Measuring Health Care Innovator Value

Introduction

The US healthcare system is known for its high costs compared to other developed countries. Several factors contribute to this, including administrative expenses, pharmaceutical prices, and the fee-for-service payment model. Despite spending more per capita on healthcare than any other nation, the US faces challenges in ensuring equitable access and controlling expenses. Rising healthcare costs strain individuals, businesses, and government budgets, highlighting the need for reforms aimed at improving efficiency, transparency, and affordability within the system.

Multiple health care innovators offer creative solutions to reduce health care costs, improve the quality of care and improve access to health care. These solutions claim to create value to stakeholders, many times developing projections and/or models estimating their value. The elephant in the room oftentimes is whether the value has been reasonably or accurately determined. This article presents concepts and approaches to validate and measure the value associated with these innovations.

The elephant in the room oftentimes is whether the value has been reasonably or accurately determined.

What is Value?

“Value” can be measured in many ways. However, value must be defined in the context of a particular perspective since the definition of value varies by perspective. For example, a $100,000 experimental treatment that might extend the life of a terminally ill patient for a short time may have very high value to the patient but may be attributed a lesser value by the patient’s doctor, health insurance company, or plan sponsor.

When measuring health care innovator value, value should be assessed from several important perspectives, including those of patients, providers, and third-party payers. In some cases, the perspectives of regulators or technology vendors may also be important. Each party will assess value differently, according to a variety of measurements.

Table 1 presents some common measurements used to assess value and indicates the perspectives from which each measure may be important. For example, measures associated with patient outcomes and convenience are usually important to patients and providers but may be less important to payers. On the other hand, the costs of healthcare services are important to patients and payers but may be of less concern to providers unless their revenues are affected.

In addition to the perspectives of each individual party, there is often a need to assess the net value from a community perspective. This type of assessment should consider all measures of value that may be important from any one perspective, as well as the relative importance of each measure from the community’s perspective.

In addition to such measurements, value needs to be based upon sound science validated and documented by evidence-based literature and other trusted information.  In the case of changes to the way specific conditions are treated by physicians, clear and valid clinical evidence is required that the proposed changes are reasonable and achievable without harming the patient. Some changes are so new that there may be a limited amount of evidence, especially the highest quality or grade of evidence, so the best evidence possible must be used. This benefits from evidence grading or the ranking of different types of evidence and what can be relied upon with the greatest confidence.

Value is the measurement of projected savings from the implementation of a specific innovation impacting the healthcare system. There are two types of savings: hard savings and soft savings. Both types are accepted and recognized in the literature and should be included in assessments. Hard savings reflect actual savings that can be readily measured (e.g., this event/procedure/approach/device costs $X less than the other event/procedure/approach/device). Soft savings often describe savings that emerge from the elimination of other events (e.g., since we did it this way, we avoided another event or type of event). It is called soft since we are estimating what the cost of the avoided event would have been had we not done it a different way).

How Do We Measure the Value?

We first need to understand the population to which we are applying the innovation. Is it a typical working commercial population, or a Medicare or Medicaid population? The age mix of these populations is obviously different, with different healthcare consumption characteristics. Many research articles used for evidence will be based upon one or more of these populations, and the results must be appropriately transformed to produce accurate savings estimates.

In addition, we need to understand how care was provided to the specific population prior to the introduction of the innovation. The most common approach is to develop actuarial cost models[1] to quantify the change in the cost of care and utilization rates inherent in the studied population as a result of the specific innovation or intervention.  This is often referenced as the before and the after innovation scenarios which concretely analyze the financial impact of the implementation of the specific innovation.  Some refer to this as “pre-post” analysis. Whether this is a comparison of bed-days/1,000 before and after, or office-visits/1,000 before and after, number of surgeries/1,000 before and after, etc. the analysis is quite the same.

However, when making these comparisons, we need to be sure we are comparing comparable situations and populations. For example, comparing the results from one specific population (e.g., a Medicare population) to the results in a different population, say from a medical journal, would not be a valid comparison. The populations and comparisons need to be matched as closely as possible, as well as the cost impacts within the specific populations.

As an example of such comparison, if a specific innovation reduces the need for an inpatient hospital stay and we are estimating the reductions in hospital stays, we need to know the frequency of admission before and after, usually defined by admit rate/1,000 persons or members. These values need to be estimated for a common demographic mix since admit rates/1,000 generally increase as the population is older. The key for estimating the value is the cost per admit, which varies by type of stay (i.e., DRG), type of hospital, age of the individual, acuity/severity of individual, level of charges (i.e., commercial, Medicare, or Medicaid), etc. For an accurate assessment, it is important to be sure the cost per admit is appropriately adjusted. For this type of comparison, the formula is quite straightforward:

Annual Savings/1,000 = ((after admit/1,000) – (before admit/1,000))

x (adjusted cost/admit)

The annual cost of the innovation needs to be calculated on a per person or per 1,000 persons basis for comparison with the projected savings. The ROI for the innovation can be directly determined. It is common to complete a multi-year projection especially if the innovation’s effectiveness emerges over a period of time. ROI and Net Present Value ROI can be determined by year and over a period of time. ROI is calculated as the ratio of Net Savings (i.e., Gross Savings – Innovation Cost)) divided by Innovation Cost usually expressed in terms of a percentage. ROI can also be expressed in terms of a ratio (i.e., X:1) which is calculated as (1 + %ROI):1.

In addition to the straight-forward ROI comparison value can be measured in other ways, such as:

• QALYs: quality-adjusted life years
• “Bend the Trend”: impact on projected annual inflationary cost trends
• Reduced Absenteeism: fewer days not working because of a specific condition
• Reduced Mortality Rate: extended life expectancy

Communicating the Value

It is one thing to measure and/or assess the value of an intervention or innovation; it is something else to communicate it to a stakeholder. This communication process can be challenging depending on the level of analysis and what the stakeholders consider to be of value. A health plan oftentimes cares the most about the impact on premium rates (i.e., the extent of savings, both health care and administrative), the impact on the public perception of the quality of their product, the desirability of the innovation to their members, and the health plan’s competitive advantage in the market). A health care provider cares the most about the impact on revenue, the clinical acceptability with their staff and providers, and their attractiveness to marketplace payers. An employer plan sponsor cares about the bottom line cost of the program and how it will impact their overall health care costs. An investor (i.e., Venture Capital or Private Equity Investor) is looking for their return as the innovator matures to the point where they can sell their interest and make their financial profit. Other stakeholders have different perspectives.

It is important that the innovator translates their analysis into the language of the stakeholder they are communicating with. ROI analysis is helpful, but the stakeholder needs it translated into their language and analysis terms.

The Role of the Actuary and Clinical Consultant

Actuaries and clinical consultants provide significant value in completing innovator value assessments. The actuary’s ability to develop actuarial cost models combined with the clinical expertise of a physician provides the best possible value assessment. Without these perspectives, the analysis fails to incorporate the critical factors.

Endnotes

[1] Actuarial cost models are tools regularly used by actuaries and include detailed utilization rates/1,000 persons, expected cost/unit and PMPM (per member per member) health care costs by detailed category of service.  Such models are based upon extensive volumes of claims data and can be used as benchmarks for analysis.