What is the Cost of Quality in your Organization?

CFOs often work closely with operations-focused consultants, as both of us are very interested in efficiencies that positively affect the organization's bottom line. In one of my past assignments, I worked with Rebecca Brooks of Efficient Health Care Operations. Here, she has contributed her input on why efficiency and quality go hand in hand in process improvement efforts.



• Do you or your staff spend more time fixing mistakes than preventing them?
• What happens when your usually-smooth work flow is disrupted? Does it ruin the rest of the day?
• How much time is spent after an action or interaction on issues that should have been resolved before or during that event?
In these economic times, those who prosper look for every opportunity, large or small, to streamline operations and reduce costs. Often, the opportunities we can identify are not huge, slap-in-the-face ones, but rather small, incremental ones that can add up to big savings. That is why operations improvement has been labeled a “game of inches.”

A quality process uses the shortest route to a good patient outcome, both clinically and economically. Mistake correction can cost 10 to 100 times what prevention costs; this is the Cost of Quality. The Cost of Quality model shows that where in a process resources (labor, supplies and equipment) are expended greatly influences the overall expense. The goal is to perform the correct steps in the correct order, avoiding re-work, bottlenecks and preventable snafus. This applies to care in both inpatient and outpatient settings, to non-clinical support areas, and especially to time and process-critical services such as surgery, imaging and laboratory.
HOW THE MODEL WORKS: When prevention activities are deployed early on in a process, fewer correction costs are necessary to address process failure. “Good” expenses up front reduce bad events; expenses incurred to fix mistakes after they have happened waste resources.
The four cost categories in the Cost of Quality model are:
PREVENTION, APPRAISAL, INTERNAL FAILURE and EXTERNAL FAILURE.
To ensure a smooth process, PREVENT mistakes.
Examples of Prevention activities are:
• Appointment reminders, to reduce or eliminate no-shows;
• Pre-registration and pre-authorization, plus ensuring necessary blood work, radiographs, and physical exam beforehand, so treatment or surgery is not delayed.

As we work, APPRAISE, or monitor and adjust for the way the process is actually happening in real time. Appraisal might more appropriately be called ADJUSTMENT: modifying processes on the fly based on unforeseen or unusual situations.
Appraisal possibilities are:
• Reassigning a staff member on the spot to accommodate an absence;
• Deploying more resources to bottlenecks that develop, to ensure planned schedules stay on time.
If PREVENTION and APPRAISAL have not been successful, INTERNAL FAILURE may result. Internal failure happens when we don’t prevent a mistake, but we discover and correct it a short time later, before it travels outside the organization. It is a “save,” but it certainly takes much more effort.
Internal Failure Examples:
• Missing a medical record or test result for a patient, but finding it at the last minute before the patient arrives; or
• A patient arrives in surgery without blood work, but results are obtained in time so that surgery can still be done later that day.
EXTERNAL FAILURE is the worst case in wasting time/money by taking action too late in the process. External failure happens when we fail to prevent a mistake, we don’t catch it, and it travels beyond the institutional walls.
External failure examples are:
• An uncollectable debt, due to initial failure to obtain correct patient and insurer information;
• Inability to schedule a follow up appointment in an appropriate interval, because a future scheduling template had not been created, necessitating a call back to the patient to reschedule.
THE COST of QUALITY: The Cost of Quality model states that if the relative cost of Prevention or Appraisal is $1, the relative cost of correcting it when it becomes Internal Failure rises to 10 times that, or $10. If the process is so out of control that it results in External Failure, the relative cost to fix it rises exponentially to $100, or 100 times as much (!) spent in labor, loss of customer satisfaction and dollars to fix something that could have been avoided with $1 worth of effort.
The message is powerful. The quality organization shifts emphasis from fixing what went wrong to preventing breakdowns in the first place. During this shift, it is cost-efficient to spend a bit more time and money up front on Prevention and Appraisal/Adjustment activities; as a result, many times less will be spent on activities associated with correcting Internal and External Failure.
Think about the time you spend on “fire drills,” i.e., all resources directed at an immediate and critical problem. Could those fires have been prevented? Ask your staff how they spend their time. Then allocate resources to the best place in the process. The result will be better quality at a lower cost!

Satisfy Your Customer To Improve Your Margins

It seems like a no-brainer, but as hospitals strive to implement programs and processes to improve their bottom line, they don't always focus on this most important element. Like most of you, I've been in the role of patient on occasion and have at times been gob-smacked by the poor customer service attitude of the employees (both clinical and support personnel) I interacted with. For example, how often have you experienced a perceived lack of compassion by clinical staff, a cumbersome or non-friendly registration process, or bad meals?

In the June 2010 edition of HFM Magazine, a brief article on data trends, prepared by the American Hospital Directory, delineates the correlation of positive patient questionnaire responses to operating margins. The data was collected by the Centers for Medicare & Medicaid Services (CMS) based on the Hospital Consumer Assessment of Healthcare Providers and Systems survey instrument.

Hospitals were ranked into quartiles, based on high to low overall ratings, and the median operating margin was calculated for each quartile. The following table tells the story:

          Quartile       Margin
               1             (1.65418)
               2             (1.46375)
               3             (0.44875)
               4              0.409934

Quality, as perceived by patients, is not solely measured by clinical indicators. Everyone having contact with the patient/customer must exhibit a passion to satisfy or exceed their expectations. This can only be accomplished through cultural training and by measuring customer friendliness as a component of employee's periodic evaluations.

Needless to say, it all starts with senior management's dedication to achieving cultural change, and the CFO is an integral player in that regard. Be a role model for your staff and the rest of the organization. The numbers indicate it can only help your bottom line.

CFOs and the Business of Quality

Under the Health Care Reform Act, hospitals will be measured, and paid in part, on the basis of quality indicators. Those organizations that have not heretofore focused on quality will need to do so. Those that have will seek to move to the next level of quality. This is good news for consumers of health care, but equally good for the providers. It's been shown that as efficiencies and protocols are developed, quality rises, as does profitability. So, everybody wins. Need I mention this principle applies to every other industry as well?

What does this have to do with CFOs, you ask? We are critical members of the management team's collaborative efforts to improve quality and to measure improvement over time. We're familiar with key performance indicators and benchmark comparisons focused on such areas as liquidity, productivity and profitability. If we haven't already done so, we need to create similar, relevant statistics and meaningful reporting focused on quality indicators as well. There are a number of published statistics and benchmarks regarding numerous quality indicators, from reinfection rates to slips and falls.

I suggest CFOs be at the forefront of their organization's initiatives to improve quality, by teaming with the operations leaders to identify the strategic quality improvement objectives, develop key metrics to measure progress toward those objectives and create timely, meaningful reporting of progress.

So, for those currently involved, congratulations! For those who are not, what are we waiting for?