The Value of Key Performance Indicators for Healthcare Providers

If winning isn’t everything, why do they keep score?

                                                – Vince Lombardi

The quote above embodies the purest notion about the nature of work.  There is a scale by which we measure the success of our endeavors and someone is always keeping score.  For managers, this means there is a scale by which the consequences of our decisions and actions are measured.   Our hope is that the results of our efforts are favorable for those who entrust us with decision-making authority.  In a profit seeking organization, the shareholders, employees and customers measure the outcomes of the decisions we make and the actions we take.  In government, this task is given to the voting public.  For non-profits, managers are brought to account by fundraisers, contributors and the beneficiaries of the organization’s services.

In our world of healthcare, the ultimate trust is that which exists between our patients and us.   When they require care, they rely on us to provide the right diagnosis, early and timely treatment, and the best conditions for a complete recovery.  And yes, they too are keeping score.

Why measure?

This writer can think of at least 100 reasons why a healthcare leadership team should design and deploy a performance measurement system.  For the goals of this article, we will concentrate on the most important reasons.  First, a healthcare leadership team should deploy a measurement system to reinforce the organization’s mission.  A common joke about measurement systems is, “If we didn’t measure things, we wouldn’t know how good we are at measuring the things we are measuring!”  Yes, a measurement system should have a purpose.  Secondly, a healthcare leadership team should deploy a measurement system to promote process perfection and a reduction of medical errors.  A study recently conducted to identify medical errors asserts that as many as 90% of hospital mistakes go overlooked.  Finally, a good healthcare measurement system will associate patient outcomes with the performance and protocols of the system’s experts. Accuracy, accountability and purpose are three essential characteristics of a healthy performance measurement system, but the number one reason a healthcare organization should deploy quality metrics can be summed in one word = PRODUCTIVITY!

Now, more than ever, the healthcare industry needs to embrace the economic value proposition of improving productivity.  For the past 20 years, the industry has experienced negative productivity growth.  The economic consequences of this type of industry performance are stunning.  U.S. health care costs currently exceed 17% of GDP and continue to rise. A PricewaterhouseCoopers report projects that health care costs will increase 7.5 percent in 2013. That is more than three times the rate of inflation and the projected rate of US economic growth. That same report also notes that health insurance premiums are expected to rise 5.5 percent, in large part because employers are shifting costs to their employees.  Medicare’s Office of the Actuary forecasts that health care spending will jump to more than 7 percent in 2014.  At the same time, healthcare providers will face unprecedented cuts in reimbursement rates from Medicare and other third party payors.  The bottom line is that until true health care cost reform becomes a reality, these pressures will continue to cause problems for providers, for people’s health care and for the nation’s economy.  Healthcare organizations should use these pressures as motivation to embark upon a relentless pursuit of ever-increasing productivity.

Why is pursuing productivity so important to a healthcare delivery organization? 

Improving productivity helps providers stay in business and grow.  Improved productivity is an organizational competence that insulates healthcare organizations from destructive actions like avoid across-the-board cuts in expensive services, staff compensation, and head count.  In fact, a nationwide improvement in productivity among healthcare systems can reverse the negative economic consequences forecasted on the horizon.

Economists Mark Whitehouse and Tim Aeppel aptly describe the economic value of productivity growth in a November 3, 2006 Wall Street Journal Article:

“Productivity matters for everyone, because it provides the essential ingredient that makes nations rich!  When companies produce more for each hour their employees work, they can pay higher wages or reap bigger profits without having to raise prices. Annual productivity growth of 2% would more than double inflation-adjusted wages over 40 years, all else being equal. Add another percentage point in productivity growth, and wages would more than triple!”

What is Productivity?

Essentially, productivity is defined as output per unit of input.   As illustrated in the figure below , productivity is the difference between the value produced by an organization and the cost of the basic resources brought to bear in a productive process.

From the perspective of the patient, the ultimate measure of productivity (patient value) is the full set of favorable health outcomes over the cycle of care divided by the total cost of care of the patient’s condition.

A healthcare organization can increase productivity by doing the following:

1. Increase the number of patients served (the numerator) while keeping the cost of the inputs (denominator) fixed.
2. Keep the number of patients served constant while decreasing the cost of clinical and administrative processes.
3. Accomplish a combination of the two examples above.

Productivity and Quality in Healthcare Delivery Organizations

Harvard Professor, Michael Porter argues that quality and performance improvement are  key drivers of cost containment and higher value, where quality is health outcomes.  Stated another way, the drive for better quality of health outcomes and the drive for increased productivity are not mutually exclusive.  In fact, poor quality is not only poor for healthcare outcomes but also creates a drag on productivity.

The figure below illustrates how poor quality can cause problems for productivity.    It describes the generic equation of productivity and adds in certain non-productive outcomes organizations typically produce.  Along with salable goods and service transactions, organizations produce defects, errors, rework, customer credits, fines, accidents, lawsuits etc…  These outcomes are work products of what six sigma black belts call the hidden factory; and the costs associated with them are referred to as the Cost of Poor Quality (COPQ).  They reflect the failures and dysfunctions of organizations and rob industries of the productive use of human and financial capital.

In healthcare systems, the hidden factory can be found in both administrative and clinical areas.   A recent study found that medical errors cost Medicare more than $324 million per month.  A USA Today article reported that 80% of medical bills are inaccurate and a 2009 study conducted by University of Minnesota health finance professor Stephen Parente found up to 40% of hospital insurance claim statements contain errors.  To make matters worse, many patients are paying a heavy price for the hidden factory.   One out of every three people encounter an adverse event when admitted to a hospital, according to a recent study (4/6/2011) published in the health policy journal Health Affairs.  The study also found that the hidden factory is, indeed, hidden – about 90 percent of all hospital mistakes go unreported.

The cost of poor quality not only adversely affects patient outcomes (numerator) but also provider costs (denominator).  The High Value Healthcare Collaborative, an organization consisting of 20 major Hospital Groups who serve 70M people, estimate that the cost of the hidden factory is more than 30% of all healthcare delivery cost.  These costs create a significant drag on productivity.

Why do we measure?  We all know that what gets measured gets improved.  Healthcare leaders should deploy a system of quality and performance metrics to control and improve overall healthcare quality.

Improving Quality

The figure below is an adaptation of the Deming Chain Reaction and illustrates the affect that improving quality has on productivity.  It states that when provider organizations improve quality, their costs go down.  Their costs go down to the tune of 20 – 40% of total operating expenses.  The decrease occurs because the costs of wasted effort reworking problems, correcting medical errors, reassuring dissatisfied patients, and reconciling invoices are eliminated.  As these costs go down, productivity naturally improves.  Productivity improves because of the increased use of human capital, technology and working capital in producing favorable patient outcomes.

Better patient outcomes and the termination of the hidden factory lead to greater profit margins and enhanced economic value.  The additional economic value funds growth and innovation, which leads to improved healthcare quality and high value jobs.

Quality and Performance Metrics – Best Practices

When designing a system of quality and performance metrics, an organization should follow seven proven practices:

1. The metrics should be defined and understood by all within the organization.  Operational definitions help clearly define what is being measured.  There are three basic elements of an operational definition:  the measure, the instrument being used, and the procedure for measuring.
2. Performance metrics should be strategically integrated for tracking daily operations.  Good performance metrics are engineered based on cause and effect relationships.    In the world of statistics this is called engineering an explanatory response distinction; where the extent of an outcome is leveraged by the degree of influence a decision maker’s actions has on organizational processes.
3. Data derived from measurement systems contribute to operational and strategic decision-making.  This practice supports the principle of management-by-fact where decision makers not only understand the activities and work products of their organizational processes, but they also track performance records over time and keep numerical facts for analysis and decision-making.
4. Metrics should be compared with industry ratios and benchmarks.  Comparisons should represent best practices for similar activities, inside or outside the health care industry. Such data might be derived from surveys, published and public studies, participation in indicator programs or other sources.
5. Performance results should be trended over time and communicated cross functionally and vertically within the organization.
6. Measurements should align with organizational critical success factors and strategic plans.   Doing so empowers leadership to review progress and assess organizational performance relative to strategic objectives and action plans.
7. Metrics should ultimately impact a financial component.  Healthcare delivery organizations are not immune from the virtues or vices of capitalism.  Whether a provider is a not-for-profit organization or is held by a private sector company, it must create economic value to sustain itself.

Quality and Performance Metrics an Evaluation

Quality and performance metrics should collect an analyze data on three essential perspectives: operational excellence, value proposition, and economic value.

Operational Excellence

Operational excellence is defined as the extent to which the core administrative and clinical functions are managed efficiently.  Operational excellence is a key driver of patient outcomes and economic value.  Appropriate metrics should evaluate the extent to which the professional expertise, technology and protocols deliver care productively.  Metrics should track throughput, cycle times, cost and defect levels.

Value Proposition

Healthcare delivery organizations primarily extend value to patients, their families and third party payors.  Metrics should evaluate the quality of healthcare outcomes and the degree to which the outcomes are favorable or unfavorable over the care cycle.  They should also measure the extent to which the needs, attitudes and perceptions of the patient and their families have been served (patient satisfaction).  Performance metrics should also measure the extent to which administrative functions satisfy payor requirements.

Economic Value

Quality and performance metrics should evaluate the extent to which healthcare delivery operations adequately provide financial surpluses or profits to sustain its operations and fund long-term growth.   Performance metrics should include measures of financial return, financial viability and budget performance.

Quality and Performance Metrics – Examples

Poudre Valley Health System (PVHS) is a 2008 recipient of the Malcolm Baldrige National Quality Award.  The health system is a locally owned, private, not-for- profit provider to residents of northern Colorado, Nebraska, and Wyoming.  PVHS has an abundance of performance measures; this article provides three examples for your consideration.

Example – Operational Excellence Metric

For efficiency, PVHS’s measures OR turnaround times and measures on time first case starts as a metric for effective resource utilization.

Example – Value Proposition Metric

As the best key performance indicator of cardiac outcomes, PVHS focuses on acute myocardial infarction (AMI, heart attack) patient mortality rates for six months after hospitalization.  This metric is also viewed as a key measurement of outpatient care provided after discharge.

Example – Economic Value Metric

As a key performance indicator of economic value, PVHS monitors profit per discharge.  Profit per discharge is a critical success factor, which enables PVHS to maintain financial sustainability. The organization monitors profit per discharge to ensure the viability and sufficiency of investments for the future.

PVHS uses a comprehensive system of strategic and operational metrics by which to analyze its operations and progress towards its strategic objectives.  Does measurement work for healthcare?  The market and community it serves has many requirements, among them being serviceability, high quality care and low cost.  PVHS maintains its industry position as a low-cost provider in its market.  Since 2001, the systems charges have been consistently lower than the competition while its profit per discharge to surpassed the U.S. top 10 percent.   If you are keeping score, then you understand that PVHS is winning.

Gerald Taylor LSSMBB PMBscM  is a Managing Director for TPMG Consulting, a recognized leader in performance improvement consulting  He can be reached at:  www.helpingmakeithappen.com

At TPMG Consulting, we have developed an effective approach to Performance Analytics. It’s called FOCUS®. The approach is built on one basic principle: concentrate on improving those activities that enhance patient satisfaction, improve healthcare outcomes and reduce the cost of care.   To learn more about establishing a system of Key Performance Indicators in Healthcare, Click:  TPMG Healthcare Key Performance Indicators and Dashboards

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