Avoiding Failure in the New Value-Based System


In the near future, emerging delivery systems and payment models, such as pay-for-performance, bundled payments, and capitated payments, will stress current volume-based fee-for-service systems. Historically, physicians and health care managers responded to financial stress by focusing on income and expenses, increasing income through enhanced volume (“making it up on volume”), while cutting expenses for staffing and/or equipment, often leading to fewer and less-skilled staff members. However, this response is no longer effective.

As the payment model progresses along the continuum of bundled payments and capitated payments, there will be increased provider and organizational risk. Providers and organizations can assume risk from payers and will receive some reward or payment for assuming this risk. Medicare’s Value-Based Purchasing Payment Program is designed to promote value while sharing some risk; it includes rewards and penalties for patient satisfaction, outcomes and cost savings. For example, “Physician Compare” allows public access to performance metrics (currently only to Physician Quality Reporting System (PQRS), Escribing, and EHR, as well as training and board certification information). In the future, a quality-of-care and a cost measure will be used to reward physicians who score high on both measures and penalize physicians who score low on both measures.

In order to negotiate these emerging payment models and overall health care environment, robust performance measurement beyond practice expenses will be essential in the future. One cannot “cut costs to achieve greatness” and “cannot manage what is not measured.” These robust performance measurements must facilitate improvement, planning and forecasting, competitive analysis, rewards for key employees, regulatory and standards compliance.

The balanced scorecard (BSC) approach is one such approach that represents the foundation for a performance management system. The BSC measures an organization’s performance based not only on financial metrics, but also on customer perspective, internal processes, learning and growth. The BSC is based on the idea that financial metrics only capture a small portion of a company’s performance, as financial performance is a lagging indication, while customer satisfaction (customer perspective) leads financial performance, and employee satisfaction (internal processes, learning and growth) leads customer satisfaction. More specifically, employee satisfaction drives employee added-value, which drives customer satisfaction, which drives customer buying behavior, which drives sustained profitability, which creates shareholder value.

Historically, physicians (facilitated by their accountants) and health care managers often viewed the paradigm in reverse, placing financial success first, and viewing the other nonfinancial parameters as secondary issues (or ignoring them completely).

The BSC approach provides a framework on which to properly view performance and would reorganize many of the metrics noted above. It would facilitate negotiation of complex payment models that will demand quality and outcomes measures, while providing cost-of-care measures to negotiate risk-based payments, and facilitating improvement efforts. For example, the BSC approach in a small practice could involve quarterly assessment of :

  1. Financial: Income, expenses, billings, accounts receivable and current assets.
  2. Customer (Patient and Referring Provider) Perspective: Outcomes, patient satisfaction (through surveys), referring doctor satisfaction (through surveys), and numbers of new patients referred.
    Some electronic medical record systems and registry systems can provide outcomes measures. For example, the American Academy of Ophthalmology’s IRIS registry system interfaces with an EHR system to facilitate successful participation the Physician Quality Reporting System (PQRS). It can provide outcome measures, which can facilitate successful negotiation efforts with payers (for good outcomes) and facilitate improvement efforts.
  3. Internal Processes: Patient volumes, cost-of-care, and operational effectiveness.
    Internal cost-of-care for a physician-owned entity relates to the cost of providing care for the provider system, exclusive of physician compensation and pass-through expenses (such as expensive biologics). Internal cost-of-care can involve complex cost-accounting calculations, but for a typical small medical practice it can simply be approximately by two methods. In the first method, average cost-of-care per patient can be calculated by first subtracting physician compensation and costs of any pass-through expenses from overhead and dividing this by the number of patients evaluated during that time period. In the second method, average internal cost-of-care-per-hour can be calculated by first subtracting physician compensation and costs of pass-through expenses from overhead and dividing this by the number of hours of clinic time during that period.

    External cost-of-care approximates the total direct cost-of-care for payers and includes physician compensation and pass-through expenses.

    Learning about cost-of-care can be surprising and represents the starting point for many improvement initiatives as well as the basis on which to negotiate risk-sharing payment systems such as bundled payments and capitated models. Once again, “one cannot manage what is not measured”.

    Operational effectiveness and improvement initiatives can be addressed through the adoption of lean and six sigma techniques.
  4. Learning and growth: Employee satisfaction, employee training and certifications.
    Employee represent the most important component of any organization, especially in medical provider systems, where they represent the very first encounter point for referring providers who call into a practice and for patients who check-in for their appointment. Employee satisfaction can be formally assessed through surveys. Tools such as “Survey Monkey” can be very helpful. Employees can be encouraged to progress through training systems, via a formal policy of providing study materials, educational courses, and reimbursing certification testing costs. Pay raises can be implemented for passing sequential levels. Yearly performance reviews with learning goals for the upcoming year should be conducted. Focusing on employee learning and growth is key to any organization’s success, while focusing only on income and expense is a path to failure. This is especially true when physicians are employees of large provider systems, which is becoming increasingly common.

In summary, the BSC can significantly alter organizational strategy and even culture of medical offices and provider systems. The BSC facilitates a learning environment for managers; in a health care organization, this may be especially important for physician-managers, who generally will not change behavior without hard data that clearly shows the links between various performance parameters and financial success.