Is the cost of poor quality impacting your healthcare organization?

Quick Takes

  • Poor quality healthcare and healthcare services can not only lead to potential adverse events in patients, but also financial losses, unsatisfied customers, and reputational damage for organizations

  • Capturing cost of poor quality data, building a culture of employee empowerment, trust and engagement, and investing in necessary measures to lower the occurrence of non-conforming events is essential for healthcare organizations

  • This will ultimately improve patient safety and satisfaction, improve business outcomes, mitigate risk, and lead to an understanding of the return on investment of the quality programs in place

Jennifer Dawson, MHA, FACHE, CPHQ, LSSBB, DLM

Vice President, Quality & Regulatory, Human Longevity Inc.

Is the cost of poor quality impacting your healthcare organization?

23 July 2019

Non-conforming events are detrimental to the delivery of healthcare and healthcare services. In addition to causing potential patient harm, they often also cause financial losses, unsatisfied customers, and reputational damage.

Non-conforming event:  

  • The failure to meet a requirement1
  • When something does not go as planned
  • Also called adverse events, errors, incidents, non-conformities and occurrences

Defining quality and its importance

The aim of quality management is to achieve organizational quality policies and objectives.2 Non-conforming event management is a fundamental aspect of a Quality Management System (QMS) that deals with identifying, tracking, and remediating identified non-conformances. This allows an organization to reduce defects in a continuous process of improvement.

Healthcare facilities can use non-conforming event management combined with cost of poor quality tracking to identify and reduce the costs of poor quality.  When the root causes of non-conforming events are identified, actions to improve quality can be put into place. This will ultimately improve patient safety and satisfaction, and in turn, improve business outcomes such as financial bottomline, as well as mitigate risk. 

Furthermore, tracking quality allows organizations to understand the return on investment for their quality program or initiatives and justify current or additional investment in quality.

Non-conforming event management improves patient safety and satisfaction

Cost of Poor Quality

Calculating the cost of quality 

The American Society for Quality defines the cost of quality as “a methodology that allows an organization to determine the extent to which its resources are used for activities that prevent poor quality, that appraise the quality of the organization’s products or services, and that result from internal and external failures”.3 The cost of quality is comprised of the cost of good quality (CoGQ) and the cost of poor quality (CoPQ). CoGQ (cost of conformance) is comprised of prevention costs and appraisal costs. CoPQ (cost of non-conformance) is comprised of internal failure costs and external failure costs.

Cost of poor quality

CoGQ (cost of conformance)

Prevention costs: incurred to prevent or avoid quality problems (examples: quality planning, training and developing and maintaining a Quality Management System)

Appraisal costs: incurred for measuring and monitoring activities related to quality (examples: competency assessments, calibration, quality control, internal audits, inspections)

CoPQ (cost of non-conformance)

Internal failure costs: incurred to remedy defects discovered before the product or service is delivered to the customer (examples: instrument downtime, data entry errors, missing specimens, retesting, repair)

External failure costs: incurred to remedy defects discovered by the customer (examples: customer complaints, misdiagnosis, harm to patients, lawsuits)

Hard versus soft failure costs

Failure costs (internal and external) can be further broken down into hard costs and soft costs:

  • Hard costs: Obvious costs which are often easy to calculate, such as additional hourly wages spent on correcting a non-conforming event that occurred or reagents and supplies which were wasted
  • Soft costs: Costs which are usually less obvious and harder to quantify but still negatively impact the financials of an organization, such as low employee morale or reputational damage

Although difficult to assess, it is important to conservatively estimate soft failure costs. This will help to more closely quantitate the actual CoPQ for your organization, and provide awareness to the potential repercussions these events can have on the financials of the business. 

Some soft costs relating to poor quality are more difficult to assess than others, but usually a creative calculation is possible to conservatively estimate soft costs. When customers, government agencies, patients, and employees see an organization experiencing a serious patient safety issue or see an organization producing persistent poor quality, it can be very damaging for the business. For instance, a clinical laboratory can track the customers who stop using their services, but it is more difficult to track the number of potential customers that never purchased services because they heard about the poor quality issues. 

In addition, the stress and low morale that an error may cause for employees could lead to an increase in burnout, poor focus leading to more errors, work-related illnesses, or higher turnover rate. It is possible to estimate the business lost by working with the sales team to come up with a conservative figure and the financial impact of low morale can be represented by estimated hours of productivity lost. These are just examples of how CoPQ soft cost calculation can be achieved. The more data that can be collected on these considerations the better the CoPQ estimate will be.

Reducing CoPQ leads to cost savings and cost avoidance

When a failure or non-confirming event occurs, an investigation and root-cause analysis will allow you to determine an appropriate corrective action in order to eliminate the root cause of the event. Calculating CoPQ allows for an understanding of the cost savings and/or avoidance that will be realized in implementing the corrective action.

Eliminating the root cause of non-conforming events saves money

cost of poor quality

Capturing the CoPQ associated with each non-conforming event or near miss allows your organization to quantitate the financial benefit of your corrective actions and other quality improvement activities. Poor quality and rework create unnecessary financial losses and assigning a monetary value to that waste provides the motivation to eliminate it.

4 STEPS LEADERS CAN TAKE TO DECREASE THEIR ORGANIZATION’S COPQ

1.Support the implementation of a system to capture CoPQ data that estimates hard and soft failure costs. Consider a simple Excel-based CoPQ capture system or investing in a software solution to streamline this process electronically.
2.Build a culture of employee empowerment and trust. It is essential that employees feel safe to report non-conforming events in order that preventative and corrective actions can be taken against their recurrence.
3.Create an engaged workforce. Engaged employees will more likely be proactive in solving non-conforming events before they occur, or at least before the defect is discovered by a customer.
4.Invest the resources necessary to succeed. Recognize that to effectively run the quality programs needed in a timely manner, resources will be required, but there will be a return on investment.

Jennifer Dawson, MHA, FACHE, CPHQ, LSSBB, DLM is the Vice President of Quality & Regulatory Affairs for Human Longevity, Inc in San Diego, California. She has provided quality management systems consulting to organizations such as Baylor University Medical Center and Geisinger Medical Laboratories. Jennifer is a member of the CLSI Quality Management Systems Expert Panel, the Cardinal Health Laboratory Advisory Board, the ASCLS Patient Safety Committee. She also recently completed a 2-year term on the CLMA Board of Directors and has served on the National Malcolm Baldrige Quality Award Board of Examiners. Jennifer is a frequent author, speaker and poster presenter and has won many laboratory industry related awards for her work in quality.

References

  1. ISO 9000:2015 – Quality Management Systems – Fundamentals & vocabulary. Geneva, Switzerland. International Organization for Standardization; 2015
  2. ASQ. Article available from https://asq.org/quality-resources/quality-management-system [Accessed July 2019]
  3. ASQ. Article available from https://asq.org/quality-resources/cost-of-quality [Accessed July 2019]

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