The healthcare value tree
In healthcare the tree balances outcome against cost per episode. Value is what the patient gained, per unit of resource consumed — and almost every number in it is owned clinically and paid for administratively.
01 The same tree, this industry
Where the money is made and lost here
The structure does not change: value is profit plus how well that profit becomes cash, profit is revenue minus cost, and revenue is price times quantity. What changes is which drivers sit underneath each branch, and which system holds them. If you have not read the general version, start with the Enterprise Value Tree and come back.
Two systems of record disagree by design here: the clinical record describes what happened to a patient, and the billing record describes what can be claimed for it. Most of the value in this tree sits in the gap between those two descriptions of the same episode.
Every driver below names the metric it lands on. Follow one and you get its formula, the system the number lives in, and the ways it is commonly misread.
02 Price
What decides the price you actually get
Payer mix and tariff
Which payer, at which agreed rate. The same procedure has several prices and only one cost.
Average net price net_revenue ÷ unitsPriceCoding accuracy
What was clinically done versus what was captured and claimed. Under-coding is revenue given away at the keyboard.
Price realisation net_revenue ÷ list_revenuePriceDenials and underpayments
Claims rejected or paid short, with a reason code that is the cheapest process improvement signal in the business.
Days sales outstanding (accounts_receivable ÷ net_revenue) × days_in_periodPriceContracted rates against list
Negotiated once, applied thousands of times, and rarely audited against what was actually paid.
Price realisation net_revenue ÷ list_revenuePricePackage and bundled pricing
A fixed price against variable clinical consumption, which moves the margin risk to you.
Contribution margin (net_revenue − variable_cost) ÷ net_revenuePriceSelf-pay and collections
The hardest cash to collect, and the segment where price transparency matters most.
Days sales outstanding (accounts_receivable ÷ net_revenue) × days_in_period03 Quantity
What decides how much you sell
Episodes and admissions
The volume unit, which has to be defined consistently before anything else in the tree works.
Active customers count(distinct customers with at least one purchase in the window)VolumeReferral flow
Where demand originates, and the relationships that decide whether it continues.
Lead to opportunity conversion leads_accepted_as_opportunities ÷ qualified_leadsVolumeTheatre and bed utilisation
The constrained resource. Unused theatre time is capacity that cannot be stored.
Capacity utilisation actual_output ÷ practical_capacityVolumeLength of stay
Both a clinical outcome and a capacity multiplier: a day saved is a bed made available.
Order cycle time delivery_date − order_date, in calendar daysVolumeClinic throughput
Slot utilisation, did-not-attend rates and the scheduling that drives both.
Schedule adherence units_produced_as_scheduled ÷ units_scheduledVolumeService line growth
Which specialties grow, against the capital and staffing each one requires.
Market share your_units (or value) ÷ total_market_units04 Cost
What it takes to operate
Staffing and agency
The largest line by far, and the one where vacancy and absence convert directly into premium cover.
Cost per hire (external_cost + internal_cost) ÷ hiresCostAbsence and roster gaps
The operational cause of most agency spend, visible weeks before the invoice.
Absence rate days_absent ÷ scheduled_working_daysCostSupplies and implants
High-value, clinically chosen, and impossible to manage without one item master across sites.
Inventory turns cogs ÷ average_inventory_valueCostPharmacy
A cost line with its own system, its own governance and its own waste profile.
Stock cover current_stock ÷ average_daily_demandCostReadmissions and complications
Cost incurred twice and increasingly not reimbursed — an outcome measure with a direct financial edge.
Returns rate units_returned ÷ units_soldCostEstate and energy
Buildings that run continuously, where consumption per episode is measurable and rarely measured.
Energy per unit energy_consumed_kWh ÷ units_produced05 Cash
Where the cash actually sits
Denial and rework cycle
Every rejected claim is cash delayed by weeks and handled twice.
Days sales outstanding (accounts_receivable ÷ net_revenue) × days_in_periodCashPayer settlement lag
Different payers pay at different speeds, and the mix decides the working capital.
Days sales outstanding (accounts_receivable ÷ net_revenue) × days_in_periodCashSupplies inventory
Held at multiple sites, expiring, and duplicated wherever the item master is not shared.
Days inventory outstanding (inventory_value ÷ cogs) × days_in_periodCashEquipment capex
Committed against a service line forecast that staffing may not support.
Capex intensity capital_expenditure ÷ net_revenueCashSupplier terms
Balanced against clinical continuity, which limits how hard the lever can be pulled.
Days payables outstanding (accounts_payable ÷ cogs) × days_in_periodCashThe cycle as one number
Coding, billing, collections and supplies each own a piece and nobody owns the total.
Cash conversion cycle dso + dio − dpo06 Where the numbers live
The systems behind the branches
A value tree is only usable once each box maps to a system and a record. These are the six that matter most in healthcare: what each one is actually for, the records inside it the tree depends on, and which branch it feeds.
| System | What it holds | Key records | Feeds |
|---|---|---|---|
| HIS / EMR | The clinical record: encounters, diagnoses, procedures and outcomes as documented by clinicians. | Patient, Encounter, Diagnosis, Procedure, Order | Quantity, cost, price |
| Revenue cycle / billing | Claims, denials, remittances and the coding that connects clinical activity to money. | Claim, Code, Denial reason, Remittance | Price, cash |
| ERP and item master | Supplies, implants and pharmacy, plus the item master that decides whether thirty sites can be compared at all. | Item, Supplier, Purchase order, Stock location | Cost, cash |
| Scheduling and theatre | Slots, lists, utilisation and cancellations — the capacity layer of the whole tree. | Slot, List, Session, Cancellation reason | Quantity, cost |
| Workforce and rostering | Establishment, roster, absence and the agency bookings that fill the gaps. | Employee, Roster line, Absence, Agency booking | Cost |
| LIS / RIS / pharmacy | Diagnostics and medicines: high-volume ordering data that drives both cost and pathway time. | Test order, Result, Dispense, Formulary item | Cost, quantity |
Almost every hard question in healthcare needs two of these joined. That join — not the calculation — is the work.
07 Where it leaks
Value lost between two systems
These are the losses that no single system can see, because the evidence is split across two of them. Each one is a real number that stays invisible until the join exists — which is why the tree is an integration exercise before it is an analysis one.
| Where value leaks | Why it happens | The join that finds it |
|---|---|---|
| One item, thirty item codes | Each site buys the same implant under its own code, so price comparison, standardisation and consumption analysis are impossible across the group. | One governed item master across every site, resolved from local codes |
| Clinical activity that was never coded | The procedure happened, the documentation supports it, and the claim did not include it. Revenue lost silently, at scale. | Join clinical documentation to the coded claim and audit the gap |
| Denial reasons that never reach the coder | Denials are worked by the revenue cycle team and the reason never returns to the person whose action caused it, so the same denial recurs monthly. | Join denial reason codes back to the coder, clinician and service line |
| Agency spend outside the roster | Bookings made locally to fill a gap that the roster and absence data predicted weeks earlier. | Join agency bookings to roster gaps, absence and vacancy data |
| Cost per episode that stops at the department | A patient pathway crosses theatre, ward, diagnostics and pharmacy; each reports its own cost and none reports the episode. | Join every consumption event to the encounter, then to the episode |
08 Worked example
Busier, and no better off
Episode volume grew 8% and contribution was flat. The tree separates it: theatre utilisation improved but length of stay absorbed the capacity, agency cover filled a predictable roster gap at premium rates, and a rise in denials pushed cash out by three weeks without changing the revenue line at all.
| Component | Effect | What sits behind it |
|---|---|---|
| Episode volume | +€2.8m | 8% growth, weighted to two service lines |
| Payer mix | −€0.6m | Growth in the lower-tariff payer |
| Agency premium | −€1.1m | Roster gaps visible three weeks earlier |
| Supplies price variance | −€0.4m | Same implant, four prices, four sites |
| Denials and rework | −€0.5m | Handling cost; the cash delay is separate |
| Net | +€0.2m | Eight per cent more work for nothing |
Illustrative figures, shown to demonstrate the split. The point is the shape of the walk, not the numbers — on your own data the same bridge is built from your ledger.
09 Diagnostics
Six questions to ask in healthcare
Ask them of your own team before anyone asks them of you. In most organisations at least two of these cannot be answered without a manual exercise, and those two are the plan.
- Can you compare the price paid for the same implant across every site?
- What proportion of clinical activity is coded completely, and how would you evidence it?
- Do denial reasons reach the person whose action caused them, within the same month?
- Can you produce a full cost per episode across theatre, ward, diagnostics and pharmacy?
- Is agency spend explained by roster gaps you could see in advance?
- Which service lines are growing, and do they consume the capacity you have or the capacity you would have to build?
10 The metrics behind it
Definitions for every box
11 Questions
Frequently asked
Why is the item master such a common starting point?
Because it is the smallest change with the widest reach. One governed item master across sites makes price comparison, standardisation and consumption analysis possible at once, and it is a master data problem rather than a clinical one, so it moves quickly.
Is coding accuracy a revenue problem or a data problem?
Both, and treating it as only the first is why it persists. The gap between documented care and coded care is measurable by joining the clinical record to the claim, which turns an audit exercise into a monitored metric.
How do you cost an episode across departments?
By joining every consumption event — theatre minutes, ward days, diagnostics, pharmacy, implants — to the encounter and then to the episode. The join is the work; the arithmetic afterwards is simple.
Does this apply to publicly funded providers?
Yes, with the price branch replaced by tariff and activity funding. Cost per episode, capacity utilisation and workforce remain identical, and the capacity questions matter more rather than less.
See this tree on your own data
Connect the systems above, define each box once, and the tree stops being a slide.