Healthcare Operations Management T h i r d E d i T i o n

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Healthcare Operations Management T h i r d E d i T i o n

Daniel B. McLaughlin John R. Olson

Healthcare Operations Management T h i r d E d i T i o n




AUPHA/HAP Editorial Board for Graduate Studies

Nir Menachemi, PhD, Chairman Indiana University

LTC Lee W. Bewley, PhD, FACHE University of Louisville

Jan Clement, PhD Virginia Commonwealth University

Michael Counte, PhD St. Louis University

Joseph F. Crosby Jr., PhD Armstrong Atlantic State University

Mark L. Diana, PhD Tulane University

Peter D. Jacobson, JD University of Michigan

Brian J. Nickerson, PhD Icahn School of Medicine at Mount Sinai

Mark A. Norrell, FACHE Indiana University

Maia Platt, PhD University of Detroit Mercy

Debra Scammon, PhD University of Utah

Tina Smith University of Toronto

Carla Stebbins, PhD Des Moines University

Cynda M. Tipple, FACHE Marymount University



Health Administration Press, Chicago, Illinois

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Library of Congress Cataloging-in-Publication Data Names: McLaughlin, Daniel B., 1945– author. | Olson, John R. (Professor), author. Title: Healthcare operations management / Daniel B. McLaughlin and John R. Olson. Description: Third edition. | Chicago, Illinois : Health Administration Press; Washington, DC : Association of University Programs in Health Administration, [2017] | Includes bibliographical references and index. Identifiers: LCCN 2016046001 (print) | LCCN 2016046925 (ebook) | ISBN 9781567938517 (alk. paper) | ISBN 9781567938524 (ebook) | ISBN 9781567938531 (xml) | ISBN 9781567938548 (epub) | ISBN 9781567938555 (mobi) Subjects: LCSH: Medical care—Quality control. | Health services administration—Quality control. | Organizational effectiveness. | Total quality management. Classification: LCC RA399.A1 M374 2017 (print) | LCC RA399.A1 (ebook) | DDC 362.1068— dc23 LC record available at

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To my wife, Sharon, and daughters, Kelly and Katie, for their love and support throughout my career.

—Dan McLaughlin

To my father, Adolph Olson, who passed away in 2011. Your strength as you battled cancer inspired me to change and educate others about our healthcare system.

—John Olson

The first edition of this book was coauthored by Julie Hays. During the final stages of the completion of the book, Julie unexpectedly died. As Dr. Christopher Puto, dean of the Opus College of Business at the University of St. Thomas, said, “Julie cared deeply about students and their learning experience, and she was an accomplished scholar who was well respected by her peers.” This book is a final tribute to Julie’s accomplished career and is dedicated to her legacy.

—Dan McLaughlin and John Olson






Preface …………………………………………………………………………………………xv

Part I Introduction to Healthcare Operations

Chapter 1. The Challenge and the Opportunity ……………………………. 3

Chapter 2. History of Performance Improvement ……………………….. 17

Chapter 3. Evidence-Based Medicine and Value-Based Purchasing …. 45

Part II Setting Goals and Executing Strategy

Chapter 4. Strategy and the Balanced Scorecard ………………………….. 71

Chapter 5. Project Management ………………………………………………. 97

Part III Performance Improvement Tools, Techniques, and Programs

Chapter 6. Tools for Problem Solving and Decision Making ……….. 135

Chapter 7. Statistical Thinking and Statistical Problem Solving …….. 167

Chapter 8. Healthcare Analytics …………………………………………….. 203

Chapter 9. Quality Management: Focus on Six Sigma ………………… 221

Chapter 10. The Lean Enterprise ……………………………………………… 255

Part IV Applications to Contemporary Healthcare Operations Issues

Chapter 11. Process Improvement and Patient Flow ……………………. 281

Chapter 12. Scheduling and Capacity Management ……………………… 323

Chapter 13. Supply Chain Management …………………………………….. 345

Chapter 14. Improving Financial Performance with Operations Management ……………………………………………………….. 369



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Part V Putting It All Together for Operational Excellence

Chapter 15. Holding the Gains ………………………………………………… 391

Glossary ……………………………………………………………………………………. 411 Index ……………………………………………………………………………………….. 419 About the Authors ……………………………………………………………………….. 437





Preface …………………………………………………………………………………………xv

Part I Introduction to Healthcare Operations

Chapter 1. The Challenge and the Opportunity ……………………………. 3 Overview ……………………………………………………………….. 3 The Purpose of This Book …………………………………………. 3 The Challenge …………………………………………………………. 4 The Opportunity …………………………………………………….. 6 A Systems Look at Healthcare ……………………………………. 8 An Integrating Framework for Operations Management

in Healthcare …………………………………………………….. 12 Conclusion ……………………………………………………………. 15 Discussion Questions ……………………………………………… 15 References …………………………………………………………….. 15

Chapter 2. History of Performance Improvement ……………………….. 17 Operations Management in Action ……………………………. 17 Overview ……………………………………………………………… 17 Background…………………………………………………………… 18 Knowledge-Based Management ………………………………… 20 History of Scientific Management ……………………………… 22 Project Management ………………………………………………. 26 Introduction to Quality …………………………………………… 27 Philosophies of Performance Improvement …………………. 34 Supply Chain Management ………………………………………. 38 Big Data and Analytics ……………………………………………. 40 Conclusion ……………………………………………………………. 41 Discussion Questions ……………………………………………… 41 References …………………………………………………………….. 42

Chapter 3. Evidence-Based Medicine and Value-Based Purchasing …. 45 Operations Management in Action ……………………………. 45



x D e t a i l e d C o n t e n t s

Overview ……………………………………………………………… 45 Evidence-Based Medicine ………………………………………… 46 Tools to Expand the Use of Evidence-Based Medicine ….. 54 Clinical Decision Support ………………………………………… 59 The Future of Evidence-Based Medicine and Value

Purchasing ………………………………………………………… 62 Vincent Valley Hospital and Health System and Pay for

Performance ……………………………………………………… 63 Conclusion ……………………………………………………………. 64 Discussion Questions ……………………………………………… 64 Note ……………………………………………………………………. 64 References …………………………………………………………….. 65

Part II Setting Goals and Executing Strategy

Chapter 4. Strategy and the Balanced Scorecard ………………………….. 71 Operations Management in Action ……………………………. 71 Overview ……………………………………………………………… 71 Moving Strategy to Execution ………………………………….. 72 The Balanced Scorecard in Healthcare ………………………. 75 The Balanced Scorecard as Part of a Strategic

Management System …………………………………………… 76 Elements of the Balanced Scorecard System ………………… 76 Conclusion ……………………………………………………………. 93 Discussion Questions ……………………………………………… 93 Exercises ………………………………………………………………. 94 References …………………………………………………………….. 94 Further Reading …………………………………………………….. 95

Chapter 5. Project Management ………………………………………………. 97 Operations Management in Action …………………………… 97 Overview ……………………………………………………………… 97 Definition of a Project …………………………………………….. 99 Project Selection and Chartering …………………………….. 100 Project Scope and Work Breakdown ………………………… 107 Scheduling ………………………………………………………….. 113 Project Control ……………………………………………………. 117 Quality Management, Procurement, the Project

Management Office, and Project Closure ……………… 120 Agile Project Management …………………………………….. 124 Innovation Centers ……………………………………………….. 125



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The Project Manager and Project Team ……………………. 126 Conclusion ………………………………………………………….. 129 Discussion Questions ……………………………………………. 129 Exercises …………………………………………………………….. 129 References …………………………………………………………… 130 Further Reading …………………………………………………… 130

Part III Performance Improvement Tools, Techniques, and Programs

Chapter 6. Tools for Problem Solving and Decision Making ……….. 135 Operations Management in Action ………………………….. 135 Overview ……………………………………………………………. 135 Decision-Making Framework ………………………………….. 136 Mapping Techniques …………………………………………….. 138 Problem Identification Tools ………………………………….. 143 Analytical Tools ……………………………………………………. 153 Implementation: Force Field Analysis ………………………. 162 Conclusion ………………………………………………………….. 163 Discussion Questions ……………………………………………. 163 Exercises …………………………………………………………….. 164 References …………………………………………………………… 165

Chapter 7. Statistical Thinking and Statistical Problem Solving …….. 167 Operations Management in Action ………………………….. 167 Overview: Statistical Thinking in Healthcare ……………… 167 Foundations of Data Analysis ………………………………….. 169 Graphic Tools ………………………………………………………. 169 Mathematical Descriptions …………………………………….. 174 Probability ………………………………………………………….. 178 Confidence Intervals and Hypothesis Testing …………….. 185 Simple Linear Regression……………………………………….. 192 Conclusion ………………………………………………………….. 198 Discussion Questions ……………………………………………. 199 Exercises …………………………………………………………….. 199 References …………………………………………………………… 201

Chapter 8. Healthcare Analytics ……………………………………………… 203 Operations Management in Action ………………………….. 203 Overview ……………………………………………………………. 203 What Is Analytics in Healthcare? ……………………………… 203 Introduction to Data Analytics ……………………………….. 205



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Data Visualization ………………………………………………… 209 Data Mining for Discovery …………………………………….. 214 Conclusion ………………………………………………………….. 217 Discussion Questions ……………………………………………. 218 Note ………………………………………………………………….. 218 References ………………………………………………………….. 219

Chapter 9. Quality Management—Focus on Six Sigma ………………. 221 Operations Management in Action ………………………….. 221 Overview ……………………………………………………………. 221 Defining Quality ………………………………………………….. 222 Cost of Quality …………………………………………………….. 223 The Six Sigma Quality Program ………………………………. 225 Additional Quality Tools ……………………………………….. 240 Riverview Clinic Six Sigma Generic Drug Project ………. 245 Conclusion ………………………………………………………….. 250 Discussion Questions ……………………………………………. 250 Exercises …………………………………………………………….. 250 References …………………………………………………………… 253

Chapter 10. The Lean Enterprise ……………………………………………… 255 Operations Management in Action ………………………….. 255 Overview ……………………………………………………………. 255 What Is Lean? ……………………………………………………… 256 Types of Waste …………………………………………………….. 257 Kaizen ………………………………………………………………… 259 Value Stream Mapping ………………………………………….. 259 Additional Measures and Tools ……………………………….. 261 The Merging of Lean and Six Sigma Programs ………….. 274 Conclusion ………………………………………………………….. 276 Discussion Questions ……………………………………………. 276 Exercises …………………………………………………………….. 277 References …………………………………………………………… 277

Part IV Applications to Contemporary Healthcare Operations Issues

Chapter 11. Process Improvement and Patient Flow ……………………. 281 Operations Management in Action ………………………….. 281 Overview ……………………………………………………………. 281 Problem Types …………………………………………………….. 282 Patient Flow ………………………………………………………… 283



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Process Improvement Approaches …………………………… 284 The Science of Lines: Queuing Theory ……………………. 292 Process Improvement in Practice …………………………….. 304 Conclusion ………………………………………………………….. 318 Discussion Questions ……………………………………………. 319 Exercises …………………………………………………………….. 319 References …………………………………………………………… 320 Further Reading …………………………………………………… 321

Chapter 12. Scheduling and Capacity Management ……………………… 323 Operations Management in Action ………………………….. 323 Overview ……………………………………………………………. 323 Hospital Census and Rough-Cut Capacity Planning …… 324 Staff Scheduling …………………………………………………… 326 Job and Operation Scheduling and Sequencing Rules …. 330 Patient Appointment Scheduling Models ………………….. 334 Advanced-Access Patient Scheduling ………………………… 337 Conclusion ………………………………………………………….. 341 Discussion Questions ……………………………………………. 341 Exercises …………………………………………………………….. 341 References …………………………………………………………… 342

Chapter 13. Supply Chain Management …………………………………….. 345 Operations Management in Action ………………………….. 345 Overview ……………………………………………………………. 345 Supply Chain Management …………………………………….. 346 Tracking and Managing Inventory …………………………… 347 Demand Forecasting …………………………………………….. 349 Order Amount and Timing ……………………………………. 354 Inventory Systems ………………………………………………… 362 Procurement and Vendor Relationship Management …… 364 Strategic View ……………………………………………………… 364 Conclusion ………………………………………………………….. 365 Discussion Questions ……………………………………………. 366 Exercises …………………………………………………………….. 366 References …………………………………………………………… 368

Chapter 14. Improving Financial Performance with Operations Management ……………………………………………………….. 369 Operations Management in Action ………………………….. 369 Overview: The Financial Pressure for Change ……………. 369



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Making Ends Meet on Medicare and the Pressure of Narrow Networks …………………………………………….. 370

Conclusion ………………………………………………………….. 386 Discussion Questions ……………………………………………. 386 Exercises …………………………………………………………….. 387 Note ………………………………………………………………….. 387 References …………………………………………………………… 387

Part V Putting It All Together for Operational Excellence

Chapter 15. Holding the Gains ………………………………………………… 391 Overview ……………………………………………………………. 391 Approaches to Holding Gains …………………………………. 391 Which Tools to Use: A General Algorithm ………………… 397 Data and Statistics ………………………………………………… 404 Operational Excellence ………………………………………….. 405 The Healthcare Organization of the Future ………………. 407 Conclusion ………………………………………………………….. 408 Discussion Questions ……………………………………………. 408 Case Study ………………………………………………………….. 409 References …………………………………………………………… 410

Glossary ……………………………………………………………………………………. 411 Index ……………………………………………………………………………………….. 419 About the Authors ……………………………………………………………………….. 437





This book is intended to help healthcare professionals meet the challenges and take advantage of the opportunities found in healthcare today. We believe that the answers to many of the dilemmas faced by the US healthcare system, such as increasing costs, inadequate access, and uneven quality, lie in organizational operations—the nuts and bolts of healthcare delivery. The healthcare arena is filled with opportunities for significant operational improvements. We hope that this book encourages healthcare management students and working profession- als to find ways to improve the management and delivery of healthcare, thereby increasing the effectiveness and efficiency of tomorrow’s healthcare system.

Many industries outside healthcare have successfully used the programs, techniques, and tools of operations improvement for decades. Leading health- care organizations have now begun to employ the same tools. Although numer- ous other operations management texts are available, few focus on healthcare operations, and none takes an integrated approach. Students interested in healthcare process improvement have difficulty seeing the applicability of the science of operations management when most texts focus on widgets and production lines rather than on patients and providers.

This book covers the basics of operations improvement and provides an overview of the significant trends in the healthcare industry. We focus on the strategic implementation of process improvement programs, techniques, and tools in the healthcare environment, with its complex web of reimburse- ment systems, physician relations, workforce challenges, and governmental regulations. This integrated approach helps healthcare professionals gain an understanding of strategic operations management and, more important, its applicability to the healthcare field.

How This Book Is Organized

We have organized this book into five parts:

1. Introduction to Healthcare Operations 2. Setting Goals and Executing Strategy 3. Performance Improvement Tools, Techniques, and Programs



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4. Applications to Contemporary Healthcare Operations Issues 5. Putting It All Together for Operational Excellence

Although this structure is helpful for most readers, each chapter also stands alone, and the chapters can be covered or read in any order that makes sense for a particular course or student.

The first part of the book, Introduction to Healthcare Operations, begins with an overview of the challenges and opportunities found in today’s healthcare environment (chapter 1). We follow with a history of the field of management science and operations improvement (chapter 2). Next, we discuss two of the most influential environmental changes facing healthcare today: evidence-based medicine and value-based purchasing, or simply value purchasing (chapter 3).

In part II, Setting Goals and Executing Strategy, chapter 4 highlights the importance of tying the strategic direction of the organization to operational initiatives. This chapter outlines the use of the balanced scorecard technique to execute and monitor these initiatives toward achieving organizational objec- tives. Typically, strategic initiatives are large in scope, and the tools of project management (chapter 5) are needed to successfully manage them. Indeed, the use of project management tools can help to ensure the success of any size project. Strategic focus and project management provide the organizational foundation for the remainder of this book.

The next part of the book, Performance Improvement Tools, Tech- niques, and Programs, provides an introduction to basic decision-making and problem-solving processes and describes some of the associated tools (chapter 6). Most performance improvement initiatives (e.g., Six Sigma, Lean) follow these same processes and make use of some or all of the tools discussed in chapter 6.

Good decisions and effective solutions are based on facts, not intuition. Chapter 7 provides an overview of data collection processes and analysis tech- niques to enable fact-based decision making. Chapter 8 builds on the statistical approaches of chapter 7 by presenting the new tools of advanced analytics and big data.

Six Sigma, Lean, simulation, and supply chain management are specific philosophies or techniques that can be used to improve processes and systems. The Six Sigma methodology (chapter 9) is the latest manifestation of the use of quality improvement tools to reduce variation and errors in a process. The Lean methodology (chapter 10) is focused on eliminating waste in a system or process.

The fourth section of the book, Applications to Contemporary Health- care Operations Issues, begins with an integrated approach to applying the various tools and techniques for process improvement in the healthcare environ- ment (chapter 11). We then focus on a special and important case of process improvement: patient scheduling in the ambulatory setting (chapter 12).



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Supply chain management extends the boundaries of the hospital or healthcare system to include both upstream suppliers and downstream custom- ers, and this is the focus of chapter 13. The need to “bend” the healthcare cost inflation curve downward is one of the most pressing issues in healthcare today, and the use of operations management tools to achieve this goal is addressed in chapter 14.

Part V, Putting It All Together for Operational Excellence, concludes the book with a discussion of strategies for implementing and maintaining the focus on continuous improvement in healthcare organizations (chapter 15).

Many features in this book should enhance student understanding and learning. Most chapters begin with a vignette, called Operations Management in Action, that offers a real-world example related to the content of that chapter. Throughout the book, we use a fictitious but realistic organization, Vincent Valley Hospital and Health System, to illustrate the various tools, techniques, and programs discussed. Each chapter concludes with questions for discussion, and parts II through IV include exercises to be solved.

We include abundant examples throughout the text of the use of various contemporary software tools essential for effective operations management. Readers will see notes appended to some of the exhibits, for example, that indicate what software was used to create charts, graphs, and so on from the data provided. Healthcare leaders and managers must be experts in the appli- cation of these tools and stay current with the latest versions. Just as we ask healthcare providers to stay up-to-date with the latest clinical advances, so too must healthcare managers stay current with basic software tools.


A number of people contributed to this work. Dan McLaughlin would like to thank his many colleagues at the University of St. Thomas Opus College of Business. Specifically, Dr. Ernest Owens provided guidance on the project man- agement chapter, and Dr. Michael Sheppeck assisted on the human resources implications of operations improvement. Dean Stefanie Lenway and Associate Dean Michael Garrison encouraged and supported this work and helped create our new Center for Innovation in the Business of Healthcare.

Dan would also like to thank the outstanding professionals at Hennepin County Medical Center in Minneapolis, Minnesota, who provided many of the practical and realistic examples in this book. They continue to be invaluable healthcare resources for all of the residents of Minnesota.

John Olson would like to thank his many colleagues at the University of St. Thomas Opus College of Business. In addition, he would like to thank the Minnesota Hospital Association (MHA). Attributing much of his under- standing of healthcare analytics to working with the highly professional staff



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of the MHA, he wishes to acknowledge Rahul Korrane, Tanya Daniels, Mark Sonneborn, and Julie Apold (now with Optum) as true agents for change in the US healthcare system.

The dedicated employees of the Veterans Administration have helped John embrace the challenges that confront healthcare today—in particular Christine Wolohan, Lori Fox, Susan Chattin, Eric James, Denise Lingen, and Carl (Marty) Young of the continuous improvement group, who are helping to create an organization of excellence. John acknowledges their dedication to serving US veterans and the amazing, high-quality service they deliver.

John and Dan also want to thank the skilled professionals of Health Administration Press for their support, especially Janet Davis, acquisitions edi- tor, and Joyce Dunne, who edited this third edition.

Finally, this book still contains many passages that were written by Julie Hays and are a tribute to her skill and dedication to the field of operations management.

Instructor Resources

This book’s Instructor Resources include PowerPoint slides; an updated test bank; teaching notes for the end-of-chapter exercises; Excel files and cases for selected chapters; and new case studies, for most chapters, with accompanying teaching notes. Each of the new case studies is one to three pages long and is suitable for one class session or an online learning module.

For the most up-to-date information about this book and its Instructor Resources, visit and browse for the book’s title or author names.

This book’s Instructor Resources are available to instructors who adopt this book for use in their course. For access information, please e-mail

Student Resources

Case studies, exercises, tools, and web links to resources are available at












The Purpose of This Book

Excellence in healthcare derives from four major areas of expertise: clinical care, population health, leadership, and operations. Although clinical expertise, the health of a population, and leadership are critical to an orga- nization’s success, this book focuses on operations—how to deliver high- quality health services in a consistent, efficient manner.

Many books cover opera- tional improvement tools, and some focus on using these tools in health- care environments. So why have we devoted a book to the broad topic of healthcare operations? Because we see a need for organizations to adopt an integrated approach to operations improvement that puts all the tools in a logical context and provides a road map for their use. An integrated approach uses a clinical analogy: First, find and diagnose an operations issue. Second, apply the appropriate treat- ment tool to solve the problem.

The field of operations research and management science is too deep to cover in one book. In Healthcare Operations Management, only those tools and techniques currently being deployed in leading healthcare organi- zations are covered, in part so that we may describe them in enough detail

1 O V E RV I E W

The challenges and opportunities in today’s complex healthcare

delivery systems demand that leaders take charge of their opera-

tions. A strong operations focus can reduce costs, increase safety—for

patients, visitors, and staff alike—improve clinical outcomes, and allow

an organization to compete effectively in an aggressive marketplace.

In the recent past, success for many organizations in the US

healthcare system has been achieved by executing a few critical strate-

gies: First, attract and retain talented clinicians. Next, add new technol-

ogy and specialty care services. Finally, find new methods to maximize

the organization’s reimbursement for these services. In most organiza-

tions, new services, not ongoing operations, were the key to success.

However, that era is ending. Payer resistance to cost

increases and a surge in public reporting on the quality of health-

care are forces driving a major change in strategy. The passage of

the Affordable Care Act (ACA) in 2010 represented a culmination

of these forces. Although portions of this law may be repealed or

changed, the general direction of health policy in the United States

has been set. To succeed in this new environment, a healthcare

enterprise must focus on making significant improvements in its

core operations.

This book is about improvement and how to get things done.

It offers an integrated, systematic approach and set of contemporary

operations improvement tools that can be used to make significant

gains in any organization. These tools have been successfully deployed

in much of the global business community for more than 40 years and

now are being used by leading healthcare delivery organizations.

This chapter outlines the purpose of the book, identifies

challenges that healthcare systems currently face, presents a systems

view of healthcare, and provides a comprehensive framework for the

use of operations tools and methods in healthcare. Finally, Vincent

Valley Hospital and Health System (VVH), the fictional healthcare

delivery system used in examples throughout the book, is described.



H e a l t h c a r e O p e r a t i o n s M a n a g e m e n t4

to enable students and practitioners to use them in their work. Each chap- ter provides many references for further reading and deeper study. We also

include additional resources, case studies, exercises, and tools on the companion website that accompanies this book.

This book is organized so that each chapter builds on the previous one and is cross-referenced. However, each chapter also stands alone, so a reader interested in Six Sigma can start in chapter 9 and then move to the other chapters in any order he wishes.

This book does not specifically explore quality in healthcare as defined by the many agencies that have as their mission to ensure healthcare quality, such as The Joint Commission, the National Committee for Quality Assurance, the National Quality Forum, and some federally funded quality improvement organizations. In particular, The Healthcare Quality Book: Vision, Strategy, and Tools (Joshi et al. 2014) delves into this perspective in depth and may be considered a useful companion to this book. However, the systems, tools, and techniques discussed here are essential to completing the operational improve- ments needed to meet the expectations of these quality assurance organizations.

The Challenge

Health spending is projected to grow 1.3 percent faster per year than the gross domestic product (GDP) between 2015 and 2025. As a result, the health share of GDP is expected to rise from 17.5 percent in 2014 to 20.1 percent by 2025 (CMS 2015). In addition, healthcare spending is placing increasing pressure on the federal budget. In its expenditure report summary, the Centers for Medicare & Medicaid Services (CMS 2015) notes that “federal, state and local governments are projected to finance 47 percent of national health spending by 2024 (from 45 percent in 2014).”

Despite the high cost, the value delivered by the system has been ques- tioned by many policymakers. For example, unexplained quality variations in healthcare were estimated in 1999 to result in 44,000 to 98,000 preventable deaths every year (IOM 1999). And those problems persist. A 2010 study of hospitals in North Carolina showed a high rate of adverse events, unchanged over time even though hospitals had sought to improve the safety of inpatient care (Landrigan et al. 2010).

Clearly, the pace of quality improvement is slow. “National Healthcare Quality Report, 2009,” published by the Agency for Healthcare Research and Quality (AHRQ), reported: “Quality is improving at a slow pace. Of the 33 core measures, two-thirds improved, 14 (42%) with a rate between 1% and 5% per year and 8 (24%) with a rate greater than 5% per year. . . . The

Agency for Healthcare Research and Quality (AHRQ) A federal agency that is part of the Department of Health and Human Services. It provides leadership and funding to identify and communicate the most effective methods to deliver high-quality healthcare in the United States.

On the web at



C h a p t e r 1 : T h e C h a l l e n g e a n d t h e O p p o r t u n i t y 5

median rate of change was 2% per year. Across all 169 measures, results were similar, although the median rate of change was slightly higher at 2.3% per year” (AHRQ 2010).

These problems were studied in the landmark work of the Institute of Medicine (IOM), Crossing the Quality Chasm: A New Health System for the 21st Century. The IOM (2001) panel concluded that the knowledge to improve patient care is available, but a gap—a chasm—separates that knowledge from everyday practice. The panel summarized the goals of a new health system in terms of six aims, as described in exhibit 1.1.

Although this seminal work was published more than a decade ago, its goals still guide much of the quality improvement effort today.

Many healthcare leaders are addressing these issues by capitalizing on proven tools employed by other industries to ensure high performance and quality outcomes. For major change to occur in the US health system, however, these strategies must be adopted by a broad spectrum of healthcare providers and implemented consistently throughout the continuum of care—in ambula- tory, inpatient, acute, and long-term care settings—to undergird population health initiatives.

The payers for healthcare must engage with the delivery system to find new ways to partner for improvement. In addition, patients need to assume strong financial and self-care roles in this new system. The ACA and subsequent health policy initiatives provide many new policies to support the achievement of these goals.

Although not all of the IOM goals can be accomplished through opera- tional improvements, this book provides methods and tools to actively change the system toward accomplishing several aspects of these aims.

Institute of Medicine (IOM) The healthcare arm of the National Academy of Sciences; an independent, nonprofit organization providing unbiased and authoritative advice to decision makers and the public.

1. Safe, avoiding injuries to patients from the care that is intended to help them

2. Effective, providing services based on scientific knowledge to all who could benefit, and refraining from providing services to those not likely to benefit (avoiding underuse and overuse, respectively);

3. Patient centered, providing care that is respectful of and responsive to individual patient preferences, needs, and values, and ensuring that patient values guide all clinical decisions;

4. Timely, reducing wait times and harmful delays for both those who receive and those who give care;

5. Efficient, avoiding waste of equipment, supplies, ideas, and energy; and 6. Equitable, providing care that does not vary in quality because of per-

sonal characteristics such as gender, ethnicity, geographic location, and socioeconomic status.

EXHIBIT 1.1 Six Aims for the US Health System

Source: Information from IOM (2001).



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The Opportunity

While the current US health system presents numerous challenges, opportuni- ties for improvement are emerging as well. A number of major trends provide hope that significant change is possible. The following trends represent this groundswell:

• Informatics systems are maturing, and big data and analytics tools are becoming ever more powerful.

• Automation, robots, and the Internet of Things will begin to replace human labor in healthcare.

• Supply chains and the relationships among health plans, healthcare systems, and individual providers are changing through mergers, partnerships, and acquisitions.

• Primary care is being redesigned with new provider models and new tools, such as telemedicine and mobile applications.

• Medicine itself is undergoing rapid change with the adoption of precision medicine tools, such as pharmacogenomics, to individualize patient treatments.

• A new emphasis on population health accountability and management will lead to healthier environments and lifestyles.

Evidence-Based Medicine The use of evidence-based medicine (EBM) for the delivery of healthcare in the United States is the result of 40 years of work by some of the most progres- sive and thoughtful practitioners in the nation. The movement has produced an array of care guidelines, care patterns, and shared decision-making tools for caregivers and patients.

The impact of EBM on care delivery can be powerful. Rotter and col- leagues (2010) reviewed 27 studies worldwide including 11,938 patients and assessed the use of clinical pathways. They found that the cost of care for patients whose treatment was delivered using the pathways was $4,919 per admission less than for those who did not receive pathway-centered care.

Comprehensive resources are available to healthcare organizations that wish to emphasize EBM. For example, the National Guideline Clearinghouse (NGC 2016) is a comprehensive database of more than 4,000 evidence-based clinical practice guidelines and related documents. NGC is an initiative of AHRQ, which itself is a division of the US Department of Health and Human Services. NGC was originally created in partnership with the American Medical Association and American Association of Health Plans, now America’s Health Insurance Plans.

Evidence-based medicine (EBM) The conscientious and judicious use of the best current evidence in making decisions about the care of individual patients.



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Big Data and Analytics Healthcare delivery has been slow to adopt information technologies, but many organizations have now implemented electronic health record (EHR) systems and other automated tools. Although implementation of these systems

Evidence-Based Medicine (EBM) The Institute of Medicine has been a leading advocate for comparative effec- tiveness research, the National Academy of Sciences’ concomitant deploy- ment of EBM. The IOM Roundtable on Value and Science-Driven Healthcare has set a “goal that by the year 2020, 90 percent of clinical decisions will be supported by accurate, timely, and up-to-date clinical information and will reflect the best available evidence” (IOM 2011, 4; emphasis in original).

To achieve this end, the IOM Roundtable recommends a sophisticated set of processes and infrastructure, which it describes as follows (IOM 2011, 10).

Infrastructure Required for Comparative Effectiveness Research: Common


• Care that is effective and efficient stems from the integrity of the

infrastructure for learning.

• Coordinating work and ensuring standards are key components of the

evidence infrastructure.

• Learning about effectiveness must continue beyond the transition from

testing to practice.

• Timely and dynamic evidence of clinical effectiveness requires bridging

research and practice.

• Current infrastructure planning must build to future needs and


• Keeping pace with technological innovation compels more than a head-

to-head and time-to-time focus.

• Real-time learning depends on health information technology


• Developing and applying tools that foster real-time data analysis is an

important element.

• A trained workforce is a vital link in the chain of evidence stewardship.

• Approaches are needed that draw effectively on both public and private


• Efficiency and effectiveness compel globalizing evidence and localizing


In short, EBM is the conscientious and judicious use of the best cur- rent evidence in making decisions about the care of individual patients.



H e a l t h c a r e O p e r a t i o n s M a n a g e m e n t8

has sometimes been organizationally painful, EHRs are now becoming mature enough to have a substantial positive impact on operations.

In addition, data science computer engineering has evolved to provide significant new tools in the following areas:

• Big data storage and retrieval—high volume, high velocity, and high variety of data types

• New analytical tools for reporting and prediction • Portable and wearable devices • Interoperabilty of devices and databases

Chapter 8 describes a set of analytical tools to fully utilize these new resources.

Active and Engaged Consumers Consumers are assuming new roles in their own care through the use of health education and information and by partnering effectively with their healthcare providers. Personal maintenance of wellness though a healthy lifestyle is one essential component. Understanding one’s disease and treatment options and having an awareness of the cost of care are also important responsibilities of the consumer.

Patients are becoming good consumers of healthcare by finding and considering price information when selecting providers and treatments. Many employers now offer high-deductible health plans with accompanying health savings accounts (HSAs). This type of consumer-directed healthcare is likely to grow and increase pressure on providers to deliver cost-effective, customer- sensitive, high-quality care. In addition, the ACA provides new tools for employ- ers to motivate their employees financially to engage in healthy lifestyles.

The healthcare delivery system of the future will support and empower active, informed consumers.

A Systems Look at Healthcare The Clinical System To participate in the improvement of healthcare operations, healthcare leaders must understand the series of interconnected systems that influence the delivery of clinical care (exhibit 1.2).

In the patient care microsystem, the healthcare professional provides hands-on care to the patient. Elements of the clinical microsystem include

• the team of health professionals who provide clinical care to the patient, • the tools that the team has at its disposal to diagnose and treat the

patient (e.g., imaging capabilities, laboratory tests, drugs), and

Health savings account (HSA) A personal monetary account that can only be used for healthcare expenses. The funds are not taxed, and the balance can be rolled over from year to year. HSAs are normally used with high- deductible health insurance plans.

Consumer-directed healthcare In general, the consumer (patient) is well informed about healthcare prices and quality and makes personal buying decisions on the basis of this information. The health savings account is frequently included as a key component of consumer-directed healthcare.

Patient care microsystem The level of healthcare delivery that includes providers, technology, and treatment processes.



C h a p t e r 1 : T h e C h a l l e n g e a n d t h e O p p o r t u n i t y 9

• the logic for determining the appropriate treatments and the processes to deliver that care.

Because common conditions (e.g., hypertension) affect a large number of patients, clinical research has been conducted to determine the most effec- tive ways to treat these patients. Therefore, in many cases, the organization and functioning of the microsystem can be optimized. Process improvements can be made at this level to ensure that the most effective, least costly care is delivered. In addition, the use of EBM guidelines can help ensure that the patient receives the correct treatment at the correct time.

The organizational infrastructure also influences the effective delivery of care to the patient. Ensuring that providers have the correct tools and skills is an important element of infrastructure.

The EHR is one of the most important advances in the clinical micro- system for both process improvement and the wider adoption of EBM.

Another key component of infrastructure is the leadership displayed by senior staff. Without leadership, progress and change do not occur.

Finally, the environment strongly influences the delivery of care. Key environmental factors include market competition, government regulation, demographics, and payer policies. An organization’s strategy is frequently influ- enced by such factors (e.g., a new regulation from Medicare, a new competitor).

Many of the systems concepts regarding healthcare delivery were ini- tially developed by Avedis Donabedian. These fundamental contributions are discussed in depth in chapter 2.

Organization Level C

Microsystem Level B

Patient Level A

Environment Level D

EXHIBIT 1.2 A Systems View of Healthcare

Source: Ransom, Joshi, and Nash (2005). Based on Ferlie, E., and S. M. Shortell. 2001. “Improving the Quality of Healthcare in the United Kingdom and the United States: A Framework for Change.” Milbank Quarterly 79 (2): 281–316.



H e a l t h c a r e O p e r a t i o n s M a n a g e m e n t10

System Stability and Change Elements in each layer of this system interact. Peter Senge (1990) provides a useful theory for understanding the interaction of elements in a complex system such as healthcare. In his model, the structure of a system is the primary mecha- nism for producing an outcome. For example, the presence of an organized structure of facilities, trained professionals, supplies, equipment, and EBM care guidelines leads to a high probability of producing an expected clinical outcome.

No system is ever completely stable. Each system’s performance is modi- fied and controlled by feedback (exhibit 1.3). Senge (1990, 75) defines feedback as “any reciprocal flow of influence. In systems thinking it is an axiom that every influence is both cause and effect.” As shown in exhibit 1.3, increased salaries provide an incentive for employees to achieve improvement in performance level. This improved performance leads to enhanced financial performance and profitability for the organization, and increased profits provide additional funds for higher salaries, and the cycle continues. Another frequent example in healthcare delivery is patient lab results that directly influence the medication




Employee motivation


Financial performance, profit

Add or reduce staff

Actual staffing level

Compare actual to needed staff based on patient demand

EXHIBIT 1.3 Systems with

Reinforcing and Balancing




C h a p t e r 1 : T h e C h a l l e n g e a n d t h e O p p o r t u n i t y 11

ordered by a physician. A third example is a financial report that shows an over-expenditure in one category that prompts a manager to reduce spending to meet budget goals.

A more complete definition of a feedback-driven operational system includes an operational process, a sensor that monitors process output, a feed- back loop, and a control that modifies how the process operates.

Feedback can be either reinforcing or balancing. Reinforcing feedback prompts change that builds on itself and amplifies the outcome of a process, taking the process further and further from its starting point. The effect of rein- forcing feedback can be either positive or negative. For example, a reinforcing change of positive financial results for an organization could lead to increases in salaries, which would then lead to even better financial performance because the employees are highly motivated. In contrast, a poor supervisor could cause employee turnover, possibly resulting in short staffing and even more turnover.

Balancing feedback prompts change that seeks stability. A balancing feedback loop attempts to return the system to its starting point. The human body provides a good example of a complex system that has many balancing feedback mechanisms. For example, an overheated body prompts perspiration until the body is cooled through evaporation. The clinical term for this type of balance is homeostasis. A treatment process that controls drug dosing via real-time monitoring of the patient’s physiological responses is an example of balancing feedback. Inpatient unit staffing levels that determine where in a hospital patients are admitted is another. All of these feedback mechanisms are designed to maintain balance in the system.

A confounding problem with feedback is delay. Delays occur when interruptions arise between actions and consequences. In the midst of delays, systems tend to “overshoot” and thus perform poorly. For example, an emer- gency department might experience a surge in patients and call in additional staff. When the surge subsides, the added staff stay on shift but are no longer needed, and unnecessary expense is incurred.

As healthcare leaders focus on improving their operations, they must understand the systems in which change resides. Every change will be resisted and reinforced by feedback mechanisms, many of which are not clearly visible. Taking a broad systems view can improve the effectiveness of change.

Many subsystems in the total healthcare system are interconnected. These connections have feedback mechanisms that either reinforce or balance the subsystem’s performance. Exhibit 1.4 shows a simple connection that origi- nates in the environmental segment of the total health system. Each process has both reinforcing and balancing feedback.

This general systems model can be converted to a more quantitative system dynamics model, which is useful as part of a predictive analytics system. This concept is addressed in more depth in chapter 8.



H e a l t h c a r e O p e r a t i o n s M a n a g e m e n t12

An Integrating Framework for Operations Management in Healthcare

The five-part framework of this book (illustrated in exhibit 1.5) reflects our view that effective operations management in healthcare consists of highly focused strategy execution and organizational change accompanied by the disciplined use of analytical tools, techniques, and programs. An organization needs to understand the environment, develop a strategy, and implement a system to effectively deploy this strategy. At the same time, the organization must become adept at using all the tools of operations improvement contained in this book. These improvement tools can then be combined to attack the fundamental challenges of operating a complex healthcare delivery organization.

Introduction to Healthcare Operations The introductory chapters provide an overview of the significant environmental trends healthcare delivery organizations face. Annual updates to industrywide trends can be found in Futurescan: Healthcare Trends and Implications 2016–2021 (SHSMD and ACHE 2016). Progressive organizations tend to review these publications care- fully, as they can use this information in response to external forces by identifying either new strategies or current operating problems that must be addressed.

Business has aggressively used operations improvement tools for the past 40 years, but the field of operations science actually began many centuries ago. Chapter 2 provides a brief history.

Healthcare operations are increasingly driven by the effects of EBM and pay for performance; chapter 3 offers an overview of these trends and how organizations can effect change to meet current challenges and opportunities.

Setting Goals and Executing Strategy A key component of effective operations is the ability to move strategy to action. Chapter 4 shows how the use of the balanced scorecard and strategy maps can help accomplish this aim. Change in all organizations is challenging, and the formal methods of project management (chapter 5) can deliver effec- tive, lasting improvements in an organization’s operations.

Payers want to reduce costs for chemotherapy

New payment method for chemotherapy is created

Environment Organization Clinical microsystem Patient

Changes are made in care processes and support systems to maintain quality while reducing costs

Chemotherapy treatment needs to be more efficient to meet payment levels

EXHIBIT 1.4 Linkages Within

the Healthcare System:




C h a p t e r 1 : T h e C h a l l e n g e a n d t h e O p p o r t u n i t y 13

Performance Improvement Tools, Techniques, and Programs Once an organization has its strategy implementation and change management processes in place, it needs to select the correct tools, techniques, and programs to analyze current operations and develop effective adjustments.

Chapter 6 outlines the basic steps of problem solving, which begins by framing the question or problem and continues through data collection and analyses to enable effective decision making. Chapter 7 introduces the building blocks for many of the advanced tools used later in the book. (This chapter may serve as a review or reference for readers who already have good statistical skills.)

Closely related to statistical thinking is the emerging science of analyt- ics. With powerful new software tools and big data repositories, the ability to understand and predict organizational performance is significantly enhanced. Chapter 8 is new to this edition and presents several tools that have become available to healthcare analysts and leaders since publication of the second edition.

Some projects require a focus on process improvement. Six Sigma tools (chapter 9) can be used to reduce variability in the outcome of a process. Lean tools (chapter 10) help eliminate waste and increase speed.

Applications to Contemporary Healthcare Operations Issues This part of the book demonstrates how these concepts can be applied to some of today’s fundamental healthcare challenges. Process improvement techniques are now widely deployed in many organizations to significantly improve performance; chapter 11 reviews the tools of process improvement and demonstrates their use in improving patient flow.

Scheduling and capacity management continue to be major concerns for most healthcare delivery organizations, particularly with the advent of advanced- access scheduling, a concept promoted by the Institute for Healthcare Improve- ment and discussed in chapter 12. Specifically, the chapter demonstrates how

Setting goals and executing strategy

Performance improvement tools, techniques, and programs

Fundamental healthcare operations issues

High performance

EXHIBIT 1.5 Framework for Effective Operations Management in Healthcare



H e a l t h c a r e O p e r a t i o n s M a n a g e m e n t14

simulation can be used to optimize scheduling. Chapter 13 explores the optimal methods for acquiring supplies and maintaining appropriate inventory levels. Chapter 14 outlines a systems approach to improving financial results, with a special emphasis on cost reduction—one of today’s most important challenges.

Putting It All Together for Operational Excellence In the end, any operations improvement will fail unless steps are taken to maintain the gains; chapter 15 contains the necessary tools to do so. The chapter also provides a detailed algorithm that helps practitioners select the appropriate tools, methods, and techniques to effect significant operational improvements. It demonstrates how our fictionalized case study healthcare system, Vincent Valley Hospital and Health System (VVH), uses all the tools presented in the book to achieve operational excellence. In this way, a future is envisioned in which many of the tools and methods contained in the book are widely deployed in the US healthcare system.

Vincent Valley Hospital and Health System Woven throughout the chapters are examples featuring VVH, a fictitious but realistic health system. The companion website contains an expansive descrip- tion of VVH; here we provide some essential details.

VVH is located in a midwestern city with a population of 1.5 million. The health system employs 5,000 staff members, oper- ates 350 inpatient beds, and has a medical staff of 450 physicians. It operates nine clinics staffed by physicians who are employees of the system. VVH competes with

two major hospitals and an independent ambulatory surgery center that was formed by several surgeons from all three hospitals.

The VVH brand includes an accountable care organization to reflect the increased emphasis it has placed on population health in its community. The organization also is working to create a Medicare Advantage plan. It has significantly restructured its primary care delivery segment and has contracted with a variety of retail clinics to supplement the traditional office-based primary care physicians with whom it is affiliated. It recently added an online diagnosis and treatment service, with 24-hour telehealth now available.

Three major health plans provide most of the private payment to VVH, which, along with the state Medicaid system, have recently begun a pay-for- performance reimbursement initiative. VVH has a strong balance sheet and a profit margin of approximately 2 percent, but its senior leaders feel the orga- nization is financially challenged.

The board of VVH includes many local industry leaders, who have asked the chief executive to focus on using the operational techniques that have led them to succeed in their own businesses.

On the web at



C h a p t e r 1 : T h e C h a l l e n g e a n d t h e O p p o r t u n i t y 15


This book is an overview of operations management approaches and tools. The reader is expected to understand all the concepts in the book (and in current use in the field) and be able to apply, at the basic level, most of the tools, techniques, and programs presented. The reader is not expected to execute at the more advanced (e.g., Six Sigma black belt, project management professional) level. However, this book prepares readers to work effectively with knowledgeable professionals and, most important, enables them to direct the work of those professionals.

Final Note About the Third Edition Prior editions of this book included a chapter on simulation. Although simula- tion is a valuable tool in many industries, it is not used widely in healthcare, so the chapter was eliminated, with some of the principles of simulation moved to chapter 11. We hope the industry embraces this tool in the future—and then we will bring this chapter back.

Discussion Questions

1. Provide three examples of system improvements at the boundaries of the healthcare subsystems (patient, microsystem, organization, and environment).

2. Identify three systems in a healthcare organization (at any level) that have reinforcing feedback.

3. Identify three systems in a healthcare organization (at any level) that have balancing feedback.

4. Identify three systems in a healthcare organization (at any level) in which feedback delays affect the performance of the system.


Agency for Healthcare Research and Quality (AHRQ). 2010. “National Healthcare Quality Report, 2009: Key Themes and Highlights from the National Healthcare Qual- ity Report.” Last reviewed March. nhqrdr/nhqr09/Key.html.

Centers for Medicare & Medicaid Services (CMS). 2015. “National Health Expenditure Projections 2014-2025 Forecast Summary.” Published July 14. Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/National HealthExpendData/Downloads/Proj2015.pdf.



H e a l t h c a r e O p e r a t i o n s M a n a g e m e n t16

Institute of Medicine (IOM). 2011. Learning What Works: Infrastructure Required for Comparative Effectiveness Research. Workshop Summary. Accessed August 8, 2016. comparative-effectiveness-research-workshop.

———. 2001. Crossing the Quality Chasm: A New Health System for the 21st Century. Wash- ington, DC: National Academies Press.

———. 1999. To Err Is Human: Building a Safer Health System. Washington, DC: National Academies Press.

Joshi, M. S., E. R. Ransom, D. B. Nash, and S. B. Ransom. 2014. The Healthcare Quality Book: Vision, Strategy and Tools, 3rd edition. Chicago: Health Administration Press.

Landrigan, C. P., G. J. Parry, C. B. Bones, A. D. Hackbarth, D. A. Goldmann, and P. J. Sharek. 2010. “Temporal Trends in Rates of Patient Harm Resulting from Medical Care.” New England Journal of Medicine 363 (22): 2124–34.

National Guideline Clearinghouse (NGC). 2016. Home page. Accessed August 8. https://

Ransom, S. B., M. S. Joshi, and D. B. Nash (eds.). 2005. The Healthcare Quality Book: Vision, Strategy, and Tools. Chicago: Health Administration Press.

Rotter, T., L. Kinsman, E. L. James, A. Machotta, H. Gothe, J. Willis, P. Snow, and J. Kugler. 2010. “Clinical Pathways: Effects on Professional Practice, Patient Outcomes, Length of Stay and Hospital Costs.” Cochrane Database of Systematic Reviews 3: CD006632.

Senge, P. M. 1990. The Fifth Discipline: The Art and Practice of the Learning Organization. New York: Doubleday.

Society for Healthcare Strategy and Market Development (SHSMD) and American Col- lege of Healthcare Executives (ACHE). 2016. Futurescan: Healthcare Trends and Implications 2016–2021. Chicago: SHSMD and Health Administration Press.






During the Crimean War, a conflict that waged from October 1853 to February 1856 pitting Russia against Britain, France, and Ottoman Turkey, reports of ter- rible conditions in military hospitals began to emerge that alarmed British citizens. In response to the out- cry, the British government commissioned Florence Nightingale, now widely recognized as a pioneer in nursing practice, to oversee the introduction of nurses to military hospitals and to improve conditions in the hospitals. When Nightingale arrived in Scutari, Turkey, she found the military hospital there overcrowded and filthy. She instituted many changes to improve the sanitary conditions in the hospital, and many lives were saved as a result of these reforms.

Nightingale was among the first healthcare professionals to collect, tabulate, interpret, and graph- ically display data related to the impact of process changes on care outcomes—what is known today as evidence-based medicine. To quantify the overcrowd- ing problem, she compared the average amount of space per patient in London hospitals—1,600 square feet—to the space in Scutari—about 400 square feet. She developed a standardized document, the Model Hospital Statistical Form, to enable the collection of consistent data for analysis and comparison. In Feb- ruary 1855, the patient mortality rate at the military hospital in Scutari was 42 percent. As a result of Night- ingale’s changes, by June of that year the mortality rate had decreased to 2.2 percent.

To present these data in a persuasive manner, she developed a new type of graphic display, the polar area diagram. The diagram was a pie chart with a monthly slice for mortality numbers and their causes displayed in a different color. A quick glance at the diagram “showed that except for the bloodiest month in the siege of Sevastopol, battle deaths take up a very small portion of each slice,” notes Lienhard


This chapter provides the background and historical

context for performance improvement—which is not

a new concept. Several of the tools, techniques, and

philosophies outlined in this text are based in past

efforts. Although the terminology has changed, many

of the core concepts remain the same.

The major topics in this chapter include the


• Background for understanding operations


• Systems thinking and knowledge-based


• Scientific management

• Project management

• Introduction to quality, and quality experts of


• Philosophies of performance improvement,

including Six Sigma, Lean, and others

• Introduction to supply chain management

• Introduction to big data and analytics

Although these tools and techniques have been

adapted for contemporary healthcare, their roots

are in the past, and an understanding of this history

(exhibit 2.1) can enable organizations to move success-

fully into the future.



H e a l t h c a r e O p e r a t i o n s M a n a g e m e n t18

(2016). It revealed that “The Russians were a minor enemy. The real enemies were cholera, typhus, and dysentery. Once the military looked at that eloquent graph, the modern army hospital system was inevitable” (Lienhard 2016).

After the war, Nightingale used the data she had collected to demonstrate that the mortality rate in Scutari following her reforms was significantly lower than in other British military hospitals. Although the British military hierarchy was resis- tant to her changes, the data were convincing and resulted in reforms to military hospitals and the establishment of the Royal Commission on the Health of the Army.

Were she alive today, Nightingale would recognize many of the philosophies, tools, and techniques outlined in this text as essentially the same as those she employed to achieve lasting reform in hospitals throughout the world.

Sources: Information from Cohen (1984), Lienhard (2016), Neuhauser (2003), and Nightingale (1858).


The healthcare industry faces many challenges. The costs of care and level of services delivered are increasing; even as the population ages, we are able to pro- long lives to an ever greater extent as technology advances and expertise grows. The expectation of quality care with zero defects, or failures in care, is being pursued by government and other stakeholders, driving the need for healthcare providers to produce more of a high-quality product or service at a reduced cost. This need can only be met through improved utilization of resources.

Specifically, providers must offer their services more effectively and effi- ciently than at any time in the past by optimizing their use of limited financial assets, employees and staff, machines and facilities, and time.

Enter operations management. Operations management is the design, implementation, and improve-

ment of the processes and systems that create and deliver the organization’s products and services. Operations managers plan and control delivery processes and systems within the organization.

Forward-thinking healthcare leaders and professionals have realized that the theories, tools, and techniques of operations management, if properly applied, can enable their organizations to become efficient and effective care delivery environments. However, for many of the aims identified by the US healthcare system to be achieved, essentially all healthcare providers must adopt these tools and techniques, many of which have enabled other service indus- tries and manufacturing sectors to improve efficiency and effectiveness. The operations management information presented in this book should similarly enable hospitals and other healthcare organizations to design systems, processes, products, and services that meet the needs of their stakeholders. Importantly, it should also allow continuous improvement in these systems and services to keep pace with the quickly changing healthcare landscape.



C h a p t e r 2 : H i s t o r y o f P e r f o r m a n c e I m p r o v e m e n t 19


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H e a l t h c a r e O p e r a t i o n s M a n a g e m e n t20

To improve systems and processes, however, one must first know the system or process and its desired inputs and outputs.

Knowledge-Based Management

This book takes a systems view of service provision and delivery, as illustrated in exhibit 2.2, and focuses on knowledge-based management (KBM)—using data and information toward basing management decisions on facts rather than on feelings or intuition—to frame that view. The improvement in computer systems and new analytical approaches support the increased use of KBM, especially in terms of building a knowledge hierarchy.

The knowledge hierarchy relates to the learning that ultimately under- pins KBM. As illustrated in exhibit 2.3, the knowledge hierarchy consists of the following five categories (Zeleny 1987):

Knowledge hierarchy The foundation of knowledge-based management, composed of five categories of learning: data, information, knowledge, understanding, and wisdom.


Transformation process

Labor Material Machines Management Capital

Goods or services


EXHIBIT 2.2 Systems View

of the Provision of Services for

Purposes of This Book

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EXHIBIT 2.3 Knowledge




C h a p t e r 2 : H i s t o r y o f P e r f o r m a n c e I m p r o v e m e n t 21

1. Data. Symbols or raw numbers that simply exist; they have no structure or organization. Entities collect data with their computer systems; individuals collect data through their experiences. At this stage of the hierarchy, one can presume to know nothing because raw data alone are not adequate for decision making.

2. Information. Data that are organized or processed to have meaning. Information can be useful, but it is not necessarily useful. It can answer such questions as who, what, where, and when—in other words, know what.

3. Knowledge. Information that is deliberately useful. Knowledge enables decision making—know how.

4. Understanding. A mental frame that allows use of what is known and enables the development of new knowledge. Understanding represents the difference between learning and memorizing—know why.

5. Wisdom. A high-level stage that adds moral and ethical views to understanding. Wisdom answers questions to which there is no known correct answer and, in some cases, to which there will never be a known correct answer—know right.

A simple example may help explain this hierarchy. Say your height is 67 inches and your weight is 175 pounds (data). You have a body mass index (BMI) of 26.7 (information). A healthy BMI is 18.5 to 25.5 (knowledge). Your BMI is high, and to be healthy you should lower it (understanding). You begin a diet and exercise program and lower your BMI (wisdom).

Finnie (1997, 24) summarizes the relationships in the hierarchy and notes our tendency to focus on its less important levels:

We talk about the accumulation of information, but we fail to distinguish between

data, information, knowledge, understanding, and wisdom. An ounce of information

is worth a pound of data, an ounce of knowledge is worth a pound of information,

an ounce of understanding is worth a pound of knowledge, an ounce of wisdom is

worth a pound of understanding. In the past, our focus has been inversely related to

importance. We have focused mainly on data and information, a little bit on knowl-

edge, nothing on understanding, and virtually less than nothing on wisdom.

Knowledge Through the Ages The roots of the knowledge hierarchy can be traced to eighteenth-century philosopher Immanuel Kant, much of whose work attempted to address the questions of what and how we can know.

The two major philosophical movements that significantly influenced Kant were empiricism and rationalism (McCormick 2006). The empiricists, most notably John Locke, argued that human knowledge originates in one’s



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experiences. According to Locke, the mind is a blank slate that fills with ideas through its interaction with the world. The rationalists, including Descartes and Galileo, argued that the world is knowable through an analysis of ideas and logical reasoning. Both the empiricists and the rationalists viewed the mind as passive, either by receiving ideas onto a blank slate or because it possesses innate ideas that can be logically analyzed.

Kant joined these philosophical ideologies by arguing that experience leads to knowing only if the mind provides a structure for those experiences. Although the idea that the rational mind plays a role in defining reality is now common, in Kant’s time this was a major insight into what and how we know. Knowledge does not flow from our experiences alone, nor only from our ability to reason; rather, knowledge flows from our ability to apply reasoning to our experiences.

Relating Kant’s philosophy to the knowledge hierarchy, data are our experiences, information is obtained through logical reasoning, and knowledge is obtained when we apply structured reasoning to data to acquire knowledge (Ressler and Ahrens 2006).

The intent of this text is to enable readers to gain knowledge. We discuss tools and techniques that allow the application of logical reasoning to data toward obtaining knowledge and using it to make decisions. This knowledge and understanding should help the reader provide healthcare in an efficient and effective manner.

History of Scientific Management

Frederick Taylor (whose work is covered in more detail later in the chapter) originated the term scientific management in The Principles of Scientific Man- agement (Taylor 1911). Scientific management methods called for eliminating the old rule-of-thumb, individual way of performing work and, through study and optimization of the work, replacing the varied methods with the one “best” way of performing the work to improve productivity and efficiency. Today, the term scientific management has been replaced with operations management, but the concept is similar: Study the process or system and determine ways to optimize it to achieve improved efficiency and effectiveness.

Mass Production The Industrial Revolution and mass production set the stage for much of Tay- lor’s work. Prior to the Industrial Revolution, individual craftsmen performed all tasks necessary to produce a good using their own tools and procedures. In the eighteenth century, Adam Smith advocated for the division of labor— increasing work efficiency through specialization. To support a division of labor, a large number of workers are brought together, and each performs a specific task related to the production of a good. Thus, the factory system of

Scientific management A disciplined approach to studying a system or process and then using data to optimize it to achieve improved efficiency and effectiveness.



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mass production was born, and Henry Ford’s assembly line eventually emerged, making industrial conditions ripe for Taylor to introduce scientific management.

Mass production allows for significant economies of scale, as predicted by Smith. Before Ford set up his moving assembly line, each car chassis was assembled by a single worker and took about 12½ hours to produce. After the introduction of the assembly line, this time was reduced to 93 minutes (Bellis 2006). The standardization of products and work ushered in by the assembly line not only led to a reduction in the time needed to produce cars but also significantly reduced the costs of production. The selling price of the Model T fell from $1,000 to $360 between 1908 and 1916 (Simkin 2005), allowing Ford to capture a large portion of the market.

Although Ford is commonly credited with introducing the moving assembly line and mass production in modern times, both processes were in practice several hundred years earlier. The Venetian Arsenal of the 1500s employed 16,000 people and produced nearly one ship every day (NationMas- 2004). Ships were mass produced using premanufactured, standardized parts on a floating assembly line (Schmenner 2001).

One of the first examples of mass production in the healthcare industry is Shouldice Hospital (Heskett 2003). Much like Ford, who is commonly cited as saying people could have the Model T in any color, “so long as it’s black,” Shouldice, founded in 1945 in Toronto, performs just one type of surgery— routine hernia operations—and it continues to thrive with its unique approach (Heskett 2003).

Furthermore, evidence is growing in healthcare that level of experience in treating specific illnesses and conditions affects the outcome of that care. Higher volumes of cases often result in better outcomes (Halm, Lee, and Chassin 2002). Specifically, the additional practice associated with higher volume results in bet- ter outcomes. The idea of “practice makes perfect,” or learning-curve effects, has led organizations such as the Leapfrog Group (made up of organizations that provide healthcare benefits) to list patient volume among its criteria for quality (Halm, Lee, and Chassin 2002). The Agency for Healthcare Research and Quality (AHRQ) report Localizing Care to High-Volume Centers devotes an entire chapter to this issue and its impact on medical practice (Auerbach 2001).

Frederick Taylor Taylor began his work when mass production and the factory system were in their infancy. He believed that US industry was “wasting” human effort and that, as a result, national efficiency (now called productivity) was significantly lower than it could be. The introduction to The Principles of Scientific Manage- ment (Taylor 1911) illustrates his intent:

[O]ur larger wastes of human effort, which go on every day through such of our acts

as are blundering, ill-directed, or inefficient, and which Mr. [Theodore] Roosevelt



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refers to as a lack of “national efficiency,” are less visible, less tangible, and are but

vaguely appreciated. . . . This paper has been written:

First. To point out, through a series of simple illustrations, the great loss which the

whole country is suffering through inefficiency in almost all of our daily acts.

Second. To try to convince the reader that the remedy for this inefficiency lies in

systematic management, rather than in searching for some unusual or extraordinary

man [referring to the so-called great man theory prevalent at the time].

Third. To prove that the best management is a true science, resting upon clearly

defined laws, rules, and principles, as a foundation. And further to show that the

fundamental principles of scientific management are applicable to all kinds of human

activities, from our simplest individual acts to the work of our great corporations,

which call for the most elaborate cooperation. And, briefly, through a series of illus-

trations, to convince the reader that whenever these principles are correctly applied,

results must follow which are truly astounding.

Note that Taylor specifically mentions systems management as opposed to the individual; this is a common theme that we revisit throughout this book. Rather than focusing on individuals as the cause of problems and the source of solutions, emphasis is placed on systems and their optimization.

Taylor believed that much waste was the result of what he called “sol- diering,” which today might be thought of as slacking. Further, he believed that the underlying causes of soldiering were as follows (Taylor 1911):

First. The fallacy, which has from time immemorial been almost universal among

workmen, that a material increase in the output of each man or each machine in

the trade would result in the end in throwing a large number of men out of work.

Second. The defective systems of management which are in common use, and which

make it necessary for each workman to soldier, or work slowly, in order that he may

protect his own best interests.

Third. The inefficient rule-of-thumb methods, which are still almost universal in all

trades, and in practicing which our workmen waste a large part of their effort.

To eliminate soldiering, Taylor proposed instituting incentive schemes. While at Midvale Steel Company, he used time studies to set daily production quotas. Incentives were paid to those workers who reached their daily goals, and those who did not reach their goals were paid significantly less. Productiv- ity at Midvale doubled. Not surprisingly, Taylor’s ideas produced considerable backlash. The resistance to increasingly popular pay-for-performance programs in healthcare today is analogous to that experienced by Taylor.

Taylor believed that “one best way” existed to perform any task and that careful study and analysis would lead to the discovery of that way. For



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example, while at Bethlehem Steel Corporation, he studied the shoveling of coal. Using time studies and a careful analysis of how the work was performed, he determined that the optimal amount of coal per shovel load was 21 pounds. Taylor then developed shovels that would hold exactly 21 pounds for each type of coal; workers had previously supplied their own shovels ( 2005). He also determined the ideal work rate and rest periods to ensure that workers could shovel all day without fatigue. As a result of Taylor’s improved methods, Bethlehem Steel was able to reduce the number of workers shoveling coal from 500 to 140 (Nelson 1980).

Taylor’s four principles of scientific management are to

1. develop and standardize work methods on the basis of scientific study, and use these to replace individual rule-of-thumb methods;

2. select, train, and develop workers rather than allowing them to choose their own tasks and train themselves;

3. develop a spirit of cooperation between management and workers to ensure that the scientifically developed work methods are both sustainable and implemented on a continuing basis; and

4. divide work between management and workers so that each has an equal share, where management plans the work and workers perform the work.

Although some would be problematic today—particularly the notion that workers are “machinelike” and motivated solely by money—many of Taylor’s ideas can be seen in the foundations of newer initiatives such as Six Sigma and Lean, two important quality improvement approaches discussed in depth later in the book.

Frank and Lillian Gilbreth The Gilbreths were contemporaries of Frederick Taylor. Frank, who worked in the construction industry, noticed that no two bricklayers performed their tasks the same way. He believed that bricklaying could be standardized and the one best way determined. He studied the work of bricklaying and analyzed the workers’ motions, finding much unnecessary stooping, walking, and reaching. He eliminated these motions by developing an adjustable scaffold designed to hold both bricks and mortar (Taylor 1911). As a result of this and other improvements, Frank Gilbreth reduced the number of motions in bricklaying from 18 to 5 (International Work Simplification Institute 1968) and raised out- put from 1,000 to 2,700 bricks a day (Perkins 1997). He applied what he had learned from his bricklaying experiments to other industries and types of work.

In his study of surgical operations, Frank Gilbreth found that doctors spent more time searching for instruments than performing the surgery. He



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developed a technique still seen in operating rooms today: When the doctor needs an instrument, he extends his hand, palm up, and asks for the instru- ment, which is then placed in his hand. This technique eliminates searching for the instrument and allows the doctor to stay focused on the surgical area, thus reducing surgical time (Perkins 1997).

Frank and Lillian Gilbreth may be more familiarly known as the parents in the book Cheaper by the Dozen (Gilbreth and Carey 1948) (which was made into a movie by the same title in 1950 and remade in 2003). The Gilbreths incorporated many of their time-saving ideas in their family as well. For example, they bought just one type of sock for all 12 of their children, thus eliminating time-consuming sorting.

Scientific Management Today Scientific management fell out of favor during the Depression, partly because of the sense that it dehumanized employees, but mainly because of a general belief in society that productivity improvements resulted in downsizing and increased unemployment. Not until World War II did scientific management, renamed operations research, see a resurgence of interest.

In healthcare today, standardized methods and procedures are used to reduce costs and increase the quality of outcomes. Specialized equipment has been developed to speed procedures and reduce labor costs. In a sense, we are still searching for the one best way. However, we must heed the lessons of the past. If the tools of operations management are perceived to be dehumanizing or to result in downsizing by healthcare organizations, their implementation will meet significant resistance.

Project Management

The discipline of project management began with the development of the Gantt chart in the early twentieth century. Henry Gantt worked closely with Frederick Taylor at Midvale Steel and in Navy ship construction during World War I. From this work, he developed bar graphs to illustrate the duration of project tasks and display scheduled and actual progress. These Gantt charts were used to help manage large projects, including construction of the Hoover Dam, and proved to be such a powerful tool that they are commonly used today.

Although Gantt charts were originally adopted to track large projects, they are not ideal for very large, complicated projects because they do not explicitly show precedence relationships, that is, what tasks need to be completed before other tasks can start. In the 1950s, two mathematic project scheduling techniques were developed: the program evaluation and review technique (PERT) and the critical path method (CPM). Both techniques begin by developing a project network showing the precedence relationships among tasks and task duration.

Program evaluation and review technique (PERT) A graphic technique to link and analyze all tasks within a project; the resulting graph helps optimize the project’s schedule.

Critical path method (CPM) The critical path is the longest course through a graph of linked tasks in a project. The critical path method is used to reduce the total time of a project by decreasing the duration of tasks on the critical path.



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PERT was developed by the US Navy to address the desire to acceler- ate the Polaris missile program. This “need for speed” was precipitated by the Soviet launch of Sputnik, the first space satellite. PERT uses a probability distribution (the beta distribution), rather than a point estimate, for the dura- tion of each project task. The probability of completing the entire project in a given amount of time can then be determined. This technique is most useful for estimating project completion time when task times are uncertain and for evaluating risks to project completion prior to the start of a project.

The CPM technique was developed at the same time as PERT by the DuPont and Remington Rand corporations to manage plant maintenance projects. CPM uses the project network and point estimates of task duration times to determine the critical path through the network, or the sequence of activities that will take the longest to complete. If any one of the activities on the critical path is delayed, the entire project is delayed. This technique is most useful when task times can be estimated with certainty and is typically used in project management and control.

Although both of these techniques are powerful analytical tools for planning, implementing, controlling, and evaluating a project plan, perform- ing the required calculations by hand is tedious, and use of the techniques was not initially widespread. With the advent of commercially available project management software for personal computers in the late 1960s, use of PERT and CPM increased considerably. Today, numerous project management soft- ware packages are commercially available. Microsoft Project, for instance, can perform network analysis on the basis of either PERT or CPM; the default is CPM, making it the more commonly used technique.

Projects are an integral part of many of the process improvement ini- tiatives found in the healthcare industry. Project management and its tools are needed to ensure that projects related to quality, Lean, and supply chain management are completed in the most effective and timely manner possible.

Introduction to Quality

Any discussion of quality in industry—including healthcare—should begin with those recognized as originators in quality improvement methodology. Here we introduce the individuals credited with developing various quality approaches, and later in the section we discuss some prevailing quality improve- ment processes. This introductory discussion establishes the background for the in-depth treatment of the concepts throughout the book.

Walter Shewhart If W. Edwards Deming and Joseph Juran (profiled in later subsections) are considered the fathers of the quality movement, Walter Shewhart may be seen



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as its grandfather. Both Deming and Juran studied under Shewhart, and much of their work was influenced by his ideas.

Shewhart believed that managers need certain information to enable them to make scientific, efficient, and economical decisions. He developed statistical process control (SPC) charts to supply that information (Shewhart 1931). He also believed that management and production practices need to be continu- ously evaluated, and then adopted or rejected on the basis of this evaluation, if an organization hopes to evolve and survive. Deming’s cycle of improvement, known as plan-do-check-act (PDCA) (sometimes rendered as plan-do-study- act), was adapted from Shewhart’s work (Shewhart and Deming 1939).

W. Edwards Deming Deming was an employee of the US government in the 1930s and 1940s, work- ing with statistical sampling techniques. He became a supporter and student of Shewhart, believing Shewhart’s techniques could be useful in nonmanufactur- ing environments. Deming applied SPC methods to his work at the National Bureau of the Census to improve clerical operations in preparation for the 1940 population census. As a result, in some cases productivity improved by a factor of six (Kansal and Rao 2006).

Deming taught seminars to bring his and Shewhart’s work to US and Canadian organizations, where major reductions in scrap and rework resulted. However, after World War II, Deming’s ideas lost popularity in the United States, mainly because demand for all products was so great that quality became unimportant; any product, regardless of how well it was made, was snapped up by hungry consumers.

After the war, Deming traveled to Japan as an adviser for that country’s census. While he was there, the Union of Japanese Scientists and Engineers invited him to lecture on quality control techniques, and Deming brought his message to Japanese executives: Improving quality reduces expenses while increasing productivity and market share. During the 1950s and 1960s, Deming’s ideas were widely known and implemented in Japan, but not in the United States.

The energy crisis of the 1970s was the turning point. In part as a result of oil shortages, the small, well-built Japanese automobiles increased in popular- ity, and the US auto industry saw declines in demand, setting the stage for the return of Deming’s ideas. The 1980 television documentary If Japan Can . . . Why Can’t We?, investigating the increasing competition that numerous US industries faced from Japan, made Deming and his quality ideas known to a broad audience. Much like the Institute of Medicine report To Err Is Human (1999) increased awareness of the need for quality in healthcare, this documen- tary drove US industry’s attention to the need for quality in manufacturing.

Deming’s quality ideas reflected his statistical background, but his expe- rience in their implementation prompted him to expand his approach. He instructed managers in the two types of variation—special cause, resulting from

Statistical process control (SPC) A scientific approach to controlling the performance of a process by measuring the process outputs and then using statistical tools to determine whether this process is meeting expected performance.

Plan-do-check-act (PDCA) A core process improvement tool with four elements: Plan a change to a process, enact the change, check to make sure it is working as expected, and act to make sure the change is sustainable. PDCA functions as a continuous cycle and, as such, is sometimes referred to as the Deming wheel.



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a change in the system that can be identified or assigned and the problem fixed, and common cause, deriving from the natural differences in the system that cannot be eliminated without changing the system. Although identifying the common causes of variation is possible, these causes cannot be fixed without the authority and ability to improve the system, for which management is typically responsible.

Moving far beyond SPC, Deming’s quality methods include a systematic approach to problem solving and continuous process improvement with his PDCA cycle. He also believed that management is ultimately responsible for quality and must actively support and encourage quality “transformations” in organizations. In the preface to Out of the Crisis, Deming (1986) writes:

Drastic changes are required. The first step in the transformation is to learn how to

change. . . . Long term commitment to new learning and new philosophy is required

of any management that seeks transformation. The timid and the faint-hearted, and

people that expect quick results are doomed to disappointment. Whilst the intro-

duction of statistical problem solving and quality techniques and computerization

and robotization have a part to play, this is not the solution: Solving problems, big

problems and little problems, will not halt the decline of American industry, nor will

expansion in use of computers, gadgets, and robotic machinery.

Benefits from massive expansion of new machinery also constitute a vain

hope. Massive immediate expansion in the teaching of statistical methods to pro-

duction workers is not the answer either, nor wholesale flashes of quality control

circles. All these activities make their contribution, but they only prolong the life of

the patient, they cannot halt the decline. Only transformation of management and

of Government’s relations with industry can halt the decline.

Out of the Crisis contains Deming’s famous 14 points for management. Although not as well known, he also included an adaptation of the 14 points for medical services (exhibit 2.4), which he attributed to Drs. Paul B. Batalden and Loren Vorlicky of the Health Services Research Center in Minneapolis (Deming 1986).

1. Establish constancy of purpose toward service. a. Define in operational terms what you mean by “service to patients.” b. Specify standards of service for a year hence and for five years hence. c. Define the patients whom you are seeking to serve. d. Constancy of purpose brings innovation. e. Innovate for better service. f. Put resources into maintenance and new aids to production.

g. Decide whom the administrators are responsible to and the means by which they will be held responsible.

EXHIBIT 2.4 Deming’s Adaptation of the 14 Points for Medical Service




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h. Translate this constancy of purpose to service to patients and the community.

i. The board of directors must hold onto the purpose.

2. Adopt the new philosophy. We are in a new economic age. We can no lon- ger live with commonly accepted levels of mistakes, materials not suited to the job, people on the job who do not know what the job is and are afraid to ask, failure of management to understand their job, antiquated methods of training on the job, and inadequate and ineffective supervi- sion. The board must put resources into this new philosophy, with com- mitment to in-service training.

3. a. Require statistical evidence of quality of incoming materials, such as pharmaceuticals. Inspection is not the answer. Inspection is too late and is unreliable. Inspection does not produce quality. The quality is already built in and paid for. Require corrective action, where needed, for all tasks that are performed in the hospital.

b. Institute a rigid program of feedback from patients in regard to their satisfaction with services.

c. Look for evidence of rework or defects and the cost that may accrue.

4. Deal with vendors that can furnish statistical evidence of control. We must take a clear stand that price of services has no meaning without adequate measure of quality. Without such a stand for rigorous mea- sures of quality, business drifts to the lowest bidder, low quality and high cost being the inevitable result.

Requirement of suitable measures of quality will, in all likelihood, require us to reduce the number of vendors. We must work with vendors so that we understand the procedures that they use to achieve reduced numbers of defects.

5. Improve constantly and forever the system of production and service.

6. Restructure training. a. Develop the concept of tutors. b. Develop increased in-service education. c. Teach employees methods of statistical control on the job. d. Provide operational definitions of all jobs. e. Provide training until the learner’s work reaches the state of statisti-

cal control.

7. Improve supervision. Supervision is the responsibility of the management. a. Supervisors need time to help people on the job. b. Supervisors need to find ways to translate the constancy of purpose

to the individual employee. c. Supervisors must be trained in simple statistical methods with the

aim to detect and eliminate special causes of mistakes and rework. d. Focus supervisory time on people who are out of statistical control

and not those who are low performers. If the members of a group are

EXHIBIT 2.4 Deming’s

Adaptation of the 14 Points for Medical Service (continued from previous page)




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The New Economics for Industry, Government, Education (Deming 1994) outlines the Deming System of Profound Knowledge. Deming believed that to transform organizations, the individuals in those organizations need to understand the four parts of this system.

1. Appreciation for a system: Everything is related to everything else, and those inside the system need to understand the relationships in it.

2. Knowledge about variation: This part of the system refers to what can and cannot be done to decrease either of the two types of variation.

in fact in statistical control, there will be some low performers and some high performers.

e. Teach supervisors how to use the results of surveys of patients.

8. Drive out fear. We must break down the class distinctions between types of workers within the organization—physicians, nonphysicians, clinical providers versus nonclinical providers, physician to physician. Discon- tinue gossip. Cease to blame employees for problems of the system. Man- agement should be held responsible for faults of the system. People need to feel secure to make suggestions. Management must follow through on suggestions. People on the job cannot work effectively if they dare not offer suggestions for simplification and improvement of the system.

9. Break down barriers between departments. One way would be to encour- age switches of personnel in related departments.

10. Eliminate numerical goals, slogans, and posters imploring people to do better. Instead, display accomplishments of the management in respect to helping employees improve their performance.

11. Eliminate work standards that set quotas. Work standards must produce quality, not mere quantity. It is better to take aim at rework, error, and defects.

12. Institute a massive training program in statistical techniques. Bring statisti- cal techniques down to the level of the individual employee’s job, and help him to gather information about the nature of his job in a systematic way.

13. Institute a vigorous program for retraining people in new skills. People must be secure about their jobs in the future and must know that acquir- ing new skills will facilitate security.

14. Create a structure in top management that will push every day on the previous 13 points. Top management may organize a task force with the authority and obligation to act. This task force will require guidance from an experienced consultant, but the consultant cannot take on obligations that only the management can carry out.

EXHIBIT 2.4 Deming’s Adaptation of the 14 Points for Medical Service (continued from previous page)

Source: Full credit and proper copyright notice must be given for material used. Please credit as follows: Deming, W. Edwards, Out of the Crisis, pp. 199–203, © 2000 Massachusetts Institute of Technology, by permission of The MIT Press.



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3. Theory of knowledge: The theory highlights the need for understanding and knowledge rather than information.

4. Knowledge of psychology: People are intrinsically motivated and different from one another, and attempts to use generic extrinsic motivators can result in unwanted outcomes.

Deming’s 14 points and System of Profound Knowledge still provide a road map for organizational transformation.

Joseph M. Juran Juran was a contemporary of Deming and a student of Shewhart. He began his career at the Western Electric Hawthorne Works plant, the site of the famous Hawthorne studies (Mayo 1933) related to worker motivation. Western Electric had close ties to Bell Telephone, Shewhart’s employer, because the company was the sole supplier of telephone equipment to Bell.

During World War II, Juran served as assistant administrator for the Lend-Lease Administration. Juran’s quality improvement techniques made him instrumental in improving the efficiency of processes by eliminating unnecessary paperwork and ensuring the timely arrival of supplies to US allies.

Juran’s Quality Handbook (Juran and Godfrey 1998) was first published in 1951 and remains a standard reference for quality. Juran was among the first quality experts to define quality from the customer perspective as “fitness for use.”

His contributions to quality include the adaptation of the Pareto prin- ciple to the quality arena (see chapter 9 for its application in quality improve- ment). According to this principle, 80 percent of defects are caused by 20 percent of problems, and quality improvement should therefore focus on the “vital few” to gain the most benefit. The roots of Six Sigma programs can be seen in Juran’s (1986) quality trilogy, shown in exhibit 2.5.

Avedis Donabedian Avedis Donabedian was born in 1919 in Beirut, Lebanon, and received a medical degree from the American University of Beirut. In 1955, he earned a master’s degree in public health from Harvard University. While a student at Harvard, Donabedian wrote a paper on quality assessment that brought his work to the attention of various experts in the field of public health. He taught for a short period at New York Medical College before becoming a faculty member at the School of Public Health of the University of Michigan, where he stayed for the remainder of his career.

Shortly after Donabedian joined the University of Michigan faculty, the US Public Health Service began a project looking at the entire field of health services research, for which Donabedian was asked to review and evalu- ate the literature on quality assessment. This work culminated in his famous

Pareto principle Developed by Italian economist Vilfredo Pareto in 1906 on the basis of his observation that 80 percent of the wealth in Italy was owned by 20 percent of the population.



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article, “Evaluating the Quality of Medical Care” (Donabedian 1966), followed by a three-volume book series, titled Exploration in Quality Assessment and Monitoring (Donabedian 1980, 1982, 1985). Over the course of his career, Donabedian wrote 16 books and more than 100 articles on quality assessment and improvement in the healthcare sector on such topics as the definition of quality in healthcare, the relationship between outcomes and process, the impact of clinical decisions on quality, the effectiveness of quality programs, and the relationship between quality and cost (Sunol 2000).

Donabedian (1980) defined healthcare quality in terms of efficacy, effi- ciency, optimality, adaptability, legitimacy, equality, and cost. He was among the first quality researchers to view healthcare as a system composed of structure, process, and outcome, providing a framework for health services research still used today (Donabedian 1966). He also highlighted many of the issues that arise when attempting to measure structures, processes, and outcomes.

Basic Quality Processes

Quality Planning • Identify the customers, both external and internal. • Determine customer needs. • Develop product features that respond to customer. • Establish quality goals that meet the needs of custom-

ers and suppliers alike, and do so at a minimum com- bined cost.

• Develop a process that can produce the needed product features.

• Prove the process capability—prove that the process can meet quality goals under operating conditions.

Control • Choose control subjects—what to control. • Choose units of measurement. • Establish measurement. • Establish standards of performance. • Measure actual performance. • Interpret the difference (actual versus standard). • Take action on the difference.

Improvement • Prove the need for improvement. • Identify specific projects for improvement. • Organize to guide the projects. • Organize for diagnosis—for discovery of causes. • Diagnose to find the causes. • Provide remedies. • Prove that the remedies are effective under operating

conditions. • Provide for control to hold the gains.

Source: Juran, J. M. 1986. “The Quality Trilogy.” Quality Progress 19 (8): 19–24. Reprinted with per- mission from Juran Institute, Inc.

EXHIBIT 2.5 Juran’s Quality Trilogy



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Outcomes were viewed by Donabedian in terms of recovery, restoration of function, and survival, but he also included less easily measured outcome areas such as patient satisfaction (Donabedian 1966). He noted that process of care consists of the methods by which care is delivered, including gathering appropri- ate and necessary information, developing competence in diagnosis and therapy, and providing preventive care. Finally, he established the principle that structure is related to the environment in which care takes place, including facilities and equipment, medical staff qualifications, administrative structure, and programs. Donabedian (1966, 188) believed that quality of care is related not only to each of these elements individually but also to the relationships among them:

Clearly, the relationships between process and outcome, and between structure

and both process and outcome, are not fully understood. With regard to this, the

requirements of validation are best expressed by the concept . . . of a chain of events

in which each event is an end to the one that comes before it and a necessary condi-

tion to the one that follows.

Similar to Deming and Juran, Donabedian advocated the continuous improvement of healthcare quality through a cycle of structure and process changes supported by outcome assessment.

The influence of Donabedian’s seminal work in healthcare can still be seen. Pay-for-performance programs (structure) reward providers for deliv- ering care that meets evidence-based goals (assessed in terms of process or outcomes). The 5 Million Lives Campaign, and its predecessor, the 100,000 Lives Campaign (IHI 2006), are programs (structure) designed to decrease mortality (outcome) through the use of evidence-based practices and procedures (process). Not only are assessments of process, structure, and outcome being developed, implemented, and reported in healthcare, but the quality focus is shifting toward the systematic view of healthcare advocated by Donabedian.

Philosophies of Performance Improvement TQM and CQI, Leading to Six Sigma The US Navy is credited with coining the term total quality management (TQM) in the 1980s to describe its approach, informed by Japanese models, to quality management and improvement (Hefkin 1993). TQM has come to refer to a management philosophy or program aimed at ensuring quality—defined as customer satisfaction—by focusing on it throughout the organization and for each product or service life cycle. All stakeholders in the organization par- ticipate in a continuous improvement cycle.

TQM, referred to in healthcare as continuous quality improvement (CQI), is defined differently by different organizations and individuals, but in general it has come to encompass the theory and ideas of such quality experts

Total quality management (TQM) A management philosophy or program aimed at ensuring quality—defined as customer satisfaction—by focusing on it throughout the organization and for each product or service life cycle.

Continuous quality improvement (CQI) A comprehensive quality improvement and management system with three key components: planning, control, and improvement.



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as Deming, Juran, Philip B. Crosby, Armand V. Feigenbaum, Kaoru Ishikawa, and Donabedian. Perhaps because TQM implementation and vocabulary vary from one organization to the next, TQM programs have decreased in popularity in the United States and have been replaced with more codified programs such as Six Sigma, Lean, and the Malcolm Baldrige National Quality Award criteria.

Six Sigma and TQM are both based on the teachings of Shewhart, Deming, Juran, and other quality experts. Both methodologies emphasize the importance of top management support and leadership, and both focus on continuous improvement as a means to ensure the long-term viability of an organization. The define-measure-analyze-improve-control cycle of Six Sigma (see chapter 9) has its roots in the PDCA cycle of TQM. Six Sigma and TQM have been described as both philosophies and methodologies. Six Sigma can also be defined as a metric, or goal, of 3.4 defects per million opportunities, represented by its unit-based form, 6σ; TQM does not specify a numeric goal to achieve. TQM is not defined as Six Sigma and is not supported by or associ- ated with any certification programs.

The definition of TQM was shaped mainly by academics and is abstract and general, whereas Six Sigma has its base in industry—Motorola and General Electric were early developers—and is specific, providing a clear framework for organizations to follow. Early TQM efforts focused on quality as the primary goal; improved business performance was thought to be a natural outcome of this goal. Quality departments were mainly responsible for TQM throughout the organization. While Six Sigma sets quality (again, as defined by the customer in terms of satisfaction) as a primary goal and focuses on tangible results, it also takes into account the effects of a Six Sigma initiative on business performance. No longer is the focus on quality for quality’s sake; instead, a quality focus is seen as a means to improve organizational performance. Six Sigma training in the use of specific tools and techniques provides common understanding and common vocabulary across organizations. In other words, this method makes quality the goal of the entire organization, not just the quality department.

In essence, Six Sigma took the theory and tools of TQM and codified their implementation, providing a well-defined approach to quality that orga- nizations can quickly and easily adopt.

ISO 9000 The ISO 9000 series of standards, first published in 1987 by the Interna- tional Organization for Standardization (ISO), is primarily concerned with quality management, or how the organization ensures that its products and services satisfy the customer’s quality requirements and comply with applicable regulations. In 2002, the ISO 9000 standard was renamed ISO 9000:2000, consolidating the ISO 9001, 9002, and 9003 standards into the set.

The standards are specifically concerned with the processes of ensuring quality rather than the products or services themselves. ISO standards give

ISO 9000 A series of process standards developed by the International Organization for Standardization to give organizations guidelines for developing and maintaining effective quality systems.



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organizations guidelines by which to develop and maintain effective quality systems.

A significant number of US hospitals are now using the ISO 9001 Quality Management Program to achieve Medicare accreditation. This deeming author- ity, whereby the Centers for Medicare & Medicaid Services confers accreditation authority on a third party, was granted to DNV GL (2016) in 2008.

Many organizations require that their vendors be ISO certified. For an organization to be registered as an ISO 9001 supplier, it must demonstrate to an accredited registrar (a third-party organization that is itself certified) its compliance with the requirements specified in the standard(s). Organizations that are not required by their vendors to be certified can still use the standards to develop quality systems without attempting to be certified.

Baldrige Award Japanese automobiles and electronics gained market share in the United States during the 1970s because their quality was higher and their costs were lower than those manufactured in the United States. In the early 1980s, both US government and industry believed that the only way for the country to stay competitive was to increase industry focus on quality. The Malcolm Baldrige National Quality Award was established by Congress in 1987 to recognize US organizations for their achievements in quality. Its aim was to raise aware- ness about the importance of quality as a competitive priority and help dis- seminate best practices by providing examples of how to achieve quality and performance excellence.

The award was originally given annually to a maximum of three organi- zations in each of three categories: manufacturing, service, and small business. In 1999, the categories of education and healthcare were added, and in 2002, the first Baldrige Award in healthcare was bestowed. The healthcare category includes hospitals, health maintenance organizations, long-term care facilities, healthcare practitioner offices, home health agencies, health insurance compa- nies, and medical and dental laboratories.

The program is a cooperative effort of government and the private sec- tor. The evaluations are performed by a board of examiners, which includes experts from industry, academia, government, and the not-for-profit sector. The examiners volunteer their time to review applications, conduct site visits, and provide applicants with feedback on their strengths and opportunities for improvement in seven categories. Additionally, board members give presenta- tions on quality management, performance improvement, and the Baldrige Award.

A main purpose of the award is the dissemination of best practices and strategies. Recipients are asked to participate in conferences, provide basic mate- rials on their organizations’ performance strategies and methods to interested parties, and answer inquiries from the media. Baldrige Award recipients have

Malcolm Baldrige National Quality Award An annual award established by the US Congress in 1987 to recognize organizations in the United States for their achievements in quality.



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gone beyond these expectations to give thousands of presentations aimed at educating other organizations on the benefits of using the Baldrige framework and disseminating best practices. In fact, many organizations now use the application process as a structure for their comprehensive quality improve- ment programs.

Just-in-Time, Leading to Lean and Agile Just-in-time (JIT) is an inventory management strategy aimed at reducing or eliminating inventory. It is one aspect of Lean manufacturing, whose goal is to eliminate waste, of which inventory is one form. JIT was the term originally used for Lean production in the United States, where industry leaders noted the success of the Japanese auto manufacturers and attempted to copy it by adopting Japanese practices. As academics and organizations realized that Lean production was more than JIT, inventory management terms such as big JIT and little JIT were employed, and JIT production became synonymous with Lean production. For clarity, the term JIT refers to the inventory management strategy in this text.

After World War II, Japanese industry needed to rebuild and grow, and its leaders wanted to copy the assembly line and mass production systems found in the United States. However, the country had limited resources and limited storage space. At Toyota Motor Corporation, Taiichi Ohno and Shigeo Shingo developed what has become known as the Toyota Production System (TPS). They began by realizing that large amounts of capital dollars were tied up in inventory in the mass production system typical at that time.

Ohno and Shingo sought to reduce inventory by various means, most importantly by increasing the rate at which autos were assembled (known as flow rate). Standardization reduced the number of parts in inventory and the number of tools and machines needed. Processes such as single-minute exchange of die allowed for quick changeovers of tooling, increasing the amount of time that could be used for production by reducing setup time. As in-process inventory was reduced, large amounts of capital were freed for other purposes.

Customer lead time (the time a customer spends waiting for his vehicle once it has been ordered) was reduced as the speed of product flow increased throughout the plant. Because inventory provides a buffer for poor quality, reducing inventory forced Toyota to pay close attention to not only its own quality but suppliers’ quality as well. To discover the best ways to reduce inven- tory, management and line workers needed to cooperate, and teams became an integral part of Lean.

When the US auto industry began to be threatened by the increased popularity of Japanese automobiles, management and scholars began to study this Japanese system. However, what they brought back were usually the most visible techniques of the program—JIT, kanbans, quality circles (discussed in more depth later in the book)—rather than the underlying principles of

Just-in-time (JIT) An inventory management system designed to improve efficiency and reduce waste. Part of Lean manufacturing.

Toyota Production System (TPS) A quality improvement system developed by Toyota Motor Corporation for its automobile manufacturing lines. TPS has broad applicability beyond auto manufacturing and is now commonly known as Lean manufacturing.



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Lean. Not surprisingly, many of the first US firms that attempted to copy this system failed; however, some were successful. The Machine That Changed the World (Womack, Jones, and Roos 1990), a study of Japanese, European, and American automobile manufacturing practices, first introduced the term Lean manufacturing and brought the theory, principles, and techniques of Lean to a broad audience.

Lean is both a management philosophy and a strategy. Its goal is to eliminate all waste in the system. Although Lean production originated in manufacturing, the goal of eliminating waste is easily applied to the service sector. Many healthcare organizations are using the tools and techniques asso- ciated with Lean to improve efficiency and effectiveness.

Sometimes seen as a broader strategy than TQM or Six Sigma, Lean requires an organization to be defined by quality. To operate as a quality orga- nization, it does not necessarily need to be Lean. However, if customers value speed of delivery and low cost, and quality is defined as customer satisfaction, a quality focus should lead an organization to implement Lean. That said, either a Lean initiative or another type of quality improvement program can result in the same outcome.

Bringing Together Baldrige, Six Sigma, Lean, and ISO 9000 All of these systems or frameworks are designed for performance improvement, and each differs in area of emphasis, tools, and techniques. However, they all emphasize customer focus, process or system analysis, teamwork, and quality, and they all are compatible.

The importance of the organization’s culture, and management’s ability to shape that culture, cannot be overstated. The successful implementation of any program or deployment of any technique requires a culture that supports those changes. The leading causes of failure of new initiatives are lack of top management support and absence of buy-in on the part of employees.

Management must believe that a particular initiative will make the organi- zation better and must demonstrate its support in that belief, both ideologically and financially, to ensure the success of the initiative. Employee buy-in and support only occur when top management commitment is evident. Communi- cation and training can aid in this process, but only unequivocal management commitment ensures success.

Supply Chain Management

The term supply chain management (SCM) was first used in the early 1980s. In 2005, the Council of Supply Chain Management Professionals (2016) agreed on the following definition of SCM:



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Supply chain management encompasses the planning and management of all activi-

ties involved in sourcing and procurement, conversion, and all logistics management

activities. Importantly, it also includes coordination and collaboration with channel

partners, which can be suppliers, intermediaries, third party service providers, and

customers. In essence, supply chain management integrates supply and demand

management within and across companies.

This definition makes apparent that SCM is a broad discipline, encompassing activities outside as well as inside an organization.

SCM has its roots in systems thinking. Systems thinking is based on the idea that everything affects everything else. The need for systems thinking comes from the notion that optimizing one part of a system is possible, and even likely, if the whole system is suboptimal. A current example of a suboptimal system in healthcare can be seen in one purchasing avenue for prescription drugs. In the United States, the customer can optimize his drug purchases (minimize cost) by purchasing drugs from pharmacies located in foreign countries (e.g., Canada, Mexico). Often, these drugs are manufactured in the United States. While the customer has minimized his costs, the total supply chain has incurred additional costs, as with the extra transportation that takes place shipping drugs to Canada or another foreign country and then back to the United States.

SCM became increasingly important to manufacturing organizations in the late 1990s, driven by the need to decrease costs in response to competitive pressures and enabled by technological advances. As manufacturing became more automated, labor costs as a percentage of total costs decreased, and the percentage of material and supply costs increased. In 2006, 70 to 80 percent of the cost of a manufactured good was expended in purchased materials and services, and less than 25 percent was spent on labor (BEA 2006); this trend continues today. Consequently, fewer opportunities are available for reducing the cost of goods through decreasing labor and more opportunities are associ- ated with managing the supply chain. Additionally, advances in information technology allow firms to collect and analyze the information needed to be increasingly efficient in managing their supply chains.

Indeed, SCM was significantly enabled by technology, beginning with the inventory management systems of the 1970s—including materials require- ments planning—followed by the enterprise resource planning systems of the 1990s. As industry moved to increasingly sophisticated technological systems for managing the flow of information and goods, its ability to collect and respond to information about the entire supply chain expanded and firms could now actively manage their supply chains.

SCM is becoming increasingly important in healthcare as well, with its growing focus on reducing costs and the need to reduce those costs through the development of efficient and effective supply chains.

Systems thinking A view of reality that emphasizes the relationships and interactions of each part of the system to all of the other parts.



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Big Data and Analytics

Business has always embraced computing technologies as they become available and reliable. In a 2001 article published in The Economist, the magazine looks back at the first use of computers in business, for example:

[T]he Lyons Electronic Office (LEO), was built by Lyons, a British catering company. On

November 17th 1951, it ran a program to evaluate the costs, prices and margins for

that week’s output of bread, cakes and pies, and ran the same program each week

thereafter. In February 1954 LEO took on the weekly calculation of the company’s

payroll, prompting an article in these pages [referring to Economist (1954)].

Other computers had been used to run one-off calculations for businesses,

and many firms used mechanical or electrical calculators. But LEO was the first dedi-

cated business machine to operate on the “stored program” principle, meaning that

it could be quickly reconfigured to perform different tasks by loading a new program.

Between 1950 and 1970, business use of computers was essentially con- fined to databases and computing machines that were physically located in the business enterprise and that only operated on the organization’s owned data. In the 1970s, the personal computer was created, which allowed individuals in business to conduct their own analysis using a desktop machine. The year 1991 gave rise to the use of the Internet, freeing analysts to access data from both their own company and other sources throughout the world. In 1997, Google launched its search engine and the term big data began to appear.

Big data is typically characterized by the so-called three Vs (Marr 2015):

• Volume. Data sets were becoming very large—in 2008, 9.57 trillion gigabytes of data were processed by the world’s computers.

• Variety. Many types of data are now being stored (e.g., text, video, clinical equipment outputs).

• Velocity. The data enter computer databases at an increasing rate of speed.

In 2005, HaDoop, an open source data framework developed to process big data, was widely deployed (Bappalige 2014). HaDoop software allowed very large clusters of multiple computers to work as one and thereby provide the computing power necessary for the analysis of very large data sets. In 2014, mobile Internet usage (e.g., via tablets and smartphones) surpassed desktop usage, and the connection of many devices (e.g., thermostats, lights, refrigera- tors, pacemakers) to the Internet continues to increase (Marr 2015).

As these new technologies came online, opportunities for increasingly sophisticated analysis emerged. Many of these new and powerful tools are described throughout the remainder of this book.



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Service organizations in general, and healthcare organizations in particular, have lagged in their adoption of process improvement philosophies, techniques, and tools of operations management, but they no longer have this option. Hospitals, health systems, and other healthcare delivery organizations face increasing pressures from consumers, industry, and government to provide their services in an efficient and effective manner, and they must adopt these philosophies to remain competitive.

In healthcare today, organizations such as the Institute for Healthcare Improvement and AHRQ are leading the way in the development and dis- semination of tools, techniques, and programs aimed at improving the quality, safety, efficiency, and effectiveness of the US healthcare system.

Discussion Questions

1. What is the difference between data, information, knowledge, understanding, and wisdom? Give specific examples of each in your own organization.

2. How has operations management changed since its early days as scientific management?

3. What are the major factors leading to increased interest in the use of operations management tools and techniques in the healthcare sector?

4. Why has ISO 9000 certification become important to healthcare organizations?

5. Research those organizations that have won the Baldrige Award in the healthcare category. What factors led to their success in winning the award?

6. What are some of the reasons for the success of Six Sigma? 7. What are some of the reasons for the success of Lean? 8. Compare and contrast ISO 9000, the Baldrige

criteria, and Six Sigma. (More information on each of these programs is available on the book’s companion website.) Which would you find most appropriate to your organization? Why?

9. How are Lean initiatives similar to total quality management and Six Sigma initiatives? How are they different?

10. Why is supply chain management increasing in importance for healthcare organizations?

11. What are some new opportunities for the use of big data and analytics in healthcare?

On the web at



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Operations Management in Action

MultiCare Health System is an inte- grated delivery system serving com- munities throughout Washington state. After reviewing its patient populations, it undertook an initiative to lower the costs of care and improve the care expe- rience for pneumonia patients.

This initiative included build- ing an evidenced-based order set and assigning a team of social workers, called personal health partners, to research and improve patient follow-up and communication processes. It also deployed an analytics application to provide near real-time feedback on com- pliance and performance while offering a single view of patient-specific data across multiple visits and care settings.

The MultiCare team determined that a standardized electronic order set was the easiest and most effective way to define best practices while leverag- ing informatics to help clinicians “do the right thing.” This effort required bring- ing its clinicians together to review the evidence on best practices in the treat- ment of pneumonia and to arrive at a consensus on the treatment protocols.

Advanced analytics provided new capabilities to correlate processes with outcomes. MultiCare used an analytics

3 O V E RV I E W

The science of medicine progressed rapidly through the latter half

of the twentieth century, with advances in pharmaceuticals, surgi-

cal techniques, and laboratory and imaging technology promoting

the rapid subspecialization of medicine itself. This “age of miracles”

improved health and lengthened life spans.

In the mid-1960s, the federal government began the Medi-

care and Medicaid programs. This new source of funding fueled the

explosive growth and expansion of the US healthcare delivery system.

However, in this vastly expanded care environment, many new tools

and clinical approaches that had little scientific merit were initiated

alongside those with great promise. As these clinical approaches were

used broadly, they became community standards. At the same time,

many simple yet highly effective tools and techniques either fell out

of favor or were not used consistently.

In response to these trends, a number of clinicians began the

movement that has become known today as evidence-based medicine

(EBM). As defined earlier, EBM is the conscientious and judicious use

of the best current evidence in making decisions about the care of

individual patients. In almost all cases, the broad application of EBM

not only improves clinical outcomes for patients but reduces costs in

the system as well.

This chapter reviews

• the history, current status, and future of EBM;

• public reporting;

• pay for performance (P4P) and payment reform; and

• value purchasing, including Medicare’s Hospital Value-Based

Purchasing (VBP) program

EBM is explored in depth, followed by an examination of how

payers use its principles to encourage the use of EBM by clinicians.




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application that could mine the data related to pneumonia patients and provide near real- time, interactive data that showed the im- pact of interventions on the high-level out- come metrics: mortal- ity, readmissions, length of stay (LOS), and cost. The feedback generated through these analytic tools provided the platform for continuous improvement in the order sets and protocols.

Through these efforts, MultiCare has realized significant outcome improve- ments, including the following:

• 28 percent reduction in pneumonia mortality rate

• 23 percent reduction in pneumonia readmissions

• 2 percent decrease in LOS for pneumonia patients

• 6.4 percent reduction in average variable cost per patient

Source: Health Catalyst (2016).

Evidence-Based Medicine

The expansion of clinical knowledge has three major phases. First, basic research is undertaken in the lab and with animal models. Second, carefully controlled clinical trials are conducted to demonstrate the efficacy of a diagnostic or treat- ment methodology that emerges from the preliminary research. Third, the successful or promising clinical trial results are translated to clinical practice.

The final phase, translation, is where the system often breaks down. A major study by the United Health Foundation examined the transfer of clinical research knowledge to the so-called bedside and reported (Ellis et al. 2012)

both quality and actual medical costs for episodes of care provided by nearly 250,000

US physicians serving commercially insured patients nationwide. Overall, episode

costs for a set of major medical procedures varied about 2.5-fold, and for a selected

set of common chronic conditions, episode costs varied about 15-fold. Among doc-

tors meeting quality and efficiency benchmarks, however, costs for episodes of care

were on average 14 percent lower than among other doctors.

The cure for this wide variation in practice is the consistent application of EBM. The key tool for doing so is the clinical guideline (Shekelle 2016):

O V E RV I E W ( C o n t i n u e d )

The operations tools presented in other chapters of this book are

introduced in terms of how they are linked to achieving EBM goals.

The chapter concludes with an illustration of the chartering of a

project team to improve implementation of EBM at Vincent Valley

Hospital and Health System (VVH).



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Clinical practice guidelines are recommendations for clinicians about the care of

patients with specific conditions. They should be based upon the best available

research evidence and practice experience.

The Institute of Medicine [2011] defines clinical practice guidelines as “state-

ments that include recommendations, intended to optimize patient care, that are

informed by a systematic review of evidence and an assessment of the benefits and

harms of alternative care options.”

Based on this definition, guidelines have two parts:

• The foundation is a systematic review of the research evidence bearing on a

clinical question, focused on the strength of the evidence on which clinical

decision-making for that condition is based.

• A set of recommendations, involving both the evidence and value judgments

regarding benefits and harms of alternative care options, addressing how

patients with that condition should be managed, everything else being equal.

A comprehensive source for such information is the National Guideline Clearinghouse (NGC 2016), a database of evidence-based clinical practice guidelines and related documents that contains more than 4,000 guidelines. NGC is a joint project of the Agency for Healthcare Research and Quality (AHRQ), the American Medical Association, and America’s Health Insurance Plans. In addition, AHRQ (2016b) provides easy-to-use resources for clinicians and patients through its Effective Health Care Program.

What are the barriers to the wider application of EBM? Baiardini and colleagues (2009) reviewed the literature and identified 293 potential obstacles to the use of guidelines by physicians. They then grouped these into seven barriers:

1. Lack of knowledge that guidelines exist for a specific condition 2. Lack of familiarity with the details of specific guidelines 3. Disagreement with the guideline recommendations 4. Inability to effectively apply a guideline’s recommendation due to lack

of skill, resources, or training 5. Lack of trust in the effectiveness of a guideline to improve outcomes—

particularly with an individual patient’s condition 6. Resistance to change and reliance on habits 7. External factors (lack of resources, financial barriers or incentives,

organizational factors)

The application of EBM is a two-way street that requires the involve- ment of the patient as well as the physician. Baiardini and colleagues (2009) also identified the following barriers to patients’ compliance with guidelines:



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• Presence of confounding characteristics, such as a psychiatric or psychological comorbidity or lack of social support

• Difficulty in recognizing symptoms and adhering to therapies prescribed for the symptoms

• Complex therapeutic regimens • Relationship and personal interaction issues between patient and physician

Standard and Custom Patient Care One historical criticism of EBM is that all patients are unique and EBM is “cookbook” medicine that only applies to a few patients. EBM proponents counter this argument with simple examples of well-accepted and effective clinical practices that are inconsistently followed. A more productive view of the mix of art and science in medicine is provided by Bohmer (2005), who suggests that all healthcare is a blend of custom and standard care. Exhibit 3.1 shows the four currently used models that blend these two approaches.

Model A (separate and select) provides an initial sorting by patients themselves. Those with standard problems are treated with standard care using EBM guidelines. Examples of this type of system are specialty hospitals for laser eye surgery and walk-in clinics operating in pharmacies and retail outlets. Patients who do not fit the provider’s homogeneous clinical conditions are referred to other providers who can deliver customized care (Bohmer 2005).

OutputInput Reasoning process

Sorting process

Standard subprocess

Customized subprocess


(A) Separate and select



(B) Separate and accommodate




I (D) Integrated


I (C) Modularized

EXHIBIT 3.1 Four

Approaches to Blending Custom and

Standard Processes

Source: Bohmer (2005). Used with permission.



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Model B (separate and accommodate) combines the two methods inside one provider organization. Duke University Health System, for example, has developed standard protocols for its cardiac patients. Patients are initially sorted, and those who can be treated with the standard protocols are cared for by nurse practitioners using a standard care model. Cardiologists care for the remainder using custom care. However, on every fourth visit to the nurse practitioner, the cardiologist and nurse practitioner review the patient’s case together to ensure that standard care is still the best treatment approach (Bohmer 2005).

Model C (modularized) is used when the clinician moves from the role of care provider to that of architect of care design for the patient. In this case, a number of standard processes are assembled to treat the patient. The Andrews Air Force Base clinic uses this system to treat hypertension patients. “After an initial evaluation, treatment may include weight control, diet modification, drug therapy, stress control, and ongoing surveillance. Each component may be provided by a separate professional and sometimes a separate organization. What makes the care uniquely suited to each patient is the combination of components” (Bohmer 2005, 326).

Model D (integrated) combines standard care and custom care in a single organization. In contrast to Model B, each patient receives a mix of both custom and standard care as determined by her condition. Intermountain Healthcare (IHC) employs this model through the use of 62 standard care processes available as protocols in its electronic health record (EHR). These processes cover “the care of over 90 percent of patients admitted in IHC hos- pitals” (Bohmer 2005, 326). Clinicians are encouraged to override elements in these protocols when it is in the best interest of the patient. All of these overrides are collected and analyzed, and changes are made to the protocol, which is an effective method to continuously improve clinical care.

All of the tools and techniques of operations improvement included in the remainder of this book can be used to make standard care processes oper- ate effectively and efficiently.

EBM and Cost Reduction EBM has the potential to not only improve clinical outcomes but also decrease total cost in the US healthcare system. Potentially preventable hospitalizations, which might be avoided with high-quality outpatient treatment and disease management, provide just one significant opportunity for financial savings.

AHRQ (2015) developed a set of prevention quality indicators (PQIs) to assist providers in reducing the number of potentially preventable hospi- talizations for chronic and acute conditions throughout the United States. A patient who is admitted to a hospital and has a PQI code is an individual whose hospitalization or other severe complication is potentially preventable when good, evidence-based outpatient care is delivered.

Prevention quality indicator (PQI) A set of measures that can be used with hospital discharge data to identify patients whose hospitalizations or complications might have been avoided with the use of evidence- based ambulatory care.



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The PQI system is now integrated with many other federal healthcare improvement efforts (exhibit 3.2).

Chronic Disease Management One of the most expensive aspects of all healthcare systems is the care of patients with chronic disease (e.g., diabetes, chronic obstructive pulmonary disease, congestive heart failure). Much of the variation in the outcomes of this care can be attributed to providers’ and patients’ lack of adherence to EBM.

Fortunately, many investigators now look beyond determining which clinical interventions provide good results (e.g., the use of statins) to identify- ing those systems of care that produce superior results. (Chapter 9 provides more details and examples of the use of business process improvements to achieve high-quality care.)

Federal Initiatives Using AHRQ QIs*

Indicator Module

Inpatient (IQI)

Patient Safety (PSI)

Pediatric (PDI)

Prevention (PQI)

HAC Reduction Program   Hospital Inpatient Quality Reporting Program  

Hospital VBP  Shared Savings Program  Partnership for Patients    Healthcare Innovation Awards (CMMI)   

Hospital Compare   ACO: Accelerated Development Learning Sessions (CMMI)

 

Home and Community Based Services  

* A sample of CMS and CMMI initiatives that use the AHRQ QIs.

Source: Reprinted from AHRQ (2015).

Note: AHRQ = Agency for Healthcare Research and Quality; CMMI = Center for Medicare & Medicaid Innovation; CMS = Centers for Medicare & Medicaid Services; Hospital VBP = Medicare Hospital Value-Based Purchasing program; IQI = inpatient quality initiative; PDI = pediatric initiative; PQI = prevention quality initiative; PSI = patient safety initiative; QI = quality initiative.

EXHIBIT 3.2 PQIs and

Other Federal Initiatives



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The Chronic Care Model Dr. Edward Wagner of the MacColl Center for Health Care Innovation, a leader in the improvement of chronic care, has developed one of the most widely accepted models for chronic disease management (Wagner et al. 2001). The first important element of Wagner’s chronic care model (CCM) is population-based outreach, which ensures that all patients in need of chronic disease management receive it. Next, treatment plans are created that are sensitive to each patient’s preferences. The most current evidence-based medicine is employed, and this process is aided by clinical information systems with built-in decision support. The patient is encouraged to change risky behaviors and improve the management of his health.

The clinical visit itself differs in the Wagner model to allow more time for interaction between the physician and patients with complicated clinical issues. Visits for routine or specialized matters are handled by other healthcare profes- sionals (e.g., nurses, pharmacists, dieticians, lay health workers). Close follow-up, supported by clinical information system registries and patient reminders, is also characteristic of effective chronic disease management (Wagner et al. 2001).

The CCM has now been widely deployed. In a review of 16 studies of the care of diabetes patients, for example, Stellefson, Dipnarine, and Stopka (2013) found

evidence that CCM approaches have been effective in managing diabetes in US

primary care settings. Organizational leaders in health care systems initiated sys-

tem-level reorganizations that improved the coordination of diabetes care. Disease

registries and electronic medical records were used to establish patient-centered

goals, monitor patient progress, and identify lapses in care. Primary care physicians

(PCPs) were trained to deliver evidence-based care, and PCP office–based diabetes

self-management education improved patient outcomes.

Patient-Centered Medical Homes The patient-centered medical home (PCMH) concept has emerged as an effec- tive tool in the delivery of care to patients with chronic disease. The Affordable Care Act (ACA) supported this innovation with additional payment for Medicaid patients (§2703). Also known as the healthcare home, the PCMH has proven to be a valuable addition to the care management approach for patients with chronic diseases and is now being funded by both government and private payers.

AHRQ (2016a) defines the PCMH as

a model of the organization of primary care that delivers the core functions of pri-

mary health care.

The medical home encompasses five functions and attributes:

1. Comprehensive Care

The primary care medical home is accountable for meeting the large majority of

each patient’s physical and mental health care needs, including prevention and

Patient-centered medical home (PCMH) Care that is accessible, continuous, comprehensive, family centered, coordinated, compassionate, and culturally effective.



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wellness, acute care, and chronic care. Providing comprehensive care requires a

team of care providers. This team might include physicians, advanced practice

nurses, physician assistants, nurses, pharmacists, nutritionists, social workers,

educators, and care coordinators. Although some medical home practices may

bring together large and diverse teams of care providers to meet the needs of their

patients, many others, including smaller practices, will build virtual teams linking

themselves and their patients to providers and services in their communities.

2. Patient-Centered

The primary care medical home provides health care that is relationship-based

with an orientation toward the whole person. Partnering with patients and their

families requires understanding and respecting each patient’s unique needs,

culture, values, and preferences. The medical home practice actively supports

patients in learning to manage and organize their own care at the level the patient

chooses. Recognizing that patients and families are core members of the care

team, medical home practices ensure that they are fully informed partners in

establishing care plans.

3. Coordinated Care

The primary care medical home coordinates care across all elements of the

broader health care system, including specialty care, hospitals, home health

care, and community services and supports. Such coordination is particularly

critical during transitions between sites of care, such as when patients are being

discharged from the hospital. Medical home practices also excel at building clear

and open communication among patients and families, the medical home, and

members of the broader care team.

4. Accessible Services

The primary care medical home delivers accessible services with shorter waiting

times for urgent needs, enhanced in-person hours, around-the-clock telephone

or electronic access to a member of the care team, and alternative methods of

communication such as email and telephone care. The medical home practice

is responsive to patients’ preferences regarding access.

5. Quality and Safety

The primary care medical home demonstrates a commitment to quality and qual-

ity improvement by ongoing engagement in activities such as using evidence-

based medicine and clinical decision-support tools to guide shared decision

making with patients and families, engaging in performance measurement and

improvement, measuring and responding to patient experiences and patient

satisfaction, and practicing population health management. Sharing robust

quality and safety data and improvement activities publicly is also an important

marker of a system-level commitment to quality.

The PCMH model has been shown to increase quality and reduce costs. A University of Minnesota evaluation of the Health Care Homes initiative



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in that state found that over a five-year evaluation period, the use of medical homes reduced inpatient admissions by 29 percent and hospital outpatient visits by 38 percent. The study also reported improvements in the quality of care for patients with diabetes, vascular disease, asthma, and depression (Wholey et al. 2016, i, 43).

EBM and Comparative Effectiveness Research The source of evidence for EBM has long been medical research that is pub- lished in respected and refereed journals. However, these studies usually are initiated by a single investigator’s interest, and thus the efficacy of many com- mon clinical approaches has never been adequately tested. The medical research community has held historical and understandable biases toward developing technologies that are designed to address intractable diseases and mysterious diagnostic challenges. Many aspects of routine healthcare have therefore never been sufficiently evaluated.

To address this problem, the ACA (and the American Recovery and Reinvestment Act [ARRA]) contained significant policy direction for the establishment and funding of a nonprofit corporation, the Patient-Centered Outcomes Research Institute (PCORI). ACA Section 6301 states that the mission of PCORI is

to assist patients, clinicians, purchasers, and policy-makers in making informed

health decisions by advancing the quality and relevance of evidence concerning the

manner in which diseases, disorders, and other health conditions can effectively and

appropriately be prevented, diagnosed, treated, monitored, and managed through

research and evidence synthesis that considers variations in patient sub-populations,

and the dissemination of research findings with respect to the relative health outcomes,

clinical effectiveness, and appropriateness of the medical treatments, and services.

PCORI’s focus is on the application of EBM to specific healthcare technologies and treatments to ascertain which, among alternative therapies for a given medical condition, produce the best clinical outcomes. This specific focus is known as comparative effectiveness research (CER). PCORI’s (2014) CER agenda has five priorities:

• Assessing prevention, diagnosis, and treatment options • Improving healthcare systems • Communicating and disseminating research • Addressing disparities across patient populations and the healthcare

required to achieve best outcomes in each population • Accelerating patient-centered outcomes research and methodological




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PCORI complements the work of the National Institutes of Health and AHRQ—both part of the US Department of Health and Human Services (HHS). One of AHRQ’s responsibilities is to assist users of health information technology that is focused on clinical decision support to incorporate research findings into clinical practices and to promote the technology’s ease of use. A major focus for the research topics addressed by PCORI is related to chronic disease management.

Tools to Expand the Use of Evidence-Based Medicine

Organizations that are outside the healthcare delivery system itself, such as pay- ers and government, have used the increased acceptance of EBM as the basis for new programs designed to encourage its implementation. These programs, referred to as value purchasing, feature public reporting of clinical results and pay-for-performance (P4P) elements to help third-party payers determine the value delivered by healthcare providers.

Public Reporting Although strongly resisted by clinicians for many years, public reporting has come of age. The Centers for Medicare & Medicaid Services (CMS) now reports the performance of hospitals, long-term care facilities, and medical groups online at Hospital Compare ( Many private health insurance plans also report performance and the prices charged by providers in their networks to assist their plan members, particularly those with consumer-directed health insurance products, in choosing how and from whom they receive treatment or preventive care.

As with any growing field, a number of issues surround public report- ing. The first and most prominent is risk adjustment. Most clinicians feel their patients are “sicker” than average and that contemporary risk adjustment systems do not adequately account for this factor in reimbursement. Patient compliance is another challenging aspect of public reporting. If a doctor follows EBM guidelines for diagnosis and treatment but the patient does not take her medication, for example, the public reporting mechanism may trigger an unwarranted poor grade.

One anticipated impact of public reporting is that patients will use the Internet to shop for quality healthcare products as they might for an automobile or a television. Currently, however, few patients do so to guide their health- care buying decisions. That said, clinical leaders do review the public reports and target improvement efforts to areas where they have poor performance compared to their peers.

AHRQ (2012) conducted a comprehensive review of the impact of public reporting on the healthcare system. Select findings from its research include the following:

Value purchasing A system using payment as a means to reward providers who publicly report results and achieve high levels of clinical care. Also known as value- based purchasing.

Public reporting A statement of healthcare quality made by hospitals, long-term care facilities, and clinics. May also include patient satisfaction and provider charges.

Risk adjustment Raising or lowering fees paid to providers on the basis of factors that may increase medical costs, such as age, sex, or illness.



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• Public reporting has a positive impact on mortality reduction and specific clinical outcomes such as pain reduction, decreased pressure ulcers, and increased patient satisfaction.

• Changes in the delivery structure were observed as a result of public reporting, including the addition of new services, policy revisions, departure of surgeons with poor outcomes, and increases in quality improvement activities.

• Public reports seemed to have little to no impact on selection of providers by patients and families or their representatives.

• Public reporting does have an impact in competitive markets, and improvements are more likely to occur in the subgroup of providers with low scores in initial public reports than for those with high or moderate scores.

Pay for Performance and Payment Reform Another logical tool to expand the use of EBM is the financing system. Many buyers of healthcare are installing P4P systems to encourage providers to deliver EBM care.

P4P Methods In general, P4P systems add payments to the amount that would otherwise be reimbursed to a provider. To obtain these additional payments, the provider must demonstrate that he is delivering care that meets clinical EBM goals. These clinical measures can be either process or outcome measures.

Although many providers prefer to be measured on outcomes, this approach is difficult to use, as some outcomes need to be measured over many years. In addition, some providers have a small number of patients in a particu- lar clinical group, so outcome results can vary dramatically. Therefore, process measures backed by extensive EBM literature are used to assess performance in the treatment of many conditions. For example, a patient with diabetes whose blood pressure is maintained in a normal range tends to experience fewer complications than one whose blood pressure is uncontrolled. Blood pressure can be measured and reported at every visit, whereas complications occur infrequently.

In a study sponsored by the National Quality Forum, Schneider, Hussey, and Schnyer (2011) surveyed the breadth of payment reform methods and found nearly 100 implemented and proposed payment reform programs. They then classified these methods into 11 payment reform models. Many of these models are included in the ACA, and the goals for the reforms are illustrated in exhibit 3.3.

Exhibit 3.4 lists and describes each model, and chapter 14 examines how organizations can apply the operations management tools contained throughout this book to succeed financially with any of these payment models.



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Cost containment goals • Reverse the fee-for-service

incentive to provide more services • Provide incentives for efficiency • Manage financial risk • Align payment incentives to

support quality goals

Quality goals • Increase or maintain appropriate

and necessary care • Decrease inappropriate care • Make care more responsive to

patients • Promote safer care

Source: Schneider, Hussey, and Schnyer (2011).

EXHIBIT 3.3 General

Payment Reform Model

Model Description

1. Global payment A single per-member per-month payment is made for services delivered to a patient, with payment adjustments based on measured performance and patient risk.

2. ACO shared sav- ings program

Groups of providers (known as accountable care organizations [ACOs]) that voluntarily assume responsibility for the care of a population of patients share payer savings if they meet quality and cost performance benchmarks.

3. Medical home payments

A physician practice or other provider is eligible to receive additional pay- ment if medical home criteria are met. Payment may include calculations based on quality and cost performance using a P4P-like mechanism.

4. Bundled payment

A single bundled payment, which may include multiple providers in mul- tiple care settings, is made for services delivered during an episode of care related to a medical condition or procedure.

5. Hospital–physician gainsharing

Hospitals are permitted to provide payments to physicians that represent a share of savings resulting from collaborative efforts between the hospital and physicians to improve quality and efficiency.

6. Payment for coordination

Payments are made to providers furnishing care coordination services that integrate care between providers.

7. Hospital P4P Hospitals receive differential payments for meeting or missing perfor- mance benchmarks.

8. Payment adjustment for readmissions

Payments to hospitals are adjusted based on the rate of potentially avoid- able readmissions.

9. Payment adjust- ment for hos- pital-acquired conditions

Hospitals with high rates of hospital-acquired conditions are subject to a payment penalty, or treatment of hospital-acquired conditions or serious reportable events is not reimbursed.

10. Physician P4P Physicians receive differential payments for meeting or missing perfor- mance benchmarks.

11. Payment for shared decision making

Payment is made for the provision of shared decision-making services.

Source: Schneider, Hussey, and Schnyer (2011).

EXHIBIT 3.4 Payment Reform

Model Details



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Value-Based Purchasing1 The ACA calls for establishment of a value purchasing program on the basis of much of the research, practical experience, and analysis in both public reporting and P4P described in the previous section. (If portions of the ACA are repealed or changed, value purchasing is likely to remain intact in some form because it is so strongly supported by research.) Medicare’s Hospital VBP program is CMS’s (2015) answer to that call. Forms of payment such as value purchasing, as alternatives to the traditional fee-for-service (FFS) reimbursement scheme, are accelerating, and soon the majority of financing systems for health services in the United States will move completely from FFS to value purchasing.

Although FFS has served the health industry well for many years, poli- cymakers have come to understand that perverse incentives accompany this type of payment system. Insurer UnitedHealth Group’s UnitedHealth Center for Health Reform & Modernization (2012) conducted a review of the many studies on FFS and found three major problems:

• FFS encourages providers to deliver more, and more expensive, services to maximize reimbursement.

• FFS facilitates fragmented and uncoordinated care delivery. • FFS does not offer incentives for high-quality care.

These problems have been well known for many years, and policymak- ers have searched for new payment models through Medicare demonstration projects—many of which were included in the ACA. For example, the Medi- care Shared Saving Program (§3022 of the ACA) was based on the Physician Group Practice Demonstration (CMS 2011), and the Bundled Payments for Care Improvement Initiative in the Center for Medicare & Medicaid Innova- tion (§3021) is based on the Acute Care Episode Demonstration (CMS 2016).

Today, alternative payment schemes are founded on one of two distinc- tive methodologies: bundled payments for services or additional payments or penalties for quality.

Medicare Value Purchasing As mentioned earlier, the transition from FFS to value-based systems is accel- erating. In 2015, then Secretary of HHS Sylvia Mathews Burwell announced, “Our goal is for 30% of all Medicare provider payments to be in alternative payment models that are tied to how well providers care for their patients, instead of how much care they provide in 2016. Our goal would then be to get to 50% by 2018.” The independent, not-for-profit organization Catalyst for Payment Reform (2014), which evaluates payment systems throughout the United States, found that the percentage of payments meeting its definition of value-oriented payment methods had reached 40 percent for 2014—up from 11 percent in 2013. This accelerated transformation is likely to continue.



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Policy Issues in Value Purchasing The rapid movement to value purchasing presents a number of policy issues.

Attribution, or Whose Patient Is This? In a complex delivery system, the connection of one patient’s care outcomes to a specific provider can be problematic. The Center for Healthcare Quality & Payment Reform has identified a number of these types of issues (Miller 2014). The following are just a few examples:

• Patients who lack a primary care physician can cause distortions in spending comparisons.

• As a function of EHR system structures, a physician can be assigned accountability for services a patient received from another provider.

• The cost of caring for a patient with a preventable conditions may be assigned to the physician treating the condition rather than the provider who caused it.

Too Many Measures The use of quality measures as the basis for payment is increasing the complexity of the system. For example, the number of ways that quality is measured has grown dramatically. In 2015, the Washington Post reported that 33 different care programs in Medicare used a combined 1,676 reporting measures the previous year (Millman 2015). A 2013 Health Affairs study of 23 commercial health plans found 546 distinct quality measures—with very little overlap to Medicare programs (Delbanco 2015).

Unintended Consequences Complex systems can have unintended consequences. For example, in 2008 the ARRA provided significant funding to assist with the installation of EHRs in hospitals and clinics. A clear aim of this policy was to enable providers to track patients with chronic disease, improve their care, and reduce costs in the system. However, as a consequence of more complete records arising from the use of EHRs, hospitals received $1 billion more in Medicare reimbursements in 2010 than they had five years earlier through improved billing of emergency department coding alone, according to a New York Times analysis of Medicare data (Abeslson, Creswell, and Palmers 2012). The article also notes that clinics have similarly changed the way they bill for office visits, increasing their pay- ments by billions of dollars. The consequence of increased Medicare billings was not an aim of the ARRA.

Considering that history, value purchasing’s impact on the care system will also likely produce outcomes that have not been anticipated by its architects.



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Implications for Operations Management One clear advantage of FFS was its clean lines of accountability for services—if you provided the service, you got paid. Value purchasing breaks this link as, in many cases, the service provider does not get paid directly. Hence, improved operational structures need to be built to accommodate these payment systems.

Strategy Execution The value purchasing environment leads to growth in the number of quality improvement projects required to respond to the new incentive opportunities. A useful management strategy is the blended balanced scorecard–strategy map- ping approach developed by Kaplan and Norton (2001). This method converts general strategies (e.g., reduce readmission rates) into specific projects (e.g., acquire predictive analytics capability), which are then connected in a strategy map. Each project establishes metrics that then can be displayed as a scorecard. This disciplined execution method is used by many large organizations both inside and outside healthcare. The balanced scorecard methodology is outlined in detail in chapter 4.

Improved Modeling and Analytics The new environment requires more sophisticated systems of analysis than in the past. While traditional accounting systems were adequate for the Medicare FFS environment, much more detailed costing systems are now needed, such as activity-based accounting. Patient behavior models were historically built on groups (e.g., males over age 65) but now must be built with individual predictive modeling capabilities. Modeling and analytics tools can be used to finely align delivery system resources with patient needs. Analytics is addressed in chapter 8, and activity-based accounting is covered in chapter 14.

Innovation Centers The new value purchasing environment is also sparking creativity. Many health- care organizations have launched innovation centers to coalesce creative energy toward developing new approaches to care delivery. Innovation centers are addressed in chapter 5.

Clinical Decision Support

One development in the use of guidelines is the spread of clinical decision sup- port systems, which are now becoming a standard part of EHRs. As a clinician accesses a specific patient’s medical record, the automated system provides advice on recommended treatments and needed follow-up (see the Operations Management in Action section at the beginning of this chapter).



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Institute for Clinical Systems Improvement and High-Tech Diagnostic Imaging Clinical decision support can be applied across multiple EHR systems and need not be vendor specific. The Institute for Clinical Systems Improvement (ICSI 2012), for example, undertook a project in 2007 to improve the appropriate utilization of CT (computed tomography), MRI (magnetic resonance imaging), PET (positron emission tomography), and nuclear cardiology diagnostic scans.

ICSI (2009) noted:

[The approach of those organizations we studied] consists of deploying a common

set of appropriateness criteria that would be:

• available in the physician’s office to provide clinical decision support at the

time care is being discussed with the patient and prior to ordering HTDI [high-

tech diagnostic imaging] tests

• embedded into an electronic medical record (EMR), or made available via a

Web site

• continually enriched and expanded for improved outcomes.

The ordering guidance screen is shown in exhibit 3.5. The ICSI (2009) project analysis continues, noting:

[The simple 1 through 9 rating on] the level of diagnostic utility of the provider’s selec-

tion carries multiple benefits, offering guidance to ordering providers and supporting

shared decision making between providers and patients. For those organizations with

Provider sees appropriateness of test and higher utility options—opportunity to engage patient.

Chest CT has marginal utility for clinical indications provided.

Alternate procedures to consider:



Indicated 7−9 Marginal 4−6 Low utility 1−3



EXHIBIT 3.5 Decision

Support Process Embedded

in Electronic Health Record

Source: Copyright © 2011 Institute for Clinical Systems Improvement. Used with permission.

Note: CT = computed tomography; CTA = computed tomography angiography; MR = magnetic reso- nance; MRA = magnetic resonance angiography.



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full EHRs, the patient’s clinical information is loaded automatically into this system

which then makes its recommendation based on guidelines from the American Col-

lege of Radiology and the American College of Cardiology.

When a test of a value that is below 6 is ordered, additional information is

provided to the ordering physician, who may choose to continue and order the test

or switch to another. All payers in the system have agreed to make payments no

matter what level of test is ordered. In some cases the recommended test is, in fact,

more expensive than the test originally ordered.

The project has been successful in making appropriate recommenda- tions to providers. Exhibit 3.6 shows the actual use of HTDI versus the trend that would have been seen had the existing radiology management systems remained in place.

As determined by ICSI (2010):

The summary of the benefits of this system over three years among five large medi-

cal groups is:

• $84 million savings based on reduction of HTDI scans against projected trend

line without decision-support

• 11,000 fewer administrative hours for just one medical group by having

electronic decision support accepted versus calling the radiology benefits


• Decreased exposure to radiation—potentially preventing cancers







30 32.03


39.19 40.84

44.89 47.52


54.26 56.35




42.13 42.3942.54


State legislative mandate for MN DHS

to address HTDI.

Pilot ends; medical groups continue to use decision support.

Yearlong ICSI decision support

pilot begins. 25

1Q 0


2 Q

0 3

3 Q

0 3

4 Q

0 3

1Q 0


2 Q

0 4

3 Q

0 4

4 Q

0 4

1Q 0


2 Q

0 5

3 Q

0 5

4 Q

0 5

1Q 0


2 Q

0 6

3 Q

0 6

4 Q

0 6

1Q 0


2 Q

0 7

3 Q

0 7

4 Q

0 7

1Q 0


2 Q

0 8

3 Q

0 8

4 Q

0 8

1Q 0


2 Q

0 9

3 Q

0 9

4 Q

0 9

1Q 10

2 Q


3 Q


Aggregate Utilization per 1,000 Members

Projected utilization at 1Q03–2Q06 average rate of change Projected utilization at 2Q06–3Q10 average rate of change Actual utilization

Source: Copyright © 2011 Institute for Clinical Systems Improvement. Used with permission.

Note: 1Q03 = first quarter of 2003, 2Q03 = second quarter of 2003, etc.; ICSI = Institute for Clinical Systems Improvement; MN DHS = Minnesota Department of Health Services.

EXHIBIT 3.6 Utilization of High-Tech Digital Imaging (HTDI)—Actual Versus Trend



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The Future of Evidence-Based Medicine and Value Purchasing

One challenge of the increasingly widespread use of EBM is the fact that it is based on averages resulting from clinical studies of many patients. No specific patient is ever completely average, and clinicians frequently vary from guidelines to compensate for this difference. As described next, Optum Labs is a leading example of how big data can be used to address this challenge.

The second major obstacle that arose with the increased use of EBM relates to the clinicians themselves. What systems can be created to support professionalism and fair compensation and yet encourage the use of the most current and effective healthcare methods and technologies? A brief look at physician compensation and process improvement later in this section helps set the stage for answering this question, which we return to throughout the remainder of the book.

Optum Labs Very large databases are now being created to more fully research the impact of EBM. Optum Labs is a partnership of Optum and the Mayo Clinic that, as of 2016, included 19 additional industry partners. A key asset of Optum Labs is its high-quality, integrated healthcare database, which contains deidentified claims and clinical data for more than 150 million people, gathered from multiple health plans and healthcare providers. The database also includes plan enrollment information, medical and pharmacy claims, and lab results from multiple payers that have been integrated across care settings and longitudinally linked at the patient level. This database allows Optum Labs to perform fine-grained CER.

An Optum Labs Example: Diabetes Wallace and colleagues (2014) offer an example of Optum Labs’ effectiveness in diabetes management:

Metformin is consistently recommended as the initial intervention for patients newly

diagnosed with uncomplicated type 2 diabetes. However, there are a number of

choices for second-line medication treatment, including older sulfonylurea drugs

and newer oral agents plus insulin.

An observational study using the Optum Labs database that compared alter-

native medication management strategies across 37,501 patients showed similar

effects for all drugs in achieving glucose control, longevity, and overall quality of

life. However, the cost of this benefit was less in patients who were treated with

sulfonylureas. These drugs were also associated with a longer interval until insulin

was required than was the case when other oral agents were used. These findings

are being translated into potential revisions of guidelines used by care providers.



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As the size and scope of these large databases increase, the ability to perform highly detailed analysis will improve. These new studies will lead to ever more precise evidence-based guidelines and accurate clinical effectiveness data.

Physician Compensation and Value Purchasing A major emphasis of value purchasing is to change physician behavior through payment systems. Physician compensation is a complex and frequently contro- versial topic in healthcare organizations, and value purchasing alone will not resolve this challenge. Because CMS and private payers continue to introduce many new metrics and publicly reported quality measures, an organization might be tempted to directly link physician payment to these metrics—this linkage may actually be happening in some small practices.

However, in large systems, the number and complexity of the met- rics and their relationship to all the supporting clinical systems render both accountability and transparency difficult. A basic rule of compensation systems is that the “line of sight” should be clear between a goal and a reward; value purchasing does not allow line of sight to be achieved easily.

In a report created for the Medicare Payment Advisory Commission, Zis- mer and colleagues interviewed 15 senior leaders of integrated health systems on reimbursement models and the alignment of incentives in physician compensation (Zismer 2013). A key finding was that stability in provider compensation was a major factor in retaining and recruiting physicians. Zismer comments that to bring about such stability, payment systems must disconnect how the organization is paid from how the physician is paid. Although quality outcomes are important, many physicians in integrated systems have other obligations, such as treating expanded panels of patients, managing mid-level practitioners, and teaming with colleagues to manage the care of complex patients. Hence, compensation needs to take into account payment for the many actual duties of physicians today.

A clear strategy outlined in the ACA is to encourage the formation of systems of care. To respond effectively to value purchasing will take teams of highly skilled clinicians and process improvement personnel working diligently to meet the performance goals. The remaining chapters in this book provide the tools for this ongoing journey.

Vincent Valley Hospital and Health System and Pay for Performance

The leaders of VVH feel they have a number of opportunities to succeed with the Medicare Hospital Value-Based Purchasing program. They begin by creating a project team to improve the care of patients with pneumonia. The specific measures the team targets for improvement are those delineated in the VBP:



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• Pneumonia patients assessed and given pneumococcal vaccination • Pneumonia patients whose initial emergency department blood culture

was performed prior to the administration of the first hospital dose of antibiotics

• Pneumonia patients given smoking cessation advice and counseling • Pneumonia patients given initial antibiotic(s) within six hours of arrival • Pneumonia patients given the most appropriate initial antibiotic(s) • Pneumonia patients assessed and given influenza vaccination

The operations management tools and approaches detailed in this book were used to improve performance for each of these measures, culminating in chapter 15, which describes how VVH accomplishes this goal.


The use of EBM to develop systems of care is becoming well accepted by most clinicians. Clinical results are being made transparent and easily accessible to the general public. Payers are implementing systems that reward value, and providers are installing clinical decision support systems to help in their practices. The effective use of EBM identifies high-performance healthcare organizations, and its widespread use is a key to the provision of high-quality, cost-effective care throughout the world.

Discussion Questions

1. In addition to those mentioned in the chapter, what are some examples of a care delivery setting offering a mix of standard and custom care?

2. Access the CMS Hospital Compare website and review three local hospitals’ quality scores. At which hospital would you choose to receive care, and why? Which hospital would you choose for your parents or your children? Did your answers differ? Why or why not?

3. Review the 11 payment reform methodologies (exhibit 3.4) and rank them on two scales: ability to improve quality and ability to reduce healthcare inflation. Provide a rationale for your ranking.

4. What are three strategies to maximize P4P revenue?


1. Portions of this section were adapted from McLaughlin (2015) with permission from the American College of Healthcare Executives.



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Abelson, R., J. Creswell, and G. Palmers. 2012. “Medicare Bills Rise as Records Turn Elec- tronic.” New York Times. Published September 21. business/medicare-billing-rises-at-hospitals-with-electronic-records.html?_r=0.

Agency for Healthcare Research and Quality (AHRQ). 2016a. “Defining the PCMH. Accessed August 12.

———. 2016b. “Effective Health Care Program.” Accessed August 12. www.effective

———. 2015. “Panel Discussion: Lessons Learned in Using the AHRQ QIs to Improve the Quality and Safety of Care.” PowerPoint slides. Presented December 9. www. Impact_Webinar.pdf.

———. 2012. “Public Reporting as a Quality Improvement Strategy. Closing the Quality Gap: Revisiting the State of the Science.” Published July. https://effectivehealthcare. ExecutiveSummary_20120724.pdf.

Baiardini, I., F. Braido, M. Bonini, E. Compalati, and G. W. Canonica. 2009. “Why Do Doctors and Patients Not Follow Guidelines?” Current Opinion in Allergy and Clinical Immunology 9 (3): 228–33.

Bohmer, R. M. J. 2005. “Medicine’s Service Challenge: Blending Custom and Standard Care.” Health Care Management Review 30 (4): 322–30.

Burwell, S. M. 2015. “Progress Towards Achieving Better Care, Smarter Spending, Healthier People.” Published January 26. better-care-smarter-spending-healthier-people.html.

Catalyst for Payment Reform. 2014. “National Scorecard on Payment Reform.” Accessed August 14, 2016. scorecard2014.pdf.

Centers for Medicare & Medicaid Services (CMS). 2016. “Medicare Acute Care Demonstra- tion Project for Orthopedic and Cardiovascular Surgery.” Accessed September 8. loads/ACE_web_page.pdf.

———. 2015. “Hospital Value-Based Purchasing.” Modified October 30. Medicare/Quality-Initiatives-Patient-Assessment-Instruments/hospital-value-based- purchasing/index.html?redirect=/Hospital-Value-Based-Purchasing/.

———. 2011. “Medicare Physician Group Practice Demonstration.” Published July. www. PGP_Fact_Sheet.pdf.

Delbanco, S. 2015. “The Payment Reform Landscape: Everyone Has a Goal.” Pub- lished March 6. reform-landscape-everyone-has-a-goal/.



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Ellis, P., L. G. Sandy, A. J. Larson, and S. L. Stevens. 2012. “Wide Variation in Episode Costs Within a Commercially Insured Population Highlights Potential to Improve the Efficiency of Care.” Health Affairs 31 (9): 2084–93.

Health Catalyst. 2016. “One Healthcare System’s Effective Strategy to Improve Pneu- monia Outcomes.” Accessed August 1. reducing-pneumonia-readmissions-multicare.

Institute for Clinical Systems Improvement (ICSI). 2012. “Diagnostic Imaging.” Accessed January 26.

———. 2010. “ICSI High Tech Diagnostic Imaging Enrollment and Next Steps.” Accessed May 18, 2012. html.

———. 2009. “Transforming High-Tech Diagnostic Imaging: Appropriate, Easy, and Efficient Ordering of Scans at the Point of Care.” Accessed May 18, 2012. www.

Institute of Medicine. 2011. “Clinical Practice Guidelines We Can Trust.” Published March 23.

Kaplan, R. S., and D. P. Norton. 2001. The Balanced Scorecard: Translating Strategy to Action. Boston: Harvard Business Review Press.

McLaughlin, D. B. 2015. “Value Purchasing Turns the Corner.” Healthcare Executive 30 (4): 56–58.

Miller, H. D. 2014. Measuring and Assigning Accountability for Healthcare Spending: Fair and Effective Ways to Analyze the Drivers of Healthcare Costs and Transition to Value- Based Payment. Center for Healthcare Quality & Payment Reform. Accessed August 14, 2016.

Millman, J. 2015. “Health Care’s Trillion Dollar Question: How to Define ‘Quality.’” Pub- lished January 30. the-biggest-challenge-facing-the-governments-new-plan-for-better-health-care/.

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Patient-Centered Outcomes Research Institute (PCORI). 2014. “National Priorities and Research Agenda.” Updated August 21. research-we-support/national-priorities-and-research-agenda.

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UnitedHealth Center for Health Reform & Modernization. 2012. “Farewell to Fee-for-Service? A ‘Real World’ Strategy for Health Care Payment Reform.” Published December. www.



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Wagner, E. H., B. T. Austin, C. Davis, M. Hindmarsh, J. Schaefer, and A. Bonomi. 2001. “Improving Chronic Illness Care: Translating Illness into Action.” Health Affairs 20 (6): 64–78.

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Operations Management in Action

The Malcolm Baldrige National Quality Award is the nation’s highest honor for innovation and performance excellence. In 2008, Poudre Valley Health System (PVHS) was one of three organiza- tions to receive the award and the only healthcare recipient, classifying it as one of the best hospitals in the United States. The Baldrige Award (see chap- ter 2) judges evaluate each healthcare applicant’s performance on a number of dimensions: leadership; strategy; cus- tomer focus; measurement, analysis, and knowledge management; workforce focus; operations; and results.

PVHS is particularly strong in its use of the balanced scorecard to mea- sure its performance and share best practices among departments. The met- rics PVHS uses to track its performance are gathered from the following areas:

• Employee culture

• Market share

• Physician engagement

• Clinical outcomes

• Customer service and patient satisfaction

• Financial performance

Winning the Baldrige Award brings with it an expectation to share

4 O V E RV I E W

Most healthcare organizations have good strategic plans; what fre-

quently fails is their execution. This chapter demonstrates how the bal-

anced scorecard can be an effective tool to consistently move strategy

to execution. First, we examine traditional management systems and

explore their failures. Next, we review the theory behind the balanced

scorecard and strategy mapping and explain the tools’ application to

healthcare organizations. Practical steps to implement and maintain

a balanced scorecard system are provided, and detailed examples

from Vincent Valley Hospital and Health System (VVH) demonstrate

the application of these tools. The companion website to this book

contains templates and explanatory videos that can be used for stu-

dent exercises or to implement a balanced scorecard in a healthcare

organization. In addition, a case study on the website includes data

that can be used to develop a realistic dashboard.

This chapter gives readers a basic understanding of balanced

scorecards that enables them to

• explain how a balanced scorecard can be used to move strategy

to action,

• explain how to monitor strategy from the four stakeholder


• identify key initiatives to achieve a strategic objective,

• develop a strategy map that links relevant initiatives,

• identify and measure leading and lagging indicators for each


• understand the use of business intelligence tools to extract data

for scorecards, and

• demonstrate the connection of value purchasing metrics to

strategy and execution.

On the web at



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the organization’s journey with the greater community. In accordance with this obligation, PVHS established the Center for Performance Excellence to provide consulting, coaching, and presentation services to other organizations pursuing performance excellence. The Center’s consultants apply the lessons learned over the past decade from the perspective of a Baldrige Award recipient.

Source: Nuwash (2010).

Moving Strategy to Execution The Challenge of Execution Environmental causes that are commonly cited for the failure to execute in healthcare organizations include intense financial pressures, complex operating structures, and cultures with multistakeholder leadership that resists change. New and redefined relationships among healthcare providers—particularly physicians, hospitals, and health plans—are accompanied by a rapid growth in medical treatment knowledge and technology. Increased public scrutiny of how healthcare is delivered is leading to an associated rise of consumer-directed healthcare. The Affordable Care Act (ACA) is also altering strategy significantly.

No matter how significant these external factors are, however, most organizations founder on internal factors. Outram (2014) identifies a number of internal issues that prevent effective strategy execution in industry at large:

• The leadership team does not understand the strategy. • The leadership team is overconfident. • The organization is incapable of moving with speed and pace. • The organization focuses on short-term goals. • The strategy is too diffuse—it has too many goals. • The communication of strategy to the entire organization is poor. • The strategy is not linked to organizational mission. • Organizational leaders lack accountability.

These factors also plague healthcare organizations. To gain competi- tive advantage from its operations, an organization needs an effective system to move its strategies forward. The management systems of the past are poor tools for today’s challenging environment.

The day-to-day world of a current healthcare leader is intense (exhibit 4.1). Because of ever-present communication technologies (smartphones, e-mail, texts, blogs, social networks), managers float in a sea of inputs and daily barriers.

Healthcare leaders often focus on urgent issues rather than strategy execution. And although organizations can develop effective project managers



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(as discussed in chapter 5), they fail to compete successfully if they do not place the undertaken projects in a broader system of strategy implementation. The balanced scorecard provides a framework and sophisticated mechanisms to move from strategy to execution.

Why Do Today’s Management Tools Fail? Historically, most organizations have been managed with three primary tools: strategic plans, operational reports, and financial reports. Exhibit 4.2 shows the relationships among these tools. In this traditional system, the first step is to create a strategic plan, which is usually updated annually. Next, a budget and operations or project plan is created. The operations plan is sometimes referred to as the tactical plan; it provides a detailed level of task descriptions with timelines and expected outcomes. The organization’s performance is monitored by senior

Balanced scorecard A system of strategy links and reporting mechanisms that supports effective strategy execution.

What’s on your desk today?

Public reporting of quality and


Financial pressure

Today’s urgent operating problem

This year’s new initiatives

Meetings, work/private e-mail, texts, and social


Employee turnover—recruiting

Last year’s initiative

EXHIBIT 4.1 The Complex World of Today’s Healthcare Leader

Operating statistics

Strategic plan


Management control

Financial results

EXHIBIT 4.2 The Traditional Theory of Management



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management through the financial and operational reports. Finally, if deviations from expected performance are encountered, managers take corrective action.

Although theoretically easy to grasp, this management system frequently fails for a number of reasons. Organizations are awash in operating data, and they make no effort to identify key metrics. The strategic plans, financial reports, and operational reports are all created by different departments, and each report is reviewed in different time frames, often by different managers. Finally, none of the reports connect with the others.

These are the root causes of poor execution. If strategies are not linked to action items, operations do not change, nor do the financial results. In addi- tion, strategic plans frequently are not linked to departmental or individual goals and, therefore, simply reside on a shelf in the executive suite.

Many strategic plans contain a logic hole, meaning they lack an explana- tion of how accomplishing a strategic objective provides a specific financial or operational outcome. Consider the following example.

• Strategic objective: to increase the use of evidence-based medicine (EBM)

• Expected outcome: increased patient satisfaction

Although this proposition may seem reasonable on the surface, the logic behind connecting the use of EBM to patient satisfaction is unclear. In fact, patient satisfaction may decrease if providers constantly counsel patients on personal lifestyle issues (e.g., “Will you stop smoking?” “You need to lose weight”); the providers are meeting EBM guidelines, but their patients might see these efforts as bullying or offensive behavior.

The time frame of strategy execution also tends to be problematic. Finan- cial reports are generally timely and accurate but only reflect the current reporting period. A review of these reports does not encourage the long-term strategic allocation of resources (e.g., a major capital expenditure) that may require multiple-year investments. A positive current-month financial outcome is likely the outcome of an action that occurred many months in the past. The cumulative result of these timing problems is poor execution, leading to poor outcomes.

Balance The key element of the balanced scorecard is, of course, balance. An organiza- tion can be viewed from many perspectives; to allow a standardized approach, the balanced scorecard methodology uses four common perspectives from which an organization examines its operations (exhibit 4.3):

• Financial stakeholders • Customers



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• Internal process and innovation (operations) • Employee learning and growth

Because an organization is viewed from each perspective, different mea- sures of performance are important. Every perspective in a complete balanced scorecard contains a set of objectives, metrics, targets, and actions. Each mea- sure in each perspective must be linked to the organization’s overall strategy.

The indicators that characterize performance in each of the four per- spectives must be both leading (predicting the future) and lagging (reporting on performance today). Indicators must also be obtained from both inside the organization and the external environment.

Although many think of the balanced scorecard as a reporting tech- nique, its true power lies in its ability to link strategy to action. Balanced scorecard practitioners develop strategy maps that connect projects and actions to outcomes in a series of road map–type graphics. These maps display the “theory of the company” and can be evaluated and fine-tuned as strategies are implemented.

The Balanced Scorecard in Healthcare

The balanced scorecard and its variations have been adopted by leading health- care organizations.

In 2012, Bob McDonald reviewed the use of the balanced scorecard in healthcare and found 87 published studies of healthcare organizations that are effectively using scorecards to improve their competitive marketing position, financial results, and customer satisfaction.

Operations and

strategic plan

Financial stakeholders



EXHIBIT 4.3 The Four Perspectives in the Balanced Scorecard



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In this study, he found a number of common success factors in the implementation of balanced scorecards (McDonald 2012):

• Senior management support

• Central involvement of clinicians and some flexibility at lower levels

• Demonstration of empirical benefits

• Cascading [of the balanced scorecard] to lower levels

• Ongoing communication with all staff

• Regular management review and monitoring

• Supporting information technology for monitoring and reporting performance

The Balanced Scorecard as Part of a Strategic Management System

Although it does not substitute for a complete strategic management system, the balanced scorecard is a key component in such a system and an effective tool for moving an organization’s strategy and vision into action. The development of a balanced scorecard leads to the clarification of strategy, and it communi- cates and links strategic measures throughout an organization. Organizational leaders can plan projects, set targets, and align strategic initiatives during the creation of the balanced scorecard. If used properly, the balanced scorecard can also enhance strategic feedback and learning.

Elements of the Balanced Scorecard System

A complete balanced scorecard system has the following elements, which are explained in detail in the subsequent sections:

• Organizational mission and vision, and their relationship to strategy • Perspectives

– Financial – Customer – Internal business process – Learning and growing

• Strategic alignment—linking balanced scorecard measures to strategy • Strategy maps • Implementation of the balanced scorecard, including processes for

identifying targets, resources, initiatives, and budgets • Feedback and the strategic learning process—making sure the balanced

scorecard works



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Mission and Vision The balanced scorecard system presupposes that an organization has an effective mission, vision, and strategy in place. For example, the mission of VVH is “to provide high-quality, cost-effective healthcare to our community.” Its vision is, “Within five years, we will be financially sound and will be considered the place to receive high-quality care by the majority of the residents of our com- munity.” To accomplish this vision, VVH has identified six specific strategies:

• Recruit five new primary care physicians. • Implement the healthcare home model (also referred to as patient-

centered medical home; see chapter 3). • Expand the VVH accountable care organization. • Increase the volume of obstetric care. • Renegotiate health plan contracts to include performance incentives for

improved chronic disease management. • Improve emergency department (ED) operations and patient


The VVH example is used throughout this chapter to demonstrate the use of the balanced scorecard. The two strategies examined in depth are increasing the volume of obstetric care and improving ED operations and patient satisfaction.

With an effective strategic plan in place, the next step is to evaluate the plan’s implementation as viewed from each of the four perspectives (financial, customer, operational, and learning and growing). Placing a perspective at the top of a balanced scorecard strategy map means that results in this perspective include the final outcomes desired by an organization. In most organiza- tions, the financial view is the top-most perspective. Therefore, the initiatives undertaken in the other three perspectives should result in positive financial performance for the organization.

“No margin, no mission” is still a valid assessment for nonprofit health- care organizations. They need operating margins to provide financial stability and capital. However, some organizations prefer to position the customer (patient) as the top perspective. In that case, the initiatives undertaken in the other three perspectives are intended to result in positive patient outcomes. (Modifications to the classic balanced scorecard are discussed at the end of this chapter.)

Perspectives Financial Perspective Viewed from the financial perspective, the customer, operational, and learn- ing and growing perspectives and their associated initiatives should lead to outstanding financial performance.



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Although the focus of this book is not directly on healthcare finance, some general strategies should always be under consideration by a hospital or health system.

If the organization is in a growth mode, its financial focus should be placed on increasing revenue to accommodate this growth. If it is operating in a relatively stable environment, the organization may choose to emphasize profitability. If the organization is both stable and profitable, the focus can shift to investment—in both physical assets and human capital. Another major strategy in the financial domain is the diversification of both revenues and expenditures to minimize financial risk.

Exhibit 4.4 lists many common metrics used to measure performance from the financial perspective.

Customer Perspective and Market Segmentation The second perspective is to view an organization’s operations from the cus- tomer’s point of view. In most healthcare operations, the customer is the patient. Integrated health organizations, however, may operate insurance programs and health plans; some of their customers, then, are employers or the government.

Health insurance exchanges are a new vehicle to connect insurance companies directly with customers. Many hospitals and clinics also consider

• Percent of budget—revenue

• Percent of budget—expense

• Days in accounts receivable

• Days of cash on hand

• Collection rate

• Return on assets

• Expense per relative value unit

• Cost per surgical case

• Case-mix index

• Payer mix

• Growth, revenue, expense, and profit—product line

• Growth, revenue, expense, and profit—department

• Growth of revenue from value purchasing payments

• Growth in members and profitability of accountable care organization

• Growth, revenue, and cost per adjusted patient day

• Growth, revenue, and cost per physician full-time equivalent

• Price competitiveness on selected services

• Research grant revenue

EXHIBIT 4.4 Metrics of

Performance from the Financial




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their community at large to be the customer. Finally, the physician is seen as the customer in many hospital organizations.

Once the general customers are identified, a helpful step is to segment them into smaller groups and determine the value proposition that will be delivered to each. Examples of market segments are patients with chronic ill- nesses (e.g., diabetes, congestive heart failure); patients seeking obstetric care, sports medicine services, cancer care, or emergency care; Medicaid patients; small employers; and referring primary care physicians.

Customer Measures Once market segments have been determined, a number of traditional mea- sures of marketplace performance may be applied, the most prominent being market share. Customers should be individually tracked and measured in terms of both retention and acquisition, as retaining an existing customer is always easier than attracting a new one. Customer satisfaction and profitability are also useful measures. Exhibit 4.5 displays a number of common customer metrics.

Customers: The Value Proposition Organizations create value to retain current customers and attract new ones. Each market segment may require products to have different attributes to

Value proposition A marketing term summarizing the relative cost, features, and quality of a service or good.

• Patient care volumes – By service, type, and physician – Turnover—new patients and those exiting the system

• Physician – Referral and admission rates – Satisfaction – Availability of resources (e.g., operating suite time)

• Market share by product line

• Clinical measures – Readmission rates – Complication rates – Compliance with evidence-based guidelines – Medical errors

• Customer service – Patient satisfaction – Waiting time – Cleanliness, ambience – Ease of navigation – Parking – Billing complaints

• Reputation

• Price comparisons relative to competitors

EXHIBIT 4.5 Metrics of Performance from the Customer Perspective



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maximize that segment’s particular value proposition. For example, the orga- nization may seek to be a price leader for outpatient imaging, as some patients will pay for this service via a healthcare savings account. For another seg- ment—emergency services, for example—speed of delivery may be critical. The personal relationship of provider to patient may be important in primary care but not as important in anesthesiology.

Image and reputation are particularly strong influences in consumer behavior and can be competitive advantages for specialty healthcare services. Taking care to understand the value proposition in an organization can lead to the development of effective metrics and strategy maps in the balanced scorecard system.

Vincent Valley Hospital and Health System’s Value Proposition VVH has developed a value proposition for its obstetric services. Its market segment is pregnant women aged 18 to 35. VVH believes the product attri- butes for this market should be

• quick access to care; • warm and welcoming facilities; • customer interactions characterized by strong and personal relationships

with nurses, midwives, and doctors; and • an image of high-quality care that is supported by an excellent system

for referrals and air transport for high-risk deliveries.

VVH has determined the following metrics to measure each attribute:

• The time from arrival to care in the obstetric suite • A patient survey of facility attributes • A patient survey of satisfaction with staff • The percentage of high-risk newborns referred and transported, and the

clinical outcomes of these patients

The main value proposition for emergency care has been identified as reduced waiting time. Following internal studies, competitive benchmarking, and patient focus groups, VVH has determined that its goal is to have fewer than 10 percent of its ED patients wait more than 30 minutes for care.

Internal Business Process Perspective The third perspective in the balanced scorecard is internal business processes or operations—the primary focus of this book. The internal business process perspective has three major components: innovation, ongoing process improve- ment, and post-sale service.



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Innovation Any well-functioning healthcare organization has in place a purposeful innova- tion process. However, many hospitals and health systems today do not, and they can only be characterized as reactionary. They simply respond to—rather than anticipate—new reimbursement rules, government mandates, or technologies introduced through the medical staff. Bringing thoughtful innovation into the life cycle is one of the most pressing challenges contemporary organizations face.

The first step in an organized innovation process is to identify a potential market segment. Then, two primary questions must be answered: (1) What benefits will customers value in tomorrow’s market? (2) How can the orga- nization innovate to deliver those benefits? Once these questions have been researched and answered, related products can be created.

Quality function deployment (chapter 9) can be a useful tool for new product or service development. If a new service is on the clinical leading edge, it may require additional research and testing. A more mainstream service calls for competitor research and review of the clinical literature. The principles of project management (chapter 5) should be used throughout this process until the new service is operational and stable. The process of innovation and design thinking is explored in more depth in chapter 5.

Standard innovation measures used in many industries outside healthcare include percentage of total sales resulting from new products and proprietary products, number of new product introductions per year, time to develop new products, and time to break even.

Healthcare operations tend toward stability (bordering on being rigid), and therefore, a major challenge is simply ensuring that all clinical staff use the latest and most effective diagnostic and treatment methodologies. However, with the passage of the ACA, those organizations with a well-functioning product development process have a clear competitive advantage.

Ongoing Process Improvement The case for process improvement and operations excellence is made throughout this book. The project management system (chapter 5) and process improve- ment tools (chapters 6 through 11) are key to these activities. The strategic effect of process improvement and maintaining gains is discussed in chapter 15.

Post-sale Service The final aspect of the operations perspective is the post-sales area, an element that is poorly executed in most healthcare delivery organizations. Sadly, the most common post-sale contact with a patient may be an undecipherable or incorrect bill.

Good post-service systems provide patients with follow-up information on the service they received. Patients with chronic diseases should be contacted periodically with reminders on diet, medication use, and the need to schedule



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follow-up visits. An outstanding post-sale system also finds opportunities for improvement in the service as well as possible innovations for the future. Open-ended survey questions such as, “From your perspective, how could our organization improve?” or “How else can we serve your healthcare needs?” can point to opportunities for improvement and innovation. Exhibit 4.6 lists common metrics used to measure operational performance.

External Operational Metrics Today and into the Future We pause in our discussion of the elements of the strategic plan to revisit value purchasing, specifically in terms of its influence on the business process perspec- tive. Value purchasing (or value-based purchasing, as it is often referred to) emphasizes meeting external goals and benchmarks. This emphasis complicates strategy maps; the metrics from the Centers for Medicare & Medicaid Services (CMS) alone number more than 1,700 (IOM 2015).

In 2019, CMS will implement the Merit-Based Incentive Payment Sys- tem (MIPS) for physician compensation. As discussed in chapter 3, because MIPS introduces many new metrics and publicly reported quality measures, organizations might be tempted to develop a strategy that directly links physician

• Average length of stay—case-mix adjusted

• Full-time equivalent (FTE)/adjusted patient day

• FTE/diagnosis-related group

• FTE/relative value unit

• FTE/clinic visit

• Waiting time inside clinical systems

• Access time to appointments

• Percent value-added time

• Utilization of resources (e.g., operating room, imaging suite)

• Patients leaving emergency department without being seen

• Operating room cancellations

• Admitting process performance

• Billing system performance

• Medication errors

• Nosocomial infections

• Measures from external agencies: The Joint Commission (2016), the National Quality Forum (2016), and the Centers for Medicare & Medicaid Services (2016).

• National Quality Forum (2002) “never events”

EXHIBIT 4.6 Metrics of

Performance from the

Operational Perspective



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payment to MIPS metrics (which may already be happening in some small practices).

The proliferation of metrics might also tempt an organization to develop overly complex scorecards. These data visualizations are not a substitute for a disciplined strategy featuring a strategy map that can be communicated to the entire organization and effectively executed.

Vincent Valley Hospital and Health System Internal Business Processes VVH is executing four major projects to move its birthing center and ED strategies forward. The birthing center projects include remodeling and redeco- rating labor and delivery suites, contracting with a regional health system for emergency transport of high-risk deliveries, and introducing predelivery tours of labor and delivery facilities by nursing staff. The ED project is to execute a Lean analysis and kaizen event to improve patient flow.

Learning and Growing Perspective The final perspective from which to view an organization is employee learning and growth. To effectively execute a strategy, employees must be motivated and have the necessary tools to succeed. Therefore, a high-performing organization makes substantial investments in this aspect of its operations. Kaplan and Norton (1996) identified three critical aspects of learning and growing: employee skills and abilities, necessary information technology (IT), and employee motivation.

Employee Skills and Abilities Although employees in healthcare usually come to their jobs with general training in their technical field, continuous updating of skills is necessary. Some healthcare organizations are effective in ensuring that clinical skills are updated but neglect training in other vital processes (e.g., purchasing systems, organization-wide strategies). A good measure of the attention paid to this area is the number of classes conducted by the organization (or an outside education vendor) for the staff. Another important measure is the breadth of

Kaizen and Kaizen Events Kaizen is the Japanese term for “change for the better,” or continuous improvement. Kaizen has become the vehicle by which Lean systems make changes and improve. The philosophy of kaizen involves all employees in making suggestions for improvement, then implementing those suggestions quickly. It is based on the assumptions that everything can be improved and that many small incremental changes result in an enhanced system.

A kaizen event, sometimes referred to as a rapid process improvement workshop, is a focused, short-term project aimed at improving a particular process.



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employee occupations attending these classes. Do all employees—from doctors to housekeepers—attend organization-wide training?

Necessary IT Most healthcare workers are considered knowledge workers. They primarily use thinking to accomplish the goals of their profession, as opposed to physical labor. The more immediately and conveniently they can obtain information, the more effectively they can perform their jobs. Facilitative IT is one key to this ability.

Process redesign projects frequently use IT as a resource for automa- tion and information retrieval. Measures of automation include the number of employees having easy access to IT systems, the percentage of individual jobs that have an automation component, and the speed of installation of new IT capabilities. The use of data and analytics is explored in depth in chapter 8.

Employee Motivation A progressive culture and motivated employees are clearly competitive advan- tages; therefore, the organization must monitor these areas with some frequency. Measures of employee satisfaction include the following:

• Level of involvement in decision making • Recognition for doing a good job • Amount of access to information • Level of encouragement of creativity and initiative • Support for staff-level functions • Overall satisfaction with the organization • Turnover rate • Absenteeism rate • Training hours per employee

Data for many of these measures are typically collected through employee surveys.

These three aspects of learning and growing—employee skills, IT, and motivation—all contribute to employee satisfaction. A satisfied employee is productive and tends to remain with the organization. Employee satisfaction, productivity, and loyalty make outstanding organizational performance possible.

Vincent Valley Hospital and Health System Learns and Grows VVH realizes its employees need new skills to successfully execute some of its projects, so it has engaged training firms to provide classes for all staff. Exhibit 4.7 illustrates this undertaking for improvement.



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Strategic Alignment: Linking Measures to Strategy Once expected objectives and their related measures are determined for each perspective, the initiatives to meet these goals must be developed. An initiative can be a simple action or a large project. Regardless of its scale, each initiative must be logically linked to the desired outcome through a series of cause-and-effect statements. These are usually constructed as “if–then” statements that tie initia- tives together and contribute to the outcome, as with the following examples:

• If the wait time in the ED is decreased, then the patient will be more satisfied.

• If an admitting process is improved through the use of automation, then the final collection rate will improve.

• If an optically scanned wristband is used in conjunction with an electronic health record, then medication errors will decline.

• If a discharge summary is routinely dictated and transmitted to the primary care provider within 24 hours, then the number of readmissions within 30 days will decrease.

Each initiative should have measures associated with it, and every measure selected for a balanced scorecard should be an element in a chain of cause–effect relationships that communicates the organization’s strategy.

Outcomes and Performance Drivers Selecting appropriate measures for each initiative is critical. Measures can be categorized into two basic types of indicators. Outcome indicators, familiar to most managers, are also termed lagging indicators because they result from earlier actions. Outcome indicators tend to be generic instead of tightly focused. Healthcare operations examples include profitability, market share, and patient satisfaction. The other type of indicator is a performance driver, or

Lagging indicator A performance measurement that assesses the outcome of existing actions.

Project Employees Involved Training

Begin predelivery tours of labor and delivery facilities by nursing staff

Obstetric nursing and support staff

Customer service and sales

Execute a Lean analysis and kaizen event to improve patient flow in the emergency department

Managers and key clinicians in the emergency department

Lean tools (chapter 10)

EXHIBIT 4.7 VVH Improvement Projects and Associated Training



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leading indicator. These indicators predict the future and are specific to an initiative and the organization’s strategy. One example of a performance driver is waiting time in the ED. A drop in waiting time should predict an improve- ment in a related outcome indicator, such as patient satisfaction.

A common pitfall in developing indicators is the use of measures associ- ated with the improvement project rather than with the process improvement. For example, the fact that a project to improve patient flow in a department is 88 percent complete is a less adequate indicator than a measure of the actual change in patient flow, a 12 percent reduction in waiting time. Outcome measures are always preferred, but in some cases they may be difficult or impossible to obtain.

Because the number of balanced scorecard measures should be lim- ited—ideally to fewer than 20—identifying measures that are indicators for a complex process is sometimes useful. For example, a seemingly simple indicator such as time to next appointment for patient scheduling actually tracks many complex processes in an organization.

Strategy Maps As discussed, a set of initiatives should be linked together by if–then statements to achieve a desired outcome. Both outcome and performance driver indicators should be determined for each initiative. These can be displayed graphically in a strategy map, which may be most helpfully organized into the four perspec- tives, where learning and growing is positioned at the bottom and financial resides at the top. A general strategy map for any organization includes the following conditional statements:

• If employees have skills, tools, and motivation, then they will improve operations.

• If operations and marketing efforts are improved, then customers will buy more products and services.

• If customers buy more products and services and operations are run efficiently, then the organization’s financial performance will improve.

Exhibit 4.8 shows a strategy map in which these general initiatives are indicated.

The strategy map is enhanced if each initiative also contains the strategic objective, measure used, and results that the organization hopes to achieve (targets). Each causal pathway from initiative to initiative needs to be as clear and quantitative as possible.

Vincent Valley Hospital and Health System Strategy Maps VVH has two major areas of strategic focus—the birthing center and the ED. Exhibit 4.9 displays the strategy map for the birthing center.

Leading indicator A performance measurement that predicts the future and is specific to an initiative or organizational strategy. Also called performance driver.

Strategy map A set of initiatives that are graphically linked by if–then statements to describe an organization’s strategy.



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Improve marketing and customer service

Improve financial results

Improve operations

Provide employees with skills, tools, and motivation

Learning and


Business Processes



EXHIBIT 4.8 General Strategy Map

Learning and


Business Processes


Financial Increase net revenue of obstetric product line Goal = 10%

Measure market share Goal = 5% increase

Measure patient satisfaction (facilities) Goal


90% satisfaction

Remodel obstetric suite Goal = complete by November 1

Measure patient satisfaction (perceived clinical quality) Goal


90% satisfaction

Contract for emergency transportation Goal = 10 runs/month

Measure patient satisfaction (high touch) Goal


90% satisfaction

Begin tours and survey Goal = patient satisfaction



Customer service training Goal = 90% average passing score

EXHIBIT 4.9 VVH Birthing Center Strategy Map



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Recall that VVH has decided to execute three major projects in this area. Other initiatives needed for the successful execution of each project are identi- fied on the map. For instance, for nursing staff to successfully lead expectant mothers on tours of labor and delivery suites, the staff must participate in a customer service training program. After the tours begin, the birthing center will measure potential patients’ satisfaction to ensure that the tours are being conducted effectively.

After patients deliver their babies in VVH’s obstetric unit, they will again be surveyed on their experience, with special questions on the effect of each major project. These leading satisfaction indicators should predict the lagging indicators of increased market share and net revenue.

The second major strategy for VVH is to improve patient flow in the ED. Exhibit 4.10 shows the strategy map for the department.

The first required steps in this strategy are forming a project team (chap- ter 5) and learning how to use Lean process improvement tools (chapter 10). Then the team can begin analyzing patient flow and implementing changes to improve flow. VVH has set a goal of reducing the amount of non-value-added time by 30 percent. From the time this goal is first met, waiting time for 90 percent of patients should not exceed 30 minutes. A reduced waiting time should result in patients being more satisfied and, hence, a growth in market share and increased net revenue. Following are more formal cause-and-effect statements:

Measure patient wait time Goal ^ 30 minutes

Measure patient share Goal = 5% increase

Increase net revenue of emergency department production line Goal = 10%

Conduct project on patient flow and make changes Goal = value stream increased by 30%

Learn Lean process improvement tools Goal = complete by December 1

Learning and


Business Processes



EXHIBIT 4.10 VVH Emergency

Department Strategy Map



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• If ED staff undertake educational activities to learn project management and Lean, then they can effectively execute a patient flow improvement project.

• If a patient flow project is undertaken and non-value-added time is reduced by 30 percent, then the waiting time for 90 percent of the patients should never exceed 30 minutes.

• If the waiting time for most patients never exceeds 30 minutes, then they will be highly satisfied, and this satisfaction will increase the number of patients and VVH’s market share.

• If the ED market share increases, then net revenue will increase.

The book’s companion website contains a downloadable strategy map and linked scorecard. It also includes a number of videos that demonstrate how to use and modify these tools for both student and practitioner use.

Implementation of the Balanced Scorecard Linking and Communicating The balanced scorecard can be used at many different levels in an organization. However, departmental scorecards should link to the divisional, and ultimately the corporate, level. Each scorecard should be linked upward and downward. For example, an obstetric initiative to increase revenue from normal childbirths should be linked to the corporate-level objective of overall increased revenue.

Sometimes, specific linkages are difficult to establish between a depart- mental strategy map and corporate objectives. In these cases, the department head must derive a more general link by stating how a departmental initiative will influence a particular corporate goal. For example, improving the quality of the hospital laboratory testing system generally affects the corporate objec- tive that patients should perceive that the hospital provides the highest level of quality care.

The development and operation of scorecards at each level of an orga- nization require disciplined communication, which can be an incentive for action. Balanced scorecards can also be used to communicate with an organiza- tion’s external stakeholders. A well-implemented balanced scorecard system is integrated with individual employee goals and the organization’s performance management system.

Targets, Resources, Initiatives, and Budgets As demonstrated in this chapter, a balanced scorecard strategy map consists of a series of linked initiatives, and each initiative should have a quantitative measure and a target. Initiatives can reside in one department, but they are

On the web at



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frequently cross-departmental. Many initiatives are projects, and the process for successful project management (chapter 5) should be followed.

A well-implemented balanced scorecard also links carefully to an organi- zation’s budget, particularly if initiatives and projects are expected to consume considerable operating or capital resources.

The use of the balanced scorecard does not obviate the need for addi- tional operating statistics. Many other operating and financial measures still must be collected and analyzed. If the performance of any of these measures deviates substantially from its target, a new strategy and initiative may be needed. For example, most healthcare organizations carefully track and monitor their accounts receivable. If this financial measure is within industry norms, it prob- ably will not appear on an organization’s balanced scorecard. However, if the accounts receivable balance drifts over time and begins to exceed expectations, a balanced scorecard initiative may be started to address the problem.

Displaying Results The actual scorecard tracks and communicates the results of each initiative. (Chapter 7 provides several examples of visual displays.) A challenge for most organizations is to collect the data to display in the scorecard. Because the scorecard should include fewer than 20 measures, a simple solution is to assign this responsibility to one individual who develops efficient methods to collect the data and determines effective methods by which to display them. A more robust solution is to develop a data warehouse with associated analysis and reporting tools (see exhibit 4.11).

Does the Balanced Scorecard Work? Feedback and Strategic Learning Once a balanced scorecard system is created, it must be monitored closely. Management teams should divide their routine meetings into three types: operational reviews, strategy reviews, and strategy testing and adaptation. The operational meeting is held frequently (e.g., weekly) and is designed to respond to short-term problems and promote improvements. The strategy review meet- ing is held monthly and focuses on monitoring and fine-tuning the existing strategy map. The strategy testing and adaptation meeting should be held at least annually—more frequently if the business environment is changing rapidly. These meetings are designed to improve or transform the existing strategy, develop new initiatives and revise maps, and authorize needed expenditures.

The explicit purpose of the balanced scorecard is to ensure the success- ful execution of an organization’s strategy. But what if it does not achieve the desired results? Two possible causes can be at play.

The first, most obvious, problem is that an initiative itself is not achiev- ing its targeted results. For example, the ED’s patient flow project may not be able to decrease non-valued-added time by 30 percent. In that case, the



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