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The Value-Based Hospital

September 9, 2014 By James Kent , Brett Spencer , Stefan Larsson , Heino Meerkatt , Jennifer Clawson , and Elisabeth Hansson

Health care providers all over the world face an extraordinary combination of pressures. Despite decades of cost containment and other operational-improvement initiatives, costs continue to rise, putting unrelenting pressure on hospital budgets. The tight management of department budgets and clinical processes is further complicating already complex organizations, leaving staff demoralized and disengaged. At the same time, markets are becoming more competitive. Countries with public-health systems, such as the UK, are encouraging privatization; meanwhile, in the U.S., where the private sector already plays a major role, providers are becoming more consolidated. Payers everywhere are calling for more transparency on actual health outcomes and experimenting with value-based reimbursement. Patients are becoming more demanding and exercising more choice.

In response to these pressures, a few pioneering organizations are developing a new operating model that we call the value-based hospital. These providers are taking a fundamentally different approach to continuous improvement by monitoring the health outcomes of specific patient groups and understanding resource requirements and costs in the context of how those outcomes are achieved along the clinical pathway. And they are using the provision of better health outcomes and greater health-care value (defined as the ratio of outcomes to costs) as ways to drive the organizational improvement agenda and differentiate themselves from their provider peers. The focus on outcomes and value delivered has created a shared language that allows broad groups of staff to pursue common goals and increases collaboration to achieve those goals. Among the leading organizations that have embraced this approach are Kaiser Permanente and Cleveland Clinic in the U.S., Martini-Klinik and Schön Klinik in Germany, and Terveystalo, the largest private health-care provider in Finland.

Cleveland Clinic’s CEO, Dr. Toby Cosgrove, has called the value-based approach a “breakthrough that will change the face of medicine.” The vast majority of hospitals, however, have yet to embark on this journey. Despite years of quality management initiatives, hospitals are decades behind most other industries.

We believe that the value-based hospital is more than yet another improvement initiative. Relative to past efforts, it is a far more effective way of delivering health care and running a provider organization—one that puts patients and their outcomes at the center of a hospital’s operations; that relies on the engagement, leadership, and cooperation of the hospital’s clinical community; and that makes possible a more constructive interaction between hospital management and clinicians as they take joint responsibility for the delivery of cost-effective, quality care.

The Boston Consulting Group has been working with the pioneers to understand the key success factors in the value-based hospital. What’s more, our work on the ground supporting a growing number of hospitals in their efforts to adopt this new operating model demonstrates that it is possible for any hospital, no matter what its starting point or regulatory environment, to move in the direction of value-based, continuous improvement quickly and to see positive results early. A hospital does not need to first have all the data and systems in place to see results. Simply bringing together the right people, who are committed to improving patient outcomes, in a structured process can lead to significant improvements. In our client work, we have seen organizations achieve productivity and other improvements of approximately 30 percent in just three months.

In this article, the first in a series, we describe the advantages of the new value-based operating model for hospitals and other health-care providers. In subsequent articles, we will provide examples of some of our recent client work in the U.S. and Europe to help organizations introduce the value-based approach and propose a six-step transformation agenda for any provider that seeks to put value for patients at the center of its strategy and offering.

The Value-Based Hospital

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