Making an evidence-based financial case for investment in lab quality with CoPQ
Healthcare isn’t just changing. It’s changing faster and more radically than ever. Greater focus on outcomes. Capitated payments. Integrated care delivery. In this landscape, everyone is being asked to do more with less. The time is now for departmental service lines to proactively create solutions that help meet rising demands.
This generally manifests in pressure to cut costs—something laboratory leaders are all too familiar with. However, remaining financially viable requires a more disciplined approach. Focusing narrowly on reductions in spending can lead to reductions in quality. When this happens, the impact can be far greater than what is recognized and can cost organizations far more than money.
For example, leadership across service lines often implement staff reductions in their efforts to spend less. This can be counterproductive, because professionals whose roles are eliminated often take a wealth of experience, knowledge and clinical skills with them. The resulting loss in quality may increase risk of inefficiency, poorer outcomes and higher readmissions.
More than ever, healthcare service lines need to be strategic in how they pursue opportunities to avoid excessive spending. This can be especially challenging for clinical labs, which are facing a continuous increase in test volumes with a seemingly endless decline in reimbursement rates. To meet expectations, it’s more critical than ever that lab leaders implement solutions that support cost-efficient, high-quality performance.
Cost of poor quality (CoPQ) helps labs quantify the financial implications of nonconforming events.
Use the calculator to determine the optimal allocation of funds to quality improvement.
Leverage CoPQ data to engage with the C-suite.
Contributing Lab Leaders
Head of Quality
Laboratory Quality Manager
Core Lab Medical Director
Quality Management Manager
Executive Laboratory Director
A Closer Look at the Lab
Far too often, cost reduction within the lab results in funds being allocated away from the quality department and its initiatives. This department (or quality function if not centralized) is especially vulnerable to cost cutting because quality activities are often not directly involved in the laboratory workflow. Because quality departments are not revenue generating, they are often seen as cost centers. Therefore, they are sometimes seen as a “nice to have.” As resources become scarce, some labs struggle to justify this investment.
However, reducing investment in this department can have serious consequences that impact budget, outcomes and patient safety. This is because the quality department plays a key role in risk management and remediation of nonconforming events, also called occurrences, adverse events or nonconformities. These are issues that, according to Jennifer Dawson, Head of Quality at Human Longevity, Inc., can be defined as, “when something in the lab doesn’t go as planned.” Once events are identified, it is essential to eliminate the root cause to avoid repeat events in the future. Yet when the quality function is under-funded or eliminated, this important risk management activity often falls to the wayside.
While labs track financial metrics, they are generally not equipped to quantify the impact of nonconforming events on their budget. As the lab is often perceived as a cost center within hospitals or health systems, this perception will only perpetuate if they are unable to redefine their value.
To help labs quantify the financial implications of nonconforming events, lab leaders from around the country partnered to refine and test a Cost of Poor Quality (CoPQ) calculator.
The CoPQ calculator can help illuminate the widespread impact of nonconforming events as well as the value of investing in quality initiatives. Lab leaders can use the calculator to determine the optimal allocation of funds to quality improvement. With proof of a positive return on investment (ROI) in the form of cost savings and/or cost avoidance, they are empowered to present a compelling argument to the C-suite to secure more funding.
Read on to learn more about the correlation of cost and quality and how to leverage the CoPQ calculator to reinforce the value of the lab and quality department.
Cost of Quality is a Proven Concept in Industry
Before the concept of CoPQ was established, Joseph Juran first discussed “cost of quality” (CoQ) in the 1951 edition of his Juran’s Quality Control Handbook. He reasoned that the level of quality affects both the cost of production and the price that can be charged. According to Juran, quality is two-sided. It has to meet customer needs and provide satisfaction (good quality outcomes) while minimizing deficiencies that require rework (poor quality outcomes). He estimated that about one-third of what is done in the US manufacturing industry consists of redoing work previously “done,” which further highlights the importance of minimizing deficiencies.1
This paved the way for CoPQ, which was later popularized in 1987 by H. James Harrington, an IBM quality expert. In his book Poor-Quality Cost, he outlines the general concept of the cost of poor quality as the need to reduce rework. He deduced that investment in detection and prevention of errors is more than offset by the savings in error reduction.2
Juran formally defined the term CoPQ the following year as the costs that would disappear if everything were perfect.1 The American Society for Quality (ASQ) later expanded upon this definition to include costs associated with providing poor quality products or services.3
The concept of CoPQ was first applied in manufacturing, where it was regularly measured and directly linked to profitability.3,4 Since then, process variability benchmarking tools like Six Sigma were developed to correlate the CoPQ rate with cost of quality achieved. In most companies, poor quality or rework accounts for an average of 20% of a company’s sales. Yet for those who have achieved Six Sigma, CoPQ accounts for <10% of sales.3,5 This reinforces the impact an improvement in quality can make.
The Many Facets of Quality in the Lab
Typically, when laboratory administrators think about the cost of quality (both good and poor) in their labs, they think about easily quantifiable costs, which include things like accreditation, QC materials, PT programs, quality FTEs and compliance software. Understanding good quality costs, which are those associated with appraising and proactively ensuring quality, is paramount. While these costs may seem significant, they are necessary to avoid far greater expenses downstream.
To complete their knowledge of cost of quality, administrators need to have an equal understanding of CoPQ. While they may be comfortable quantifying the cost of an individual assay, they may fail to consider the broader spectrum of cost factors including those associated with failures or rework. Many lab leaders are not equipped to accurately quantify the extra time technologists spend and materials wasted in activities such as troubleshooting instruments, re-running tests, contacting physician offices, finding lost specimens, etc.
In fact, nonconforming events, by nature, are events that occur but are largely not budgeted for. These activities have many difference sources, such as inefficient, error-prone or manual processes; outdated technology; unoptimized assays; etc., and can consume excessive time and labor for staff.
For this reason, a significant part of the lab’s investment should relate to avoiding failures and rework altogether. The two types of costs of good quality (CoGC), are vital to eliminating costs associated with poor quality3:
- Prevention: costs incurred to prevent or avoid quality problems (such as failures and rework costs). These costs are planned and budgeted for. Examples include development of a quality management system, training and quality planning.
- Appraisal: costs incurred to measure and monitor activities related to quality. Examples include internal audits, quality control and proficiency testing
CoPQ is also divided into two main categories: internal and external failure. The category depends on whether the failure is discovered before (internal) or after (external) the delivery of test results. Additionally, each category can be categorized into hard or soft costs, based on how they impact the budget. Hard costs are direct costs—those that would be of interest to the finance department. Soft costs are less direct and harder to quantify. They are often measured indirectly but can have a major impact on the lab’s bottom line.
- Internal failure costs are those that are incurred to remedy defects discovered before the product or service is delivered to the customer3
- Examples of hard costs: Labor costs including regular wages and overtime, supplies, reagents and QC materials, etc.
- Examples of soft costs: Low employee morale, productivity loss and downtime’s effect on turnaround time, etc.
- External failure costs are those that are incurred to remedy defects discovered by customers3
- Examples of hard costs: Time spent in correcting reports and complaint handling, unnecessary treatments and litigation, etc.
- Examples of soft costs: Costs associated with misdiagnoses, stress to patients, harm to patients and reputational damage, etc.
Determining the hidden Cost of Poor Quality
With 13 billion laboratory tests performed annually, nonconformities can be more frequent and costly than most people realize.6 For example, labs may not be tracking their rerun rates. This is likely because the cost of reruns may not be recognized or appreciated or may even be considered the cost of doing business. However, quantifying the frequency of reruns and subsequent total cost to the lab is often an eye-opening exercise.
The question remains: How much to invest in a quality program? The optimal investment in the quality program is determined by achieving lowest total cost of quality (CoPQ+CoGQ). Figure 1 depicts the optimal level of quality where both the failure costs and prevention costs meet. This intersection cannot occur at the point of perfect quality, but rather must equally balance quality and cost.
Figure 1: Classical model of optimum quality costs1
The CoPQ calculator was designed to help laboratorians precisely and reproducibly identify and quantify costs associated with failures and rework. This can help them demonstrate an ROI for quality efforts, pinpoint the optimal investment and further make the case for additional funds if needed.
Identifying and Preventing Nonconformities
Labs are required to track and remediate nonconforming events by the Clinical Laboratory Improvement Amendments (CLIA) regulations.7 To remediate a nonconforming event, a root cause analysis should be performed and corrective and preventive actions formulated and implemented. This process is designed to prevent recurrence of the issue. Since the lab should already be compiling nonconforming event information, the CoPQ calculation can be incorporated into current nonconforming event management tracking processes.
Conventional thinking predisposes to the expectation of trade-offs when investing in speed, quality and cost. However, research shows that increasing lab quality to the right level can significantly lower costs (Figure 2), mainly through the reduction of rework and other nonconforming events.2,5 By identifying and eliminating root causes, labs can help prevent these nonconforming events and their associated impact.
Figure 2: Typical relationship/progression of CoPQ8
Developing the Laboratory CoPQ Calculator
The advisory board agreed on seven types of common nonconformities spanning the Total Testing Process:
- Specimen mislabeling
- Instrument downtime
- Test reruns
- Proficiency testing failures
- Corrected reports
- Product recalls
- Turnaround time delay
An advisory board of lab quality experts convened to identify common and/or high-patient-safety-risk nonconforming event types. Led by Jennifer Dawson, advisors included a medical laboratory consultant as well as laboratory directors, laboratory managers and quality managers from small, medium and large healthcare organizations and reference labs. Their input and insights directly helped to test and refine the CoPQ calculator that Dawson had developed, making it a tried-and-true tool for tracking CoPQ in the clinical laboratory across a variety of settings.
Advisors worked together to determine the ideal cost categories for inclusion in the calculator for the purposes of a multi-facility study (refer to Figure 3) and discussed how to increase its consistent use. Following the advisory board meeting, each of the advisors took the calculator back to their own institutions and calculated CoPQ on an event-by-event basis for the seven types of events. They used the calculator to break down each event in order to dimensionalize its overall financial effect.
Figure 3: Fishbone diagram for CoPQ components for test reruns*
*Based on actual components from the CoPQ Calculator.
As soft costs are subjective and conditional, it is recommended that quality department leadership partner with other stakeholders including lab leadership to reach consensus on their method for calculation. If data are to be presented to the C-suite or lab leadership, for example, it will likely be beneficial to engage them prior to performing CoPQ calculations to ensure agreement on reasonable values, ranges or methods for calculation. This is essential, as inflated values could be detrimental to the credibility of CoPQ calculations.
See Figures 4 and 5 for actual data from the CoPQ multi-facility study. The wide range of values reflects the range of event severity, economies of scale and variations in both hard and soft cost interpretations. For these reasons, the calculator is more effective for computing and comparing one organization’s CoPQ over time (comparing against itself) versus benchmarking against that of other labs.
Figure 4: Calculated hard and soft CoPQ costs for each nonconforming event tracked
Figure 5: Graphical representation of the hard costs, soft costs and total CoPQ
Leveraging the CoPQ Calculator
For labs looking to improve quality, lower costs or justify further investment in quality initiatives, the CoPQ calculator can make all the difference. It is available now at lableaders.com/copq/tool/.
Follow these six steps to begin calculating your CoPQ
- Identify the most common or impactful/costly nonconformities in your lab
- Calculate the cost of representative events for each noncomformity type with the CoPQ calculator and determine an average CoPQ value per event type (20 is recommended for statistical significance)
- Determine or estimate the annual frequency of each type of nonconforming event
- Show the financial impact for each type by multiplying the average CoPQ of each nonconforming event type by the number of occurrences experienced over the last year for that event type
- Show the cumulative financial impact of all nonconformities being studied by adding all the estimated annual CoPQ values together
- Highlight how this CoPQ compares to the lab section’s budget (expressed as a %) or to the salaries for your Quality FTEs
Once CoPQ has been identified, the quality department and other lab leadership can begin to systematically reduce it. With the successful elimination of each root cause comes cost savings and/or cost avoidance. With the proper investment, the quality program can put more effort into prevention and appraisal activities such as:
- Triaging and remediating nonconforming events
- Optimizing processes that reduce variation and subsequent rerun rates
- Training and education to drive adherence to best practices
This can help the lab demonstrate:
- Improved test margins and profitability
- Greater production capacity by avoiding unnecessary rework
- The value of investment in costs of good quality, prevention and appraisal costs
- The need for additional funds to further strengthen quality activities
By performing CoPQ calculations over time, the calculator serves to track the financial benefits that are realized and ensures that investments in quality initiaitives are the most productive they can be. As labs make targeted investments, they can demonstrate the ROI of those quality initiatives. With costs captured, it becomes easier to make the case that the cost of investing in a robust quality program is far less than the cost of reacting to quality issues.
In a majority of institutions, the C-suite likely has a fixed budget for each service line and may be reluctant to allocate extra funds without an overwhelming rationale.9 Once the lab can demonstrate that they have reached capacity with their current resources, they can use the calculator to project a future return on investment from additional investment in quality. They can use these data to make a financial case for additional budget, with the expectation of even greater gains.10
In engaging with the C-suite, the lab should be prepared to face many challenges, including:
- The C-suite may not always fully understand the lab’s true value. For example, they rely on the lab for essential data but may not have a clear idea of how the lab can make a greater impact. As a result, they are often more inclined to invest funds in service lines with higher perceived potential.
- Lab quality programs may seem far removed from the organization’s top concerns. In turn, they are also not an obvious target for additional investment.
- Lab management generally speaks the language of the lab, not the C-suite. They are comfortable speaking about throughput, turnaround time and testing efficiency, but to make a compelling case to administration, it helps to be able to speak the language of money.1 Without this connection, the C-suite may not see a clear alignment between the goals of the lab and the financial goals of the organization.
The CoPQ Calculator can be of value for overcoming these challenges. It can help the lab demonstrate how these departments can contribute heavily to the organization’s strategic goals. As they directly impact costs, patient safety, lab capacity and more, investing in lab quality initiatives can be felt on an enterprise level. Once benefits have been achieved, lab leadership is in a better position to highlight to the C-suite how the lab has internalized the financial health of the organization and is taking steps to improve it.
Lab leadership should recognize that different C-suite members may receive these CoPQ messages differently. They should focus on finding an executive champion who appreciates the lab’s ability to demonstrate ROI using a tool like the calculator. One such individual is the COO, who is in a strong position to appreciate the value of procedural and operational refinements. Once the lab has identified this individual, they are encouraged to engage, highlight their perspective on quality improvement and plan to share initial data.
How to Get Started
Laboratorians are accustomed to communicating quality and patient safety benefits. Demonstrating CoPQ allows laboratorians to also speak the language of lab management and the C-suite, which means that the CoPQ Calculator can provide a highly effective tool for making a financial case across both audiences.
The CoPQ Calculator is now available at lableaders.com/copq/tool/, along with further information about this initiative.
The LabLeaders CoPQ series continues... Get More Here
1. Juran JM, De Feo JA. Juran’s Quality Control Handbook: The Complete Guide to Performance Excellence. 6th ed. McGraw-Hill Education: New York, NY; 2010.
2. Harrington HJ. Poor-Quality Cost. Milwaukee, WI: ASQC Quality Press, 1987.
3. American Society of Quality. Cost of quality. http://asq.org/learn-about-quality/cost-of-quality/overview/overview.html. Published 2013. Accessed February 22, 2018.
4. Krishnan SK. Increasing the visibility of hidden failure costs. Measuring Business Excellence. 2006;10(4):77-101.
5. CLSI. Understanding the Cost of Quality in the Laboratory; A Report. QMS20-4: Wayne, PA: Clinical and Laboratory Standards Institute; May 2014.
6. American Association for Clinical Chemistry. Laboratory Medicine: Advancing Quality in Patient Care. https://www.aacc.org/health-and-science-policy/ aacc-policy-reports/2015/laboratory-medicine-advancing-quality-in-patient-care. Published October 7, 2015. Accessed February 22, 2018.
7. Standard: General laboratory systems quality assessment, 42 CFR §493.1239 (2003).
8. Dawson J. What is your lab’s cost of poor quality? LabLeaders website. Available at: http://resourcecenter.lableaders.com/webinars/what-is-your-labs- cost-of-poor-quality. Accessed April 4, 2018.
9. Stevens F. Moving beyond the static budget: why continuous improvement is the future of healthcare budgeting. Healthcare Finance. June 11, 2015. http://www.healthcarefinancenews.com/blog/moving-beyond-static-budget. Accessed March 16, 2018.
10. Dawson J. What’s your CoPQ? Quantifying the Value of Laboratory Quality. Med Lab Magazine. 2017;6(6):12-19.
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Cost of poor quality (CoPQ): The costs associated with providing poor quality products or services.