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The following overview is a draft document pending review and approval by the Governor and Task Force.


All health systems are established to improve the quality and longevity of people’s lives. In technical terms, health care system efficiency can be measured as a ratio of performance to cost or occurs when quality of care and consumer satisfaction is maximized at a minimum cost. The challenge becomes how to measure the efficiency of the health care systems within and across countries when each country is different and universal standards of measurement are not yet fully developed or accepted. A broader approach is to consider health care system efficiency as a multi-dimensional concept with macro- and micro-level components influenced by a broad array of stakeholders and drivers – from patient utilization and provider incentives to organizational structure and public policies.


In most countries, public health spending as a percentage of gross domestic product and total expenditures has increased and will continue to increase given technological innovations and supply induced demand (these two are the biggest drivers of health care expenditures), the projected demographic growth, longevity, and rising patient expectations. Therefore, countries have an incentive to direct resources to service interventions that achieve improved health and longevity in the most efficient way. Making budget reductions or managing overall cost does not mean that a health care system is efficient.

Therefore measuring efficiency is about relating cost to outcome. For example, a hospital can provide a surgical procedure done at low cost, but it may have minimal impact on the quality of a person’s life (unnecessary intervention). Or worse, it could cause harm to the person because of complications or poor practice. There is strong emerging evidence that efficiency, appropriateness of care, and quality of care are strongly linked.

According to the Organisation for Economic Co-operation and Development, higher spending alone on the health care system does not necessarily translate to better health outcomes.

The interest in the efficiency of the health system is at multiple levels. Countries know that health care consumes a large proportion of economic output, peaking at 15.3% of gross domestic product in the United States. Governments are concerned about allocating taxpayers resources to achieve the best value for money. Employers who contribute to their employees health plans want to reduce business costs. Health insurers want to attract members but keep costs down, so they must balance cost with benefit. Health care providers, both public and private, constantly seek ways to stretch their revenue further.

Hence efficiency needs to be viewed from the perspective of a number of stakeholders, but all have an interest in it.

In order to judge overall health care system efficiency, countries may review composite indicators of performance rather than review individual performance measures. Overall system efficiency may be deceiving if single variables are analyzed rather than a composite, interdependent set of circumstances. For example, select countries may have a low infant mortality rate but a high death rate for certain age groups, which may not be explained by an individual variable. At the same time, some activities or indicators do not lend themselves to comparative analysis, and yet the pressure still exists for countries to develop methodologies or proxies for benchmarking the efficiency of their health care systems.


There is no single accepted measure of overall health care system efficiency because of the complexity of system designs and practices. So it may be more useful to think of system efficiency in terms of a framework with interconnecting dimensions. Within each there may be potential for comparative measurement, or at least exploring better practices that are evolving.

One possible framework for considering system efficiency looks at efficiency as a concept with four main categories of drivers: macro-level elements, micro-level elements, appropriate use of services, and efficient use of services.

Macro-level elements takes into consideration bigger questions such as system design and organizational structure. Funding system design can promote efficient use of resources, such as payment using diagnosis-related groups (DRGs) or other case mix approaches, to create an incentive to reduce length of stay and avoid excessive servicing during an episode of care. Organizational system design can include ‘purchaser-provider’ concepts, and aggregation of providers or payers to enable economies of scale. Policymakers drive these system design elements through policy, legislation and other resource allocation tools.

Micro-level elements refers to specific techniques, technologies, and methodologies in practice that can promote or inhibit efficiency. For example, the use of information technology to speed up processes or reduce errors has been a major contributor to efficiency improvement. Many methodologies have emerged to redesign the care process to simplify or reduce blockages, such as the use of Lean, Six Sigma, or the Institute of Healthcare Improvement collaborative methodology. Workforce redesign is another micro-level reform, where care tasks are pushed ‘down’ the workforce ladder, such as nurse practitioners or phlebotomists. There are many other micro-workplace reforms that improve efficiency.

Micro-level approaches to improving efficiency are less dramatic than macro-level, but represent constant opportunities because macro-level change is often difficult to achieve, or happens less often. In fact, responding to the macro-level incentive and structural changes requires the use of micro-level methodologies.

Appropriate use of services refers to drivers that encourage or discourage utilization of medical services. Payers of health services, whether Government or Health Plans (insurers), are often the driving force in this category, and they can apply to both macro and micro elements. For example, pay for performance (P4P) is a tool used by some countries to improve the efficiency of the health care system by providing financial incentives to reward health care providers for performing certain evidence-based care processes or achieving certain health outcomes. Pay-for-performance has been implemented in the United States in more than half of the private health insurance market and state Medicaid programs, with the idea that it reduces overuse of services and thereby increases efficiency. An ambitious country-wide P4P initiative, the Quality and Outcome Framework (QOF), has also been implemented in the United Kingdom. However, research continues and debate is ongoing over the extent of impact of incentive approaches such as P4P to truly improve patient outcomes and overall system efficiency.

Efficient use of services refers to how medical services are delivered and organized regardless of their appropriateness. In other words, once a patient receives a medical service or treatment, what factors contribute to the efficient delivery of that service? For example, if an inpatient hospitalization is deemed appropriate for a patient, how can the hospital length of stay be minimized to improve efficiency and still provide the patient with the optimum outcome?

These four components overlap in a complex integrated way to promote (or hinder) health care system efficiency. This complexity adds to the challenge of assessing and measuring system efficiency and outcomes. Not properly measuring efficiency of a health care system can have the negative consequence of creating premature “best practice” publications based on poor quality analysis and, more importantly, inappropriate policy responses in some countries.

The diagram below illustrates this efficiency framework.

Driver Macro-level elements Micro-level elements
 Appropriateness of care  For example:
  • best practice commissioning (United Kingdom)
  • authorized drug formulary or list
  • Pay for Performance (P4P)
  • pre-authorization of care
  • supply side control of high use technologies
 For example:
  • clinical practice guidelines and protocols
  • care pathways-utilization review using key performance indicators (KPIs)
  • offering home and community care alternatives (e.g. nocturnal dialysis)
  • telephone triage-palliative care vs. active intervention
 Efficient delivery and organization of care
  • casemix or bundled funding
  • aggregation to achieve economies of scale (e.g. drug purchasing)
  • accreditation systems
  • use of IT
  • process redesign systems (Lean, IHI Collaborative Approach)
  • telephonic case management-KPIs and benchmarks
  • workforce substitution

Measuring Efficiency

Efficiency relies on finding metrics to compare and assess progress. Challenges in measuring health system efficiency include:

  • Selecting performance proxies that are measurable or easily measurable;
  • Identifying reliable sources of data;
  • Completing data gaps;
  • Avoiding observation bias; and
  • System or organizational flexibility in coping with environmental influences and “external shocks.” Environmental influences on efficiency may include the health status of those served, external environment like geography, random fluctuation outside of country’s control, and the roll out of different health care priorities. External shocks may include medical advancements, new diseases, and moving targets for achieving health care efficiency.

The World Health Organization made an attempt at macro measurement through its publication, The World Health Report 2000 Health Systems: Improving Performance. It calculated efficiency by looking at the ratio of health system performance to expenditure after adjusting for presumed uncontrollable influences of performance. The goal of the report was to analyze the role of health systems and suggest ways to make them more efficient, accessible, and responsive to people not benefiting from them in select countries.

In particular, the Report uses performance measures to assess health system goal attainment using the level and distribution of health, level and distribution of responsiveness and distribution of costs. These composite measures are then compared to the level of resources invested in select countries.

However, the WHO methodology for measuring efficiency was widely criticized due to their methods for measuring performance, treatment of missing or poor quality of data, and econometric methods. Specifically, the Report lacked agreement about the best method for measuring health attainment or level of responsiveness, limited consensus on the selection and weighting of normative values assigned to health, responsiveness, and financing as well as the unavailability or unreliability of secondary data sets, such as estimation techniques, used.

Innovative Options to Addressing Health Care System Efficiency—Examples

In terms of the framework above, the following examples focus on some specific micro-level elements aimed at improving the efficient delivery of services, and which may also be applicable to improving appropriateness of care.

Kaizen/Lean Thinking/Six Sigma: Kaizen is a management philosophy that originated in Japan that promotes greater efficiency through a process of continuous, incremental change and improvement. It is based on the belief that everything in life can be improved upon and improvement is most easily achieved through a systematic approach based on small, continuous changes that are easy to implement and use minimal resources. Kaizen is a philosophy of immediate action rather than long-term solutions and ‘using what you have’ to make incremental improvements while minimizing waste. The key elements of Kaizen are quality, effort, involvement of all employees, willingness to change, and communication. The Kaizen method has been used in industries from manufacturing to healthcare to improve efficiency in processes and customer satisfaction.

Kaizen is related in principle to another management philosophy called Lean Thinking (also known as Lean production, or Lean). Lean Thinking originated in the Japanese auto industry as an alternative to the mass manufacturing philosophy of the West. Lean Thinking emphasizes value-added activities in a way that minimizes waste, much like Kaizen. If certain activities in a process do not result in an outcome desired by the consumer, then Lean principles would consider this a non-value-added activity, or waste of time and resources. Lean uses value-stream mapping and other practices and techniques to provide standard solutions to common organizational problems.

Six Sigma is another business management strategy first utilized by Motorola that strives to improve quality and efficiency through elimination of “defects,” i.e. any outcome that is undesirable to the customer. It is a data-driven approach that focuses on process improvement and variation reduction through identified “projects” within an organization that create incremental improvement in the system. The DMAIC philosophy of Six Sigma - define, measure, analyze, improve, and control – is strictly followed in developing a solution to any and all problems/projects. Six Sigma is a more complex management approach than Lean and does not rely on a standard set of solutions for common problems as does Lean. However Six Sigma provides greater organizational infrastructure and analytical tools than Lean.

Institute for Heath Improvement (IHI) Collaborative Model for Breakthrough Improvement

The Institute for Healthcare Improvement (IHI) is an independent non-profit organization based in Cambridge, Massachusetts in the United States that works toward the improvement of health care throughout the world. IHI hosts conferences to engage healthcare professionals and help create an impetus for change, promotes best practices through the dissemination of knowledge, and provides organizations with quality improvement tools and measurements in order to put knowledge into practice.

In 1995 IHI created the Breakthrough Series, a model for collaborative learning to help healthcare organizations achieve “breakthrough” improvements in quality while reducing cost. A Breakthrough Series Collaborative is a 6-15 month learning model in which multiple teams from hospitals and clinics come together to seek improvement in a specific topic area. The Breakthrough Series aims to help organizations decrease the knowledge gap that prevents good practices from being adopted in a timely way. Various IHI collaborative projects have been successful in improving quality and efficiency in healthcare organizations, for example by reducing waiting times by 50 percent, reducing worker absenteeism by 25 percent, reducing ICU costs by 25 percent, and reducing hospitalizations for patients with congestive heart failure by 50 percent.

The following two examples illustrate some possible macro-level elements which may improve efficiency by creating incentives for more appropriate care.

United Kingdom: The United Kingdom implemented one of the most pay for performance programs, the Quality and Outcome Framework (QOF), for quality of care improvements in primary care services. Approximately 20 percent of earnings for general practitioners who have a contract with the United Kingdom National Health Service are directly linked to their performance across about 150 quality of care indicators. While this program seems to offer potential for overall health system improvements, additional research need to be completed to assess the actual impact of the financial incentives and how to continue the program while controlling the high costs for this program.

California Pay for Performance Program (USA): In the state of California, in the United States of America, a group of seven private health plans and 225 physician organizations developed the California Pay for Performance Program which includes a set of quality performance measures, public report cards, and financial incentives for providers. Performance measures are included for clinical events such as preventive and chronic care management, patient experience in the health care system, and adoption of health information technology. The level of financial reward varies by individual participating health plan. Even though the program had had a positive impact on the quality of care measures, modifications to the original P4P program are to be implemented such as increasing financial incentives proportional to improvements in performance outcomes, further develop and expand the performance measure set, strengthen the administration of the program, and further develop public reporting, research and public relations.