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The Total Value Equation: A Suggested Framework for Understanding Value Creation in Diagnostic Radiology
The Total Value Equation: A Suggested Framework for Understanding Value Creation in Diagnostic Radiology Richard E. Heller III, MD, MBAa,b
As a result of macroeconomic forces necessitating fundamental changes in health care delivery systems, value has become a popular term in the medical industry. Much has been written recently about the idea of value as it relates to health care services in general and the practice of radiology in particular. Of course, cost, value, and cost-effectiveness are not new topics of conversation in radiology. Not only is value one of the most frequently used and complex words in management, entire classes in business school are taught around the concept of understanding and maximizing value. But what is value, and when speaking of value creation strategies, what is it exactly that is meant? For the leader of a radiology department, either private or academic, value creation is a core function. This article provides a deeper examination of what value is, what drives value creation, and how practices and departments can evaluate their own value creation efficiencies. An equation, referred to as the Total Value Equation, is presented as a framework to assess value creation activities and strategies. Key Words: Value, operations, management, strategy J Am Coll Radiol 2014;11:24-29. Copyright © 2014 American College of Radiology
INTRODUCTION
As a result of economic pressures necessitating fundamental changes in health care delivery systems, value has become a popular term in the medical industry. Much has been written recently about the idea of value as it relates to health care services in general and the practice of radiology in particular [1-4]. Of course, cost, value, and cost-effectiveness are not new topics of conversation in radiology [5,6]. Not only is value one of the most frequently used and complex words in management, entire classes in business school are taught around the concept of understanding and maximizing value. For the leader of a radiology department, either private or academic, value creation is a core function. But what exactly is value, and when speaking of value creation strategies, what is it that is meant? This article provides a deeper examination of what value is, what drives value creation, Credits awarded for this enduring activity are designated “SA-CME” by the American Board of Radiology (ABR) and qualify toward fulfilling requirements for Maintenance of Certification (MOC) Part II: Lifelong Learning and Self-assessment. a Radiology Imaging Consultants, SC, Harvey, Illinois. b Department of Radiology, Advocate Children’s Hospital, Oak Lawn, Illinois. Corresponding author and reprints: Richard E. Heller III, MD, MBA, Advocate Children’s Hospital, Department of Radiology, 4440 W 95th Street, Oak Lawn, IL 60453; e-mail: [email protected].
and how practices and departments can evaluate their own value creation efficiencies. An equation, referred to as the total value equation (TVE), is presented as a framework to assess value creation activities and strategies. The concept of value, namely, the idea of benefits in relation to cost, is intuitively understood by consumers. When shopping for a car, customers consider their fundamental needs from a car, additional benefits they desire from a car, their budget, and the various product offerings. Combining these concepts, customers narrow down their choices and settle on a car that provides them the greatest value, or benefit for their purchase price. Value, understood from a business perspective, combines these intuitively understood concepts. It is occasionally described as equal to (or at least proportional to) benefits divided by or minus price. Others have described value as proportional to cost and quality multiplied by efficiency [7]. A classic corporate strategy text defines value as “the difference between the benefits enjoyed by a firm’s customers and its cost of production” [8]. Value thus combines the concepts of customer desires, the benefits received from a product (or service), and the costs associated with producing the product (or service). In traditional corporate strategy theory, value is deconstructed into 3 variables. The first is the benefits (B) a consumer receives from a good or service. This can be quantified in monetary terms and understood as the
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© 2014 American College of Radiology http://dx.doi.org/10.1016/j.jacr.2013.03.016
Heller/The Total Value Equation 25
maximum willingness to pay for a good or service. The second variable is the costs of production (C) of that good or service. The difference between B and C defines the total value created. That is, the difference between the cost to produce a good and the maximum that a second party will pay for that good represents the value created. The third and final variable is the price (P) charged for the product. This final variable divides the total value created into two not necessarily equal portions. The difference between B and P, or the maximum willingness to pay and the actual price charged, is the value to the consumer. The value proposition of a firm is the difference between B and P, given its service offerings. The difference between price charged and the costs of production, or P and C, is the value captured by the firm producing the good or service. Value, understood from a health care perspective, typically equates benefits and patient outcomes. It has been suggested that for the medical industry, value should be understood as the health outcomes achieved given the dollars spent to achieve them [9]. Given comparative effectiveness research, the relationship between services (and value) and outcomes is increasingly important [10]. The value of a radiology department depends on to whom the question is posed. In health care, there are numerous stakeholders, including patients, physicians, insurance companies, the government, hospitals, pharmaceutical companies, and many others, all of whom may have differing perceptions of value. Understanding that patient care is always most important, for the purposes of this article, value is examined from the point of view of a hospital leader or chief executive officer, referred to as the client. This is whom radiologic service providers ultimately must negotiate their contracts with, thus monetizing their value creation activities. Hospital leaders must have the broadest view, for their mission is to satisfy the various stakeholders, keep an eye on the finances, and never lose sight of their top priority: patient care. As has been previously written, for any value assessment of health care to have meaning, it must be inherently patient centered and have a clear focus on optimizing outcomes [11]. Returning to the car analogy, customers will define the minimum characteristics they require from an automobile. For most car customers, chief among these is a reliable mode of transportation. Beyond this, they have varying wants and desires that they value at different strengths. For example, they may want a car with 4-wheel drive for bad weather conditions and be willing to pay quite a bit more for this feature. They may also prefer one color over another but not be willing to pay much for that option. Although the comparison is not perfect, given the complex task of balancing the concerns of the various stakeholders in a health care organization, as opposed to
the individual needs of a car shopper, hospital leaders evaluating radiologic service providers are at least analogous to car consumers. They must set a minimum level of services that need to be provided and then evaluate the other options groups may offer, along with the costs of these options. Given its budget and its varying desires for additional services beyond a core minimum, a hospital decides on a service provider that affords it the greatest value. To better understand how hospital leaders could more formally frame this value analysis, the TVE is suggested. THE TOTAL VALUE EQUATION
Emphasized by the fee-for-service model, radiologists are traditionally thought of as employed to interpret medical imaging examinations and issue formal reports to ordering physicians. Typical metrics of departmental function with respect to this service are speed of interpretation and overall interpretation quality. Means of quantifying these were developed, including turnaround times and various quality assurance parameters. This type of value is referred to as interpretive value and has been frequently understood as a core driver of value for a department or practice. Distinct from interpretive value, there is also value derived from noninterpretive, or so-called value-added, activities. These are benefits derived from a radiology department that are separate from image interpretation. This is a large category of activities, which can be subdivided into factors that directly affect patient care and those that do not. Noninterpretive value-creating activities that affect patient care include consultation with clinical colleagues, working conferences such as tumor boards, and ongoing optimization of imaging algorithms and protocols. Collaborating on utilization management efforts may also be a form of adding noninterpretive value. Factors that add noninterpretive value to the system but do not directly affect patient care include education efforts and research. Although not directly reimbursed in the fee-for-service model, noninterpretive value has financial implications. The concept of noninterpretive value has been recognized as a crucial component of a firm’s overall value proposition. As hospitals and health care networks analyze the benefits from their medical imaging service providers, the value from noninterpretive activity will likely become increasingly relevant. Regarding radiology department functions in the setting of an accountable care organization, an ACR white paper in 2011 noted, “This will most likely entail changing . . . focus from interpretative productivity, in the traditional sense of number of examinations interpreted, to becoming recognized as experts in noninterpretative areas that add additional value” to the accountable care organization [12]. Combining these two benefit-related concepts of value, interpretive and noninterpretive, the TVE can be
26 Journal of the American College of Radiology/ Vol. 11 No. 1 January 2014
derived. That is, total value (VT) is equal to the sum of interpretive value (VI) and noninterpretive value (VNI). Both VI and VNI can be deconstructed into their constituent parts. For example, the main drivers of VI are quality and timeliness. Quality itself can be defined several ways, including as factors that relate to the subspecialty training of imaging interpreters and various quality assurance parameters. Timeliness relates to the speed at which reports are made available to the relevant physicians. VNI can also be broken down into its components, including activities that directly affect care and those that do not. In its most simple form, the equation is VT ⫽ VI ⫹ VNI. To expand on the equation, because VI and VNI may be valued differently by various clients, weighting variables (WI and WNI) that sum to 1 are added. For example, if VI is valued 4 times as much as VNI, then WI is equal to 0.8 and WNI is equal to 0.2. The final equation is thus written as VT ⫽ (VI)(WI) ⫹ (VNI)(WNI ), where VT is the total value supplied to a system, VI is the interpretive value supplied, WI is the weighted preference of that system for interpretive value, VNI is the noninterpretive value supplied, and WNI is the weighted preference of that system for noninterpretive value. In this framework, VT refers to the total value supplied to an organization (such as a hospital) given its weighting preferences (WI and WNI). The value supplied is the sum of those weighting variables, each multiplied by the interpretive and noninterpretive value (VI and VNI, respectively) supplied by the radiology practice. The analysis provided by the TVE is consistent with Dr Enzmann’s [13] article on the value chain of radiology. That article indicated that the professional service model that has historically existed will be replaced with an information service model. The professional service model is one in which payment is made for interpretive services. Putting this in terms of the TVE, VI alone is both valued and reimbursed in the professional service model. In the information service model, which values noninterpretive activities such as consultative services as well as interpretive activities, both VNI and VI are valued. Dr Enzmann made the argument that the more global view of value provided by the information service model is the wiser long-term strategy. He wrote that because “the raison d’être of radiology is to answer a clinical question, it has a better chance of thriving by centering on the idea of creating actionable information for decisions, rather than on the narrower focus of reading images” [13]. Although full quantification of the variables in the TVE can be challenging, understanding the intuition
behind the TVE can be a useful exercise in understanding the value proposition of a particular radiology group or the needs of a given employer. Of note, this equation describes the value related to the practice of diagnostic radiology. There is obviously tremendous value in the practice of interventional radiology, which must also be included in an overall value assessment of a department. An extended version of the TVE could include the variable VIR, for the value related to the interventional radiology section. CLIENT HETEROGENEITY AND MARKET SEGMENTATION
There are strategic implications of the TVE, beginning with the concepts of client heterogeneity and market segmentation. These two concepts refer to the differing needs of various consumers in a marketplace. To return to the car analogy, the overall car-buying market is extremely diverse, including buyers looking for weekend sports cars as well as families looking for minivans. More formally, the market can be broken down, or segmented, in multiple ways. It can be segmented by the type of vehicle, such as sports car, sedan, or sport utility vehicle. This can then be further subdivided by price. Successful companies understand the varying market segments, target a certain segment of the market, and optimize their processes to maximize their overall value proposition (the difference between B and P) to their specifically targeted consumer populations. The TVE underscores the importance of recognizing market segmentation and client heterogeneity. It should be acknowledged that quality, in terms of accuracy in interpretations, will vary little if at all between clients. All consumers of radiologic services rightfully expect that their images will be read at the highest level. They may differ in other aspects of VI, however, including the required turnaround times and the complexity of the cases requiring subspecialty radiologists. Given differences in WI and WNI among various clients, the same radiology practice (with the same radiologists and practicing in the same fashion) would deliver different value to each client. That difference is unrelated to the radiology group but rather due to inherent differences in the weighting values of the employing organization. To put this in terms of cars, people in Miami value (and will pay extra for) a convertible, whereas the exact same car being sold in northern Canada might not be considered as valuable. Understanding market segmentation becomes crucial in a competitive industry. Michael Porter [14], of Harvard Business School, has written extensively about competition and the 5 main forces that affect the overall competitiveness of an industry. These forces are the bargaining power of customers, the bargaining power of suppliers, the threat of new entrants, the threat of substi-
Heller/The Total Value Equation 27
tute products, and the competitive rivalry among established firms. Using this framework, it can be understood why medical imaging service providers are experiencing increasing competitive pressures. Historically, radiology practices were protected to a degree from competitive forces by geographic isolation. Specifically, radiologists had to physically be present to provide image interpretation services. Actual films were obtained, printed, and displayed in the department, necessitating the physical presence of radiologists. The implication of this is that competition was limited to local practices. With the advent of digital image acquisition and transfer, these protective geographic boundaries disappeared. The effect has been increased competition due to new entrants: national teleradiology firms. Coincidentally, at the same time that hospital budgets have tightened, a new level of competition has emerged, creating downward pressure on pricing. Even well-respected local radiology groups have found themselves displaced by such national firms [15]. In light of market segmentation, the TVE also explains the opportunities and challenges of outsourcing teleradiology firms. These firms can offer high VI at a reasonable cost, but they do so at the expense of lower VNI. Although VNI can certainly be provided remotely, it is limited in this regard compared with on-site radiologists. Given market heterogeneity, these teleradiology firms have been able to find consumers whose needs match their value propositions. Specifically, if a client wishes to outsource its after-hours examinations, it is seeking a firm that most efficiently delivers VI, with less concern for VNI. A major challenge for the outsourcing teleradiology industry is commoditization. If outsourcing teleradiology firms X and Y can each offer an acceptable quality of interpretation and reasonable turnaround times, the discriminating factor between the two will be price, leading to commoditization of imaging services and downward pressure on industry pricing. A further challenge for teleradiology firms has been and will be to grow beyond the limitations of VI. Note that even growth into daytime interpretive services is still growth within the bounds of VI. For sustained, longterm growth, outsourcing firms may seek ways to deliver a more complete value proposition. In fact, some teleradiology firms have already structured their business models to create partnerships with local groups [16]. In this manner, the local groups provide the VNI, as well as some of the VI. A partnership with an outsourcing firm that focuses on highly efficient VI delivery allows the local group to offer a superior overall value proposition to the hospital employer. Additionally, some regional service providers have grown to a sufficient size that they can directly compete with such partnerships by offering onsite coverage, which is enhanced by networked in-house teleradiology support.
THE OPERATIONS FRONTIER CURVE
As competitive pressures increase, radiology practices, particularly traditional private radiology groups that provide imaging services to hospitals and imaging centers, need to consider what market segments they wish to serve, as well as those that their resources best fit. The TVE helps radiologic service providers, as well as their client hospitals, analyze their needs and can help structure analysis of the various value propositions. This analysis will help firms target market segments that their resources and processes can most efficiently serve. Because the consumers of medical imaging service providers are quite diverse, the market can be segmented in various ways. The needs, and thus value assessments, of these users vary, thus providing an opportunity for radiologic service firms to focus on particular segments. For example, the value proposition delivered to a tertiary care hospital is quite different from the one provided to a community hospital, a specialty hospital, or an outpatient facility. A group wishing to provide coverage to a full-service general hospital should include radiologists proficient in interventional radiology, neuroradiology, musculoskeletal imaging, body imaging, breast imaging, and nuclear medicine, among others. Furthermore, the group needs to have some provision for weekend and after-hours coverage. Compare this with a radiology practice providing services to an orthopedic outpatient clinic and day surgery center. A client such as this would require a different value proposition. Although both groups require radiologic services, their needs are distinct. By focusing on a particular market segment, a group is able to optimally arrange its resources to fit its desired value proposition. The concept of optimizing resources to address market segmentation is understood in a graph referred to as the operations frontier curve (Fig. 1) [17]. The x axis is the cost associated with producing a given service (or a good). The y axis is the perceived value associated with the service (or product). In this framework, value could include the variety of services offered. Firms that are on the frontier curve have the ability to offer the highest value, that is, benefit for the cost. By definition, a firm on the frontier curve can state that no other firm delivers equal or greater benefits than it does for the cost. For example, firm 1 has a high-cost but also a high-quality offering. No firm offers an equal or higher quality for the cost. In radiology terms, this may be a group that offers a great deal of subspecialization along with value-added activities but is of a higher cost to its hospital clients. In comparison, firm 2 offers lower quality (eg, longer turnaround times, less subspecialization, and less value-added activity), but it does so at a lower price point, allowing it to optimally compete for the lower cost segment of the marketplace. Firm 3 is not on the curve and thus should have trouble competing. Firm 2 can offer approximately the same
28 Journal of the American College of Radiology/ Vol. 11 No. 1 January 2014
CONCLUSIONS
Fig 1. The operations frontier curve. The x axis is the cost associated with producing a given good or service. The y axis is the quality (or perceived value or benefit) associated with the product or service. Firms that are on the frontier curve have the ability to offer the highest value, that is, benefit for the cost [17].
perceived quality level as firm 3 but can do so at a substantially lower price given its lower cost structure. Firm 3 would also have difficulty competing on quality because firm 1 is far higher in this metric, with only slightly higher costs. These classic business principles have direct implications for radiology firms. Because of technological advancements, and new entrants competing for market share, competitive pressures have risen. Firms that can maximize their value proposition for a given segment should be best positioned to compete in the new landscape. Efficiency, understood in this framework, is inherently relative. A practice should strive to be as efficient as possible given the service level it wishes to provide. From this perspective, it is a foolish radiology leader who seeks to lower costs without regard to service level. In Figure 1, firms 1 and 2 are both highly efficient. In fact, no firms in their industry are more efficient. Their cost structures, however, are wildly different. Firm 1 is not trying to lower its cost structure at the expense of its vertical position on the curve. It is not directly competing with firm 3, which occupies a different position on the curve and targets a different segment of the market. This does not mean that firms on the curve should not continually focus on improving their efficiencies. In fact, because the curve is continually shifting outward, firms that maintain the status quo will invariably be left behind. What it does mean is that firms should seek to either minimize their cost structures while attaining certain levels on the vertical axis, or they should elevate their vertical positions without increasing their costs. This ideology will place firms on the frontier of the curve and in the best competitive positions.
Although various economic forces are resulting in decreasing reimbursements for services, hospitals are also under increased pressure to satisfy their medical staff and referring physician base. This means that they must maintain a certain level of service quality and cannot afford to simply focus on lowest cost solutions. There is monetary value in satisfying clinicians through noninterpretive (VNI) activities. In an accountable care organization system, hospitals will be required to satisfy their medical staff members or risk patient referral elsewhere. Regarding both outpatient imaging centers and hospitalbased imaging practices, it has been said that referring physicians are the lifeblood of a radiology department [18]. A department that cannot satisfy its referring base, and a hospital that is unable to attract and retain patients, will obviously not be sustainable. In this time of decreasing reimbursement and increased competition for patients, value assessments will become even more important. Value, from the point of view of hospital leadership, can be thought of as the difference between benefits received (B) and the price paid (P). To maximize the value proposition offered by a services provider, either B must be elevated or P lowered (or both). To be sustainable, the medical imaging services provider must also have low enough costs (C) to generate a sufficient profit (the difference between P and C). Thus, to remain competitive, firms must be able to offer a certain level of B with the greatest efficiency. To optimize their specific value propositions, firms may choose to target certain segments of the marketplace and then streamline their operations to deliver determined levels of benefits in the most cost-efficient manner possible. This would place the groups on the operations frontier curve, meaning that of all the firms in the marketplace, they provide the highest service level, given their cost structures. Putting this in terms of the TVE, hospitals will require a certain level of services, both interpretive and noninterpretive. Additionally, they will value these services differently. To most efficiently deliver value, a radiology group will need to look at the costs associated with supplying both VI and VNI. It may be more optimal to outsource much of the VI to teleradiology firms, while the local radiologists provide the additional services (both VI and VNI) the hospital client expects and demands. Alternatively, groups may choose to grow to a sufficient size to provide economies of scale. Regardless of which strategy is taken, meeting these novel challenges will involve evolutionary changes in the way medical imaging service firms practice. Value assessment and optimization have become a part of the lexicon of radiology leadership. The TVE provides a useful framework for understanding both the medical imaging service needs of a health care organization, as well as the value provided by a radiologic services firm or depart-
Heller/The Total Value Equation 29
ment. Although additional changes in health care are sure to come, understanding value creation is here to stay.
10. Pandharipande PV, Gazelle GS. Comparative effectiveness research: what it means for radiology. Radiology 2009;253:600-5.
REFERENCES 1. Neumann PJ, Tunis SR. Medicare and medical technology—the growing demand for relevant outcomes. N Engl J Med 2010;362:377-9.
12. Allen B Jr, Levin DC, Brant-Zawadzki M, Lexa FJ, Duszak R Jr. ACR white paper: strategies for radiologists in the era of health care reform and accountable care organizations: a report from the ACR future trends committee. J Am Coll Radiol 2011;8:309-17.
2. Lee CI, Enzmann DR. Measuring radiology’s value in time saved. J Am Coll Radiol 2012;9:713-7.
13. Enzmann DR. Radiology’s value chain. Radiology 2012;263: 243-52.
3. Carlos RC, Buist DSM, Wernli KJ, Swan JS. Patient-centered outcomes in imaging: quantifying value. J Am Coll Radiol 2012;9:725-8.
14. Porter ME. Competitive strategy. New York: Free Press 1980:1.
4. Gazelle GS, Kessler L, Lee DW, et al. A framework for assessing the value of diagnostic imaging in the era of comparative effectiveness research. Radiology 2011;261:692-8. 5. Forman HP. Cost, value and price: what is the difference and why care? Radiology 2001;218:25-6. 6. Singer ME, Applegate KE. Cost-effectiveness analysis in radiology. Radiology 2001;219:611-20. 7. Rawson JV. Roots of health care reform. J Am Coll Radiol 2012;9:684-8. 8. Dranove D, Marciano S. Kellogg on strategy. Hoboken, NJ: John Wiley; 2005:30. 9. Porter ME, Teisberg EO. Redefining health care: creating value-based competition on results. Boston, Massachusetts: Harvard Business School Press; 2006:4.
11. Porter ME. What is value in health care? N Engl J Med 2010;363:2477-81.
15. Freeman L. Longtime Naples radiologists go to Physicians Regional; NCH hires national firm. November 20, 2011. Available at: http:// www.naplesnews.com/news/2011/nov/20/radiology-NCH-Physicianregional-Radisphere-health. Accessed May 1, 2013. 16. National teleradiology provider StatRad: now serving Michigan. July 3, 2012. Available at: http://www.prweb.com/releases/2012/7/prweb9663349. htm. Accessed May 1, 2013. 17. Towery M. Operational efficiency versus strategy. Industrial Research and Strategy. Available at: http://industrialresearchstrategy.blogspot.com/ 2010/04/operational-efficiency-versus-strategy.html. Accessed May 1, 2013. 18. Vasko C. Quantum leap: radiology groups consolidate to grow. October 2, 2011. Available at: http://www.imagingbiz.com/articles/view/quantumleap-radiology-groups-consolidate-to-grow. Accessed May 1, 2013.
Credits awarded for this enduring activity are designated “SA-CME” by the American Board of Radiology (ABR) and qualify toward fulfilling requirements for Maintenance of Certification (MOC) Part II: Lifelong Learning and Self-assessment.
As a result of macroeconomic forces necessitating fundamental changes in health care delivery systems, value has become a popular term in the medical industry. Much has been written recently about the idea of value as it relates to health care services in general and the practice of radiology in particular. Of course, cost, value, and cost-effectiveness are not new topics of conversation in radiology. Not only is value one of the most frequently used and complex words in management, entire classes in business school are taught around the concept of understanding and maximizing value. But what is value, and when speaking of value creation strategies, what is it exactly that is meant? For the leader of a radiology department, either private or academic, value creation is a core function. This article provides a deeper examination of what value is, what drives value creation, and how practices and departments can evaluate their own value creation efficiencies. An equation, referred to as the Total Value Equation, is presented as a framework to assess value creation activities and strategies. Key Words: Value, operations, management, strategy J Am Coll Radiol 2014;11:24-29. Copyright © 2014 American College of Radiology
INTRODUCTION
As a result of economic pressures necessitating fundamental changes in health care delivery systems, value has become a popular term in the medical industry. Much has been written recently about the idea of value as it relates to health care services in general and the practice of radiology in particular [1-4]. Of course, cost, value, and cost-effectiveness are not new topics of conversation in radiology [5,6]. Not only is value one of the most frequently used and complex words in management, entire classes in business school are taught around the concept of understanding and maximizing value. For the leader of a radiology department, either private or academic, value creation is a core function. But what exactly is value, and when speaking of value creation strategies, what is it that is meant? This article provides a deeper examination of what value is, what drives value creation, Credits awarded for this enduring activity are designated “SA-CME” by the American Board of Radiology (ABR) and qualify toward fulfilling requirements for Maintenance of Certification (MOC) Part II: Lifelong Learning and Self-assessment. a Radiology Imaging Consultants, SC, Harvey, Illinois. b Department of Radiology, Advocate Children’s Hospital, Oak Lawn, Illinois. Corresponding author and reprints: Richard E. Heller III, MD, MBA, Advocate Children’s Hospital, Department of Radiology, 4440 W 95th Street, Oak Lawn, IL 60453; e-mail: [email protected].
and how practices and departments can evaluate their own value creation efficiencies. An equation, referred to as the total value equation (TVE), is presented as a framework to assess value creation activities and strategies. The concept of value, namely, the idea of benefits in relation to cost, is intuitively understood by consumers. When shopping for a car, customers consider their fundamental needs from a car, additional benefits they desire from a car, their budget, and the various product offerings. Combining these concepts, customers narrow down their choices and settle on a car that provides them the greatest value, or benefit for their purchase price. Value, understood from a business perspective, combines these intuitively understood concepts. It is occasionally described as equal to (or at least proportional to) benefits divided by or minus price. Others have described value as proportional to cost and quality multiplied by efficiency [7]. A classic corporate strategy text defines value as “the difference between the benefits enjoyed by a firm’s customers and its cost of production” [8]. Value thus combines the concepts of customer desires, the benefits received from a product (or service), and the costs associated with producing the product (or service). In traditional corporate strategy theory, value is deconstructed into 3 variables. The first is the benefits (B) a consumer receives from a good or service. This can be quantified in monetary terms and understood as the
24 1546-1440/14/$36.00
●
© 2014 American College of Radiology http://dx.doi.org/10.1016/j.jacr.2013.03.016
Heller/The Total Value Equation 25
maximum willingness to pay for a good or service. The second variable is the costs of production (C) of that good or service. The difference between B and C defines the total value created. That is, the difference between the cost to produce a good and the maximum that a second party will pay for that good represents the value created. The third and final variable is the price (P) charged for the product. This final variable divides the total value created into two not necessarily equal portions. The difference between B and P, or the maximum willingness to pay and the actual price charged, is the value to the consumer. The value proposition of a firm is the difference between B and P, given its service offerings. The difference between price charged and the costs of production, or P and C, is the value captured by the firm producing the good or service. Value, understood from a health care perspective, typically equates benefits and patient outcomes. It has been suggested that for the medical industry, value should be understood as the health outcomes achieved given the dollars spent to achieve them [9]. Given comparative effectiveness research, the relationship between services (and value) and outcomes is increasingly important [10]. The value of a radiology department depends on to whom the question is posed. In health care, there are numerous stakeholders, including patients, physicians, insurance companies, the government, hospitals, pharmaceutical companies, and many others, all of whom may have differing perceptions of value. Understanding that patient care is always most important, for the purposes of this article, value is examined from the point of view of a hospital leader or chief executive officer, referred to as the client. This is whom radiologic service providers ultimately must negotiate their contracts with, thus monetizing their value creation activities. Hospital leaders must have the broadest view, for their mission is to satisfy the various stakeholders, keep an eye on the finances, and never lose sight of their top priority: patient care. As has been previously written, for any value assessment of health care to have meaning, it must be inherently patient centered and have a clear focus on optimizing outcomes [11]. Returning to the car analogy, customers will define the minimum characteristics they require from an automobile. For most car customers, chief among these is a reliable mode of transportation. Beyond this, they have varying wants and desires that they value at different strengths. For example, they may want a car with 4-wheel drive for bad weather conditions and be willing to pay quite a bit more for this feature. They may also prefer one color over another but not be willing to pay much for that option. Although the comparison is not perfect, given the complex task of balancing the concerns of the various stakeholders in a health care organization, as opposed to
the individual needs of a car shopper, hospital leaders evaluating radiologic service providers are at least analogous to car consumers. They must set a minimum level of services that need to be provided and then evaluate the other options groups may offer, along with the costs of these options. Given its budget and its varying desires for additional services beyond a core minimum, a hospital decides on a service provider that affords it the greatest value. To better understand how hospital leaders could more formally frame this value analysis, the TVE is suggested. THE TOTAL VALUE EQUATION
Emphasized by the fee-for-service model, radiologists are traditionally thought of as employed to interpret medical imaging examinations and issue formal reports to ordering physicians. Typical metrics of departmental function with respect to this service are speed of interpretation and overall interpretation quality. Means of quantifying these were developed, including turnaround times and various quality assurance parameters. This type of value is referred to as interpretive value and has been frequently understood as a core driver of value for a department or practice. Distinct from interpretive value, there is also value derived from noninterpretive, or so-called value-added, activities. These are benefits derived from a radiology department that are separate from image interpretation. This is a large category of activities, which can be subdivided into factors that directly affect patient care and those that do not. Noninterpretive value-creating activities that affect patient care include consultation with clinical colleagues, working conferences such as tumor boards, and ongoing optimization of imaging algorithms and protocols. Collaborating on utilization management efforts may also be a form of adding noninterpretive value. Factors that add noninterpretive value to the system but do not directly affect patient care include education efforts and research. Although not directly reimbursed in the fee-for-service model, noninterpretive value has financial implications. The concept of noninterpretive value has been recognized as a crucial component of a firm’s overall value proposition. As hospitals and health care networks analyze the benefits from their medical imaging service providers, the value from noninterpretive activity will likely become increasingly relevant. Regarding radiology department functions in the setting of an accountable care organization, an ACR white paper in 2011 noted, “This will most likely entail changing . . . focus from interpretative productivity, in the traditional sense of number of examinations interpreted, to becoming recognized as experts in noninterpretative areas that add additional value” to the accountable care organization [12]. Combining these two benefit-related concepts of value, interpretive and noninterpretive, the TVE can be
26 Journal of the American College of Radiology/ Vol. 11 No. 1 January 2014
derived. That is, total value (VT) is equal to the sum of interpretive value (VI) and noninterpretive value (VNI). Both VI and VNI can be deconstructed into their constituent parts. For example, the main drivers of VI are quality and timeliness. Quality itself can be defined several ways, including as factors that relate to the subspecialty training of imaging interpreters and various quality assurance parameters. Timeliness relates to the speed at which reports are made available to the relevant physicians. VNI can also be broken down into its components, including activities that directly affect care and those that do not. In its most simple form, the equation is VT ⫽ VI ⫹ VNI. To expand on the equation, because VI and VNI may be valued differently by various clients, weighting variables (WI and WNI) that sum to 1 are added. For example, if VI is valued 4 times as much as VNI, then WI is equal to 0.8 and WNI is equal to 0.2. The final equation is thus written as VT ⫽ (VI)(WI) ⫹ (VNI)(WNI ), where VT is the total value supplied to a system, VI is the interpretive value supplied, WI is the weighted preference of that system for interpretive value, VNI is the noninterpretive value supplied, and WNI is the weighted preference of that system for noninterpretive value. In this framework, VT refers to the total value supplied to an organization (such as a hospital) given its weighting preferences (WI and WNI). The value supplied is the sum of those weighting variables, each multiplied by the interpretive and noninterpretive value (VI and VNI, respectively) supplied by the radiology practice. The analysis provided by the TVE is consistent with Dr Enzmann’s [13] article on the value chain of radiology. That article indicated that the professional service model that has historically existed will be replaced with an information service model. The professional service model is one in which payment is made for interpretive services. Putting this in terms of the TVE, VI alone is both valued and reimbursed in the professional service model. In the information service model, which values noninterpretive activities such as consultative services as well as interpretive activities, both VNI and VI are valued. Dr Enzmann made the argument that the more global view of value provided by the information service model is the wiser long-term strategy. He wrote that because “the raison d’être of radiology is to answer a clinical question, it has a better chance of thriving by centering on the idea of creating actionable information for decisions, rather than on the narrower focus of reading images” [13]. Although full quantification of the variables in the TVE can be challenging, understanding the intuition
behind the TVE can be a useful exercise in understanding the value proposition of a particular radiology group or the needs of a given employer. Of note, this equation describes the value related to the practice of diagnostic radiology. There is obviously tremendous value in the practice of interventional radiology, which must also be included in an overall value assessment of a department. An extended version of the TVE could include the variable VIR, for the value related to the interventional radiology section. CLIENT HETEROGENEITY AND MARKET SEGMENTATION
There are strategic implications of the TVE, beginning with the concepts of client heterogeneity and market segmentation. These two concepts refer to the differing needs of various consumers in a marketplace. To return to the car analogy, the overall car-buying market is extremely diverse, including buyers looking for weekend sports cars as well as families looking for minivans. More formally, the market can be broken down, or segmented, in multiple ways. It can be segmented by the type of vehicle, such as sports car, sedan, or sport utility vehicle. This can then be further subdivided by price. Successful companies understand the varying market segments, target a certain segment of the market, and optimize their processes to maximize their overall value proposition (the difference between B and P) to their specifically targeted consumer populations. The TVE underscores the importance of recognizing market segmentation and client heterogeneity. It should be acknowledged that quality, in terms of accuracy in interpretations, will vary little if at all between clients. All consumers of radiologic services rightfully expect that their images will be read at the highest level. They may differ in other aspects of VI, however, including the required turnaround times and the complexity of the cases requiring subspecialty radiologists. Given differences in WI and WNI among various clients, the same radiology practice (with the same radiologists and practicing in the same fashion) would deliver different value to each client. That difference is unrelated to the radiology group but rather due to inherent differences in the weighting values of the employing organization. To put this in terms of cars, people in Miami value (and will pay extra for) a convertible, whereas the exact same car being sold in northern Canada might not be considered as valuable. Understanding market segmentation becomes crucial in a competitive industry. Michael Porter [14], of Harvard Business School, has written extensively about competition and the 5 main forces that affect the overall competitiveness of an industry. These forces are the bargaining power of customers, the bargaining power of suppliers, the threat of new entrants, the threat of substi-
Heller/The Total Value Equation 27
tute products, and the competitive rivalry among established firms. Using this framework, it can be understood why medical imaging service providers are experiencing increasing competitive pressures. Historically, radiology practices were protected to a degree from competitive forces by geographic isolation. Specifically, radiologists had to physically be present to provide image interpretation services. Actual films were obtained, printed, and displayed in the department, necessitating the physical presence of radiologists. The implication of this is that competition was limited to local practices. With the advent of digital image acquisition and transfer, these protective geographic boundaries disappeared. The effect has been increased competition due to new entrants: national teleradiology firms. Coincidentally, at the same time that hospital budgets have tightened, a new level of competition has emerged, creating downward pressure on pricing. Even well-respected local radiology groups have found themselves displaced by such national firms [15]. In light of market segmentation, the TVE also explains the opportunities and challenges of outsourcing teleradiology firms. These firms can offer high VI at a reasonable cost, but they do so at the expense of lower VNI. Although VNI can certainly be provided remotely, it is limited in this regard compared with on-site radiologists. Given market heterogeneity, these teleradiology firms have been able to find consumers whose needs match their value propositions. Specifically, if a client wishes to outsource its after-hours examinations, it is seeking a firm that most efficiently delivers VI, with less concern for VNI. A major challenge for the outsourcing teleradiology industry is commoditization. If outsourcing teleradiology firms X and Y can each offer an acceptable quality of interpretation and reasonable turnaround times, the discriminating factor between the two will be price, leading to commoditization of imaging services and downward pressure on industry pricing. A further challenge for teleradiology firms has been and will be to grow beyond the limitations of VI. Note that even growth into daytime interpretive services is still growth within the bounds of VI. For sustained, longterm growth, outsourcing firms may seek ways to deliver a more complete value proposition. In fact, some teleradiology firms have already structured their business models to create partnerships with local groups [16]. In this manner, the local groups provide the VNI, as well as some of the VI. A partnership with an outsourcing firm that focuses on highly efficient VI delivery allows the local group to offer a superior overall value proposition to the hospital employer. Additionally, some regional service providers have grown to a sufficient size that they can directly compete with such partnerships by offering onsite coverage, which is enhanced by networked in-house teleradiology support.
THE OPERATIONS FRONTIER CURVE
As competitive pressures increase, radiology practices, particularly traditional private radiology groups that provide imaging services to hospitals and imaging centers, need to consider what market segments they wish to serve, as well as those that their resources best fit. The TVE helps radiologic service providers, as well as their client hospitals, analyze their needs and can help structure analysis of the various value propositions. This analysis will help firms target market segments that their resources and processes can most efficiently serve. Because the consumers of medical imaging service providers are quite diverse, the market can be segmented in various ways. The needs, and thus value assessments, of these users vary, thus providing an opportunity for radiologic service firms to focus on particular segments. For example, the value proposition delivered to a tertiary care hospital is quite different from the one provided to a community hospital, a specialty hospital, or an outpatient facility. A group wishing to provide coverage to a full-service general hospital should include radiologists proficient in interventional radiology, neuroradiology, musculoskeletal imaging, body imaging, breast imaging, and nuclear medicine, among others. Furthermore, the group needs to have some provision for weekend and after-hours coverage. Compare this with a radiology practice providing services to an orthopedic outpatient clinic and day surgery center. A client such as this would require a different value proposition. Although both groups require radiologic services, their needs are distinct. By focusing on a particular market segment, a group is able to optimally arrange its resources to fit its desired value proposition. The concept of optimizing resources to address market segmentation is understood in a graph referred to as the operations frontier curve (Fig. 1) [17]. The x axis is the cost associated with producing a given service (or a good). The y axis is the perceived value associated with the service (or product). In this framework, value could include the variety of services offered. Firms that are on the frontier curve have the ability to offer the highest value, that is, benefit for the cost. By definition, a firm on the frontier curve can state that no other firm delivers equal or greater benefits than it does for the cost. For example, firm 1 has a high-cost but also a high-quality offering. No firm offers an equal or higher quality for the cost. In radiology terms, this may be a group that offers a great deal of subspecialization along with value-added activities but is of a higher cost to its hospital clients. In comparison, firm 2 offers lower quality (eg, longer turnaround times, less subspecialization, and less value-added activity), but it does so at a lower price point, allowing it to optimally compete for the lower cost segment of the marketplace. Firm 3 is not on the curve and thus should have trouble competing. Firm 2 can offer approximately the same
28 Journal of the American College of Radiology/ Vol. 11 No. 1 January 2014
CONCLUSIONS
Fig 1. The operations frontier curve. The x axis is the cost associated with producing a given good or service. The y axis is the quality (or perceived value or benefit) associated with the product or service. Firms that are on the frontier curve have the ability to offer the highest value, that is, benefit for the cost [17].
perceived quality level as firm 3 but can do so at a substantially lower price given its lower cost structure. Firm 3 would also have difficulty competing on quality because firm 1 is far higher in this metric, with only slightly higher costs. These classic business principles have direct implications for radiology firms. Because of technological advancements, and new entrants competing for market share, competitive pressures have risen. Firms that can maximize their value proposition for a given segment should be best positioned to compete in the new landscape. Efficiency, understood in this framework, is inherently relative. A practice should strive to be as efficient as possible given the service level it wishes to provide. From this perspective, it is a foolish radiology leader who seeks to lower costs without regard to service level. In Figure 1, firms 1 and 2 are both highly efficient. In fact, no firms in their industry are more efficient. Their cost structures, however, are wildly different. Firm 1 is not trying to lower its cost structure at the expense of its vertical position on the curve. It is not directly competing with firm 3, which occupies a different position on the curve and targets a different segment of the market. This does not mean that firms on the curve should not continually focus on improving their efficiencies. In fact, because the curve is continually shifting outward, firms that maintain the status quo will invariably be left behind. What it does mean is that firms should seek to either minimize their cost structures while attaining certain levels on the vertical axis, or they should elevate their vertical positions without increasing their costs. This ideology will place firms on the frontier of the curve and in the best competitive positions.
Although various economic forces are resulting in decreasing reimbursements for services, hospitals are also under increased pressure to satisfy their medical staff and referring physician base. This means that they must maintain a certain level of service quality and cannot afford to simply focus on lowest cost solutions. There is monetary value in satisfying clinicians through noninterpretive (VNI) activities. In an accountable care organization system, hospitals will be required to satisfy their medical staff members or risk patient referral elsewhere. Regarding both outpatient imaging centers and hospitalbased imaging practices, it has been said that referring physicians are the lifeblood of a radiology department [18]. A department that cannot satisfy its referring base, and a hospital that is unable to attract and retain patients, will obviously not be sustainable. In this time of decreasing reimbursement and increased competition for patients, value assessments will become even more important. Value, from the point of view of hospital leadership, can be thought of as the difference between benefits received (B) and the price paid (P). To maximize the value proposition offered by a services provider, either B must be elevated or P lowered (or both). To be sustainable, the medical imaging services provider must also have low enough costs (C) to generate a sufficient profit (the difference between P and C). Thus, to remain competitive, firms must be able to offer a certain level of B with the greatest efficiency. To optimize their specific value propositions, firms may choose to target certain segments of the marketplace and then streamline their operations to deliver determined levels of benefits in the most cost-efficient manner possible. This would place the groups on the operations frontier curve, meaning that of all the firms in the marketplace, they provide the highest service level, given their cost structures. Putting this in terms of the TVE, hospitals will require a certain level of services, both interpretive and noninterpretive. Additionally, they will value these services differently. To most efficiently deliver value, a radiology group will need to look at the costs associated with supplying both VI and VNI. It may be more optimal to outsource much of the VI to teleradiology firms, while the local radiologists provide the additional services (both VI and VNI) the hospital client expects and demands. Alternatively, groups may choose to grow to a sufficient size to provide economies of scale. Regardless of which strategy is taken, meeting these novel challenges will involve evolutionary changes in the way medical imaging service firms practice. Value assessment and optimization have become a part of the lexicon of radiology leadership. The TVE provides a useful framework for understanding both the medical imaging service needs of a health care organization, as well as the value provided by a radiologic services firm or depart-
Heller/The Total Value Equation 29
ment. Although additional changes in health care are sure to come, understanding value creation is here to stay.
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Credits awarded for this enduring activity are designated “SA-CME” by the American Board of Radiology (ABR) and qualify toward fulfilling requirements for Maintenance of Certification (MOC) Part II: Lifelong Learning and Self-assessment.