Value measurement in health care: a new perspective

Healthcare Financial Management, August, 1999 by Jeffrey E. Michelman, Patricia E. Rausch, Thomas L. Barton

Providers essentially have two customer groups to satisfy: consumers who demand more value and payers who demand lower prices. Given the right tools, a provider may be able to satisfy the demands of both consumers and payers by providing more value-adding services that are responsive to changing market demands and eliminating non-value-adding services that drive up costs.

A horizontal information system measures the quality and relevance of business processes across the value chain. This system can help healthcare providers to identify work activities that are relevant to customers and provides managers with information about how work activities relate to specific costs throughout the delivery process,a Such information usually is not provided by the various new costing systems generating information regarding product and service profitability; therefore, managers do not have the "real numbers" needed for proper decision making.

An analysis of the elimination of non-value-adding work (NVAW) explains how a horizontal information system could be used to provide useful decision-making information in the healthcare industry. Specifically, a horizontal information system bridges the gap in activity-based management systems by analyzing the quality and relevance of specific work activities. The horizontal information system begins by studying how individual workers spend their time and by using a value-adding work index (VAWI) to measure the net amount of work that adds value for the customer. Exceptions are the basis for reporting, that is, employees report only on tasks that they are not supposed to be doing, such as correcting someone else's mistake or completing duplicate paperwork.

Eliminating NVAW as a Solution to Declining Profits

Typical actions managers make in response to declining profits are as follows:

* Across-the-board budget cuts,

* Salary freezes, and

* Workforce reductions.

Unfortunately, these traditional approaches do not solve long-term needs and instead create a vicious cycle of further declining profits. For instance, cutting the workforce leaves the same workload for fewer employees to complete. These cuts cause morale to fall, which then causes the best employees to seek employment elsewhere. In addition, customer service suffers when employee morale is poor. The result is that patients dissatisfied with services may select a different physician or hospital in the future as allowed by their insurance coverage.

A better response to declining profits is to improve processes by eliminating wasteful work. The elimination of non-value-adding work allows employees to devote more time to actual value-adding work. (Value-adding work is considered to be that for which the final bill-paying customer is willing to pay.)

Using the example of a nursing services department, the most obvious type of value-adding work is patient care. For instance, when the nursing department eliminates unnecessary paperwork, nurses can increase the number of direct patient care contacts. The ability to produce more value-adding work with the same level of resources (ie, nursing staff) by eliminating non-value-adding work (ie, paperwork) is more cost-efficient and provides more customer satisfaction. Another benefit of eliminating wasteful work is that employees are more satisfied with their jobs, and they are more willing and able to offer high-quality patient care.

How to Identify Value-Adding and Non-Value-Adding Work

To begin identifying the relevance of various work activities, employees should divide activities into three categories: primary, secondary, and non-value-adding. Primary work is that which is completely relevant to customer needs. Secondary work is that which is only partially relevant to customer needs. Non-value-adding work is that which is completely irrelevant to customer needs. Exhibit 1 shows an example of how nurses might break down their work activities and define each activity's relevancy using a numeric range.

The relevance of various activities to cost then must be determined. Such a determination takes into consideration factors such as quality, work commitment, value creation, organizational learning, employee satisfaction, and, most importantly, customer satisfaction. An activity ledger (AL) that is run parallel to the general ledger (GL) is used to extract this information. Both ledgers use the same cost database; however, the activity ledger is not classified according to the general ledger chart of accounts. Instead, the basis for AL classification is activities, such as attending staff meetings, obtaining training, and so forth.

Although the same cost database is used for both the GL and the AL, the analysis is quite different. Analysis begins by translating the GL costs into AL costs and is then followed by eliminating the cost of irrelevant work. Next, the cost of poor-quality work is eliminated. The remaining value-adding work costs are applied to specific services or patients.

Translating the GL costs to AL costs. The translation of GL costs into AL costs begins with a time study grouped by standard activities for an individual employee. While time studies should be done annually at a minimum, they can be done whenever there is a significant shift in the way an employee spends his or her time.