The Opportunity in Health Care

In what industry is the potential to improve results while reducing costs the greatest? 

The title to this blog post gives the answer away, but you might ask yourself, “Seriously, could that be true?”

It’s Friday, and I’m on a plane with the September 2011 Harvard Business Review.  I have a passion for applying the principles of operations management to health care and some of us at e2e have done work in the space, but “How to Solve the Cost Crisis in Health Care,” by Harvard professors Michael Porter (If you haven’t read Competitive Advantage, you need to.) and Robert Kaplan (Think activity-based costing and Balanced Scorecard™) really lays out the contrast in the way operations are managed in healthcare as opposed to other industries.  It isn’t the first time Porter has written on the topic.  I read his 2006 HBR article, and although I always intended to read his related 2006 book (Redefining Health Care:  Creating Value-Based Competition on Results, co-authored with E.O. Teisberg), it is still on my list of books to read.  Ever since then, I have wondered how any debate on healthcare, much less any legislation or regulation could take place without guidance from Porter.  Maybe that dialog with Porter has taken place, but I don’t think you could infer that from the public dialog or the legislative and regulatory results.

If you read my piece onFinding Value in Your Value Network,” you know about the PSV Matrix and how it can help prioritize and accelerate process improvement.  That can also be useful in healthcare . . . someday, but at the moment, some of the basic building blocks for process improvement are just not there.

Kaplan and Porter argue that there health care organizations have a “complete lack of understanding” of the costs to deliver care and how to compare those costs with outcomes.

WOW!  So, good luck with legislative efforts to control costs and improve outcomes with across the board cuts to reimbursements . . . and I’m not making any comment on any particular legislation, regulation, person or political party.  But charges do not equal costs and reimbursements may equal neither.

If you don’t understand your costs, then you can’t link them to either outcomes or process improvements.  The game is over before you start.

Kaplan and Porter argue that the proper goal of health care delivery is “patient outcomes achieved per dollar expended”.  That means that both costs and outcomes must be measured at the patient level, with outcomes considering survival, ability to function, duration of care, discomfort, and complications.  But, if costs are wrong and outcomes aren’t tracked, you don’t have much hope of improving either.

They propose Time Based Activity Based Costing (TBABC) and walk through an example of how to do it.  With accurate costs and outcome data, you can forecast demand, predict the resources required to meet demand, and plan and manage capacity.  You can also standardize processes and increase quality while at the same time lowering costs.  With this kind of basic foundation, the PSV Matrix can be configured for healthcare and the principles of process improvement rigorously applied.  What’s more, health care policy can focus on fostering competition and value-based reimbursement.  “Those organizations and care-givers that deliver desired health outcomes faster and more efficiently, without unnecessary services, and with proven, simpler treatment models will not be penalized by lower revenues.”

Neither the authors, nor I, are making any political point.  This is about operations and how to improve them in healthcare.  I will say that any policy that is not informed by these insights will not have the desired outcome.

My review of the article here doesn’t do it justice, but if you work in healthcare or are interested in the topic, this article and Porter’s other work in the space is a must read.  The article in the September 2011 HBR is Reprint R1109B.  I plan to order a couple of copies for friends.

I’m still on the plane.  I’m returning from San Francisco where I had the chance to attend the IBF Supply Chain Planning and Forecasting Conference where I heard a terrific presentation by John Brown of The Coca-Cola Company on supply chain risk management.  If you are part of my LinkedIn network or follow me on Twitter, you saw or can see some of the highlights of that presentation.  I also had the opportunity to listen to other great sessions led by leaders within their respective organizations and to network with lots of supply chain professionals.  Well done, IBF.

I won’t be back home until after midnight.  No complaints.  It was my choice, but I hope your Friday wasn’t spent on a plane and that your weekend will be wonderful.

Thanks for reading.

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About Arnold Mark Wells
Industry, software, and consulting background. I help companies do the things about which I write. If you think it might make sense to explore one of these topics for your organization, I would be delighted to hear from you. I am employed by Opalytics.

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