Value measurement in health care: a new perspective

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

After exception reporting identifies information relating to quality, it is entered into the information system. Exhibit 4 shows the results of applying both relevance and quality rates to activity costs. Included is the final value-adding work index (VAWI), which measures the net amount of work that adds value for the customer. Since work improvements are now measurable and the effects of poor-quality and irrelevant work now are known, managerial action can be taken. In the example, such actions should focus on improving laboratory reporting and correcting medical record problems.

In the case of quality problems related to medical record retrieval, the medical records department has responsibility for the inefficient system causing the problems. Therefore, an adjustment should be made to charge medical records for the costs incurred in the nursing services department related to medical records inefficiencies. In addition, shifting responsibility for costs also should be supported by changing performance measures away from the functional basis toward creating value for customers. When performance measures are functionally based, they promote passing problems along to other departments and detract from providing seamless service delivery.

Applying costs to services and customers. Although the HIS has already generated important new information for managers, the process is not fully complete until costs are associated along the value chain to specific services or customers. Using Exhibit 4, final activity costs (net value-adding work) are allocated to specific services and customers by using cost drivers. For illustration purposes, assume that the nurse had only one patient. Of the $3,300 total costs, the net value-adding work costs of $1,899 should be charged to the customer; however, charging the customer with irrelevant work costs of $1,137 is questionable. In addition, charging the customer for poor-quality work of $264 is inappropriate unless the costs directly relate to the actions of a specific customer.

To provide a clear picture of all the costs involved, profits from both a traditional and a horizontal system are shown in Exhibit 5. Although this illustration focuses on profitability, the HIS approach is equally important for not-for-profit organizations by identifying where processes need improvement. With the identification of non-value-adding work, managers can take steps to understand their causes.

Eliminating Non-Value-Adding Work

Management must understand the causes of non-value-adding work if they hope to eliminate it. While there are many ways to approach the problem of understanding how wasteful work is caused, the process usually begins by discussion, observation, and examination of time records.

Next, managers classify the causes of non-value-adding work as one of the following: (1) within their control (eg, improper staff scheduling), (2) outside their control (eg, the consistent late delivery of laboratory reports), and (3) problems of a long-term nature (eg, the unavailability of qualified personnel). Processes within their control should be studied and corrected as soon as possible. Problems outside of management's control should be analyzed to determine if there is a penalty that can be assessed against the offender (such as the outsourcing of laboratory tests). Problems of a long-term nature should be understood and documented so that gradual changes can be implemented whenever possible.