Spotting value analysis as the strategic tool it is

Healthcare Purchasing News, June, 2008 by Andrew Knight

Materials managers have been using value analysis as a tool to control costs and improve standardization for some time now but value analysis has been underutilized as a means to drive strategic supply cost initiatives.

In the purest sense, value analysis is a cross-functional process used to improve and analyze the value of a product, system or service. The focus is on the analysis of function relative to the cost of the service or function provided. The overriding goal of a value analysis program is to decrease cost while improving performance and quality.

First, what is meant by strategic? By definition, strategic means having an impact outside your own department or helping the organization fulfill or meet its intended goals. How can value analysis become a strategic internal resource to the organization for overall expense management? While we know that chasing cost has it limits, and most materials managers have reached a plateau in this area, a value analysis program can assist the materials manager in making that jump from "chasing cost" to ensuring that the program is aligned with the goals of the organization. Two parts of value analysis system we will discuss are the actual process and the effective utilization of data.

The process

With value analysis, the value of a product can be determined if the product has appropriate performance and cost. Value can be improved by increasing the performance of a product or by decreasing its cost. In most cases, value analysis follows a set process and these programs generally fit into the following format.

[ILLUSTRATION OMITTED]

The process begins with the submission of a product request and ends with the request either being approved or denied. While this is extremely high level and simplistic, many can relate to this flow. If you have not already done so, it is recommended that you map out your own process. It is important when looking at your process to determine where it ties in with contracting and purchasing. Is the program integrated into the organization? Or is it operating in a silo?

For value analysis to be truly effective on a strategic scale, it needs to be cross-functional and engage all relevant disciplines. Therefore, a value analysis program should be organized around or across service lines. This enables assessment of all the costs that are generated to provide care including high-cost devices and implants, pharmaceuticals, and blood products as well as clinical drivers such as length-of-stay. By connecting value analysis with service lines, the focus is not only on costs, but also on patient outcomes, safety and quality. Admittedly, organizing your value analysis team around service lines may be difficult, but at the very least, the method by which the data is analyzed and used should be organized in this manner.

The data

Accurate, timely data is just as fundamental to a successful value analysis system.

To decrease costs strategically, or across service lines, data must be acquired and analyzed at many different levels. Analysis should start with the hospital general ledger and drill down to patient-specific or actual procedural information. Since all organizations are different, it can be difficult to find and extract the appropriate data. However, the purpose in doing so is to obtain a clear picture of costs at all levels--one that integrates supply costs with what is happening at the bedside. A data hierarchy for drilling down to the procedural level can be followed:

* Overall Hospital General Ledger Data

* Service Line Data

* MSDRG and/or ICD-9

* Physician Cost by DRG

* Physician Utilization, i.e., Drugs and Supplies

* Patient Specific

What are the benefits of observing and presenting information in this way? The data are focused on supply cost in context with revenue rather than supply cost alone. It provides a better means of explaining variances due to uncontrollable variables. Understanding the types of procedures performed at your organization can have a major impact on costs and assist in explaining variances. Lastly, presenting data with profitability and physician-specific utilization data helps build credibility with physicians, making that much-needed collaboration easier.

Integrating this data into usable information can be challenging for the materials manager because of disparate data sets and errors. It is especially important that the materials manager and/or value analysis professional develop a system to scrub the data into a usable format. Additionally, organizing by service line is a good place to start and create structure. Starting at this level will help establish a usable framework from which to drill down. Once this point is reached, sound decisions can be made to determine the exact impact a change in product or utilization will have. By presenting data at the service line-procedural level, the materials manager also helps strengthen his or her connection with the clinical end-user.

For materials management professionals to have a more strategic impact, they need to utilize their value analysis process as more than a vehicle for standardization. Value analysis must be built around a sound, concise system that seamlessly integrates purchasing and contracting to facilitate the overall process rather than having it be an afterthought.