Recently, and appropriately, great attention is being paid to the cost of poor quality (CoPQ) concept in clinical laboratories. First described by Joseph Juran in his 1951 handbook on quality,1 CoPQ can be defined as the cost of not performing a process correctly the first time or “the costs associated with providing poor quality products or services.”2 It is widely accepted that poor quality engenders significant financial losses for organizations,3-6 postulated at 20% of sales for an average company.4,5 Yet, many executives believe this cost is less than 5%, or are unaware of it altogether. Studies show that CoPQ costs companies millions of dollars annually, and the reduction of this waste can help transform a company from marginally successful to profitable.5
The CoPQ concept can be useful in demonstrating the financial value provided to a clinical laboratory or hospital by its quality program through the cost avoidance and cost savings realized by eliminating root causes of nonconforming events. Without the interventions enabled by the nonconforming event management system and lab quality program improvement initiatives, the laboratory and/or hospital would continue to experience financial losses for these opportunities, in addition to potential patient safety risks. Further, calculating CoPQ aids laboratory leadership in identifying the often large amount of waste in everyday operations, more effectively triaging nonconforming events for remediation, and in justifying additional investment in quality tools and resources.
A Multi-Facility CoPQ Study
In 2017, a study was performed incorporating CoPQ data from multiple laboratory facilities in different geographical locations and across a variety of types and sizes.7 As a result, the standardized CoPQ worksheet that Dawson developed (referred to as the CoPQ Calculator) was tested and refined by seven leaders from different facilities across the United States. The CoPQ Calculator was then deployed at the same seven facilities for a study on seven types of nonconforming events commonly encountered in the clinical laboratory:
The outcome of the project was presented as a poster7 that provides ranges for each type of event, as well as the median and average CoPQ figures for each event type. The goals of the study were twofold:
Drawing on the results of this study, what follows are six tips intended to convey helpful, implementation information that will enable other laboratories and their leadership to more efficiently optimize their efforts in preventing CoPQ.
Tips for Success
1. Use a Standardized Tool
Ensure reproducible CoPQ calculations are being performed using a standardized methodology. It helps to list all of the different costs in as much detail as possible. An example of a readily available CoPQ calculator tool can be found at http://lableaders.com/copq/tool. Whether you use an existing tool or create your own, be sure to beta test your tool with users and thoroughly train staff to ensure the capture of reliable and useful CoPQ data.
2. Management Buy-In is Essential
It is necessary to meet with executive management prior to starting collection of CoPQ data to gain consensus regarding meaningful metrics for your specific organization. While buy-in for overall CoPQ initiatives can be strong, there are varying levels of buy-in for the inclusion of soft costs in CoPQ calculations. Thus, be sure to emphasize the calculation of these more nebulous, but real financial implications when addressing the quality program.
3. Be Creative, but Conservative, with Soft Costs
Although it can be difficult to collect substantive data regarding soft costs (which likewise challenges buy-in), it remains a worthwhile exercise in order to fully understand the holistic impact of nonconforming events. Furthermore, all facilities take different approaches to the calculation of soft costs, as these are largely dependent on data availability and management’s tolerance for estimated figures. One such exercise is applying creative calculations for soft costs such as low morale, where example metrics can include a percentage of overall daily revenue or percentage of an individual employee’s wages. Hard costs tend to be more straightforward to calculate in a standardized, reproducible way using basic cost accounting, although some such quantifiable information may not be available from other departments. The cost to the organization to operate the emergency room for one patient for one hour, or to observe isolation precautions for one patient for one day are examples of costs of poor quality that may not be readily available.
4. CoPQ is Not Useful for External Benchmarking
Our study7 showed that considerable intrafacility and interfacility variability exists for CoPQ for the same event type. Variation within and amongst labs for the same event type is likely to be significant even with the use of a standardized tool. This is due to the variables surrounding each event, lack of a standardized CoPQ calculation method in industry, and the unique laboratory environments in which they occur. As an example, 35 corrected report nonconforming events were included in our study with CoPQ values ranging from $31 to $54,526 (average $4,913, median $541)7. Likewise, there were 28 turnaround time delay events included in the study with a range of $21 to $106,179 (average $6,820, median $232)7 (CoPQ values rounded to the nearest dollar). For this reason, external benchmarking of CoPQ data has limited value.
5. Choose the Right Approach for Your Lab
Different approaches to the collection of CoPQ data are taken based on the availability of resources and the number of nonconforming events that occur in a specific lab. Some labs will choose to calculate CoPQ data for all events, while others will take a few representative events to determine an average CoPQ for that event type, enabling application of an average number to their monthly and annual frequency of occurrence. Alternatively, some may choose to only calculate CoPQ for single issues that are particularly problematic or ongoing. Regardless of your approach, do not expect perfect calculations from the beginning. The process of capturing CoPQ is likely to evolve for your organization, requiring flexibility and change as the program takes shape.
6. Know the Difference Between Cost Savings and Cost Avoidance
It is common for the terms cost savings and cost avoidance to be confused or used interchangeably. However, if the intent is for these terms to be used to express a return on investment for quality initiatives in your laboratory, they must be distinct and used properly. In order to foster an understanding of the vital role of quality in the lab and to gain buy-in and support from those who hold sway over the necessary resources, you must speak their language, as doing so lends more credibility to your claims (see SIDEBAR).
Cost savings measures are reflected in financial statements and the annual budget. On the other hand, cost avoidance measures do not appear in financial statements or the annual budget. They are only reflected in instances where a proposed action is not implemented, resulting in a cost increase.8 Consider quality control (QC) in your laboratory. For example, if we can order control material at a lower cost, or perhaps implement an individualized quality control plan (IQCP), which would result in running less QC without compromising patient safety, these actions will result in cost savings. Cost avoidance is provided to the laboratory by QC, simply by virtue of the reliability of issued results being verified by running controls. Without ongoing QC, the laboratory would inevitably issue unreliable results, which could lead to misdiagnoses and harm to patients (at elevated cost). Ultimately, cost avoidance is more difficult to convey because it requires factoring in events that did not occur because an intervention was implemented.
Get Started Capturing CoPQ
Capturing the CoPQ associated with nonconforming events or near misses allows laboratory leadership to quantitate the financial benefit of quality initiatives. This further allows lab leadership to speak the language of key executives in the organization whose interest invariably lies in the financial bottom line. Approaching executive management armed not only with quality and patient safety benefits, but also with an indication of financial benefit will allow the lab to sell proposed quality initiatives effectively. Poor quality and rework create unnecessary financial losses to an organization. Assigning a monetary value to that waste provides the motivation to eliminate it.
An investment in the cost of good quality (prevention and appraisal) results in lower cost of poor quality and overall cost of quality reduction. It is the hope of the authors that understanding, articulating, and providing examples of the CoPQ concept in the clinical laboratory will help laboratories to demonstrate the implication of nonconforming events in their laboratories as well as the cost avoidance and cost savings achieved through elimination of root causes enabling them to gain executive buy-in and subsequent financial investment for their quality programs.
Jennifer Dawson, MHA, DLM(ASCP)SLS, FACHE, CPHQ, LSSBB, QIHC, QLC, is senior director of quality for Human Longevity, Inc, in San Diego, California. She is a member of the CLSI Quality Management Systems Expert Panel, the Cardinal Health Laboratory Advisory Board, the ASCLS Patient Safety Committee and the AACC Management Sciences & Patient Safety Division Executive Committee.
Christina Nickel, MHA, MLS(ASCP)CM, CPHQ, is laboratory quality manager at Bryan Medical Center in Lincoln, Nebraska. This two-hospital organization includes two full-service laboratories and houses over 600 licensed beds. Christina has nearly 20 years of experience in the laboratory setting and is a member of the American Society for Quality (ASQ), the American College of Healthcare Executives (ACHE), the National Association for Healthcare Quality (NAHQ), and she currently serves on the Board of Directors for the Clinical Laboratory Management Association (CLMA).
Key Terms for Laboratory CoPQ
Below are just a sampling of terms that require a nuanced understanding by both lab leadership and facility leadership for quality to be properly positioned to succeed.
Hard Costs: Direct costs to the organization that will be reflected on financial statements.
Examples: Wasted supplies, labor, reagents, and controls.
Soft costs: Indirect costs which are difficult to assign an actual value to, but have a negative impact on the financials of the organization.
Examples: Low morale, productivity loss, reputational damage.
Cost Savings: Also referred to as “Hard Savings.” Any action that results in a tangible benefit that lowers current spending, investment, or debt levels.7
Examples: Changing methodology to produce the same result using a different test, reducing staff to perform the same quantity of work in the same time period, streamlining an assay including less labor and more inexpensive reagents and supplies.
Cost Avoidance: Also referred to as “Soft Savings.” Any action that avoids incurring of costs in the future.7
Examples: Reduction in a proposed price from a vendor, elimination of need for additional headcount through process improvements, change in maintenance schedules to avoid instrument downtime.7
More on CoPQ
Jennifer Dawson and Christina Nickel have both contributed to the LabLeaders community, helping to raise awareness around CoPQ and providing tools and resources for leaders in the lab. More information is available at LabLeaders.com.
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