What is Value?

The term "Value" is commonly used and tossed around as if it has a standard definition to which everyone agrees. But the reality is value can mean many different things depending on the context and discipline within which it is used. In fact the concept of value dates back over 2,000 years and has steadily been shaped and built upon, that is it has evolved over centuries. To further confound us, value is usually relative as well, meaning the amount of "value" to one person may differ from the amount of "value" to another person or may depend on the context of the situation.

Generally speaking throughout the evolution and as used today, "value" is thought of as the relationship between benefit created and the resources required to create that benefit. Put another way Value is the benefit of something relative to the cost to obtain it.

The definition of value has some notable features:

1. Anything with benefit has value (numerator is not zero)

2. To increase value you can increase benefit, decrease cost or both increase benefit while reducing cost

A little bit of the history behind value

Lets be clear, I am not a philosopher, an economist, nor a historian (and no I didn't stay at a Holiday Inn express either), but to better understand the evolution of the concept of value it is instructive to understand where the term came from and how it has evolved over time.

Aristotle 350 BC (2,000 years ago)

Aristotle was one of the earliest people to try to put some definition around the term "value". He framed value in the terms of use value or exchange value:

• Use Value: The utility or function something provides

• Exchange Value: What something can be traded for

Notice that this creates an inherent tension. What a person finds useful may not be what the market prices the highest.

Adam Smith 1776

Famed for his master piece The Wealth of Nations on capitalism and economics, Adam Smith contributed to the definition of value through the labor theory of value:

• Labor Theory of Value: Value of a good is related to the labor required to produce it
  

Adam Smith's work on value contributed the concept that markets price scarcity (supply) and demand, not necessarily societal importance or impact. A question we will dive into in another post is "Does healthcare prices reflect supply, demand or societal impact?"

Economic Theory (1800s)

Economics as a discipline experienced significant growth and development in the 1800s. Led by several economists, Marginal Utility Theory was advanced. Marginal Utility Theory, contributed to the concept of quantifying value as that usefulness of the next incremental value of a good.

This has applications in healthcare, in that more of something is not always better. For example, if you are thirsty the first glass of water is much more valuable to you than the 10th glass of water (you can carry this forward with food, alcohol, etc.)

Modern finance (1900s)

In the 1900s the finance discipline defined value as the future economic productivity. For those of you that remember your finance classes, this is essentially the discounted cash flow model (DCF) that states that value is the present value (PV) of expected future cash flows (CF). While DCF and its derivations are commonly used in investing, its not usually discussed in terms of healthcare.

However, if you go to the underpinnings of DCF, I would argue that the underlying theory that value is the future economic productivity clearly aligns to the value that healthcare delivers. If a person is able to maintain their health they will contribute more to the economy and society.

Value in health care (2000s)

In 2010 Michael Porter's article "What is value in health care"[1] Porter stated:

"In health care, value is defined as the patient health outcomes achieved per dollar spent. Value should be the preeminent goal in the health care system, because it is what ultimately matters for customers (patients) and unites the interests of all system actors"

Porter also says the following about defining value in healthcare:

"Value is neither an abstract ideal nor a code word for cost reduction, but value should define the framework for performance improvement in health care. Rigorous, disciplined measurement and improvement of value is the best way to drive system progress. Yet value in health care remains largely misunderstood."

Porter adapts value constructs to health care by saying in the value equation that the benefit is the health outcomes and the denominator is dollars of cost expended.

So where are we?

For over 2,000 years philosophers, economists and various scholars have worked to define and explain the concept of value. In many ways, value is in the eye of the beholder in that it is relative to context and environment.

The US healthcare system is complex both clinically and administratively and represents almost 20% of the economy. It is also, arguably, not an efficient market - in this ecosystem the concept of value may be even more difficult to define.

The US healthcare system may be the best place in the world to receive "sick care" - but the system has not been as successful in delivering "health care". As in most systems, there is not one person/stakeholder to blame for its design - the system has emerged into its current form through a lot of stimuli and responses. It his highly unlikely that anyone would design the system the way it works today if given a blanksheet of paper.

Unfortunately we do not have the luxury of redesigning the system from scratch, which means transforming the system one step at a time. In the past I have described this "transformation as playing a giant game of Jenga, where each solution we try is like a wood block in Jenga.

In coming posts, we will explore the US healthcare value chain, examining value more deeply, from its creation, to its capture and more importantly, how do we increase value by improving benefit reducing cost or both.

At Value's Edge, we are dedicated to the pursuit of amplifying signals, while dampening noise to help healthcare leaders learn, thinking more deeply, and create more value.

Thank you for being part of the Value's Edge Community.

1. Porter ME. What is value in health care? N Engl J Med 2010; 363:2477-81 (10.1056/NEJMp1011024).↩︎