Measuring the Cost of Quality in Healthcare

Few services affect the lives of people so directly and personally as those offered by health care professionals. Quality determines how successfully we prevent and treat physical and mental illness - key concerns affecting the lives and well-being of our patients and their families.

In today’s competitive environment, quality has a direct impact on organizational success.  In his study of hundreds of thriving organizations, Dr J M Juran, the quality guru, has identified the practices most characteristic of a quality environment. Dr Juran found that the same organizational practices that attract and retain customers contribute to more empowered employees, higher revenue, and lower costs.  These practices are ongoing processes, generally referred to as Total Quality Management (TQM).

What is Quality?
There are many short definitions of quality, including "fitness for use", "meeting customer expectations, and "doing the right things right".  Any useful definition of quality must incorporate these two dimensions:

• product features (product includes both goods and services)
• freedom from deficiencies.

Product Features
Well-designed goods and services create customer satisfaction because they provide the features or characteristics customers need.  Customer satisfaction is a high priority for any organization because customers continue to use the goods and services that meet their needs.

The better an organization meets customer needs by providing the right combination of desirable features, the higher its revenue is likely to be.  This happens because the organization will attract more customers.  At the same time, providing more features will usually cost more.

Freedom from Deficiencies
Product with deficiencies create customer dissatisfaction.  They are also costly to an organization because mistakes must be identified and corrected, and the customer must be appeased.  What is more, the original work is wasted.  All these costs can be trimmed when quality is improved by reducing deficiencies.

Who are the Customers?
Customers are all those affected by our work, thus they ultimately define quality for us.  It is helpful to look at customers from two perspectives:

• External customers are those people outside of our organization whom we affect - patients, physicians who are not in our organization, third-party payers, etc.
• Internal customers are those within our organization for whom we supply goods and services.

Satisfying our external customers requires that we also satisfy our internal customers.

Total Quality
Not long ago, the concept of quality simply meant the absence of defects from a manufactured physical good.  In health care, quality tended to be limited to established standards for structure and process in clinical care.  We now realize that this "limited quality" or "little q" view restricts our ability to delight our customers.  To succeed today, we need to expand our approach to one of "Total Quality" or "Big Q".

Total Quality means:

• Customers are all those affected by what we do
• Products include both goods and services
• Processes include all functions
  • clinical care
  • service to all customers
  • support services
  • business operations.

Reducing Costs
If all work processes were consistently performed correctly, there would be no need to check them.  There would be no need to redo them, and customers would have no reason to complain.  In most health care organizations, however, work does need to be checked.  Much of it needs to be corrected, and considerable time and effort are spent reassuring dissatisfied customers.  The costs involved are high, but they would disappear if everything were done perfectly the first time.

For most organizations, costs associated with wasted effort and correcting work are between 20 and 40 per cent of total operating expenses. In health care settings, these costs are found in all administrative and clinical areas.

Most costs for correcting work are invisible because the customary practice is to budget for waste.  Budgets tend to be based on past performance, which includes all this work of correcting.  With fewer deficiencies, not only are the customers happier, but costs are also dramatically lower.

Three Categories of Costs Associated With Poor Quality
The accumulated results of many studies of costs for poor quality indicate these costs generally fall into three major categories:

• Appraisal/inspection costs
• Internal failure costs
• External failure costs.

Appraisal / Inspection Costs
Appraisal and inspection costs are associated with finding errors before customers are affected by them.

Appraisal and inspection costs are often incurred to:

• Review physician order requisitions before transmission to ancillary departments
• Check patient medication records against existing medication stock
• Inspect purchased equipment/supplies
• Examine preoperative/preprocedure checklists
• Proofread medical record transcriptions
• Audit patient charges prior to billing.

Internal Failure Costs
Internal failure costs are those for repairing, replacing, or discarding work in progress or completed work.  The customer does not see the associated deficiency directly, but customer service may well be impaired.

Internal failure costs might be incurred to:

• Replace medications discarded because of improper labelling of date and time
• Purchase extra linens and other supplies because of hoarding to prevent shortages
• Make up for unplanned computer downtime
• Wait for late input of admissions data, patient orders, lab results, etc.                     
• Redesign clinical processes that were poorly planned
• Perform lab tests on a STAT basis when there is no emergency       
• Correct improper recording of narcotics used on a nursing unit
• Locate medical records that are unavailable when needed.

External Failure Costs
External failure costs are those that directly affect the customer and are the most expensive to correct.  Besides remedial costs, external failures incur expenses to attempt to regain customer confidence.  What is more, there is another price to pay for external failures that cannot be fully accounted for - the costs associated with losing dissatisfied customers.

Common external failure costs include those to:

• Treat postoperative wound infections
• Restart improperly taped patient IVs
• Return a patient to surgery because of complications
• Perform unnecessary procedures or tests
• Correct billing errors
• Make up for delays in surgical procedures
• Appease customers dissatisfied because of excessive waiting times
• Process patient or physician complaints.

Quality Results
Quality features drive an organization’s revenues, and reduced deficiencies lower costs.  Both improve overall financial performance.  Organizations that have initiated quality improvement efforts report significant results. Dr J M Juran, Founder and Chairman Emeritus of Juran Institute, summarizes some of them as follows:

The most visible features of these achievements is their stunning magnitude...numerous cases in which, during a few years:

• The time to provide customer service has been reduced by an order of magnitude
• Defect levels have been reduced by an order of magnitude
• Productivity has been doubled
• Costs have been cut by 50 per cent.

These are indeed stunning results.

The second notable features of the achievements is that the improvements took place throughout the entire spectrum of company activities: customer satisfaction, timeliness of customer service, quality of business processes, employee safety...

Thirdly, we should notice that the companies have made extensive gains beyond the measurable results.  For example, as a byproduct of making all these improvements, their personnel have become experienced at making improvements and have gotten into the habit of making improvements.  In addition, most of these improvements were made by teams.  That requires teamwork. The exhilaration of being on winning teams then carries over into traditional responsibilities as well.

Excerpts from a speech by Dr Juran at "Made in USA: A Break in the Clouds", at the presentation of the 1989 Malcolm Baldrige National Quality Awards, February 23, 1990.

Good News for Health Care Organizations
Equally significant for health care professionals are studies of clinical outcomes in hospitals.  These results were detailed in an article by Gregory S Binns and John F Early in Juran Report, Number 10, Autumn, 1989, entitled "Hospital Care: Frontiers in Managing Quality". The bottom line: improving quality increased both market share and financial performance.

No Accident
The impressive results of TQM are no accident.  They are created using a systematic, structured approach to quality based on three processes: quality planning, quality improvement, and quality control.  These processes are known as the Juran Trilogy.