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Reducing health care costs: a case for quality.

Today, it is not quality or access but cost that has become the primary motivator for change in the U.S. health care delivery system. Cost, as the driver, has created a frenzy of nation wide activity, searching, examining, and testing any and all ways that offer promise of financial health care stability. And cost, not quality or access, is the principal motivator for the ever accelerating national health care policy debate. But there is a relationship between costs and quality that has to be addressed if quality is to be maintained.

In the '80s, when health care costs became too painful, the federal government reacted to the financial challenge with a frontal attack. It began to reduce payments and health care benefits incrementally while making two assumptions:

* There is plenty of "fat"in the system.

* The quality of medical care is a given under any circumstances.

Medicare instituted arbitrary denials of payments while gradually reducing reimbursements. Meanwhile, managed care organizations, taking their cue from Washington, began discount contracting. In response to the question, "What are we getting for our money?", utilization review, performed not only by providers and third-party payers but also by HCFA's Professional Review Organizations, became the hottest ticket in town--turning up problems of early hospital discharge of patients, underutilization of resources, denial of access, and other indications revealing the fact that quality was not, as mistakenly assumed, a given. Indeed, quality, which was naively assumed to be inherent in health care proved to be, like cost and access, very much influenced by external incentives. Even greater and perhaps more serious problems surfaced when financial risk-taking was introduced into the system by way of capitation. Was the "fat" now gone? Perhaps. But regardless, reducing costs without equal attention to access and quality began to hurt not only providers of care but, more important, the recipients of care-our patients.

What then is the relationship of cost to quality? Better yet, is there any relationship between cost and quality? When costs go up, does quality improve? Conversely, when costs go down, does quality suffer? Friedman illuminates the answer to this question quite clearly: "There are times, as in the overuse of cesarean section and coronary bypass grafts, when less is better. There are also times, as in pitifully low immunization rates and lack of access to mammography for low-income women, when more would obviously be better. At times, spending less will produce better results; at other times spending more will do the same." [1] Thus, it would seem that there is no consistent relationship of cost to quality. Cost, employed as the primary health care policy incentive, imposes unpredictable and chaotic effects on a system that already suffers from chaos and unpredictability. And it follows that if cost cutting is the sole driver, slowing the growth of health care costs without affecting the quality of care may simply not be possible.

While quality bears no consistent relationship to cost, the reverse is not true. Cost does bear a relationship to quality. It is an inverse relationship, a relationship that has been demonstrated repeatedly, first in manufacturing and service industries employing total quality management and, more recently, in health care. As quality goes up, costs go down. As quality goes down, costs go up (figure 1, above).

Quality Is Conformance to Requirements [2]

This is a genetic definition of quality and applies to all work. All work may be considered as a process performed to produce an output or outcome. The requirements of that outcome or output must be carefully listed so that when the process produces a product or service that meets all of the agreed upon requirements, quality, by definition, has occurred. The reverse is also true. If requirements are not met, quality, by definition, has not occurred (figure 2, below).

Quality/Cost Relationship in Industry

Quality is free, says Philip Crosby,[2] but it is not without its costs. Those costs are referred to as the Cost of Quality (COQ). The Cost of Quality may be divided into two categories (figure 3, right): the Price of Conformance (POC) and the Price of Nonconformance (PONC).

There are costs involved in ensuring that all of the requirements of the output of a process will be met each time. Such costs may involve the establishment of procedures, training, education, purchase of appropriate technology, monitoring of processes, maintenance, etc. This cost of quality (POC) is devoted to prevention of "nonquality."

When processes do not perform properly, when they do not produce a product or service that con.forms to the predetermined and agreed upon requirements, by definition, quality has not occurred. The cost produced by this "nonquality" is PONC. Industry attributes such costs to scrap, rework, warranty, redesign, product liability, loss of customer credibility, etc. Manufacturing has repeatedly determined that PONC (prior to quality improvement efforts) represents 20 percent or more of sales. Service industries estimate higher quality costs--in the range of 35 percent of sales.[3-5] When industry uses PONC as a measure of poor quality and identifies savings resulting from improved quality, the results are sometimes breathtaking (figure 4, page 12).

Quality/Cost (Q/C) Relationship in Health Care

The Q/C relationship in industry is interesting but what about health care? Isn't health care different? After all, health care is very complicated. We're treating patients, not manufacturing widgets. Patients cannot be specifically measured or remolded or simply discarded. True.

But when quality and cost are the issues, health care and other industries are remarkably the same. Steffen searches the medical literature for a definition of quality and finally settles on "the capacity to achieve goals."[6] This definition sounds remarkably similar to "conformance to requirements." The concept of cost is also common to all industries, even those that operate in the not-for-profit arena. The relationship of cost to quality is the same in health care as it is in hotels, banks, manufacturing, repair shops, restaurants, farms, etc.

The Q/C inverse relationship has been well documented in health care. Binns and Early, rating hospital quality on the basis of severity-adjusted mortality rates, demonstrated that higher quality institutions had lower costs and, conversely, that lower quality institutions had higher costs.[7] A study of coronary artery bypass graft surgery in Boston hospitals clearly demonstrated that patient care costs related inversely to quality. The average charge for live discharges with complications was 43 percent greater than charges for cases without complications. Charges for patients that died were 143 percent greater than charges for those discharged without complications. The authors concluded that "high-quality outcomes are typically less expensive than poor outcomes whenever other factors are constant."

Cost of Quality in Health Care

Consultants who worked with hospitals and health maintenance organizations during the eight-month National Demonstration Project on Quality Improvement in Health Care estimated that the cost of "waste, rework, complexity, and variation" (PONC) exceeded what they had come to know in more familiar industries. "Several estimated that those costs could approach 40 to 50 percent of the health care bill!"[8] This is an extraordinary figure, suggesting that there is, as previously surmised, a great deal of "fat" in the system.

In hospitals and similar institutions, the cost of nonconformance to requirements may be the result of organizational support processes, (administrative, financial, and other hotel functions), clinical support processes, and executive clinical processes (diagnostic and therapeutic decision-making and other physician management activities). (See figure 5, page 13.) Regardless of the source, total quality management says that all process categories contribute to the final output of the macroprocess of health care and each deserves attention.

Winter Park Memorial Hospital, Winter Park, Fla., (WPMH) has been in a quality improvement process for more than two years. During that time, innumerable processes have been addressed, some small and intradepartmental and some large and institutionwide. Some have been corrected by individuals while others have been approached by cross-functional teams. The successes involved problems ranging from health care payroll errors ($800), unavailability of lab results prior to outpatient surgery ($33,696), scheduling changes caused by no-shows in the Cancer Care Center ($5,500), duplicated narcotic counts by nursing ($51,150), and lost charged involving the To-Be-Admitted Unit ($205,000). WPMH's initial PONC was estimated at $8,000,000. As of July 1991, we identified a total recaptured PONC of $1,907,527. Other hospitals have also reported quality successes in terms of dollars recaptured (figure 6, page 14).

These examples illustrate that as processes are improved and made appropriate, capable, and reliable, resulting in well-defined outputs, the cost of poor quality (PONC) is significantly reduced. The savings may be carried directly to the bottom line, identified but not realized until efficiencies are instituted, or indirect and more difficult to identify. Examples of the third group are decreased employee turnover secondary to decreased hassle and a happier workplace; increased patient and physician satisfaction, resulting in increased admissions and improved market share; decreased liability secondary to increased safety and decreased morbidity and mortality; and reduced need for inspection and monitoring.

Most of the examples address internal subprocesses that contribute to the megaprocess of a patient's health care encounter. The success of those encounters as a megaprocess is judged by conformance to the requirements of the patient's ultimate outcome. Have the outcome requirements, as set by the physicians and the patients, been met? If not, can the degree of nonconformance be measured? Once again, we turn to PONC to express this measurement. Now, however, we are dealing with real patients and what finally happens to them. It seems too commercial to measure their fortunes in terms so crass as money. Therefore, we generally settle for conditions that relate specifically to health care--terms such as increased length of stay, untoward morbidity, and untoward mortality. It makes little difference whether or not such terminology is substituted, because the cost, expressed in any terms, may be quantified and measured. All the while, the inverse relationship of quality to cost continues to hold true. As improvement in conforming to patient outcome requirements (or goals) occurs, PONC, whether expressed as money or as length of stay, morbidity, or mortality, will decrease.

Quality is not an accident. It doesn't just happen. Quality is planned and monitored to ensure that it continuously occurs. If it does not occur, quality management demands that there be an unrelenting search for, and correction of, the root cause that is preventing conformance. Quality management also demands that change be anticipated and planned to ensure that processes are continuously improved and continuously appropriate. There is a cost to this activity, POC, and it must also be planned.

Can Health Care Afford Total Quality Management?

In a recent health care quality management seminar, the question was asked, "How much does quality cost and can we afford it?" The answer offered, "We in health care simply cannot not afford it. We must pursue quality for the benefit of our patients. Quality must become the driver of our culture." Certainly the answer was direct and accurate. But what the questioner was really asking was, "Can my institution afford quality management, considering the immediate up front and the ongoing Price of Conformance?" Fortunately, we may turn to industry's experience for the answer. Total quality management in manufacturing and service companies has repeatedly demonstrated a 1:10 to a 1:100 and even greater relationship between the POC and PONC. For every dollar spent on managing quality, including up front costs, anywhere from a 10-to-one to a 100-to-one or more return on investment has been shown.[9-10] Although this is an extraordinary ratio, there is no reason to assume that the experience in health care will be any different. Initial reports coming from hospitals and managed care organizations continue to confirm this most desirable ratio.


Total quality management promises a significant return on investment. For every increment of improved quality, there is the dividend of a reduced PONC. When expressed in dollars, this may provide a significant improvement in the bottom line and, for some institutions, may actually mean the difference between continuing to serve a community or closing. Despite these tangible benefits, recouping PONC is not the reason to pursue quality.

PONC does not always reach the bottom line. It is not a guarantee of riches. It is a measurement, a way to document improvement in processes, a way to benchmark quality progress. Whatever monetary benefits accrue, and they may be substantial, they are merely dividends--welcomed dividends certainly, but not sufficient reason to begin quality management. Improving the health care of our patients is the reason to begin quality management. In order to accomplish that while reducing costs, quality, and not cost reduction, must be the driver.


1. Friedman, E. "The Eternal Triangle: Cost, Access, and Quality." Physician Executive 17(4):3-9, July-Aug. 1991.

2. Crosby, P. Quality is Free. New York, N.Y.: McGraw-Hill Book Company, 1979, p. 271.

3. Crosby, P. Quality Without Tears--The Art of Hassle Free Management. New York, NY: McGraw-Hill Book Company, 1984, p. 87-88.

4. Juran, J. Planning For Quality. Phase 1. New York, NY: The Free Press, 1988.

5. Deming, W. Out of the Crisis. Cambridge, Mass.: MIT, 1982, p. 12.

6. Steffen, G. "Quality Medical Care." JAMA 260(1):56-61, July 1, 1988.

7. Binns, G, and Early, J. "Hospital Care-- Frontiers in Managing Quality." Juran Report, Fall 1989, pp. 18-31.

8. Berwick, D., and others. Curing Health Care. San Francisco, Calif.: Jossey-Bass Publishers, 1990, p. 150.

9. Progress Reports. Winter Park, Fla.: PCA Inc., Creative Factory, 1991, p.151-93.

10. Crosby, P. Personal communication, December 1991.

11. "Communication Key to Customer/Supplier Relationship at Ortho Pharmaceutical." Quality Update 9(7):13-4, Jan.-Feb. 1991.

12. "Monmouth Medical Center Injects Quality Vaccine." Quality Update 9(7):4-8, Jan.Feb. 1991.

13. Dixon, M., and others. "Quality Improvement in Clinical Medicine: Case Studies." Presentation at Third Annual Forum on Quality Improvement in Health Care, National Demonstration Project, Atlanta, Ga., Oct. 23, 1991.

Jay M. Hughes, MD, FAPC, is Physicians Advisor for Health Care Quality Management, Philip Crosby Associates, Winter Park, Fla. He is a member of the College's Society on Hospitals and its Forums on Quality Health Care and International Medicine and Health Care.
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Title Annotation:Medical Quality Management
Author:Hughs, Jay M.
Publication:Physician Executive
Date:Jul 1, 1992
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