Healthcare Economics

The importance of determining 'value' in healthcare


This is the first in a series of articles in which Dr Arby Khan looks at the concept of ‘value’ in healthcare. He assesses this concept in the context of medical practice in the United States and considers its implications for countries which have a developing healthcare infrastructure, such as those in the Middle East.

Healthcare costs are indeed rising – rapidly in most countries and alarmingly so in the United States. Despite such extraordinary expenditure, however, patient outcomes in the US are actually inferior to many industrialised nations[1, 2]. This divergence is puzzling at best and an analysis of its cause holds important lessons for nations which are currently developing their healthcare infrastructure – such as those in the Middle East. In the US there has been a focus on reforming healthcare for quite some time but without significant results. The most recent idea is that of ‘value’ in healthcare, which proposes that the ratio of ‘outcomes/cost’ be improved – either by improving outcomes or by decreasing costs. Critics suggest that it is just a new way of trying to cut payments to facilities and healthcare providers. In this article, we will define the problems facing US healthcare, their extent, why we need the concept of ‘value’, and whether or not it will be a worthwhile concept. In a following series of articles, we will elaborate the history of US healthcare which will provide insight into why the US healthcare system finds itself in this predicament. We will then try to define ‘value’ as precisely as possible and create a possible framework for how it could be useful elsewhere.

Reasons for the problem

Analysing the complexity of healthcare problems in the US is a lengthy process. It is not the focus of this series of articles and the reader is directed to the extensive literature available for review[1-17]. However a concise understanding of the difficulties and complexities of the US system which lead to such high cost of care will be necessary to establish the context of why ‘value’ in health is now such an important point of discussion.

History of healthcare development: The development of healthcare has historically been shaped by special interests (e.g. physicians, insurance companies, labour unions, pharmaceutical companies) and without regard to a national healthcare strategy[15, 16]. Such development has led to significant fragmentation of the healthcare infrastructure. Knowing this history is critical in understanding the current situation the US finds itself in and this history will be discussed in detail in a later article

High degree of fragmentation: Due to the historical absence of a national health strategy, there are many different forms of healthcare coverage. Most get private health insurance through the workplace, and employees usually share the cost with the employer. Some take their chances getting private insurance policies for themselves if the employer cannot or does not provide it. Some get it through public programmes: people older than 65 or disabled get it from Medicare, those below or around the poverty line get it from Medicaid, and children might be covered by the State Children’s Health Insurance Program. Military personnel get insurance through a programme called TRICARE, and after leaving the military, they get it through the Veterans Administration or Medicare. Every single public/government/military programme mentioned above has different rules and regulations and different platforms for medical records with no communication amongst them. With private insurance programmes the situation is even worse – there are more than 1,300 private programmes each with its own sets of rules and regulations. The confusion and administrative cost (20- 31% of healthcare costs) to individual practitioners and hospitals that need to abide by these rules and regulations can only be described as onerous. Lack of communication between all these different medical systems also leads to needless duplication of physician visits, tests, and other healthcare resources. Additionally, fragmented healthcare in the US is a zero sum game – if one stakeholder increases his profit it leads to a decrease in another stakeholder’s profit – which in turn leads to stakeholders trying to influence the system in their favour. Consider the following, staggering, statistics:

– In 2000, healthcare became the largest political lobby in Washington, spending more than any other industry to influence government policy and legislation.

– The total money spent was approximately $400 million.

– There were 7,000 registered Washington lobbyists – that is 13 lobbyists for each of the 535 members of Congress. Clearly, there is a problem in the basic structure and incentives in the healthcare system.

Litigation and defensive medicine. The US tops all countries in medical litigation at a tremendous cost[18]. The methods used to deal with negative outcomes in medicine are antiquated and costly. The high degree of litigation and threat of expensive settlements not only causes doctors to order unnecessary tests (often it is so institutionalised that they may not even realise it) but also leads to high malpractice insurance premiums.

System incentives: The healthcare system is designed to reward volume of procedures and patient encounters, not patient outcomes. This skews the overall objective and intentions of all stakeholders in the healthcare system. In such a free-market, fragmented system, healthcare strategies that are most profitable will proliferate regardless of the overall impact of these activities on the actual health and welfare of the patients.

Medication, hospitalisation, and outpatient costs: Costs per capita are the highest in the world for all three categories.

Medical licensure and credentialing:
It is illogical that all states in the US regulate and license physicians without any reciprocity. Human anatomy, physiology and pathology are all the same in every state, just as the rules of the road are the same for every driver and the laws of gravity and aerodynamics are the same for every pilot. If one has a license to drive a car in California, he is allowed to drive a car in New York. If one has a license to fly a plane (nationally tested and licensed by the Federal Aviation Administration), he can fly it in any state. So why is medical licensing so cumbersome, redundant, and done state-by-state? Most likely because the states make money doing so, all the while, however, increasing the cost of healthcare. Credentialing, and recredentialing, is where health plans, hospitals, surgery centres, and various other healthcare facilities require physicians and other healthcare facilities to submit their professional histories and credentials for review and verification. The administrative and financial burden of doing this repeatedly with every physician and every healthcare facility, year after year, is in the billions of dollars. Even problems like this, which have a simple solution, are not being addressed.

The concept of ‘value’ in medicine

In no other country has healthcare been such a volatile flashpoint of ideological conflict as it has in the US[5, 15, 16]. The development of healthcare infrastructure has historically been propelled by special interests and politics, both domestic and international (e.g. the deliberate negative association of universal healthcare coverage with socialism, communism, and anti-German sentiment in the 1900s)[15, 16], and has resulted in the fragmented, directionless system that currently exists. On the other hand, many industrialised nations (Canada, the Nordic States, United Kingdom, etc.) laid to rest many decades ago, the basic tenets of universal health coverage – the most important being that covering all citizens in the context of unified rules and processes was the most economical way to provide healthcare[3, 16] and with equally good or better patient outcomes[1, 2]. Yet even in 2012, the United States struggles with whether to, and how to, provide healthcare for all its citizens. Winston Churchill once said that “Americans can always be counted on to do the right thing...after they have exhausted all other possibilities”. Well, it seems that all other possibilities have indeed been exhausted.

Currently, one of the concepts that holds some promise is the concept of ‘value’ in medicine[1, 2, 13, 17]. This basically consists of results or outcomes in the numerator and cost in the denominator. Whereas this concept has intuitive appeal, it requires a lot of refining to make it practically useful. The denominator is, at least theoretically, determinable, and in practice somewhat difficult, but still determinable. However, a precise definition of the numerator, or outcomes, proves to be elusive at this time. Some disease entities in some specialties easily lend themselves to being called positive “outcomes” – e.g. appendicitis. A case can illustrate this point – a young, otherwise healthy man presents to the emergency room with abdominal pain. He is diagnosed with appendicitis, taken to the operating room where the appendix is removed, and the patient goes home in two days with no complications. Subsequently, and within a week, he rejoins the workforce. Whereas it might be difficult to quantify the “outcome” itself, the general, intuitive impression would be of a “good outcome”. Thus, this is great ‘value’. But then how about the 79-year-old lady who comes in with breathing difficulties due to congestive heart failure. She also has several other diagnoses such as rheumatoid arthritis, chronic obstructive pulmonary disease (COPD), and early signs of Alzheimer’s disease. She is hospitalised, treated for three weeks with the best medical care at significant cost, and is finally discharged to a nursing home. She is brought back 5 weeks later with chest pain and after 2 weeks of expensive medical care in the hospital, she passes away. How do we determine whether there was poor, good, or great ‘value’ in this patient’s care? The cost, once again, could be determined but how do we judge the outcome in this patient? Was five more weeks of life for this lady a good outcome? It might depend on who we ask.

The two patients described above personify the extremes of patients’ medical problems, from a relatively straightforward, acute, condition in a young adult that is easily fixed to multiple, chronic problems in an elderly patient. How do we judge the outcome as good or bad in the elderly patient described above? There must be agreement, then, that the deceptively simple equation, ‘value = outcomes/cost’ has a subjective numerator. This is where society has to decide how to define ‘value’? Will we provide expensive medical care to prolong life by five weeks? The debate in the literature so far is confounded by lack of clear definitions and frameworks. Additionally, and perhaps most importantly, we must first define ‘value’ from whose perspective? Clearly, the definition of ‘value’ would differ depending on which stakeholder one listens to. The extra five weeks of life may have been of tremendous ‘value’ to the 79-year-old lady and her family but of little or no ‘value’ to the hospital or the healthcare system in general. Thus, clarifying definitions, adhering to certain socially acceptable axioms, creating a framework within which to work and determining whose perspective is most rational is necessary to provide a coherent context in which to build a model with ‘value’. Let’s then look at the various stakeholders’ perspectives and see which one we must use.

Stakeholder’s perspectives

There are at least six major stakeholders in the healthcare industry: society/economic, patient, provider, payer, employer, and health product/device manufacturer. The literature discussed above tries to reconcile and benefit all these stakeholders all the while trying to instill ‘value’ into the healthcare system. That is not possible. We cannot choose everybody’s perspective when determining ‘value’ because they all differ. As a corollary to this observation we have to choose one perspective but which one? Logic would compel us to choose the perspective which solidly supports the raison d’etre of medicine and healthcare – which is taking care of sick people and restoring them to a normal, functional status no matter what the cost. Alternatively, we might choose a perspective that dictates taking care of sick people in the way society can afford. Or, we might choose a perspective that creates a reasonable compromise. Let’s look at these stakeholders’ perspectives individually:

1. Society/Economic:
This perspective, more than others’, seems to embody the most realistic approach to healthcare. Since runaway cost is the most important factor today, it is logical that society’s aggregate perspective will be most effective in advocating an approach that addresses this issue. All other perspectives will necessarily be parochial – the providers will want more money, the manufacturer will want to sell more, the patient will want everything done no matter what the cost, and the payers and employers would want to pay the least and profit the most. Since the general citizenry eventually pays for all healthcare (whether the cost is paid by the government or insurance companies, it is indeed paid by all citizens, either as taxes or as premiums[1]), it can be reasonably argued that society’s perspective is the most balanced. This perspective also seems to subsume some other perspectives to some extent – e.g. the patients’ and the payers’ perspective. Thus, from society’s perspective ‘value’ is when all citizens receive ideal healthcare given unlimited resources – however if resources are limited, then the most appropriate care needs to be given within the resources available.

2. Patients: This perspective can be complex and may entail many facets[17]. However, ‘value’ for a patient can essentially be crystallized in one sentence – the patients want to get better as soon as possible, as safely as contemporary technology and knowledge allows, so that they can get back to their baseline functioning.

3. Employers: This perspective is parochial but in the process also seems to take the employees’ perspective. The employer is interested in healthy and strong employees who deliver better performance, reduced absenteeism, and increased productivity. ‘Value’ for the employers is to achieve these goals with the minimal cost possible.

4. Providers (personnel, hospitals): This perspective can be divided into two parts. First, the physician’s and other healthcare personnel’s perspective is to provide the individual patient with the best available options without any limitations – for that is the duty of a healer. Additionally, these personnel would want to maximize their remuneration as much as possible. Thus, ‘value’ for healthcare providers is the ability to provide unrestricted healthcare to their patients while being remunerated maximally. On the other hand, hospitals tend to be corporate entities and in general are more cost conscious. However, they still try to provide as many services as possible for maximal remuneration. This is a result of the present system which rewards volume of services not outcomes. Any effort to improve ‘value’, either by decreasing cost (almost always) or by improving outcomes (seldom), is viewed suspiciously and as an effort to benefit the payer or employer rather than ensuring delivery of needed services. Thus ‘value’ for providers, under the current system, is the benefit of the individual patient they are treating and maximal remuneration for services provided.

5. Payers: This group is divided into two major groups – private insurance companies and the government. Even though the reasons differ (insurance companies want to increase profits and the government has financial constraints) both payers’ perspectives see ‘value’ in decreasing costs to improve ‘value’. There are usually some efforts by both to improve outcomes but such efforts are in their infancy when seen in aggregate.

6. Manufacturers: Since most manufacturers are for-profit companies, their perspective sees ‘value’ in selling as many products as possible to increase profits. In the process they may improve outcomes but that is not their major goal (e.g. continued pharmaceutical sales despite knowledge that the medication causes unwarranted deaths – Vioxx would be a good example).

Creation of national goals and alignment

The substantial fragmentation of the US healthcare system has prevented the US from marching towards clear national goals. Today there is an opportunity to reframe the whole issue of healthcare so that all stakeholders’ efforts can be guided in the right direction. One of the problems in defining ‘value’ is that we have no absolute, gold standard we can refer to. Clearly, we can compare one hospital’s results in, for example, cardiac surgery to another hospital’s results and determine that one provides better ‘value’ than the other. However, how do we know if the other hospital is indeed the ideal we aspire to? For example, with better diet, education, exercise, and preventive measures – which would cost a lot less – the surgery itself may have been avoided[19]. The point here is that we cannot judge ‘value’ until we look at the entire life span of the entire population. Looking at ‘value’ of individual procedures or hospital admissions gives only limited information which may give the illusion of progress. True ‘value’ it has been argued, is determined by evaluating outcomes over the entire cycle of a particular disease[2, 13]. However, it may be reasonably argued that we need to take this a step further. True ‘value’ can only be established if we analyse the life span of each individual citizen and then aggregate that into a national ‘value’.

Admittedly, it might be challenging to create these ideal, unifying goals for universal healthcare (unifying goals and universal healthcare does not exclude private insurance companies and should not be equated with the negative connotation that “socialised” medicine has). But we must start somewhere and adhering to proven principles as guidelines is a good start. For example, there is very little effort towards prevention of disease and more of an effort to treat patients and treat them as much as possible – mostly because there are no incentives for preventing a heart attack. As a suggestion, what if we espoused the unifying goal of prevention, which aspires to keep people healthy and out of hospitals. This ideal would then become the unifying gold standard by which all hospitals and providers would be judged. Of course, we would never get 100% prevention of disease but at least now we have a unifying standard that is a consistent and clear reference point. It would be unifying because few would argue that the ideal situation for all people is to stay healthy and prevent disease. Few would argue that it would be more economical to stay healthy and prevent disease. To make this happen, keeping people healthy should be the most financially rewarded outcome because it results in the most ‘value’ created. As a corollary, perhaps the second most financially rewarded outcome should be treating patients as outpatients and keeping people out of the hospital if they do indeed get sick. Thus, each facility or healthcare provider can be evaluated based on what percentage of the total population it serves is in the most desirable category (stay healthy and prevent disease), what percentage in the next desirable category, and so on. This way, we can nationally create a simple system which rewards healthcare providers for keeping people in the most ideal state – staying healthy. This might mean investing in extensive preventive measures, perhaps even starting as early as elementary school. However, it would be significantly more economical to do so than to treat disease. Such a framework also facilitates collecting data in a way which will help providers determine what percentage of their population served has remained healthy, what percentage they treated as an outpatient, etc. Hospitals and providers that increased their percentage of people they kept healthy would receive the largest remuneration. Only such national high ‘value’ goals with financial alignment will force the healthcare system to gravitate towards attaining high ‘value’.

The focus on preventive measures discussed above is only one example. Clearly, more discussion will be necessary to determine the nature of such unifying goals and will no doubt be controversial. The controversy, however, can be mitigated if the impact of special interest groups can be minimised or eliminated.

The framework

Now comes the challenging part – choosing some guiding and unifying principles (axioms) and an overall framework. This framework will facilitate the creation of a system within which ‘value’ can be defined and created in a manner consistent with guidelines of the framework. Of course, there could be disagreement with the framework itself – which can only be useful as the debate will now be focused on the correct starting point.

Perspective: Given the dire financial circumstances the US finds itself in, society’s perspective is the only logical one to adopt at this time. In fact, it is the only one that will not be parochial and will not perpetuate the fragmentation, and consequent high cost of healthcare, that has led to the current situation.

- Healthcare is most economically provided if all citizens are covered by unified processes and goals.
- Society is responsible for providing the most individualised health care possible given the resources available.
- Prevention of disease will get priority – this is the highest ‘value’ intervention possible.


Healthcare costs are rising in all countries, but exponentially in the US. This is due largely to a highly fragmented system that has evolved piecemeal over the last 150 years – primarily due to pressures by special interest groups and political conditions. This high degree of fragmentation leads to incredibly high administrative and healthcare delivery costs. To rein in such costs, the concept of ‘value’ was introduced which tries to provide better outcomes with similar or less cost. ‘Value’ is currently defined as ‘outcomes/cost’ – however defining and quantifying outcomes is difficult. Because of such subjectivity inherent in the definition of ‘value’, it is imperative that a framework of definitions and axioms be created so that a coherent, consistent, and aligned system can be created in which ‘value’ can be usefully defined.

There are important lessons here for nations who are in the process of developing their healthcare system. A national goal, or set of goals, should be created that unifies the care of the people, systems should be developed that generate the requisite data to achieve those goals, and financial incentives should be aligned with those goals. Whereas these unifying goals may vary from country to country, or even from region to region, they must always facilitate and encourage high ‘value’ processes. One of those goals should certainly be prevention of disease – it is the highest ‘value’ intervention there is. The eradication of small pox is a premier example of the high ‘value’ of prevention – and the same concept can be applied to the five major conditions that account for 75% of healthcare costs – heart disease, cancer, stroke, diabetes, and chronic lung disease[17].

In the next article in this series, we will look at the historical development of the US healthcare system, study the forces that shaped its structure, and extract lessons from this that may be useful for countries currently developing their healthcare infrastructure.

Arby Khan, MD, FACS, MBA is the Deputy National Director for Surgery for the United States Veterans Health Administration - which oversees 152 acute care facilities and 965 outpatient clinics. Dr Khan is a regular contributor to Middle East Health. He has written on a range of subjects – such as Human Resources management in hospitals, Change Management in GCC hospitals, Brain Death and Hospital Resource Management and organ transplant- related legislation, among others – with a view to improving healthcare in the UAE and the wider region. He is a multi-organ Transplant Surgeon and Immunologist and has successfully started, from the ground up, two multiorgan transplantation programmes – one in the United States and one in Abu Dhabi. He is the author of many clinical and basic immunology papers, and has been educated, trained and employed variously at University of California - Berkeley, McGill University, University of California - San Francisco, Harvard Medical School, Yale University - Graduate School of Immunobiology, University of Pittsburgh - Starzl Transplantation Institute, University of Vermont - School of Medicine, and Columbia University (NY). He also holds an MBA, with Distinction, from London Business School.

– The views expressed in this article are those of the author and do not necessarily represent the views of the institutions for which Dr Khan has worked or currently works.


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 Date of upload: 21st Jan 2012


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