Demonstrating a Value Model in Healthcare

People might think the transition from volume to value in healthcare sounds good, but it’s just not realistic. I believe it is realistic and will be necessary for us to have a sustainable healthcare system. I gave two examples of a value model in a previous blog post—flat screen televisions and digital storage. The costs for each have significantly declined while their quality and technology have improved, both demonstrating a value model.

But what about healthcare? I know of at least one medical device company that has been in existence for more than 30 years and exemplifies a value-based model that benefits both customers and employees. As an expert in my field, I’m what the industry calls a KOL (Key Opinion Leader), I’ve had the opportunity to tour many medical device manufacturing facilities. These facilities have clean rooms and processes designed to meet government regulatory standards; they all pretty much look the same and have similar processes.

To enter certain types of clean rooms, you must put on what’s called a “bunny suit.” It includes a white gown that covers your clothing, a bouffant hat to cover your hair, footies for your shoes, and a mask for your beard (even if you have a short one like me). Once in the appropriate attire, you enter the manufacturing floor. There are a few levels of cleanliness with sterile rooms being the cleanest. Typically, you would only be able to look through the window to view the sterile rooms where the workers are completely covered.

Most of the device manufacturing occurs in the clean manufacturing area where multiple manufacturing lines are located. The typical line has long rows of benches with workers at each bench providing their specific step in the process—maybe adding a handle or dial to the instrument as it’s being made. After several steps in the process, one worker does a quality check, which includes looking specifically at parts of the instrument that have been constructed up to that point. Sometimes this is done using a microscope for smaller pieces of the device.

After the quality control step, if there are no defects, a box is checked and the device continues on through the process, but if there is a flaw, the device is removed from the process and discarded. The typical goal is to manufacture these devices as efficiently as possible and sell as many as they can at a price as high as possible – the Volume Model.

But, at one unique medical device company (which I’ve visited twice), the manufacturing process is quite different. The company was started in the late 1980s by a visionary who had previously worked as an engineer at a typical medical device company with the typical manufacturing process. He saw the potential to bring a value-based continuous improvement manufacturing model to the medical device industry. When you walk onto the manufacturing floor of this company, it looks very different. There are the same clean rooms and sterile rooms, but workers are not performing the construction of the devices, robots are. Through visualization software, robots even perform the quality checks.

But that doesn’t mean people aren’t also there working. In fact, people are collaborating while observing the manufacturing process to determine where it could be improved through increasing the efficiency of the process, lowering the cost of the process, and/or improving the quality of the devices manufactured. Instead of the workers being used primarily to do simple, mechanical tasks, they are being encouraged to use higher cognitive functions to attempt to innovate and improve the manufacturing process. This is a real-world example of the benefits that could come from humans working with robots in the future (a human-computing symbiosis).

To maximize the potential of lowering costs and improving the quality of the process, the entire manufacturing process, from the raw materials to the final packaged product, is maintained at one location. Other companies often outsource parts of the process to lower-cost manufacturing companies with low-wage workers outside the U.S. By fragmenting the process, it can inhibit the ability of the manufacturing team to use the principles of continuous process improvement to improve the output for the whole process.

Because of a value-based model, this company will often sell their devices at a lower price than competitors. To improve the value for their customers (hospitals and outpatient surgery centers), they will try to improve the quality without increasing the price. To increase their profit margin, they will lower the cost of the manufacturing process while improving quality and maintaining the same price for their customers. In a value-model, an organization can increase their profit margin while improving quality and maintaining or decreasing costs for the customer/patient.

I’m not promoting any of this company’s products and I recognize that other companies can produce high value products as well. The point is that it should be important to measure the value of any drug, device, diagnostic tool or treatment in each local clinical environment. That should happen, but it doesn’t. Every hospital has a value-analysis committee to determine what medical devices will be purchased for use in the operating room. In my experience, none of these committees measure value.

There is no data infrastructure in hospitals to evaluate the value of a device in terms of outcome for the patient, or even for the financial impact to the hospital. It’s possible that a device that is more expensive than the competitor’s actually results in lower hospital costs and increased hospital profit; by decreasing length of stay and decreasing complications, for example. But the hospital has no way of knowing that because they don’t measure it. So, most of the time a purchase decision is made based on the cost of the product alone, compliance with a bundled contract, influence of a high-volume surgeon, or a combination of these factors.

Imagine if we could apply value-based continuous improvement principles to patient care. When I told the president of this company that our small hernia team was applying these same principles to real patient care his first response was, “Wow, if you could get a whole hospital to adopt these concepts, their profit margin could be 20% or higher.” Sadly, no hospital has made this transition yet. The typical hospital profit margin is less than 5% and, worse, many hospitals have negative margins, relying on other revenue streams such as investment income and philanthropy.

For the good of our patients and for the good of our physicians and clinical teams, I hope this transition happens sooner rather than later. Instead of continuing in a volume model, we can learn to apply the principles of value-based continuous process improvement.

Note: The application of a volume model and a value model for any process are very different and based on the different principles of Reductionist Science and Systems Science, respectively. To learn more about these different scientific paradigms, see previous blog posts here and here.