From the PresidentClarke FY12 

Richard L. Clarke, DHA, FHFMA 

"Each year, I can point to thousands of Intermountain patients who would have died but did not.... We have also taken well over $150 million in variable costs out of Intermountain in the last couple of years. That's a massive ROI."

This quote comes from an interview I did with Brent James, MD, chief quality officer at Intermountain Healthcare, which appears in this issue of hfm. The quote demonstrates the significant benefits of a value focus.

Historically, improved quality (measured by reduced harm, improved outcomes, and enhanced patient experience) was assumed to increase costs. In fact, many healthcare leaders and purchasers believed that higher cost was a proxy for higher quality. However, a majority of outcomes and comparative effectiveness research has found little relationship between the quality of a service and its cost. And much of the research has found that increased services often reduce quality. Given these research findings, purchasers (employers, government, and consumers) increasingly are focused on the value they receive from services by measuring both quality and payment (or cost).

This desire of purchasers to focus on value is driving changes in payment systems such that providers are more accountable for quality and cost. Accountable care organizations, value-based purchasing, and bundled payments are all attempts by purchasers to induce both high quality and low cost for the services they purchase. And as noted in other articles in this issue of hfm, sustainable cost management is a key survival strategy for most healthcare organizations, given ongoing governmental deficits.

So what is the ROI of value? James identified two important components of this return: improved safety and reduced variable costs associated with reduced unnecessary services. Additionally, a reduction in unnecessary services increases overall throughput, decreasing the need for additional fixed costs associated with facilities, equipment, and staffing. More patients can be seen when throughput is increased, allowing potentially more volume to be handled with existing fixed costs-and driving more revenue.

The concern about this ROI concept is that currently these "unnecessary services" drive revenue under volume-based purchasing, and reducing these services reduces volume and revenue. This concern quickly is becoming less important because major payers are no longer paying for what is viewed as unnecessary, inappropriate, or of low quality. Medicare's preventable readmission and value-based purchasing programs are examples of this change. And increasingly, as improved quality and cost transparency is available to purchasers, especially consumers, patients will migrate to those organizations producing better value.

The focus on value promotes improved clinical and administrative processes, which improves outcomes and the patient experience. Another benefit is reduction in variation and unnecessary, non-value-added activities, which in turn reduces variable costs and some fixed costs. Increased value potentially increases a healthcare provider's volume of patients and purchasers, resulting in lower per-unit total costs as the remaining fixed cost is spread over a larger base. By driving value, providers will improve quality, reduce cost, and increase the volume of patients associated with them. This is the value ROI. 

Publication Date: Thursday, March 01, 2012

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