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The Value-Based Hospital: A Transformation Agenda for Health Care Providers

October 1, 2014 By Elisabeth Hansson , Brett Spencer , James Kent , Jennifer Clawson , Heino Meerkatt , and Stefan Larsson

This article is part of a series on value based hospitals.

Although more and more hospital leaders see the promise of the new value-based operating model, many hesitate because they perceive the transformation challenge to be overwhelming. After all, the pioneers of the value-based hospital have taken decades to transform their organizations. In our recent work with hospitals in the U.S. and Europe, however, The Boston Consulting Group has identified six steps that are most effective in helping organizations get started and in accelerating the rate of change.

Assess Organizational Readiness

The starting point is to understand an organization’s readiness for value-based health-care delivery by carefully assessing its operations against a comprehensive set of criteria that we have developed from our work with leading value-based organizations. This first step will not only build knowledge among the senior team about the extent of the organization’s current capabilities but also help create buy-in, provide valuable inputs to a discussion about strategic direction, and identify where to focus some initial pilot projects. For an idea of how this process works, consider the recent experience of Sahlgrenska University Hospital, based in Göteborg, Sweden. One of the largest hospital networks in northern Europe, Sahlgrenska provides emergency and basic care for the 700,000 inhabitants of the Göteborg region and specialized care for the 1.7 million inhabitants of western Sweden. It is also one of only two Swedish hospitals that perform pediatric heart surgery and heart, liver, and lung transplants for patients of all ages. 

As is the case for many public hospitals in Europe, however, Sahlgrenska is facing severe pressure from the regional government (regional governments are the chief payers in Sweden’s public-health system) to keep costs down. What’s more, as Sweden introduces more patient choice and elements of value-based reimbursement into its public-health system, the hospital is facing growing competition and the need to make strategic choices about the specialist areas on which to focus its resources. 

In the fall of 2013, Sahlgrenska’s CEO, Dr. Barbro Fridén, determined that value-based health care should be one of the hospital’s three areas of strategic focus. An MD with a research background in in vitro fertilization, Fridén found the value-based approach’s reliance on patient data appealing. But she didn’t want to wait until all the right data were in place; she wanted to move faster. 

In its work with the senior-management team at Sahlgrenska, BCG used a version of the self-assessment tool portrayed in Exhibit 1. The tool ranks an organization’s care-delivery capabilities for a particular disease or medical condition on a scale from 1 through 5 across three key dimensions: outcomes and cost measures, the medical-quality-improvement process, and infrastructure and organization. Sahlgrenska established ten disease-focused teams to evaluate the hospital’s performance in key disease areas or medical conditions. This assessment became the basis for an initial strategic discussion among Sahlgrenska’s senior leadership. The process allowed those leaders to develop a shared understanding of where the hospital was strong and define hypotheses about the most important areas of improvement in order to enhance the value delivered to different patient groups.

The outcome of this assessment process was a decision to start with four pilot initiatives, each focusing on a particular disease or procedure: bipolar disease, prostate cancer, hip arthroplasty, and pediatric cardiac surgery. A variety of criteria were used to choose the pilots, including the size and financial importance of the patient group; whether the group had obvious areas of improvement that could lead to quick wins and, thus, feed the appetite for change; the strategic importance of the group to the hospital’s competitive differentiation; and the availability of good data. But in every case, it was essential that the teams be able to identify a dynamic clinical leader interested in trying the approach and willing and able to inspire his or her colleagues to participate. These leaders serve as integrators of the heterogeneous clinical team contributing to the care of each patient group. After the completion of the pilot project, these leaders typically take on formal responsibility for managing the continuous improvement of care delivery for their patient group.

Define the Outcomes That Matter

Once an organization has identified the initial medical conditions and patient groups for which it wants to launch the value-based initiative, the next step is to set up multidisciplinary teams to define the key outcomes metrics that matter for those groups.

It’s essential that the members of these teams be broadly representative, including specialists across medical and other functions at the main steps in the care delivery process, as well as patient representatives. Some members of these clinical-care teams will be working with colleagues from other points on the care delivery value chain for the first time. At one hospital we worked with, a pilot team focusing on orthogeriatrics included orthopedic surgeons, rehabilitation specialists, and geriatricians. These specialists had been referring their patients to each other for years without ever sitting down to discuss how best to jointly manage the entire care pathway.

When it comes to defining the outcomes measures, often the issue is less whether such measures exist than whether they are actually used to manage care. Take the example of Sahlgrenska’s hip-replacement pilot team. For hip replacement, identifying the appropriate outcomes metrics was relatively straightforward. Sweden has an active hip-arthroplasty registry that for more than 30 years has been collecting data on all patients in the nation who undergo the procedure. The key challenge, however, was figuring out how to make the data more user-friendly and actionable. So, instead of continuing the previous practice of receiving the unit’s results once a year from the registry, the team developed a “scorecard” that clinicians in the unit receive every month—which allows them to take action and adapt in response to the data far more quickly. (For an image of the online scorecard used by Sahlgrenska, see Exhibit 2.)

Not long after the scorecard was introduced, for instance, the unit discovered that there had been a sudden spike in the number of patients who were experiencing falls during inpatient recovery. When team members discussed the new data, they noticed that in every case where a patient had suffered a fall, the hospital had neglected to conduct a risk assessment upon admission—even though doing so was part of the unit’s formal procedural guidelines. By ensuring that a systematic risk assessment took place at intake, clinicians were able to identify high-risk patients and better plan their postsurgical recovery.

Allocate Costs per Patient

Once the right outcomes measures are defined, the expert team is in a position to discuss how each step in the clinical pathway contributes both to outcomes and to costs. Mapping the clinical pathway requires a well-defined methodology that is both consistent and flexible. Consistency is important so that the methodology can be applied across all patient groups and so that the organization can develop a common vocabulary that is easy to use internally and easy to communicate to outside groups such as other providers and payers. But flexibility is also important to capture multiple perspectives, to allow deep dives into especially important process steps, and to customize to the unique circumstances of specific patient groups.

But even with the best methodology, genuine improvements will occur only if the team engages the senior leaders of those parts of the hospital that play an important role in caring for the specific patient group. In our experience, the effort to map and discuss the clinical pathways surfaces many good insights about the everyday challenges facing the clinical teams. When functional and unit leaders are exposed to those insights, they are able to rapidly make decisions to resolve “silo based” inefficiencies.

When allocating costs to key activities, it is important to be pragmatic in the face of complexity. When it came to mapping the costs along the hip replacement value chain at Sahlgrenska—from diagnosis to surgery to rehabilitation—the hospital’s existing cost system wasn’t much help. So the pilot team took a rough “resource based” approach, allocating various costs according to the resources used, activities performed, and time the patient was in hospital at the various steps of the process. Although this approach did not perfectly allocate all the costs per patient, it was good enough to provide a first-generation understanding of where the majority of costs were incurred. As the team continues its work, it will refine its cost-allocation model. But even the first-order reallocation done at Sahlgrenska was enough to focus the teams on key areas for improvement.

Implement Quick Wins

As important as identifying and collecting this new data is the learning that happens as pilot teams talk about the data and its implications for clinical practice. Again, the makeup of the teams is critical.

At Sahlgrenska, for instance, Fridén insisted that the hip replacement team include not only surgeons and rehabilitation specialists but also nurses and nurse’s aides. The inclusion of nursing personnel, who spend the most time with patients during recovery, led to important insights. At one meeting, for example, a nurse’s aide mentioned that after surgery a significant number of patients experience nausea, a postsurgical complication that not only degrades the quality of care but also adds costs by extending these patients’ length of stay in the hospital. As a result, the team has designed new steps for the regular monitoring of severe postsurgical nausea and for identifying potential interventions to alleviate it.

As pilot teams identify clinical-improvement opportunities like this one, these ideas can be immediately translated into an implementation plan and, once implemented, tested for their impact on both outcomes and costs. As a result of the pilot team’s efforts, the hip replacement unit at Sahlgrenska was able to improve the productivity of its surgical procedures by more than 30 percent in three months.

Enhance Service Function Productivity

The patient group pilots will typically result in a number of suggestions for how hospital service functions—such as the routines in the emergency ward, the scheduling in the radiology department, or the type of specialists available in the outpatient clinic—can better support the disease-specific clinical pathways. As these suggestions accumulate, these specialty units need to consider how to change their processes, roles and responsibilities, and performance metrics to better satisfy the needs of high-value patient care.

In one hospital where we worked, for example, inpatients had priority access over outpatients to magnetic-resonance imaging (MRI). As a result, patients with cancer of the esophagus, who ordinarily are prepared for treatment through outpatient visits and diagnostics, were instead routinely admitted to the hospital for a costly overnight stay, simply because that was the fastest way to get access to the needed diagnostics. In the process mapping, this work-around quickly became apparent. As a result, the routines for MRI scheduling were changed so that priority outpatients had the same access as inpatients.

Institutionalize the Value-Based Approach

The final step in the pilot process is for teams to develop recommendations for how the continuous tracking of outcomes and costs per patient can be integrated into the day-to-day management of the organization. Doing so often requires some clarification of governance, including new roles in the team; some modifications in IT systems to automate as much of data gathering and analysis as possible; and possibly a change in the hospital’s financial-control routines. These last actions lay the foundation for creating a self-reinforcing cycle of continuous improvements that allow hospitals to build on their strengths and develop strategies for competitive differentiation that drive increased patient volume and better economic stability. (See Exhibit 3.)

The hip replacement pilot at Sahlgrenska, for example, has now morphed into an ongoing capability for continuous improvement. Now that the detailed scorecard is in place, the unit has the data that will allow it to take another big step to improve the value it delivers: implementing a new approach to postsurgical rehabilitation known as Fast Track. (Clinical studies show that the faster a hip replacement patient can get up and about after surgery, the better the health outcomes from the surgery.)

Fast Track uses small but effective innovations in care delivery—setting patients’ expectations so that they anticipate getting up and standing in 24 hours, putting four patients who have all had the same surgery on the same day in one room to encourage constructive competition in recovery, replacing in-room TVs with a TV room down the hall so that patients have an incentive to get up and move about—to speed patient recovery. With this approach, Sahlgrenska aims to improve the long-term outcome and reduce the average length of stay from the current four to seven days to two days. This change will result in a significant improvement in patient value.

As an organization strives to institutionalize the value-based approach, it will, eventually, have to address a few big-picture items—in particular, the role of IT and the implications for the hospital’s organization structure. In a data-driven approach such as we have described, the quality of an organization’s information systems is an important success factor. But organizations shouldn’t wait for such systems to be put in place to get started on value-based transformation. In our experience, engaged clinical teams can identify effective ways to track outcomes and costs that do not require significant new IT investment. Once organizations have begun to work with a focused set of outcomes metrics and have developed a picture of costs per patient group, they will be in a position to identify the key priorities for future IT investments to further support value improvement—for instance, the automation of data collection and analysis, the integration of new outcomes metrics into the hospital’s electronic-medical-record system, improved financial accounting systems that generate patient group data, and so on.

So, too, with organization design and structure. Some of the pioneers of the value-based model have taken the ultimate step of aligning their entire organization around individual diseases. In 2008, for instance, Cleveland Clinic underwent a major reorganization in which it jettisoned a structure organized around traditional medical disciplines in favor of a new structure based on multidisciplinary institutes organized by disease areas, such as digestive disease and respiratory disease (comprising lungs, breathing, and allergy). Each institute combines medical and surgical departments for specific diseases or somatic systems. All are required to publish outcomes and measure costs. Cleveland Clinic has integrated care through shared protocols and use of electronic medical records at all 75 of its care-delivery sites.

The change has allowed the clinic to take a more patientcentric approach to care and to achieve the cooperation and alignment necessary to improve outcomes and treatment efficiency by taking a holistic view of costs along each treatment pathway. As part of the transformation, Cleveland Clinic also created its in-house Quality & Patient Safety Institute, which tracks outcomes as defined by each of the disease-based teams.

But an organization can take steps short of a complete reorganization. For instance, it can create a matrix structure in which clinical experts within the traditional functional organization are formally assigned the integrator role, with the responsibility to take a horizontal view of the entire experience for a given patient group. Such patient-group “owners” report simultaneously to line management and to a senior executive for value-based health care who has a cross-departmental perspective. It is critical, of course, that these new patient-group leaders are sufficiently empowered to drive the change agenda.



In our experience, going through the six steps for an initial pilot group of diseases requires a focused initiative of approximately six to nine months. During that period, the organization customizes and refines its methodological approach and tests it, typically in two waves of patient group pilots. (See Exhibit 4.)

Of course, to work through the full range of 200 or so diseases typically covered by a major hospital network, as well as to execute major changes in IT and in hospital organization, takes longer—about two to three years of persistent senior leadership. To support institutions going through this major transformation effort, BCG has created the BCG Center for Health Care Value to help hospital and other provider-organization executives develop the internal experience and capabilities they need to lead their transformation efforts. In addition to providing both hands-on coaching of hospital management and change teams and training for working-group members, the center will facilitate exchanges among provider organizations so that, in the spirit of continuous improvement, they can learn from one another.

The multiple pressures that health care providers face will not go away. The traditional focus on operational efficiency has reached its limit. Executives at hospitals and other provider groups need a new strategy to succeed. The value-based hospital aligns all constituencies to a common goal, one that engages and motivates the full range of staff around the change agenda and that provides society with a sustainable model for cost-effective and high-quality health-care delivery.

The Value-Based Hospital: A Transformation Agenda for Health Care Providers
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