Value-Based Health Care:

Reconciling Mission and Margin

Bob Kaplan, Senior Fellow and Marvin Bower Professor of Leadership

Development, Emeritus
 Health Care Value-Based Delivery
Use Competition to Drive the Greatest Value to Patients

The central goal in health care must be value for patients, not
access, volume, convenience, quality, or cost containment

Health outcomes
Value =
Costs of delivering the
outcomes

The unit of analysis for creating and measuring value is the treatment
of a patients medical condition over a complete cycle of care.

1. Outcomes: the full set of patient health outcomes over the care
cycle
2. Costs: the total costs of resources used to care for a patients
condition over the care cycle

Copyright Harvard Business School, 2015 2

 Patient-level outcomes and costs should be measured over
a complete cycle of care for a clinical condition

Assess Assess Schedule

Patient Procedure Recovery
appropriateness risk OR
problem

MD Possible need Shared Pre- Tier 1,2 Tier 3

encounter for procedure decision procedure outcome outcome
making testing measures measures

Source: Tim Ferris, MD, personal communication

Copyright Harvard Business School, 2015 3

 For chronic medical conditions and population-based
care, measure outcomes and costs over an annual cycle.
S Specialist PCP
IPU
Visit
follow-up

Case Case
Management Management

PCP PCP
Follow Up Visit

Specialist
IPU Visit Case
Management
Copyright Harvard Business School, 2015 4
Creating a Value-Based Health Care System

1. Organize Multi-disciplinary teams around the patients

medical condition

2. Measure and communicate Outcomes by medical condition

3. Measure and improve Costs by medical condition

4. Develop Bundled Payments to compensate providers for

treating the medical condition

Copyright Harvard Business School, 2015 5

Creating a Value-Based Health Care System

1. Organize Multi-disciplinary teams around the patients

medical condition

2. Measure and communicate Outcomes by medical condition

3. Measure and improve Costs by medical condition

4. Develop Bundled Payments to compensate providers for

treating the medical condition

Copyright Harvard Business School, 2015 6

 A case study in multi-disciplinary care and outcomes measurement:
The Martini Klinik Prostate Cancer Surgery Center in Hamburg

Professor Dr. Hartwig Huland

Founder and Chief of Martini Klinik

Copyright Harvard Business School, 2015 7

 Clinical and Staff Resources Contained within Martini Klinik

Personnel
Faculty: Urological Surgeons (9)
Peri-operative staff: nurses (39) [dedicated to prostate cancer]
Physiotherapists
Psychologists *
Oncologists *
Anesthesiologists *
Social Workers
Biostatisticians for clinical trials and outcomes measurement

Facilities
Operating rooms (4) [dedicated]
Inpatient ward
Physiotherapy unit
Outpatient clinic
Central Administration and Scheduling

* Employed by Hospital Department but dedicated to Martini Klinik

Copyright Harvard Business School, 2015 8

 Outcomes Measurement at Martini Klinik
Prostate Cancer Surgery Center in Hamburg

Started outcomes measurement in 1994 (Huland, German surgeons

typically do not know what happens to their patients.)

Initially data recorded on Excel spread sheet, now on electronic data

base

Outcomes data measured pre-surgery, at discharge from MK, and,

post-discharge, 3 months, 1 year, 2 years, and 3 years.

2013: 1,200 surveys per month; 90% return rate (multiple phone
reminders)

Data base on 20,000 prostate cancer patients

Collecting molecular genetic data for every tumor tissue sample

Copyright Harvard Business School, 2015 9

 Outcomes Measurement at Martini Klinik

Every six months, MK holds a 3 hours quality review meeting to

analyze outcomes at individual surgeon level
Biostatistician from Outcomes Study Group presents the data and
frames the discussion
Shows risk-adjusted outcome measures by faculty member and surgical
technique; explored the trade-offs between clinical metrics (surgical
margins to remove all cancer) versus incidence of complications
Surgeons with higher complication rates asked to have more
experienced surgeons assist in their surgeries
Surgeons with excellent results observe surgeons with below average
outcomes.
o After one six month period in which his positive surgical margins had
increased from 5% to 8%, Dr. Huland, founder and head of MK,
entered training with junior surgeons who had better performance.
o Dr. Hulands subsequent incidence of positive margins dropped to
3.5%.

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 Outcomes Measurement at Martini Klinik

Annual Public report (also on MK website)

o Disease-specific survival rates
o Continence rate
o Potency rate

o BCR (biochemical recurrence, by age group and cancer stage)

Copyright Harvard Business School, 2015 11

Prostate Cancer Outcomes in Germany

Average hospital Best hospital

94%
5 year disease specific survival
95%

75.5%
Severe erectile dysfunction after one year
17.4%

43.3%
Incontinence after one year
9.2%

Copyright Harvard Business School, 2015 12

Martini Klinik Outcomes versus the average German hospital
Average hospital Best hospital

94
5 years disease specific survival
95

75.5
Severe erectile dysfunction
17.4

43.3
Incontinence
9.2

Percentage of patients treated

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 Use a Radar Chart to Display and Report Value:
Outcomes and Cost for a Treating a Medical Condition
Illustrative
Outcomes and Costs for Brachytherapy Treatment for Prostate Cancer

Notes: A score of 100 represents ideal performance on the measure. TDABC stands for Time-Driven Activity-Based Costing and is a
measure of the cost incurred by the provider of the treatment.
Source: International Consortium for Health Outcomes Measurement

Copyright Harvard Business School, 2015 14

 Radar Chart for Alternative Prostate Cancer Treatments
Comparing Three Types of Prostate Cancer Treatments Illustrative

Notes: A score of 100 represents ideal performance on the measure. Reciprocal of cost is a measure of the cost incurred by the provider
of the treatment.
Source: MD Anderson Cancer Center
Copyright Harvard Business School, 2015 15
 Using Radar Charts to Compare the Value Delivered by
Surgeons for Alternative Bariatric Procedures
Illustrative
Comparing Performance of Three Bariatric Surgeons Across Two Types of Procedures
Surgeon A Surgeon B Surgeon C
Gastric Bypass Procedures Laparoscopic Sleeve Procedures

Reciprocal of Cost Reciprocal of Cost

100 100
90 90
80 80
70 70
BMI Change (weight 60 BMI Change (weight 60
50 Mortality 50 Mortality
loss) loss)
40 40
30 30
20 20
10 10
0 -

Reoperation Rate Complication Rate Reoperation Rate Complication Rate

Readmission Rate Readmission Rate

Notes: A score of 100 represents ideal performance on the measure. Reciprocal of cost is a measure of the cost incurred by the provider
of the treatment.
Source: Author analysis of data provided by Scottsdale Healthcare (now part of HonorHealth)
Copyright Harvard Business School, 2015 16
 International Consortium for Health Outcomes Measurement (ICHOM)
is Developing Outcome Standards for Multiple Medical Conditions

Conditions in Year One Conditions in Year Two Conditions in Year Three

(2013) (2014) (2015)
Coronary Artery Disease Parkinsons disease Dementia
Lower Back Pain Cleft Lip and Palate Heart Failure
Cataracts Stroke Inflammatory bowel
disease
Localized Prostate Cancer Hip and knee osteoarthritis
Frail elderly
Macular degeneration
Brain tumors
Lung cancer Breast cancer
Depression and anxiety Colon cancer
Advanced prostate cancer Pregnancy and childbirth
Cardiovascular health
Traumatic brain injury
Overactive bladder (TBC)
Hemifacial microsomnia
Burden of
Disease
Covered 18% 35% 45%

Copyright Harvard Business School, 2015 17

Creating a Value-Based Health Care System

1. Organize Multi-disciplinary teams around the patients

medical condition

2. Measure and communicate Outcomes by medical condition

3. Measure and improve Costs by medical condition

4. Develop Bundled Payments to compensate providers for

treating the medical condition

Copyright Harvard Business School, 2015 18

 Poor cost measurement causes communication failures
between clinical personnel and health care administrators.

I became a physician You need to reduce

to cure patients and headcount and cut costs
save lives. and do it now!

Mission vs. Margin

Copyright Harvard Business School, 2015 19

 Time-Driven Activity-Based Costing (TDABC) enables
accurate Patient Level Costing

What activities are performed over the care

Determine cycle for a medical condition?
1 the Care
Process Who performs each activity?
How long does each activity take?

Calculate What is the cost per unit of time for each type
2 Cost Rates of personnel?

Account for What materials, supplies, and drugs are

3
Consumables consumed during the care cycle?

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 Measuring Costs Correctly
Develop process maps for the care cycle
Level 1: Overall care cycle

Level 2: Studied care cycle

Map 2 : Map 3: Day Map 8:

Map 1: Map 5: Post-
of surgery Map 4: Map 6: Map 7:
Surgical Pre-operative anesthesia Follow-up
pre-operative Operation Discharge Rehabilitation
consultation testing care unit visit
prep

Level 3: Process maps for studied care cycle

Map 2

Copyright Harvard Business School, 2015 21

 Clinical and administrative teams work collaboratively
to identify:
Process-Steps: All the
administrative and clinical
process-steps used over
a patients complete cycle
of care for a medical
condition

Resources: personnel,
equipment, consumable
medicines and supplies
used at each process
step

Time Estimates: The

personnel and equipment
time used at each
process step for that
patient

Copyright Harvard Business School, 2015 22

 TDABC Step 2: Calculate the Capacity Cost Rate for each
type of personnel and resource

Costs: All the costs (salary, fringe benefits, occupancy, support resources)
associated with having that person (or piece of equipment) available to
treat patients

Capacity: The capacity (time) that each resource (personnel, equipment)

has available for treating and caring for patients
o Number of days person shows up, available for clinical work
multiplied by
o Number of minutes available per day for patient-related work
(net of breaks, meetings, training, education, etc.)

Capacity Cost Rate ($/minute) = Resource Cost/ Resource Capacity

Copyright Harvard Business School, 2015 23

 Capacity Cost Rates ($/minute) for clinical and staff people

Physician X-Ray Office

Surgeon Assistant RN Tech Scribe Assistant

Total Clinical Costs $546,400 $120,000 $100,000 $64,000 $51,000 $61,000

Personnel Capacity (minutes) 91,086 89,086 89,086 89,086 89,086 89,086

Personnel Capacity Cost Rate $6.00 $1.35 $1.12 $0.72 $0.57 $0.68

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We compute total patient-level care costs by multiplying capacity cost
rates by process times and summing across each patients cycle of care

Minutes Cost/ *Total

minute
Initial consultation
MD X1 Y1 136.13
RN X2 Y2 68.04
CA X3 Y3 6.17

ASR X4 Y4 15.74

$266.08

Surgical procedure MD X1 Y1 584.99

Anes. X2 Y2 603.89
RN X3 Y3 136.29
Tech X4 Y4 97.82
OR X5 Y5 329.16

$1752.15

Follow-up or post-operative visit MD X1 Y1 55.19

RN X2 Y2 13.61
CA X3 Y3 3.09
ASR X4 Y4 1.77

$73.66
Source: Meg Abbott, MD & John Meara, MD Boston Childrens Hospital
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 Time-Driven ABC breaks down the wall, enabling productive discussions
between clinical and finance personnel

By standardizing on this
procedure and we can achieve We can skip this
consistently excellent outcomes process and save
at lower cost. $120 per patient.

Copyright Harvard Business School, 2015 26

 HBS cost measurement & management project areas
Chronic and Primary Care Episodic Care
Bariatric surgery
Chronic kidney disease
Bone marrow transplants
Care transitions/preventing Cervical spine surgery
readmissions Child birth and pregnancy
Congestive heart failure Colonoscopies and EGDs
Heart valve replacements and repairs
Diabetes
Head and neck cancers
Palliative care Hysterectomies
Primary and psychiatric care for Interventional radiology
patients with intellectual disabilities Joint replacements
Mastectomies
Neurosurgical procedures
Ancillary and Indirect Observation patients
Percutaneous coronary interventions
Radiology Prostate cancer surgeries and radiation
treatments
Pharmacy Rotator cuff repairs
Billing Tonsils & adenoids
Copyright Harvard Business School, 2015 27
 Cost measurement & management partner organizations

30 hospitals participating in a Joint Replacement

Learning Community
Copyright Harvard Business School, 2015 28
 Joint Replacement Learning Community: Range in total personnel and
consumable costs for Total Knee Arthroscopy (TKA)

Indexed TKA Total Personnel and Consumable Costs at U.S. Organizations

200
2.3x Ratio of
180 90th to 10th 184
160 Percentile
155
140 90th percentile 138
135
120 122
115 75th percentile
100 100 Median
86
80 77 25th percentile
60 58 2.1x Ratio of
10th percentile
40 90th to 10th
20 Percentile

0
Personnel Consumables
N = 27; scope of care is decision for surgery through discharge plus follow-up visits
within 90 days
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 Large productivity differences exist between providers

Number of Joint Replacements Number of Operating Rooms (OR)

Performed per Day per Surgeon with Used per Day by Ortho Surgeons in
Similar Cut to Close Times Joint Replacement Program

12
10
10

8 7
2 ORs 1 OR
6
45% 55%
4 3

0
Surgeon Surgeon Surgeon
A B C

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 Space & equipment costs are much lower than personnel
costs

Operating Room Cost per Minute of Time

Data are illustrative
Personnel Equipment Space

Shoulder surgery $20/min $.25/min $.55/min

at Hospital A

Cardiac surgery
$20/min $1.30/min $.40/min
at Hospital B

Knee surgery $25/min $.25/min $.35/min

at Hospital C

Copyright Harvard Business School, 2015 31

 Discharge disposition, not readmissions, primary driver of
variation in post acute care spend

Skilled
Quartiles of Post Home w/ Home Inpatient Nursing Readmiss Standardized
Acute Care Spend Outpatient Health Rehab Facility ions Cost
Highest 4% 42% 24% 29% 3% $6,688
2nd Highest 17% 50% 4% 29% 3% $4,911
2nd Lowest 23% 57% 7% 13% 3% $4,330
Lowest 44% 42% 4% 10% 2% $3,664

Organizations were categorized into quartiles based on their standardized post acute
care costs; the percentages reflect the averages for each quartile of organizations

N = 27
Copyright Harvard Business School, 2015 32
 The financial opportunity from using best practices to
move to the next bracket.

Total Personnel and Consumable Costs

Percentage Savings
Improvement TKA THA
90th to 75th 15% 14%
75th to 50th 8% 16%
50th to 25th 13% 13%
25th to 10th 12% 12%

Moving to next bracket produces an annual savings of > $1 million for an

organization performing 800 TJRs

Copyright Harvard Business School, 2015 33

Creating a Value-Based Health Care System

1. Organize Multi-disciplinary teams around the patients

medical condition

2. Measure and communicate Outcomes by medical condition

3. Measure and improve Costs by medical condition

4. Develop Bundled Payments to compensate providers for

treating the medical condition

Copyright Harvard Business School, 2015 34

 Value-Based Bundled Payment

A single payment for treating a patient with a specific medical condition

across a full cycle of care.
The payment is contingent upon achieving good patient outcomes, with
both the payment and outcome targets risk-stratified by the complexity
of a provider groups patient population.
Payment should cover the costs of efficient and effective care providers
Contract specifies limits of responsibility for unrelated care needs and
catastrophic events.

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A Bundled Payment for complete treatment of a medical condition is the
only reimbursement approach aligned with delivering value to patients

Global provider
budgets

Bundled
Fee for payments Global
for specific capitation
service
medical
conditions

Copyright Harvard Business School, 2015 36

 Joint Replacement Surgeries in County of Stockholm

Patients were on waiting lists for up to two years, and they were suffering and
many were on sick leave. We would tell providers to do more procedures, we
would offer more money. It was never enough. There was still waiting.
Loss of work due to pain and disability
Stockholm County had to pay out-of-county providers to supplement
backlog in Stockholm

Swedish Health Care System: Global Provider Budgets

Hospitals reimbursed on prospective volume so little incentive to work
harder, faster or smarter to eliminate the backlog
Hospital payments not linked to quality, outcomes or cost
Salaried physicians

Health Authority Goals

o How to motivate providers to perform more replacements
o Improve outcomes
o Reduce complications and readmissions
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 New bundled payment introduced for total joint
replacements
Fixed fee to cover physician fees, all other personnel costs,
occupancy in hospital, drugs, prosthesis (implant), tests, supplies
o Outpatient rehab and additional inpatient rehab not included
(would remain under the previous system)

Cycle of care: Pre-op consultation, surgery, inpatient recovery, one

follow-up visit

Risk adjustment: Low risk surgeries (ASA 1 and 2, ~80% of all

patients) would be reimbursed under the bundle. Surgeries on ASA
3 and 4 patients remained under the previous system

Warranty or guarantee for two year cycle of care (extended to 5

years if complication within 2 years)
Exclude care for non joint-replacement conditions; hip
dislocation

Prosthesis must have 10 years of data; 96% survival rate

Copyright Harvard Business School, 2015 38
 Hip and Knee Replacement Volume: Pre and Post
Introduction (2009) of OrthoChoice in Stockholm County

Copyright Harvard Business School, 2015 39

 Patients waiting time decreased and costs decreased.

In one year, % of patients waiting at least 90 days for

treatment declined from 33% to 13%.

Average pre-operative sick leave decreased from 50 days

(2008) to 39 days (2009)

Surgery queue disappeared by 2011

Per-procedure cost for joint replacements had declined by

17% in 2011 compared to 2008.

Complication rate dropped from 6.3% to < 4%.

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 MD Anderson negotiated a bundled payments contract
with its largest private insurer, United Health Care

The Dallas Morning News

15 December 2014

UTs M.D. Anderson Cancer Center,

after a tune-up with the Harvard
Business School, is launching a pilot
program using bundled payments for all
the care that neck and head cancer
patients will receive in a year. Its a big
break with fee-for-service medicine and
one way to try to hold the line on the
cost of care.

Copyright Harvard Business School, 2015 41

To learn more about the value framework, participate in
Porter and Kaplans upcoming HBS executive programs
Value Measurement for Health Care
December 14-16, 2015

Strategy for Health Care Delivery

January 11-13, 2016

42
By measuring outcomes and cost, by medical condition, over full
cycles of care, we create a Value-Based Healthcare System

1. Organize Multi-disciplinary teams around the patients

medical condition

2. Measure and communicate Outcomes by medical condition

3. Measure and improve Costs by medical condition

4. Develop Bundled Payments to compensate providers for

treating the medical condition

43