Value in Healthcare: Porter’s Framework and Lean Accounting

Value in Healthcare: Porter’s Framework and Lean Accounting

What is Value?

Over the past 15 years, Michael Porter with numerous co-authors has developed a framework to define and achieve value in healthcare (e.g. Porter and Teisberg (2006) Redefining health care: creating value-based competition on results, Harvard Business School Press, Boston.).

Porter and his colleagues make a clear case for measurement of both outcomes and costs:

“To improve value, the measurement of both outcomes and costs is essential. Without these data, clinicians lack the information needed to validate choices, guide improvement, learn from others, and motivate collaboration and change. Value measurement is also needed to demonstrate the impact of innovations and justify additional investments.” (Michael E. Porter, Erika A. Pabo and Thomas H. Lee (2013), “Redesigning Primary Care: A Strategic Vision To Improve Value By Organizing Around Patients' Needs”, Health Affairs, 32, no.3, 516-525; quote from p. 517)

Survival, quality of life, and function are the outcomes that matter to patients, not the process or procedural compliance measures that proliferated in the U.S. in the past 30 years.

What about Costs?

“Accurate costing begins with process mapping, or understanding all of the care processes involved in serving a patient subgroup over time, including common pathway variations such as the need for an interpreter’s services or reviewing radiographic images from outside providers. Then the resources involved in each process—for example, personnel, equipment, space, drugs, and supplies—can be identified and their costs ascertained and aggregated.” (Porter, Pabo and Lee, p. 520)

The usual method to measure costs in the Porter value framework is“Time-Driven Activity Based Costing”, TDABC. (See for example Kaplan RS. “Improving value with TDABC”, HFM Magazine. June 2014.; Kaplan RS, Anderson SB. “Time-Driven Activity-Based Costing”, Harvard Business Review. November 2007,; Kaplan RS, Porter ME,“The big idea: How to solve the cost crisis in health care”, Harvard Business Review. September 2011.

While the conceptual basis for TDABC is straightforward—determine the cost of each resource used to provide a service and then add up all those resources—my preliminary experience with applications of TDABC suggest that organizations do not repeat the TDABC calculations regularly. That is, the cost numbers are derived occasionally and are not used for regular monitoring and insight. Since Porter convincingly argues that clinicians and managers need to be able to measure costs of their services, what should you do?

An Alternative to TDABC

“Lean Accounting” provides regular cost, quality and capacity data for a value stream, for example every week. In healthcare, Lean Accounting appears especially useful when people take Porter’s advice to organize care into integrated practice units.

I learned about Lean Accounting from Brian Maskell last year, introduced in this post.

The relevant cost numbers for many (most?) healthcare value streams will be dominated by staff costs for the people who work in the value stream and the consumables used to provide the services. That has an important practical consequence. While there are important accounting details related to costs of physical space and equipment (rent and depreciation), Brian’s work indicates that weekly cost numbers that are “good enough” for management guidance can be derived from staff salary and benefits, along with consumables.

Staff and consumable costs are already calculated regularly somewhere in every organization; the task is to make these costs visible to the clinicians, staff and managers every week so they can spot unusual patterns, take corrective actions and measure the impact of specific projects.

Although some organizations are building systems to automatically roll up numbers in the manner of TDABC (see this article in The New York Times ), Lean Accounting offers a potentially simpler alternative.

More importantly, Lean Accounting is built to drive management insight and action to increase value both in special projects and week to week monitoring. And that’s the point—we need to increase value, measurement is just the first step.

Measurements Good Enough for Guidance

Measurements Good Enough for Guidance

The Burden of Measurement

The Burden of Measurement