Understanding Healthcare's Value Chain


Published: 01 June 2015

Value is an ambiguous term in healthcare. It could refer to a number of things—the speed of delivery, the quality, the availability, or perhaps even the cost of care. However, as countries like Australia continue to address the rising budgetary costs of healthcare, questions are being asked about how we should define value in healthcare. As nurses and midwives, understanding how the economic realities underpinning healthcare delivery affect our roles, our employment, our managers, and most importantly our patients is essential.

How Big is Healthcare?

Health expenditure, total (% of GDP)

Health Expenditure, Total (% of GDP), data from the World Bank

As evident in the chart above, healthcare expenditure makes up a large component of a countries economy. Yet, unlike almost every other industry, the business models and value propositions have changed very little in the past twenty years. This is significant, especially if one considers the revolutionary advances made during this time, such as the Internet.

Renowned Harvard economist, Michael Porter, has been researching this notion for quite some time now. He describes the term value chain as a collection of processes, inputs and outputs that take place to produce a product or service. This includes the entire production chain—from the supply of raw materials, to the production, to the distribution, and to the eventual delivery of the product to the consumer. By mapping an organisations value chain, one can clearly identify where the most value is being added, where costs are greatest, and where inefficiencies reside.

Regular adjustment of these processes can create and protect a company’s competitive advantages, reduce its costs, or simply improve its efficiency.

What Is Healthcare’s Value Chain?

Healthcare systems have typically grown over time, leading to high levels of duplication of providers and very disjointed services in general. In many ways healthcare’s value chain is quite similar to most other industries; it includes manufacturers, wholesalers, distributors, providers, professionals (nurses, midwives, etc.), and payers (health consumers).

However, the complexities begin to emerge when, on top of all of this, you include the many different levels of Government, their policies, vested interests and, of course, the secondary industries such as private providers and insurance companies. This complex, interdependent value chain causes the synchronicity between each link to be impeded, making it difficult to see the true value of the care being delivered—and its true cost.

Of course, if we look at the system as a whole, it becomes clear that, in Porter’s words, healthcare’s value proposition is “to provide the best quality care to the patient at the lowest overall cost”. The question then becomes, how and whether we can deliver the same standard of care at a reduced cost?

Porter proposes a six-point strategy, including:

  1. organise care around the patient, not the tools
  2. measure outcomes and cost for every patient, and do so in live-time
  3. pay for care differently, reimbursing providers through bundled prices for care cycles
  4. integrate care delivery across seperate facilities
  5. breakdown the local nature of care delivery, and
  6. build an enabling information technology platform.

Reducing Costs While Maintaining Quality

Technology is one potential mechanism for cost reduction and has a good track record of having done so in other parts of the economy. For example, many countries have introduced electronic health records in recent years, allowing a patient’s home physician to easily transmit medical records globally. Not only does this improve efficiency, it also helps to ensure a continuity of care is delivered to the patient. Similarly, the introduction of mHealth—personal healthcare devices and wearables—will only further improve the quality of information available to both the patient and their health team. mHealth also has the potential to reduce presentations at health services, further reducing the cost simply by preventing the need for care.

Legislation is another source of inefficiency for most healthcare systems. In April 2015, the Australian Government announced a review into the countries healthcare funding scheme. The ‘Medicare Shakeup’, as it was known, will review all treatments and procedures currently funded by the Government. Academics, such as Sydney University’s Associate Professor Adam Elshaug, estimate that between 500 and 600 million dollars a year could be saved by simply removing items that are unsafe, ineffective, or inappropriate under certain circumstances.


Despite healthcare’s value chain being so unique, it is important that innovation takes place. In countries like Australia, where the population is aging, the sheer volume of care that will need to be delivered over the next few decades will require us to find greater efficiencies. If we fail to do so, we will risk a notable reduction in the quality of care being provided.