Patient Lifetime Value: True Enterprise Value Measurement for Health Systems
The Value of Relationships
Health systems must attract and retain patient relationships. This aspect of the business model is not new. However, as the financial contribution gap widens between different payer segments, clinical programs and care delivery settings, it is becoming more important to be able to attract and retain enough of the financially accretive patient relationships to support the health system mission. Understanding the financially accretive patient segments and identifying the ways to attract and retain these segments better than others is required for long-term mission sustainability.
Historically, health systems have approached these goals transactionally. Asking questions like, “which programs or payers have the highest contribution margins?” demonstrate the emphasis on what services are being provided to financially support the mission. However, in an era of increasing alternatives to the care organized and offered by the health systems, this transactional approach assumes an ongoing patient relationship that may not be as likely today.
As a result, we propose the old transactional approach of service margin should be supplemented with longitudinal approach of lifetime relationship margin. Specifically, health systems must incorporate the present value of a patient relationship’s lifetime value in determining its focus, investments and organizational structures when determining which patient segments it must attract and retain.
Patient Lifetime Value (PLV)
The Patient Lifetime Value (PLV) approach helps health systems evaluate the longitudinal returns from forming specific relationships with patient segments. This approach is an extension of customer lifetime value, commonly used in the retail setting. In the health system setting, a patient’s lifetime value is the present value of the total margin a patient adds to the health system over the entirety of their health care journey, essentially the cumulation of all their interactions discounted for time.
This approach includes the following considerations: the cost to form a relationship with the patient, the ongoing costs to maintaining the relationship, the time-discounted contribution margin from the interactions with that patient over time, attrition and leakage of the relationship, and the length of the relationship.
Using national benchmarks for utilization and cost accounting systems, health systems can evaluate the longitudinal margins associated with patient segments and better identify which relationships create the most enterprise value.
These patient segments can be stratified by demographic criteria such as gender and/or age, clinical criteria: disease state, utilization rates and geographic factors: location, distance travelled for care, payor, etc. to determine the differential value to the health system.
Calculating PLV in Easy Six Steps
There are six steps to calculate the total PLV potential in each market.
Determine healthcare spending by segment utilizing national and local healthcare spending data to project spending ratios.
Translate the national healthcare spend calculations to incremental direct contribution margin using health system’s financial information over a defined timeframe.
Determine rates of attrition based on patient mortality risk, the likelihood of a patient moving away from the market and losses to other competitors.
Evaluate patient influence and decision-making strength.
Project patient lifetime value to determine how much a patient will contribute, the probability of a patient being able to contribute, and the value of the patient’s contribution at each future year of life.
Segment PLV curve into discrete demographic, geographic and clinical segments.
With the total PLV calculated, the health system can begin to determine what share of the PLV they can attract/retain and how much it will cost to do so.
Using PLV to Better Position the Health System
With a clear understanding of the potential PLV of each patient segment, the health system can continue to stratify the opportunity. A simple approach would be on a two-by-two as shown to the left: plotting the PLV and the relationship strength with any health system.
This two-by-two plots out where the where the health systems are most adept at attracting and retaining relationships. Moreover, it also identifies the areas of opportunity for your health system investment and capability development.
Quadrant 1: Low PLV, Weak Health System Relationship.
Patient segments in this quadrant should be deprioritized when evaluated for economically supporting the health system mission. The health system has generated little loyalty from these segments and the segments do not generate the economic returns needed to invest significantly in the health system’s capabilities or actions to generate that loyalty.
Perpetually well, low healthcare users who do not use high-margin services and those with low-paying payors tend to fall into this quadrant under fee-for-service reimbursement.
Quadrant 2: Low PLV, Strong Health System Relationship.
Patient segments in this quadrant are already have a loyal relationship with the health system and the health system likely captures a large share of the lifetime value as a result. However, given the low economic future return, the health system should be focusing on efficient servicing of these patient segments’ needs rather than investing in growth.
Elderly patients with government payers tend to fall into this quadrant.
Quadrant 3: High PLV, Weak Health System Relationship.
Segments in this quadrant offer the most potential for growth without having to compete with the established health system competitors. These patients have a high longitudinal value but are not linked to any established health system. Because the returns are high, health systems can afford to invest more to create capabilities and services to attract this quadrant. Competition in this quadrant is often with new industry entrants (e.g., retailers, venture-capital backed entrants, payers moving into providing care) who are building services that specifically cater to this quadrants desires/needs.
Young, privately insured families tend to fall into this quadrant.
Quadrant 4: High PLV, Strong Health System Relationship.
This segment is the profit engine of the health system today and also the target of the other traditional industry competitors. Health systems typically spend most of their time seeking to grow, maintain and defend the relationship and volumes from these patient segments. Competition in this quadrant is typically with other established health systems.
Older (age 55+) privately insured populations tend to fall into this quadrant.
The PLV tools allow health systems to reevaluate their long-term strategy from the perspective of their patients. Understanding the value a relationship has over time, allows a health system to prioritize the most important relationships better than other health systems that do not use these approaches. The result, long-term improvement of health system economics for those that use PLV as a tool to shape their strategies.
Health System Advisors advises health systems on their competitive market positioning. Our team of motivated, engaged, and inspired strategists brings analysis, insight, and expertise as we facilitate your teams to new ways of thinking and strategies that advance your organization.
Kate Lovrien and Luke C. Peterson are principals at HSA. They can be contacted at Kate.Lovrien@HealthSystemAdvisors.com and Luke.Peterson@HealthSystemAdvisors.com