, but Arnold Palmer Hospital has actually
developed comprehensive and scientific means of asking customers to judge the quality of care
they receive. Participating in a national benchmark comparison against other hospitals, Arnold
Palmer Hospital consistently scores in the top 10% in overall patient satisfaction. Executive
Director Kathy Swanson states, “Hospitals in this area will be distinguished largely on the basis
of their customer satisfaction. We must have accurate information about how our patent and their
families judge the quality of our care, so I follow the questionnaire results daily. The in-depth
survey helps me and others on my team to gain quack knowledge from patient feedback.” Arnold
Palmer Hospital employees are empowered to provide gifts in value up to $200 to patients who
find reason to complain about any hospital service such as food, courtesy, responsiveness, or
cleanliness.

Swanson doesn’t focus just on the customer surveys, which are mailed to patients one week after
discharge, but also on a variety of internal measures. These measures usually start at the
grassroots level, where the staff sees a problem and develops ways to track performance. The
hospital’s longstanding philosophy supports the concept that each patient is important and
respected as a person. That patient has the right to comprehensive, compassionate family-
centered health care provided by a knowledgeable physician-directed team.

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Some of the measures Swanson carefully monitors for continuous improvement are morbidity,
infection rates, readmission rates, costs per case, and length of stays. The tools she uses daily
include Pareto charts, flowcharts and process charts, in addition to benchmarking against
hospitals both nationally and in the southeast region. The result of all of these efforts has been a
quality culture as manifested in Arnold Palmer’s high ranking in patient satisfaction and one of
the highest survival rates of critically ill babies.

QUESTION:

How does the Arnold Palmer Hospital operations strategy provide competitive advantage? (Hint:
Evaluate how Arnold Palmer Hospital performs its OM decisions versus how other hospitals –
say in Tanzania – perform their OM decisions).

Instructions:

1. This is a group work to be done by FIVE members.

2. The submission date is 21ST DECEMBER, 2009 before the end of the day.
3. The work should be word processed, neat, including all necessary illustrations and
workings; with:
 Script: Times New Roman
 Font Size: 12
 Line Spacing: 1.5
 Number of Pages: NO MORE THAN 10 (Excluding the cover page and
Appendices).
4. You may wish to visit one of the local hospitals to know how they perform their
OM decisions.