Value-based healthcare starts with standard definitions

March 20, 2019

Depending on whom you talk to, the move to value-based healthcare is driven by a high-level societal objective and a fiscal imperative to deliver the highest value to patients through effective resource use and management. How to measure if we are getting value for money is quite another matter, one that has plagued economists for decades. The challenge, once again, is a lack of standards around definitions — from value-based care itself, to outcomes, and the difference between price and costs. Each of these topics deserves its own chapter in a book, but let’s start the conversation.

It begins with the definition of value-based healthcare, which at its core, is really about how healthcare delivery organizations and physicians are paid — based on patient outcomes1,which is another term up for debate. Admittedly, those payment models are evolving, but they are designed to help patients achieve better health status, while value is determined by measuring outcomes against the costs of delivering those outcomes. That’s where another disconnect comes into play.

Evaluating value

How do you measure value? As a recent Health Affairs blog2 pointed out, it is difficult given that historically we have measured costs in terms of discrete activities like hospital visits, whereas the vast majority of our national health expenditures are attributed to treating chronic disease. Economists are working toward understanding the full costs by disease state but are still in the experimental stages. Then there is the issue of what contributes to better outcomes. That may be even harder to measure, given that the impact of clinical care is less impactful to many other factors, including genetics, socio-economic status and the environmental conditions in which a person lives.

Finally, there is confusion around the terms cost and price, which are often used interchangeably and rarely clearly or correctly. Price, for example, is typically discussed as what a hospital or physician charges for a service (but it is rarely the actual cost incurred by the patient). In other words, cost is in the eye of the beholder.

This further exposes another problem around definitions: the difference between revenue and cost reduction. Too-often, in my opinion, we have focused on top-line growth (revenue) and far less on cost-reduction or avoidance. With the move to value-based payment models, more hospitals and healthcare delivery organizations will need to manage how they deliver care according to a (usually lower) target price or payment. The problem is many hospitals do not know how much it truly costs to deliver care. That’s because they never really had to. They performed a service and got paid.

This is where supply chain can shine, if given a chance. The fact is, many well-intentioned and highly skilled leaders in healthcare are working diligently on programs that they believe will achieve the objectives of value-based healthcare. Problem is, they are often pursuing the vision from their own unique perspectives and experience, when value-based care requires us to look at the delivery of healthcare, and better health, more holistically. As they hand down directives to the leaders of their respective functions: chief medical officer, chief nursing officer, chief financial officer, chief supply chain officer, etc., they often task them to work in what have been well-established silos. They, in turn, fail to create the structures that allow for more cross-functional collaboration and data sharing, let alone recognize that the respective disciplines might have something to offer the other.

A shared investment

I see this all the time with supply chain, which has the ability to support both clinical and financial objectives, yet sometimes is not empowered to collaborate to its full potential. Case in point, a friend and supply chain leader told me recently that a decision (made by supply chain and clinical leaders) to move to a new, more innovative product resulted in the elimination of the test they were using previously, which had been a source of revenue for the hospital. That met with resistance from the revenue cycle lead who was only thinking about top-line growth. When the supply chain leader explained the new product would result in overall lower costs to care for a patient, but with the same quality of care, the supply chain leader was told: “Revenue cycle is not your responsibility.”

The fact is, under value-based healthcare, we need to consider both: costs and revenue, as they both contribute to the financial strength of our healthcare system to improve the health of individuals and populations, and at a lower cost per capita. Supply chain can support this by considering the impacts of its decisions beyond the price of products and services and even the total cost of ownership (e.g., sourcing, acquiring, managing, etc.). Also consider how those decisions affect revenue, cost reduction and patient care. But supply chain cannot do this in a vacuum. Supply chain professionals must collaborate with clinicians on which products are best for which kinds of patients, and with finance to understand the revenue and cost implications. Value-based healthcare is truly a team sport, and no one should forget the often too-silent team player, the patient, who may have another perspective on value. To build further on the sport analogy, it is imperative that everyone understands which direction is the goal line. It may move a bit, as our understanding of value-based care and the payment structures evolve, but unlike San Francisco 49ers player Jim Marshall, who ran the wrong way in a game against the Vikings in 1964, we should all be running in the same direction and that starts with standard definitions and measurements.


  1. What is Value-based Healthcare? NEJM Catalyst blog. Published January 1, 2017. Accessed March 11, 2019.
  2. “Medical Expenditures Are Likely “Worth It.” But Can We Measure How Much They Are Worth?”,  Health Affairs Blog, February 20, 2019. DOI: 10.1377/hblog20190215.71093.
About the Author

Karen Conway | CEO, Value Works

Karen Conway applies her knowledge of supply chain operations and systems thinking to align data and processes to improve health outcomes and the performance of organizations upon which an effective healthcare system depends.  After retiring in 2024 from GHX, where she served as Vice President of Healthcare Value, Conway established ValueWorks to advance the role of supply chain to achieve a value-based healthcare system that optimizes the cost and quality of care, while improving both equity and sustainability in care delivery. Conway is former national chair of AHRMM, the supply chain association for the American Hospital Association, and an honorary member of the Health Care Supplies Association in the UK.