Walk into most hospitals in the United States today, and you observe a true logistical anachronism. Patients arrive in the admissions area at 5:00 in the morning, only to wait two hours before they are checked in and two more before someone preps them for surgery. At lunchtime, the traffic jam spills over into the operating rooms, where patients routinely arrive late because of the admissions delays. The surgeons, anticipating this, come later than scheduled for operations in order to avoid wasting time. By midafternoon the bottleneck has shifted to the recovery area and the intensive care unit (ICU), forcing groggy patients to wait back in the operating rooms. Frederick Winslow Taylor was worrying about inefficiencies of this kind in factories a century ago.

To understand why such problems persist in health care, you must go back at least to the mid-1980s. In those days, insurers still paid whatever fee hospitals demanded, and federal and state governments still subsidized the expansion of capacity by adding a "capital pass-through" term to their Medicaid and Medicare payments. Although much of US industry was applying modern logistics techniques, hospitals—like many service providers—felt no competitive pressure to do so.

Hospital care becomes a...