Why Do We Need Value-Based Care?

When we buy a television set (TV), we have many choices. We can buy a QLED, OLED, or LCD TV, choose one from several brands, or select a size we like. We know how much value we can get from a specific TV and how much we can afford.

In contrast, if we need surgery (hope not), there is no easy way to make similar choices to those when we buy a TV. Before surgery, we typically do not know how much a surgery costs, what implants a surgeon uses, and in many cases, how much we need to pay out of pocket. We may not know how much we value the surgery before it is done since the outcome is often uncertain and side effects or medical errors may occur.

“Price is what you pay, value is what you get,” said Warren Buffett. In healthcare, there is ambiguity around both price and value. Worse, patients get value, but payers, often at a national level, pay for the most part. Unlike other industries, there is a definite disconnect between value and cost, and what value really means to each individual remains controversial.

It seems clear that we do not need value-based TV, but we need value-based care, which will bridge the gap between value to patients and payment from insurance as the U.S. healthcare system is moving away from volume and towards value.

What is Value-Based Care?

Historically, value has been an elusive concept ever since Aristotle. Since the value of a product to an individual fluctuates over time, saying it is hard to measure is an understatement. We can ride a bicycle to work or exercise when it is sunny, but the value of having a bicycle decreases when it snows.

But, instead of measuring value directly, we can measure efficiency because as efficiency improves, we get better value for money. Thanks to Michael Porter, a Harvard Business School professor, who proposed such a definition of value in healthcare: health outcomes that matter to patients achieved per dollar spent, and the definition has been widely adopted by both academics and practitioners around the world.

To make it easier for us to understand Porter’s definition, we can look at it this way:

Added Value = Value of Outcome Improvement for Patients – Incremental Total Cost of Care

This then becomes actionable: we can either improve patient outcomes, reduce treatment costs, or both, to increase value. This formula also indicates that we should abandon any medical intervention that has an added value of less than zero. And more importantly, it allows us to compare different medical interventions.

According to McKinsey & Company, as of 2022, the value-based care industry had an enterprise value of $500 billion, which is expected to grow to $1 trillion when the market matures. These enterprises establish or facilitate risk-based contracts between providers and payers. Physicians and hospitals are paid, fully or at least partially, on quality measures or patient outcomes achieved and/or specific treatment costs or total cost of care incurred. But remember, the enterprise value of $500 billion was achieved after the value concept was introduced nearly 15 years ago, highlighting the importance of continually assessing value-based care implementation and impact. Despite this growth, many healthcare providers are struggling to implement value-based care, including large academic medical centers.

How Can We Improve Surgical Outcomes? A Case Study of Hernia Repair

There are about 1.6 million (600 thousand ventral and 1 million inguinal) hernia repair surgeries per year in the U.S., imposing a large financial burden on patients as well as the healthcare system. Nearly 30 thousand patients undergoing inguinal hernia repair have chronic pain after the surgery, demonstrating large variability in the quality of care. In addition, the field has been plagued by additions of expensive technology solutions such as robotic repairs that have driven up the cost of care without significant improvements in outcomes. Thus, the field of hernia repair surgery has become a ripen test bed for value-based care.

Boston Hernia, an independent practice, is a pioneer in implementing value-based care in the field of hernia repair surgery. It was founded on the belief that outcomes in hernia care can and should be better through employing efficient approaches to surgery that drive better patient outcomes. Boston Hernia has been modeled after the famous Shouldice Hospital, which has been extensively studied in medical and business publications. Boston Hernia performs more than 1,000 hernia repairs per year and with its focus on value-based care, has been able to reset the bar for quality in hernia care.

As illustrated in Exhibit 1 below, based on two academic publications and Medicare payments, Boston Hernia has achieved outcomes that matter to patients at a lower cost. For each unit increase in quality of life, measured on a 0-100 scale, Boston Hernia uses only $38, while a typical ambulatory surgical center (ASC) using traditional open surgery as opposed to Boston Hernia’s posterior mesh open surgery, consumes $42, and an ASC-based laparoscopic or robotic surgery costs $60. Hospital-based surgeries are more expensive than ASC-based ones: traditional open surgery costs $55 per unit gain in quality of life and a laparoscopic or robotic surgery needs $69. On average, the 452 members of the Abdominal Core Health Quality Collaborative (ACHQC), a multi-institutional, comprehensive effort – including a data repository – to improve the quality of care delivered to hernia patients, require $61 to produce one unit gain in quality of life.

To translate these findings in terms of surgical cost savings, we can use counterfactuals. Boston Hernia’s patients have an average of 92 units of quality of life gained and cost Medicare $3,505 per procedure in comparison to $4,640 for 84 units for hospital patients receiving traditional open surgery. If patients receiving a traditional open surgery in a hospital switched to Boston Hernia and gained a quality of life score of 92 units, they would save $1,439 or 31% of total costs born by Medicare. Similarly, if patients receiving a laparoscopic or robotic procedure in a hospital switched to Boston Hernia, the savings would amount to $2,783 or 45% of total costs.

Exhibit 1. Cost Per Unit of Quality of Life Gained in Inguinal Hernia Repair Note: The quality of life is measured based on EuraHS at 30 days post-surgery, which is normalized to a scale of 0 to 100. The higher the score, the better. The outcome improvement estimates came from the two academic publications by Reinhorn et al. and Agarwal et al. The cost data points are based on the 2023 Medicare payments to providers in the Great Boston area. ASC = Ambulatory Surgical Center. ACHQC = The Abdominal Core Health Quality Collaborative. ACHQC members are assumed to perform 50% of laparoscopic/robotic procedures and 50% of open procedures, and 90% of procedures are conducted in a hospital setting.

If we calculate the inverse of the ratios shown in Exhibit 1, we would conclude that Boston Hernia produces the best patient outcome per dollar spent, which is the definition proposed by Professor Porter. In other words, Boston Hernia is the most efficient provider, meaning it generates more value for money than other hernia repair providers.

What is Boston Hernia’s secret sauce? The answer lies in its focus on patient-centered care.

• First, it customizes care for each patient. While many surgeons repair hernias the same way for every patient, Boston Hernia recognizes that there is substantial evidence to suggest specific approaches are less risky for certain patients. Hernia repair is not a one-size-fits-all surgical procedure and nuanced adjustments can provide improved outcomes. Boston Hernia employs advanced techniques to provide surgical care tailored to each patient’s needs. This has led to the elimination of almost all chronic pain, reduced risks of hernia recurrence and the need for additional surgeries, and improved quality of life after repair.
• Second, it utilizes evidence-based and cost-effective surgical techniques rather than following fashion and using laparoscopic or robot-based surgical equipment. Numerous medical publications have shown that there is little to no quality difference for patients undergoing robotic hernia surgeries, but they are more expensive. In fact, leveraging the data from all members of the ACHQC, Boston Hernia surgeons published peer-reviewed academic research showing their “posterior mesh open surgery” is superior to traditional open surgery as well as laparoscopic or robotic surgery. And importantly, Boston Hernia’s open approach is cheaper than laparoscopic or robotic surgery.
• Third, Boston Hernia established a care-delivery unit and a care team specialized in hernia care. All employees have extensive expertise in hernia surgeries and are continually working to adopt evidence-based and the most cost-effective techniques.
• Finally, it invests in technology to measure outcomes and costs and is transparent in the results with patients. Outcomes are studied and quality data is shared. Through offering clean-cut and bundled surgical costs, patients can also see and compare how much their surgery will cost before it occurs.

How Can We Reduce Surgical Treatment Costs? A Case Study of Rotator Cuff Repair

Treatment cost is the other component of the value formula. Academic publications have demonstrated a wide variation in treatment costs across surgeons and institutions. Understanding why some surgeons or hospitals utilize more resources for the same procedure than others and adopting the best practices can help reduce costs. That is, we will need accurate costing data and benchmarking against the best practices.

Step 1. Obtain Accurate Cost Accounting Data

A prerequisite for cost reduction is to know how much a medical intervention costs and what the cost drivers are. But, this is not a trivial task. There are two challenges surgeons and administrators face: data and analytic tools.

First, traditional cost accounting based on existing data from hospitals and surgical centers is often insufficient. As a powerful solution, academic studies showed that time-driven activity-based costing (TDABC) is more accurate than traditional cost accounting. TDABC accounts for not just materials and supplies but also the amount of time spent by surgeons and operating room staff as well as the usage of an operating room, and therefore results in a much more accurate accounting of surgical costs.

Second, many surgeons and administrators do not have the right tools. They often aggregate and analyze the cost data using Excel spreadsheets and create pivot tables on top of existing pivot tables. Needless to say, this is a cumbersome process that is prone to errors, and it is inadequate for implementing value-based care.

Born out of the Harvard Business School’s value-based healthcare research, led by Professors Michael Porter and Robert Kaplan, Avant-garde Health was established in 2014 to help healthcare providers understand and improve their costs and outcomes via data analytics and actionable insights. In particular, it provides a sophisticated data and analytic platform that integrates hospital or ASC data and automates TDABC calculations, both of which lay a great foundation for value-based care implementation.

Exhibit 2 shows the rotator cuff repair supply cost data from an institution that Avant-garde Health has collaborated with. The platform provides detailed supply cost data by surgeons and by supply categories such as wound irrigator, suture anchor, surgical pack, medication, and implant system, among others. Such data analysis offers insights immediately. For instance, the 2nd physician used $344 per case just for sutures. The 3rd and 7th physicians spent over $1,000 on suture anchors and used $208 and $674 for implant systems, respectively.

Exhibit 2. Avant-garde Health Analytics Platform Automates TDABC Calculation: an Example of Rotator Cuff Repair Supply Costs Note: TDABC = Time-driven activity-based costing.

Step 2. Benchmark Against Best Practices

In order to learn from the best practices, we want to know how good they are and where they are most cost-efficient. Benchmarking against the best in the industry seems to be the right approach. As an example shown in Exhibit 3, on average, the institution spent $4,188 on a rotator cuff repair procedure, with supply costs accounting for 43% of the total. The institution was ranked at the 90th percentile nationally, which is a great achievement in itself. However, when looking at the total cost by physicians, the 3rd and the 7th surgeons were at the 50th percentile, about $5,000 per case. As you might notice, these are the same surgeons who used more suture anchors and implant systems than others; if they could reduce their use of suture anchors and implant systems to the average level, their total cost would be in line with that of other surgeons.

Exhibit 3. Avant-garde Health Analytics Platform Allows Benchmarking Against the Industry’s Best Providers: an Example of Total Rotator Cuff Repair Costs

Step 3. Implement the Best Practices

Equipped with the insights from TDABC data analysis, healthcare providers can take action to reduce surgical treatment costs. In the example of rotator cuff repair above, the institution talked to the two surgeons with high costs of suture, suture anchor, and implant system to figure out the underlying issues and was able to reduce surgical costs.

Working with many of the top-ranked hospitals in the country, Avant-garde Health has worked with these institutions to save millions of dollars. Based on its past successful case studies, Avant-garde Health has summarized four effective ways to reduce surgical treatment costs, such as decreasing surgical supply costs, hospital length of stay, operating room time, and post-acute care spending.

Summary

Given the U.S. healthcare system is rapidly changing, it is paramount for healthcare providers to shift away from volume-based care and implement value-based care. Measuring efficiency can provide a surrogate measure of value. The definition proposed by Professor Porter makes value-based care measurable and actionable: improving outcomes and reducing treatment costs.

Leveraging two example surgical procedures – hernia repair and rotator cuff repair and based on the experiences of Boston Hernia and Avant-garde Health, we summarize the core steps to improve outcomes and reduce costs. Equipped with these proven methods and tools, we will be able to further transform surgical care and make value-based care a reality.

Click here if you would like a downloadable PDF copy of this report.

Contributions made by Avant-garde Health & Boston Hernia Surgeons

Authored by: Ana Paula Etges, Michael Reinhorn, Nora Fullington, Lauren Ott, Porter Jones, Harry Liu