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The new economics of healthcare

Guest blog by Charles Tilley, chief executive of CIMA (Chartered Institute of Management Accountants).

As the NHS reacts to the need to make £20bn of efficiency savings by 2014/15, we must ask ourselves how we can go about achieving such financial efficiency without compromising on patient care. Recently, the Chartered Institute of Management Accountants (CIMA) held a lecture, in association with the Anthony Howitt Trust.

The subject of the lecture was ‘The New Economics of Healthcare’, and its aim was to discuss how to design and implement ‘integrated performance tools’. These tools measure costs whilst putting patient care at the centre of the healthcare system – by using patients and their conditions (rather than departments, procedures or services) to track outcomes over a full cycle of care.

Professor Robert Kaplan, Marvin Bower Professor of Leadership Development, Emeritus at the Harvard Business School delivered the lecture. A panel discussion followed, which featured panellists including Fiona Dalton, Interim Chief Executive of Great Ormond Street Hospital for Children NHS Foundation Trust and Tony Whitfield, Executive Director of Finance and Deputy Chief Executive of Salford Royal NHS Foundation Trust.

On the eve of President Barack Obama’s re-election, Professor Kaplan began by considering the challenges facing ‘ObamaCare’ – and in particular the difficulties of increasing access to healthcare whilst keeping quality high and costs stable – and related this to issues in the NHS. In order to create a lean and efficacious financial model, Professor Kaplan argued, we must ‘sweat out the inefficiencies’ by conducting a thorough investigation of precisely where money is being spent in each cycle of patient care, and interrogating the data to find opportunities for efficiency.

Kaplan’s model demands exhaustive attention to detail: this is not something that can be achieved by the broader scope of economics, but something which management accountants, who are proficient in looking inside organisations, can tackle.

Professor Kaplan argued that healthcare providers should be paid according to complete cycles of patient care; he describes this as ‘Bundled Reimbursement’ because all the resources – staff, equipment, consulting room space – needed to treat an individual patient from presentation to discharge are bundled together. In order to calculate the cost of these resources, Professor Kaplan takes three steps:

1) Develop process maps and time estimates for a condition – which resources are needed, and how long for?

2) Estimate the cost of supplying each resource (e.g. the cost per month of one nurse) and divide this by resource capacity (the number of hours per month the nurse is able to work) to find the capacity cost rate for each resource.

3) Calculate the total patient care costs by multiplying resource capacity cost rate by process times, and then adding together these variables to get a complete picture of each patient’s cycle of care.

Professor Kaplan’s proposal means taking a meticulous approach to a complex set of data. However, he reports that his work so far has been a success, not least because it provides quantitative data and prompts discussion amongst clinical and administrative personnel, who can easily identify where resources are being misused – for example, when technology is underused because consultants are remaining in ultrasound rooms to discuss results with patients, rather than moving on to a non-specialist consulting room so that the equipment can be used with the next patient. Where Professor Kaplan has applied his approach and enabled staff to see these myriad small inefficiencies, new procedures led to immediate benefits.

Professor Kaplan was aware of the potential for conflicting priorities between physicians, and health care administrators focussed on financials – and said that poor measurement of costs lead to mutual frustration as physicians strive to concentrate on patients and administrators focus on reducing costs. However, he gained the agreement of the panel when he made the point that since physicians are very used to dealing with data, they typically appreciate his approach as it gives them evidence to analyse.

The panel stressed that spotting inefficiencies in the system would not necessarily lead to the stripping back of resources, but rather to their being more effectively used. Fiona Dalton, for example, said that highlighting unnecessary use of her nurses would not lead necessarily to her scaling back the number of nurses she employed, but using their time more effectively – for example, to chat to parents of patients and thus increase the value they offered.

There was widespread support amongst the panel and the audience for Professor Kaplan’s ‘process modelling’ approach, something which has been successfully undertaken already in the UK by hospitals including Liverpool Heart and Chest Hospital NHS Foundation Trust. Professor Kaplan estimated that there are, overall, around 80-100 medical conditions that between them account for 80% of healthcare spend. He believes that it could take around five years to ‘process map’ and cost these conditions.

This proposal is an extremely ambitious one, but elements of Professor Kaplan’s suggestions are already being successfully implemented in the US and here in the UK. What is needed are professionals who can make sense of this ‘big data’, identify opportunities for savings and provide strategic, business-like advice to healthcare administrators whilst taking in the pressing need to maintain high standards of patient care.

As Professor Kaplan commented, ‘you can’t manage what you don’t measure’.

CIMA has a long history of working with the NHS and we have more than 3,000 members and students in its employ.

Meanwhile, I personally have a particular interest in health care as I am a non-executive director of the Great Ormond Street Hospital and chair of its audit committee. Big ideas such as those put forward by Professor Kaplan could hold the key to a ‘new economics of healthcare’, and I believe the management accountancy profession can play an important role as business partners to the NHS in facilitating that change.

- Charles Tilley is chief executive of CIMA (Chartered Institute of Management Accountants) and a prominent advocate for global reform of corporate reporting. A commentator on a wide range of business and management accounting issues, he speaks at events around the world on business sustainability and ethics.

The lecture was a was a CGMA event, hosted by CIMA and the AICPA. For more information on CIMA’s thought leadership programme go to www.cgma.org/resources

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