The cost of poor quality: an opportunity of enormous proportions - Quality Improvement

Jay M. Hughes

THE YEAR WAS 1988 AND OUR INSTRUCTOR WAS reviewing the cost of doing business. She told us that from the standpoint of quality, business costs may be divided into three categories: (1) the cost of productive work, (that which is appropriate and efficient); (2) the cost of assuring that work is and remains productive (developing, studying, and acting upon indicators to ascertain that work remains appropriate and efficient); and (3) the cost of nonproductive work, (work that is not appropriate and/or efficient), referred to here as the Cost of Waste (COW).

The cost of productive work is incurred while making a product or performing a service that conforms to requirements as defined by the customer and agreed to by the supplier. It is a necessary cost. The cost of assuring that productive work remains appropriate and efficient is also necessary, but generally amounts to less than 3 to 4 percent of an operating budget. (1) The COW on the other hand, is an unnecessary and undesirable cost incurred when work Is not appropriate and/or is not efficient. Either the wrong thing is done or the right thing is done incorrectly. Such nonproductive work results in a cost of material waste, rework, squandered personnel time, hassles, customer and employee dissatisfaction, in creased possibility of poor clinical outcomes, potential loss of managed care contracts, and, sometimes, legal and regulatory punishment.

As a group, we were impressed when our instructor claimed that the COW absorbs anywhere from 20 to 35 percent of gross revenues or budget in manufacturing and service industries. What she did not know, however, was that quality engineers who consulted with clinics and hospitals during the National Demonstration Project for Quality Improvement in Health Care agreed that the cost of nonproductive work (COW) in medicine might well exceed 40 to 50 percent of the total health care dollar. (2) Regardless of the exact percentage, such numbers would suggest that the Cost of Waste in any industry presents a financial opportunity of enormous proportions. (3)

COW is no stranger to health care

The Cost of Waste concept is no stranger to health care. One need only peruse the quality literature to find report after report documenting remarkable financial savings enjoyed by hospitals and clinics which have reduced their COW by improving both administrative and clinical services. 4.0 Although a focus on cost may be disturbing to the traditional clinician, it must be admitted that the quality improvement movement in health care may have been slow in coming had there not been an unprecedented purchaser demand, and a correspondingly unabashed provider effort to cut costs. Nor can it be reasonably claimed that efforts to cut costs are categorically bad. In fact, the invitation to save money has proven to be a powerful driver for performance improvement when such savings result from eliminating inappropriate and inefficient work.

Cost-driven quality improvement in hospitals

Cost has been documented as a powerful driver to improve CABG surgery. Prior to the mid-1980s, that procedure, like most care processes, showed unexplained and largely unexamined variation in incidence, process, and outcome.

* Abbott Northwestern was one of the first hospitals to respond to the cost demands of the new managed care marketplace. reducing COW by employing the tools and techniques of continuous quality improvement to analyze and improve its care process. Abbott Northwestern improved the quality of care and reduced variation of the CABG surgery process. (4) The annual COW was a $2,000,000 savings.

* Others followed. Borgess Medical Center, responding to the demands of a regional health care coalition, employed a benchmarking process to reduce costs and improve CABG surgery. Our customers were sending us a clear message--fine tune your practices and control your costs." said Timothy Stack. President and CEO of Borgess Medical Center. Employing MediQual's CABG benchmarking program. Borgess developed clinical paths, reduced length of stay by 1.4 days, maintained mortality at 2.7 percent, and reduced average total charges. (5) The annual COW was $1,533,000 in savings.

The fact that such successes came so quickly may have surprised purchasers and providers alike and suggested that there was a great deal of cost to be wrung out of the health care system. Purchasers, benefiting from these successes, became increasingly proactive by merging their health care needs and forming even more powerful coalitions. TQM-conscious hospitals, forced by serious financial threats, responded by reducing and eliminating nonproductive. inappropriate, and inefficient care.

* By developing a critical path and instituting same-day admissions for all total joint replacement patients, Jewish Hospital of Cincinnati reduced LOS by 61 percent. Quality indicators were better than those of benchmark organizations. (6) The annual COW was a savings of $1,000,000.

* An expanding health care coalition began to exert cost and quality pressures on providers in the Orlando area. Winter Park Memorial Hospital was one of many forced to examine its costs if it wished to remain competitive and viable. Following Philip Crosby's Quality Improvement Process, hospital management examined multiple processes and estimated a cumulative COW of $8,500,000. Improvements in individual processes ranged from $200 to $1.2 million in annual savings. (7) The annual COW was $1,200,000 in savings.

Today, such reports are not unusual. In fact, the literature is replete with process improvements and reengineering efforts driven by external cost demands.

* Northwest Hospital in Seattle invested in hospital-wide cost reduction and QI training. By targeting OR start times, overtime expense dropped $60,000 the first year and $312,000 in the following nine months. (6) The annual COW was 312,000.

* More recently, Morton Plant Health System reported that organization-wide clinical process improvement teams addressing 35 APR-DRGs decreased charges by $22,733,413 in 1994-1995. 1996 activities added an additional $16.4 million, making costs competitive with investor-owned hospitals. (8) The annual COW was $39,133,413.

Cost-driven quality in ambulatory care

No less threatened by cost reduction and risk-shifting contracts are the providers of ambulatory care. They also have been compelled to examine what it is they do and how well they do it. The result? Reports of improved teamwork, reduced variation through adopting guidelines, and, more recently, incorporating disease management methods.

* A five site, primary care, staff model HMO assessed a guideline for treating uncomplicated female cystitis and recognized a cost of waste opportunity of $46.20 per case. Potential cost savings if the guideline had been used to treat all eligible cases was calculated at $1 20,000. (9)

* A six site primary care community health center, threatened by managed care's entry into the Medicaid market, identified missed charges. Not all encounter slips were being submitted to the cashier. A process improvement team identified 1,860 such incidences in a 12-month period. Correcting this error resulted in significant savings of $180,592. (10)

Major cost opportunities remain

With such an emphasis on cost and process improvement, one might assume that the major COW opportunities have already been addressed--that future improvements will yield ever diminishing returns. Perhaps that argument might be made, but evidence suggests otherwise. As an example, adverse drug events (ADE) offer an enormous COW opportunity.

* David Classen of Intermountain Health Systems reports 2.43 adverse drug events per 100 admissions at LDS Hospital, each costing $2,300 more than a normal case and resulting in near doubling of the mortality rate. A total of 567 ADEs were detected in 1992. resulting in a direct hospital cost of $1,099,413 in that year alone. If 50 percent of these adverse events are reversible, he says, improvement could save more than $500,000 annually. (11)

* David Bates, reviewing admissions at 726-bed Brigham and Women's Hospital and 846-bed Massachusetts General Hospital over a six month period noted that patients who endured ADEs stayed in the hospital 4.6 days longer and cost $5,900 more. Unpreventable events lead to costs $3,244 higher than expected. Bates estimates that ADEs cost a 700-bed teaching hospital $5.6 million annually, with $2.8 million of that related to manageable, preventable events. Costs to the nation's hospitals could total $4 billion with preventable ADEs costing approximately $2 billion. Not factored into his analysis are the costs for outpatient drug errors, injury to patients, malpractice costs, and less serious prescription errors. (12)

* Disease management offers yet another opportunity to reduce costs and improve outcomes. In 1993, Lovelace Health Systems in Albuquerque instituted its pediatric asthma program at a time when its ER visits and hospitalizations were above national benchmark levels. By aiming to educate and train every asthmatic child, Lovelace reduced pediatric asthma hospital visits and admissions below national benchmarks, while documenting significant savings of $1 million. (13)

Employing cost as a proactive internal driver

The fact that managed care uses cost so effectively to drive change has, in a perverse sense, done health care a significant favor. Hospitals and other provider groups have learned that a need to cut costs does not necessarily mean a need to reduce quality. On the contrary, when utilized constructively, the need to cut costs has repeatedly proven to be a powerful driver of quality improvement. And therein lies the opportunity for providers to parry external cost demands with a proactive COW system that utilizes the persuasive power of money to facilitate quality improvement--the chance to substitute a carrot for the stick.

But before continuing, it is important to note that a focus on cost does not mean that serious clinical issues, such as high mortality and morbidity, will be ignored. In fact, such entities carry their own well documented and very significant cost of waste and therefore will receive high priority under a COW system. (14)

The 10 step cost of waste system

The following COW system may be incorporated into any existing performance improvement program (please see Figure I). It Is limited to key processes that generally present the most dramatic financial opportunities. It Is not applied to small group or individual processes, where time and energy spent to document costs and calculate relatively small amounts of money may exceed the system's capability to facilitate change.

1. Identify key processes

Management, or a group appointed by management, identifies 'key' processes that, according to the strategic plan, are paramount to the organization's success (or failure). Key processes are big and usually complicated. They generally transcend departmental boundaries, involve many people, and consume significant resources. Depending on the organization, such processes might be as diverse as delivering medications; performing joint replacement surgery; admitting, transferring, and discharging patients: treating expectant mothers; performing emergency room triage; or maintaining managed care contracts, Concomitantly, leadership asks middle management to identify intradepartmental and small group activities that must be addressed, but need not be accounted for in the COW system.

2. Target key processes for improvement

Once key processes have been identified, management determines which processes are candidates for improvement. Does the process under examination meet the required outcomes of today? If the answer is yes, is it capable of meeting the anticipated outcomes of tomorrow? If the answer to either is no, the process is targeted for improvement. Once again, note that this function does not apply to lesser intradepartmental, individual or small group processes.

3. Prioritize key processes for improvement

Key processes targeted for improvement are prioritized and assigned to performance improvement teams. Issues commonly employed to rank improvement opportunities are high customer impact or interest, high mortality, high morbidity, sentinel events, frequency of occurrence, probability of success, ease of solving, and financial impact--not necessarily in that order.

4. Identify source of waste opportunities

"The quality of medical care," says David Eddy, "is determined by two main factors: The quality of the decisions that determine what actions are taken, and the quality with which those actions are executed--what to do and how to do it." (15) All of this may well be equated to appropriateness and efficiency; that is, are we taking appropriate actions and are we performing those appropriate actions efficiently? If the answer to either is no, we have identified a source of waste and an opportunity for improvement.

Is the process appropriate? Is it consistent with the mission, vision, and values of the organization? Is it covered under contract? If the answer to any of the above is no, then that action may be considered inappropriate and is targeted for elimination, improvement, or qualification through a special exemption. For example:

* Dr. C, urologist, treats all prostatic carcinomas with prostatectomy. In this unlikely scenario, Dr. C inappropriately ignores the fact that different grades of prostatic cancer call for different treatments, and that alternate treatments are available for similar grades.

* A Community Health Center refers all new patients, including those with acceptable health insurance, to a financial-needs counselor.

* Dr. E, family practitioner, admits all radiographically documented pneumonias.

* Dr. K, internist, performs endoscopies which are not covered by the patient's managed care contract.

As an aside, one cannot help but recognize that a common clue to the potential presence of inappropriateness may be the word "all."

If a process is deemed appropriate, the next question should be: Is it performed efficiently? Three methods are commonly used to determine efficiency:

I) process analysis

II) process analysis/internal bench marking

III) process analysis/external bench marking

I. Process analysis

A process flow analysis is performed by individuals (process workers) who are familiar with the intricacies of that function and who can identify where in the process inappropriate and inefficient actions result in waste. If nonproductive components are identified, an estimate is made concerning the amount of personnel time, equipment, materials, and supplies consumed, as well as the impact of delays upon other processes (the systemic effect of inefficiencies). This estimate is then multiplied by the frequency of such occurrences. Other negative consequences, including personnel turnover, effect on market share, loss of contracts, and litigation may be included if agreed upon and applied evenly to all processes, but these are 'soft" costs and, as such, are difficult to defend.

Caring Memorial Hospital averages five unreadable portable chest radiographs daily which must be repeated. Cost of Waste per unreadable film includes technician time of 0.5 hours, nursing time of 0.5 hours, film and developer solution wasted, machine maintenance costs, and patient care delays affecting other services of 0.5 hours (please see cost determination example in step 5).

II. Process analysis and internal benchmarking

Provider groups may have multiple centers and many providers who administer services differently. If this is the case, analyzing processes conducted by various centers or providers allows an organization to identify its own internal best practice. Target process costs are then compared to best practice, the difference representing the relative COW and the potential financial value of improvement.

* The Barton Clinic with two pediatricians, two nurses, and four support personnel sees an average of 58 children per working day. Bethel Clinic with four pediatricians, four nurses, and 16 support personnel sees 80 children per working day. There is no discernible difference in the population served and patient satisfaction scores are similar, Bethel Clinic's overhead is twice that of Barton Clinic. The opportunity cost of waste for Bethel Clinic equals the potential net income produced by an additional 36 patients per working day. Barton Clinic, in this example, represents "best practice." It may or may not be best practice compared to other organizations.

III. Process analysis and external benchmarking

There are innumerable sources of best practices, acceptable guidelines, critical paths, and process/outcomes indicators available to the average hospital or clinic. Such information is provided by private organizations, such as The Maryland Hospital Association's Quality Indicator Project; community activists, including the Cleveland Area Quality Choice; and federal as well as state governments, including The Health Care Financing Administration's (HCFA) Health Care Quality Improvement Program, The Agency for Health Care Policy and Research, the National Institutes of Health practice guidelines, and CABG consumer reports by the states of New York and Pennsylvania. Formal benchmarking programs are available through for-profit (i.e., MediQual, Iameter) and non-profit (i.e., Institute of Healthcare Improvement) organizations. (16)

* As an example, Hospital X obtained comparable HCFA hospital discharge data from a proprietary company. Hospital X in the Northeast was concerned about the cost of treating DRG 127 heart failure and shock. Utilizing HCFA data, the hospital compared its performance to four nearby competitors and determined that although mortality and morbidity rates were similar for all facilities, its average length of stay of 9.8 days exceeded the cumulative average of 8.4 days. Hence, hospital X determined a performance improvement opportunity of 1.4 days. (Please see cost determination example in step 5).

5. Calculate the Cost of Waste

Although a preliminary cost of waste may be estimated by those analyzing the process, it is best for the finance department to calculate a more accurate figure. Finance personnel have direct access to all costs, including salaries, materials, contracts, and overhead, and may be more familiar with newer methods of linking cost to processes of care. (17) In addition, they are in the best position to defend the final calculation when questioned by leadership and the board.

The COW is not an accurate accounting figure, but rather an informed approximate calculation. There is a tendency to inflate that calculation in order to impress others with the enormity of a problem, but that is not wise, nor is it necessary. Reality has it that most organizations produce more than enough waste to be impressive by anyone's standards. In addition, since the COW must be justified when impaired processes are improved, savings should approximate the original estimate, otherwise the COW system will lose credibility and be soon abandoned. A lesson learned-when calculating process COW, err on the conservative side.

* In the example listed previously, Caring Memorial Hospital repeats an average of five unreadable portable chest radiographs daily. Finance made the following calculations:

Technician time             0.5 hr at $ 8.00/hr       $ 4.00
Nursing time                0.5 hr at $18.00/hr       $ 9.00
Film cost                                             $ 7.00
Developer                                             $ 2.00
Machine maintenance                                   $ 1.00
Patient care delay
(affecting other services)                           $ 10.00
Calculated COW/
unreadable film                                      $ 33.00
Calculated annual COW                            $ 61,875.00

* In the second example described, hospital X's average daily cost for treating DRG 127 was $407 per day for 446 cases per year. The cost of waste was calculated to be $254,130 per year. However, finance wished to employ a more defensible figure. Recognizing that the last day-and-a-half of hospitalization usually costs less than the average daily cost, a more conservative cost of $200 per day was assigned to the last 1.4 days. The calculated annual COW was $124,880.

6. Determine the "top 10" cumulative Cost of Waste

Although larger organizations may wish to track more, it is recommended that the COW system be limited to no more than 10 key processes-do not insist on developing a COW for smaller processes. This suggestion is based on the experience at Winter Park Memorial Hospital which tracked quality costs on all processes.

* When Winter Park Memorial Hospital first instituted quality management, its consultants suggested that managers from all departments identify the COW for all processes. Those costs were then combined to create a cumulative COW ($8.5 million). Although probably less than 80 percent of the true value was captured, that was sufficient to emphasize the cold, hard cash value of the total quality opportunities. (7) "But then we made a mistake. Rather than using the system as a tool to glean management's attention, we began to approach It as an accounting method." "We were,' as Crosby says, "getting lost in statistical swamps. " (18)

As processes were addressed, teams and finance personnel measured not only the improvements, but also the COW reduction or elimination. Two things were learned from that experience: (1) Identifying the COW of big cross-functional key processes helped showcase the need for serious performance improvement: (2) this benefit did not extend to projects of lesser value. Not only did performance improvement team members addressing smaller processes feel that their efforts were less important; they also complained that the time and energy devoted to determining the COW diverted their attention from the improvement effort itself.

7. Publish the "top 10" cumulative Cast or Waste

Calculating the "top 10" Cost of Waste is not enough. The index must be posted, shared, and communicated with everyone in the organization. In particular, It should be presented monthly as a separate financial item to top management and the board.

8. Assign prioritized improvement opportunities

Charter performance Improvement teams (PITs) as time allows to address the "top 10' processes. PIT members must thoroughly understand how the COW was calculated since they will be responsible for further defining it as more Is learned about the process. If further analysis suggests a significant change, the cumulative COW should be adjusted accordingly.

9. Maintain an updated, cumulative Cost of Waste

Once a performance improvement is confirmed and a process Is functioning more appropriately or efficiently, the resultant reduction in waste is determined. A dollar amount is assigned, and that figure is subtracted from the cumulative COW. Hence, an index of quality evolves, providing a current value for the top 10 quality processes, as well as an inverse indicator of performance improvement. As processes improve, the cumulative COW falls. If there are no significant improvements, the cumulative COW remains the same.

10. Celebrate and start again

Organizational processes are constantly changing and so is the COW. To remain current and relevant, the individual and cumulative COW is revitalized yearly by identifying, targeting, prioritizing, evaluating, and scheduling the new "top 10', key processes and recalculating the cumulative COW.

Conclusion

Although improved appropriateness and efficiency should be sufficient incentives to drive a quality process, often times that is not enough. Improvement activities are expensive--they take time and money. The COW system provides an easy and inexpensive way to identify and Justify those times and monies, while simultaneously enlisting the significant financial interests and support of management.

FIGURE 1. THE 10 STEP COST OF WASTE SYSTEM

1. Identify key processes

2. Target key processes for improvement

3. Prioritize key processes for improvement

4. Identify Cost of Waste opportunities

5. Calculate the Cost of Waste

6. Determine "top 10" cumulative Cost of Waste

7. Publish "top 10" cumulative Cost of Waste

8. Assign improvement opportunities

9. Maintain cumulative Cost of Waste

10. Celebrate and begin again

Jay M. Hughes, MD, FACP

References

(1.) Crosby P.B. Quality Without Tears. New York. New York: McGraw-Hill, 1984. pp 89-90.

(2.) Berwick, D.M., Godfrey, A.B., Roessner. J. Curing Health Care. San Francisco. California: Jossey-Bass, 1990.

(3.) Hughes, J.M. Reducing Healthcare Costs: a Case For Quality. The Physician Executive vol. 18. issue 4:1-7. 1992.

(4.) Dixon, M.D., Nelson, R.R., Huttner, C.A. Abbott-Northwestern Hospital: Presentation to the Annual National Forum on Quality Improvement in Health Care, Atlanta. 1991.

(5.) Barnes, R.V., Lawton, L. Briggs, D: Clinical Benchmarking Improves Clinical Paths: Experience with Coronary Artery Bypass Grafting. The Joint Commission Journal on Quality Improvement 20: 267-276, 1994.

(6.) Kennedy. M. Working Smarter: Cutting Costs Using TQM. The Quality Letter, vol. 6. no 8: 6-13, 1994.

(7.) Hughes, J.M. Total Quality Management in a 300 Bed Community Hospital: The Quality Improvement Process Translated to Health Care. Quality Review Bulletin, 18: 293-300. 1992.

(8.) Babka, J. Improve Clinical Processes in Three Meetings. The Physician Executive. vol. 23, issue 4:19-23,1997.

(9.) O'Connor, P.J., Solberg, L.I., Christianson, J., Amundson, G., Mosser, G. Mechanism of Action and impact of a Cystitis Clinical Practice Guideline on Outcomes and Costs of Care in an HMO. The Joint Commission Journal on Quality Improvement 22: 673-682, 1996.

(10.) Hughes. J. Personal Experience. Community Health Center, Inc. Apopka, FL 1996.

(11.) Classen, D.C., Pestomik, S.L., Evans, S., Lloyd, J., Burke. J. Adverse Drug Events in Hospitalized Patients. JAMA 227: 301-306, 1997.

(12.) Bates, D.W., Spell. N., Culien. D.J., Burdick. E., Laird, N., Petersen, L.A., Small, S.D., Sweitzer, B.J., Leape, L.L., The Cost of Adverse Drug Events in Hospitalized Patients. JAMA 227: 307-311. 1997.

(13.) Zablocki, E. Using Disease State Management to Coordinate Care Across a Continuum. The Quality Letter for Healthcare Leaders vol 7, no 9:2-10,1995.

(14.) Binns, G., Early, J. Hospital Care-Frontiers in Managing Quality. Juran Report 18-31. Pall, 1989.

(15.) Eddy, D. Clinical Decision Making: From Theory to Practice, Anatomy of a Decision. JAMA 263: 441-443, 1990.

(16.) The 1996 Medical Outcomes and Guidelines Sourcebook, Faulkner and Gray's Healthcare Information Center, New York. 1995.

(17.) Johnson, L.C., Batalden, P.B., Corindia. J.T., Marrin, A.S., Neison, E.G., Plume, S.K. Clinical Process Cost Analysis: A Promising Tool For Clinical Improvement. Quality Management in Health Care 5:52-62, 1997.

(18.) Crosby. P.B., Quality Is Free. New York, New York: McGraw-Hill. 1979. pp 125-126.

RELATED ARTICLE: WHY EMPLOY A COST OF WASTE SYSTEM?

All of this sounds like a great deal of work. Why, one must ask, should a COW system be established? Isn't it enough to improve processes and enjoy the financial fallout, whatever that may be?

Certainly that is the way most care groups deal with the cost side of quality today. And isolated improvements continue to be reported. Still, by ignoring an up-front Cost of Waste system, organizations forfeit the use of a very powerful quality improvement tool.

* The COW system places a common value on problems

Regardless of who is appraising the process, regardless of their career disciplines, regardless of their motivation, the COW is the same. By quantifying poor quality in terms of dollars, we establish a common language and a common value of quality There is no need to convince others of the importance of a wayward process. The value speaks for itself. Everyone understands money.

* The COW system prioritizes problems

All other things being equal, everyone can agree that a high opportunity cost is a compelling reason to address a wayward process.

* The COW system gets management's attention

By proactively assigning a cost opportunity to quality and conveying this to management, leadership imperatives are modified. A significant COW elevates the importance of the problem and provides a justifiable reason for leadership to mobilize resources and personnel in support of the team effort.

* The COW system expands possible solutions

Although performance improvement efforts do cost money the COW may exceed the cost of quality efforts by hundreds and even thousands of dollars. Such savings opportunities expand the choice of improvement actions. The greater the COW the greater the resources which may be justifiably committed toward obtaining a rapid, satisfactory, and lasting solution,

* The COW provides a quality benchmark

By establishing and maintaining the cumulative COW, an institution is provided with a relative indicator of the state of quality and an index of quality improvement.

Jay M. Hughes, MD, FACP

Jay M. Hughes, MD, FACP, is a consultant to Ambulatory Innovations, Inc. a health care quality management consulting firm. He can be reached by calling 407/647-2199, via fax at 407/647-7047, or via email at Jamar32@aol.com.

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