A remedy for the broken economics of health care

Ineffective measurement of processes and performance are causing nasty side effects, including inefficiencies and squandered cost savings, for organisations around the world.

That was the message delivered by Harvard Business School Professor Robert Kaplan at a CGMA lecture in London on Tuesday marking the 20th anniversary of the Balanced Scorecard, the strategy performance management tool he created with David Norton.

Addressing delegates at the Anthony Howitt Lecture, Kaplan used work he has been doing around activity-based costing in the US medical sector to outline how organisations can reap savings by measuring costs “properly and accurately”.

When Kaplan began the project a few years ago, the medical profession stood out from other sectors as it had not yet found a way to properly measure its costs. The traditional “fee-for-service” system meant that different hospitals were delivering exactly the same procedures, with exactly the same outcomes, but at very different prices, based on their status, lobbying power or prestige.

Payments were unrelated to outcomes, Kaplan said, which meant unnecessary procedures were sometimes performed. In addition, where hospitals were paid a fee “per patient”, there was a danger hospitals would start cherry-picking patients on the basis of the costliness of the care.

“There was a need to think about health care, not from the point of view of how it is funded, but how it is paid for – the cost of clinicians, administrative staff, other personnel and processes, etc. – and how we could pay for it in ways that add more value, providing better outcomes at a lower cost,” Kaplan said.

Measuring costs effectively

To provide better incentives to improve outcomes while reducing costs, what was needed was an approach that pays a fixed amount for treating a particular medical condition, Kaplan said, whether an orthopaedic condition or a cancer treatment, for example.

“This approach allows you to get a portfolio of physicians, other medical personnel and administrative people together to focus on a single medical condition,” he explained. “You can then add up the cost of that unit of people and see clearly your combined costs for treating that condition. Once you have that, the medical team can focus on improving outcomes – successful treatments or procedures – and the cost does not rise because it is set by the treatment of the condition.

“The key to achieving this is measurement,” Kaplan said. “You have to be able to effectively measure outcomes … and you have to measure what it costs to get to that outcome.”

To provide exact costs for treatments, Kaplan and his team created process maps for the journey patients made, which considered a number of factors, from working out exactly who is responsible for procedures and processes and how many of those individuals were needed to meet the required outcomes. This was done resource by resource, measuring the total cost over a complete cycle of care. Indirect and support costs, traditionally referred to as “overheads”, were also factored in and tied to the individual employee, helping to give a true reflection of the cost required for that treatment.

This process identified a number of cost-saving opportunities. In one case, it revealed that expensive clinicians were being used to make phone calls that could be handled by less expensive staff. It also highlighted that, in costly ultrasound rooms, where patients needed two procedures on the same day but some time apart, they were asked to wait in those rooms between procedures. A simple move to a new location during that waiting period freed up the room, which in turn helped improve outcomes by allowing more people to have ultrasounds done more quickly.

“Now that is a cute story of a single example, and one that will not change the future of health care on its own,” Kaplan said. “But there are thousands of these opportunities in every provider organisation, and that is where we are going to win this battle. It’s not one magical thing – it’s taking all the inefficiencies and the waste that have built up over the decades when we didn’t have accurate measurements.

“There are many opportunities to attack inefficiencies. In another example, we found 12 orthopaedic clinicians using 12 different practices. We saw a three-to-one cost difference on the same procedure. The outcomes were all the same, so what’s the point of all that variation? Our process allows us to standardise procedures and adopt the ones with the lowest costs – but which result in the same outcome.”

Learning for other industries

Kaplan added that the work set out valuable lessons for other sectors.

“Of course, history has already shown that removing inefficiencies is relatively simple to action once measurements are in place. And cost accountants already know how to do much of this stuff because it’s called cost-variance analysis,” he said. “Doing something so simple as variance analysis to reduce costs is fantastic for finance people. But you have to have the measurement in place to do it. Otherwise, it’s impossible.”

Related content:

The Future of the Balanced Scorecard”: Kaplan and Norton offer insight into how the Balanced Scorecard can be used to maximise future opportunities.

The Big Idea: How to Solve the Cost Crisis in Health Care”: In this Harvard Business Review article Robert Kaplan and Michael Porter examine the fallout of poor health costs measurement.