Section Journal: Chapters 7-10

Daniel B. McLaughlin
John R. Olson

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

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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

vii

BRIEF CONTENTS

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

viii Brief Contents

Part V Putting It All Together for Operational Excellence

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

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

ix

DETAILED CONTENTS

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 Detai led Contents

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

xiDetai led Contents

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

xii Detai led Contents

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

xiiiDetai led Contents

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

xiv Detai led Contents

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

xv

PREFACE

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

xvi Preface

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).

xviiPreface

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.

Acknowledgments

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

xviii Preface

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 ache.org/HAP 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
[email protected]

Student Resources

Case studies, exercises, tools, and web links to resources are available at
ache.org/books/OpsManagement3.

PART

INTRODUCTION TO
HEALTHCARE OPERATIONS

I

CHAPTER

3

THE CHALLENGE AND THE OPPORTUNITY

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
OVE RVI EW

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.

Healthcare Operat ions Management4

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
ache.org/books/OpsManagement3

Chapter 1 : The Chal lenge and the Oppor tunity 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).

Healthcare Operat ions Management6

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.

Chapter 1 : The Chal lenge and the Oppor tunity 7

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

Themes

• 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

opportunities.

• 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

investment.

• 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

capacities.

• Efficiency and effectiveness compel globalizing evidence and localizing

decisions.

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

Healthcare Operat ions Management8

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.

Chapter 1 : The Chal lenge and the Oppor tunity 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.

Healthcare Operat ions Management10

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

Salaries

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

Feedback

Chapter 1 : The Chal lenge and the Oppor tunity 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.

Healthcare Operat ions Management12

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:

Chemotherapy

Chapter 1 : The Chal lenge and the Oppor tunity 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

Healthcare Operat ions Management14

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
ache.org/books/OpsManagement3

Chapter 1 : The Chal lenge and the Oppor tunity 15

Conclusion

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.

References

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. http://archive.ahrq.gov/research/findings/
nhqrdr/nhqr09/Key.html.

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

Healthcare Operat ions Management16

Institute of Medicine (IOM). 2011. Learning What Works: Infrastructure Required for
Comparative Effectiveness Research. Workshop Summary. Accessed August 8, 2016.
www.nap.edu/catalog/12214/learning-what-works-infrastructure-required-for-
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://
guideline.gov/.

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.

CHAPTER

17

2HISTORY OF PERFORMANCE IMPROVEMENT

Operations Management in Action

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

OVE RVI EW

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

following:

• Background for understanding operations

management

• Systems thinking and knowledge-based

management

• Scientific management

• Project management

• Introduction to quality, and quality experts of

note

• 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.

Healthcare Operat ions Management18

(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).

Background

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.

Chapter 2: History of Performance Improvement 19

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Healthcare Operat ions Management20

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.

Feedback

Transformation
process

Labor
Material
Machines
Management
Capital

Goods or
services

TUPTUOTUPNI

EXHIBIT 2.2
Systems View

of the Provision
of Services for

Purposes of
This Book

Im
po

rt
an

ce

Understanding

Wisdom

morals

principles

patterns

relationships

Knowledge

Learning

Information

Data

EXHIBIT 2.3
Knowledge

Hierarchy

Chapter 2: History of Performance Improvement 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

Healthcare Operat ions Management22

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.

Chapter 2: History of Performance Improvement 23

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-
ter.com 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

Healthcare Operat ions Management24

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

Chapter 2: History of Performance Improvement 25

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 (NetMBA.com
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

Healthcare Operat ions Management26

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.

Chapter 2: History of Performance Improvement 27

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

Healthcare Operat ions Management28

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.

Chapter 2: History of Performance Improvement 29

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

(continued)

Healthcare Operat ions Management30

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)

(continued)

Chapter 2: History of Performance Improvement 31

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.

Healthcare Operat ions Management32

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.

Chapter 2: History of Performance Improvement 33

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

Healthcare Operat ions Management34

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.

Chapter 2: History of Performance Improvement 35

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.

Healthcare Operat ions Management36

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.

Chapter 2: History of Performance Improvement 37

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.

Healthcare Operat ions Management38

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:

Chapter 2: History of Performance Improvement 39

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.

Healthcare Operat ions Management40

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.

Chapter 2: History of Performance Improvement 41

Conclusion

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
ache.org/books/OpsManagement3

Healthcare Operat ions Management42

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CHAPTER

45

EVIDENCE-BASED MEDICINE AND VALUE-
BASED PURCHASING

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
OVE RVI EW

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.

(continued)

Healthcare Operat ions Management46

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):

OVE RVI EW (Continued)

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).

Chapter 3: Evidence-Based Medicine and Value-Based Purchasing 47

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:

Healthcare Operat ions Management48

• 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 OI

(A) Separate
and select

O

I

(B) Separate and
accommodate

OO

I

O

I
(D) Integrated

O

I
(C) Modularized

EXHIBIT 3.1
Four

Approaches
to Blending
Custom and

Standard
Processes

Source: Bohmer (2005). Used with permission.

Chapter 3: Evidence-Based Medicine and Value-Based Purchasing 49

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.

Healthcare Operat ions Management50

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

Chapter 3: Evidence-Based Medicine and Value-Based Purchasing 51

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.

Healthcare Operat ions Management52

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

Chapter 3: Evidence-Based Medicine and Value-Based Purchasing 53

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

research

Healthcare Operat ions Management54

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 (www.hospitalcompare.hhs.gov). 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.

Chapter 3: Evidence-Based Medicine and Value-Based Purchasing 55

• 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.

Healthcare Operat ions Management56

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

Chapter 3: Evidence-Based Medicine and Value-Based Purchasing 57

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.

Healthcare Operat ions Management58

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.

Chapter 3: Evidence-Based Medicine and Value-Based Purchasing 59

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).

Healthcare Operat ions Management60

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:

23456789

229
MRACTA

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

MR

1

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.

Chapter 3: Evidence-Based Medicine and Value-Based Purchasing 61

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

manager

• Decreased exposure to radiation—potentially preventing cancers

60

55

45

50

40

35

30
32.03

36.12

39.19
40.84

44.89
47.52

51.26

54.26
56.35

39.47

43.94

40.3040.2139.77

42.13
42.3942.54

38.09

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
03

2Q
03

3Q
03

4Q
03

1Q
04

2Q
04

3Q
04

4Q
04

1Q
05

2Q
05

3Q
05

4Q
05

1Q
06

2Q
06

3Q
06

4Q
06

1Q
07

2Q
07

3Q
07

4Q
07

1Q
08

2Q
08

3Q
08

4Q
08

1Q
09

2Q
09

3Q
09

4Q
09

1Q
10

2Q
10

3Q
10

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

Healthcare Operat ions Management62

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.

Chapter 3: Evidence-Based Medicine and Value-Based Purchasing 63

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:

Healthcare Operat ions Management64

• 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.

Conclusion

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?

Note

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

Chapter 3: Evidence-Based Medicine and Value-Based Purchasing 65

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PART

II
SETTING GOALS AND

EXECUTING STRATEGY

CHAPTER

71

STRATEGY AND THE BALANCED SCORECARD

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
OVE RVI EW

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

perspectives,

• 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

initiative,

• 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 ache.org/books/OpsManagement3

Healthcare Operat ions Management72

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

Chapter 4: Strategy and the Balanced Scorecard 73

(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

costs

Financial
pressure

Today’s urgent
operating
problem This year’s new

initiatives

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

media

Employee
turnover—recruiting

Last year’s
initiative

EXHIBIT 4.1
The Complex
World of Today’s
Healthcare
Leader

Operating
statistics

Strategic
plan

Operations

Management
control

Financial
results

EXHIBIT 4.2
The Traditional
Theory of
Management

Healthcare Operat ions Management74

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

Chapter 4: Strategy and the Balanced Scorecard 75

• 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

EmployeesOperations

Customers

EXHIBIT 4.3
The Four
Perspectives in
the Balanced
Scorecard

Healthcare Operat ions Management76

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

Chapter 4: Strategy and the Balanced Scorecard 77

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

satisfaction.

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.

Healthcare Operat ions Management78

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

Perspective

Chapter 4: Strategy and the Balanced Scorecard 79

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

Healthcare Operat ions Management80

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.

Chapter 4: Strategy and the Balanced Scorecard 81

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

Healthcare Operat ions Management82

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

Chapter 4: Strategy and the Balanced Scorecard 83

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.

Healthcare Operat ions Management84

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.

Chapter 4: Strategy and the Balanced Scorecard 85

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

Healthcare Operat ions Management86

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.

Chapter 4: Strategy and the Balanced Scorecard 87

Improve
marketing and
customer
service

Improve
financial results

Improve
operations

Provide employees
with skills, tools, and
motivation

Learning
and

Growing

Business
Processes

Customers

Financial

EXHIBIT 4.8
General
Strategy Map

Learning
and

Growing

Business
Processes

Customers

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

^

90%

Customer service training
Goal = 90% average
passing score

EXHIBIT 4.9
VVH Birthing
Center Strategy
Map

Healthcare Operat ions Management88

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

Growing

Business
Processes

Customers

Financial

EXHIBIT 4.10
VVH Emergency

Department
Strategy Map

Chapter 4: Strategy and the Balanced Scorecard 89

• 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
ache.org/books/OpsManagement3

Healthcare Operat ions Management90

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

Chapter 4: Strategy and the Balanced Scorecard 91

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

0%

20%

40%

60%

80%

100%

120%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

0%

5%

10%

15%

20%

25%

30%

35%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

0

20

40

60

80

100

120

140

160

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

0

50

100

150

200

250

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

82%
84%
86%
88%
90%
92%
94%
96%
98%

100%
102%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

0%

20%

40%

60%

80%

100%

120%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Net revenue

Patient
satisfaction

Increase in
admissions

Customer service
training tests

Profit

FT admission (%)

Cost/unit

Six Sigma
training tests

YTD

Actual 2,877,842

Goal 3,266,667

YTD

Actual 88%

Goal 90%

YTD

Actual 83

Goal 100

YTD

Actual 94%

Goal 90%

YTD

Actual 3.2%

Goal 3.0%

YTD

Actual 16%

Goal 30%

YTD

Actual 134

Goal 115

YTD

Actual 86%

Goal 90%

Note: Download this scorecard from the book’s companion website at ache.org/books/
OpsManagement3. FT = full time; YTD = year to date.

EXHIBIT 4.11
Balanced
Scorecard
Template

Healthcare Operat ions Management92

hospital may need to add an initiative, such as engaging a consultant. This
measure must be carefully monitored and frequently posted on the scorecard.

The second, more complex, problem occurs when the successful execu-
tion of an initiative does not lead to achievement of the next linked target. For
example, although waiting times in the ED decrease, the department does not
gain market share. The first step in solving this problem is to reconsider the
cause-and-effect relationships.

An organization should review its results and strategy map at least quar-
terly and revise its strategy annually, usually as part of the budgeting process.

Modifications of the Classic Balanced Scorecard
The balanced scorecard has been modified by many healthcare organizations,
most commonly by placing the customer or patient at the top of the strategy
map (exhibit 4.12). Finance then becomes a means to achieve superior patient
outcomes and satisfaction.

Implementation Issues
Two common challenges arise when implementing balanced scorecards: (1)
determination and development of metrics, and (2) initiative prioritization.

The balanced scorecard is a quantitative tool and, as such, requires
data systems that generate timely information for inclusion. Each initiative on

Improve
operations

Improve patient
results and
satisfaction

Improve availability
of financial resources

Provide employees
with skills, tools, and
motivation

Learning
and

Growing

Business
Processes

Customers

Financial

EXHIBIT 4.12
Inverted
General

Strategy Map

Chapter 4: Strategy and the Balanced Scorecard 93

a strategy map should have quantitative measures, which should represent an
even mix of leading and lagging indicators. Each initiative should have a target
as well. However, setting targets is an art: Too timid a goal does not move
the organization forward, and too aggressive a goal is discouraging for staff.

A number of sources should be used to construct targets. They include
internal company operating data, executive interviews, internal and external
strategic assessments, customer research, industry averages, and benchmarking
data. Targets can be incremental on the basis of current operating results (e.g.,
increase productivity in a nursing unit by 10 percent in the next 12 months), or
they can be “stretch goals,” which are possible to achieve but require extraor-
dinary effort (e.g., improve compliance with evidence-based guidelines for 98
percent of patients with diabetes). Including too many measures and initiatives
renders a scorecard confusing; therefore, even the most sophisticated organiza-
tions limit their measures to 20 or fewer.

Achieving perfect alignment with a balanced scorecard’s goals for all of
an organization’s initiatives is difficult. However, the closer the alignment, the
more likely the organization’s strategic objectives will be achieved.

Conclusion

This text is about how to get things done. The balanced scorecard with strategy
mapping provides a powerful tool toward that end because it

• links strategy to action in the form of initiatives;
• provides a comprehensive communication tool inside and outside an

organization; and
• is quantitatively based, providing a vehicle for ongoing strategy analysis

and improvement.

Discussion Questions

1. What other indicators might be used in each of the four perspectives for
public health agencies? For health plans?

2. If you were to add a perspective to the four discussed in the chapter,
what would it be? Draw a strategy map of a healthcare delivery
organization and include this perspective.

3. How do you manage the other operations of an organization—that is,
those that do not appear on a strategy map or balanced scorecard?

4. How would a department link its balanced scorecard to the corporate
scorecard?

Healthcare Operat ions Management94

5. What methods could be used to involve the customer or patient in
identifying the key elements of the balanced scorecard?

Exercises

1. View the videos at the companion website for this book, and download
the PowerPoint strategy map provided. Develop a strategy map and

balanced scorecard for a primary care dental
clinic. Conduct Internet research to determine
the challenges facing primary care dentistry,
and develop a strategy map for success in this
environment.

Make sure the strategy map includes at least eight initiatives and
that they touch on the four perspectives. Include targets, and be sure
the metrics are a mix of leading and lagging indicators. Develop a plan
to periodically review your map to ascertain its effectiveness.

2. Download the data for this chapter provided on the companion
website, and develop a dashboard in Excel to identify readmissions that
occur within 30 days of discharge. A number of initiatives are described
on the website to minimize readmissions. Conduct additional Internet
research and construct a strategy map to improve this readmission rate.

References

Centers for Medicare & Medicaid Services (CMS). 2016. “Quality Measures.” Modified
February 14. www.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment-
Instruments/QualityMeasures/index.html?redirect=/QUALITYMEASURES/.

Institute of Medicine (IOM). 2015. Vital Signs: Core Metrics for Health and Health Care
Progress. Published April 28. http://iom.nationalacademies.org/Reports/2015/
Vital-Signs-Core-Metrics.aspx#sthash.NIyVcAPm.dpuf.

Joint Commission, The. 2016. “Core Measure Sets.” Accessed February 10. www.jointcom-
mission.org/core_measure_sets.aspx.

Kaplan, R. S., and D. P. Norton. 1996. The Balanced Scorecard: Translating Strategy into
Action. Boston: Harvard Business School Press.

McDonald, B. 2012. “A Review of the Use of the Balanced Scorecard in Healthcare.” Pub-
lished April. www.bmcdconsulting.com/index_htm_files/Review%20of%20the%20
Use%20of%20the%20Balanced%20Scorecard%20in%20Healthcare%20BMcD.pdf.

National Quality Forum (NQF). 2016. “Measures, Reports & Tools.” Accessed February
10. www.qualityforum.org/Measures_Reports_Tools.aspx.

On the web at
ache.org/books/OpsManagement3

Chapter 4: Strategy and the Balanced Scorecard 95

———. 2002. “Serious Reportable Events in Healthcare: A National Quality Forum Con-
sensus Report.” Publication No. NQFCR01-02. Washington, DC: NQF.

Nuwash, P. 2010. “Transforming Change in Health Services Performance Through Business
Intelligence.” Presentation at Midwest Healthcare Business Intelligence Summit,
Bloomington, Minnesota, October 19.

Outram, C. 2014. “Ten Pitfalls of Strategic Failure.” INSEAD Blog. Published March 17. http://
knowledge.insead.edu/blog/insead-blog/ten-pitfalls-of-strategic-failure-3225.

Further Reading

Cleverley, W. O., and J. O. Cleverley. 2005. “Scorecards and Dashboards.” Healthcare
Financial Management 59 (7): 64–69.

Kaplan, R. S., and D. P. Norton. 2008a. The Execution Premium: Linking Strategy to Opera-
tions for Competitive Advantage. Boston: Harvard Business School Publishing.

———. 2008b. “Mastering the Management System.” Harvard Business Review 86 (1): 62–77.
———. 2006. “How to Implement a New Strategy Without Disrupting Your Organiza-

tion.” Harvard Business Review 84 (3): 100–109.
———. 2001. The Strategy-Focused Organization: How Balanced Scorecard Companies

Thrive in the New Business Environment. Boston: Harvard Business School Press.
Tarantino, D. P. 2003. “Using the Balanced Scorecard as a Performance Management Tool.”

Physician Executive 29 (5): 69–72.
Wyatt, J. 2004. “Scorecards, Dashboards, and KPIs: Keys to Integrated Performance Mea-

surement.” Healthcare Financial Management 58 (2): 76–80.

CHAPTER

97

PROJECT MANAGEMENT

Operations Management
in Action

The examples in the Operations Manage-
ment in Action sections throughout this
book generally demonstrate the effec-
tive use of the principles of operations
management. However, professionals
can also learn from failures. One of the
most visible, and nearly catastrophic, fail-
ures in healthcare operations manage-
ment was in the implementation of the
Affordable Care Act’s health insurance
exchanges by the US federal government.

Although most of the operational
issues with the exchanges have now been
corrected, at the outset of the implementa-
tion, many of the principles of good project
management were not employed. Following
is a list of poor or inadequate approaches
compiled by an experienced governmen-
tal project manager that demonstrate the
absence of good operations management
(adapted from Thomson 2013):

Unrealistic requirements. This
is the first time anybody has ever tried
to develop a single website where
diverse users could (1) establish an
online identity, (2) review hundreds of
health-insurance options, (3) enroll in a
specific plan, and (4) determine eligibil-
ity for federal subsidies—all in real time.

Technical complexity. As often
occurs with poorly planned [defense]
projects, unrealistic requirements for

5
OVE RVI EW

Everyone manages projects, whether painting a bedroom at home or

adding a 100-bed wing to a hospital. This chapter provides grounding

in the science of project management. The major topics covered include

• selecting and chartering projects;

• using stakeholder analysis to set project requirements;

• developing a work breakdown structure and schedule;

• using Microsoft Project to develop project plans and monitor

cost, schedule, and earned value;

• managing project communications, change control, and risk; and

• creating and leading project teams.

After reading this chapter and completing the associated

exercises, readers should be able to

• create a project charter with a detailed plan for costs, schedule,

scope, and performance;

• monitor the progress of a project, make changes as required,

communicate to stakeholders, and manage risks; and

• develop the skills to successfully lead a project team.

If virtually everyone has had experience managing projects,

why devote a chapter in a healthcare operations book to the topic?

The answer lies in the question. Although everyone has life experi-

ences in project management, few healthcare professionals take the

time to understand and practice the science and discipline of project

management. The ability to successfully move a project forward while

meeting time and budget goals is a distinguishing characteristic of a

high-quality, highly competitive healthcare organization.

Effective project management provides an opportunity for

progressive healthcare organizations to quickly develop new clinical

services, fix major operating problems, reduce expenses, and provide

new consumer-directed products to their patients.

Healthcare Operat ions Management98

HealthCare.gov resulted
in an extraordinarily
complicated system
that is difficult to main-
tain. There are just too
many moving pieces.

Integration re-
sponsibility. Despite
weak internal [infor-
mation technology
(IT)] capabilities, [the
Centers for Medicare
& Medicaid Services
(CMS)] decided it
would take charge of
integrating all the parts
in HealthCare.gov, and
testing the end product
to ensure functionality.
The results show why
the military almost
always hires outside
companies to serve
as lead integrator. The
final resolution of the
problems of Health-
Care.gov was led by
an outside consultant.

Fragmented au-
thority. There seems to
have been a great deal
of infighting at CMS
over how the website
would operate and
what the user experi-
ence would feel like.
With three different
parts of the bureau-
cracy contending for
control—the IT shop,
the policy shop, and
the communications

OVE RVI EW (Continued)

Project management as a formalized management meth-

odology came of age in the period 1958–1979. New management

science mathematical tools, such as program evaluation and review

technique (PERT) and the critical path method (introduced in chap-

ter 2 and discussed later in this chapter), were developed. In addi-

tion, the rapid development of computer systems, such as the

minicomputer, made the use of these tools accessible to project

managers (Azzopardi 2016).

Project management as a discipline continued to develop

over time, culminating in the establishment of the Project Manage-

ment Institute (PMI) in 1969 (www.PMI.org). As of 2014, PMI had

more than 2.9 million members, and more than 650,000 of those

members were certified as project management professionals

(PMPs) (PMI 2015).

PMI publishes the Project Management Body of Knowl-

edge (PMBOK) (PMI 2013), which details best practices for suc-

cessful project management.

In addition to the work of PMI, Carden and Egan (2008)

undertook a comprehensive review of the scientific basis for project

management. According to their study,

refereed research has indicated that project managers utilize

tools and techniques along with people to ensure quality

deliverables are on time, within scope, and within budget.

Additionally, project leadership and a favorable development

environment both are important to the successful delivery

of projects. Therefore, the connection between knowledge

and action can be used to frame behaviors by engaging in

transactions to plan, organize, monitor, and report findings

in order to maintain a dynamic balance with the organization,

resources, tools, and the external environment.

Much as evidence-based medicine delineates the most

effective methods to care for specific clinical conditions, PMBOK

provides science-based, field-tested guidelines for successful

project management. This chapter is based on PMBOK principles as

applied to healthcare. Healthcare professionals who spend much of

their time leading projects should consider using resources avail-

able through PMI; for some, PMP certification may be appropriate.

Chapter 5: Project Management 99

shop—key decisions were often delayed, guidance to contractors was inconsistent,
and nobody was truly in charge.

Loose metrics. Perhaps the most important factor in keeping complex projects
on track is for managers to utilize rigorous, unambiguous performance metrics in
measuring progress. Absence of reliable metrics helps explain why federal officials
didn’t realize until late in the game that HealthCare.gov might not be ready for
prime time.

Inadequate testing. Despite repeated warnings from contractors that more
testing of system components was needed, CMS was determined to see the site go
live on its planned debut date of October 1.

Aggressive schedules. You wouldn’t think that standing up a website after
literally years of planning might entail overly aggressive schedules, but in the case
of HealthCare.gov the disorganized bureaucracy took so long to make design choices
that the back end of the project was way too hurried for comfort.

Administrative blindness. [CMS] may not have had good management prac-
tices or metrics for identifying problems, but that doesn’t mean it didn’t get plenty
of warnings about potential problems with HealthCare.gov. Outside consultants and
contractors on the project repeatedly warned government officials about functional
difficulties with some features of the site, lack of adequate testing, poor protection
of sensitive information, and the like.

Definition of a Project

A project is a one-time set of activities that culminates in a desired outcome.
Therefore, activities that occur repeatedly—for example, making appointments
for patients in a clinic—are not projects. However, the installation of new
software to upgrade the appointment-making capability is a project, as is a
major process improvement effort to reduce telephone hold time for patients.

Slack (2005) provides a useful tool for determining the need for formal
project management (exhibit 5.1). Operational issues arise frequently; if they
are simple, they can be fixed immediately by operations staff. More difficult
problems can be addressed by using the tools detailed in chapter 6. However,
projects that are complex and have high organizational value need the discipline
of formal project management. Many of the strategic initiatives on an organiza-
tion’s balanced scorecard should use the project management methodology.

A well-managed project includes

• a specified scope of work,
• expected outcomes and performance levels,
• a budget,
• a detailed work breakdown tied to a schedule,

Healthcare Operat ions Management100

• a formal change procedure,
• a communications plan,
• a plan to deal with risk,
• a project conclusion process, and
• a plan for redeployment of staff.

Many high-performing organizations also have a formal, executive-level
chartering process for projects and a project management office to monitor
enterprisewide project activities. Some healthcare organizations (e.g., health
plans) may have a substantial share of their operating resources invested in
projects at any one time.

For effective execution of a project, PMI recommends that three ele-
ments be in place. A project charter begins the project and addresses stakeholder
needs. A project scope statement identifies the project outcomes, timelines, and
budget in detail. Finally, a project plan is developed and includes scope man-
agement, work breakdown, schedule management, cost management, quality
control, staffing management, communications, risk management, procure-
ment, and the closeout process. Exhibit 5.2 displays the relationships among
these elements.

Project Selection and Chartering
Project Selection
Most organizations have many projects vying for attention, funding, and senior
executive support. The annual budget and strategic planning processes serve

Find it ,
fix it

Problem-solving
process

Level of
detail and
problem
solving

Project
management

Complex

Simple

Source: Slack (2005). Used with permission.

EXHIBIT 5.1
When to

Use Project
Management

Chapter 5: Project Management 101

as useful vehicles for prioritizing projects in many organizations. The balanced
scorecard (chapter 4) helps guide the identification of worthwhile strategic
projects. Other external forces (e.g., new Medicare rules) or clinical innovations
(e.g., new imaging technologies), however, conspire to present an organization’s
leadership with a list of projects too long for successful implementation. When
selection dilemmas present themselves, consider using a quantitative approach,
such as the example provided in exhibit 5.3. In this case, each possible project
is scored on six measures, including the four balanced scorecard perspectives
with a predetermined weighting.

To use this tool, each potential project should be scored by a senior
planning group on the following factors: how well it fits into the organization’s
strategy, its financial benefit, how it affects quality, its operational impact, the key
personnel requirements, and the costs and time required for the project itself.
A scale of 1 (low) to 10 (high) is usually used. Each criterion is also weighted;
the scores are multiplied by their weight for each criterion and summed over all
of the criteria. In exhibit 5.3, project B has a higher total score because of its
importance to the organization’s strategy. Such a ranking methodology helps
organizations avoid committing resources to projects that may have a powerful
internal champion but do not advance the organization’s overall strategy. This
matrix can be modified with other categories and weights in accordance with
an organization’s current needs.

Initiation
and charter

Scope—
requirements

Project plan

Scope management
and work breakdown

Schedule management

Cost management

Quality control

Communications

Risk management

Procurement

Stakeholders

Closeout process

EXHIBIT 5.2
Complete
Project
Management
Process

Healthcare Operat ions Management102

Project Charter
Once a project is identified for implementation, it needs to be chartered. “The
project charter is [a] document issued by the project initiator or sponsor that
formally authorizes the existence of a project and provides the project manager
with the authority to apply organizational resources to project activities” (PMI
2013). A project initiator, or sponsor external to the project, issues the charter
and signs it to authorize the start of the project.

Four factors tend to constrain the execution of a project charter: time,
cost, scope, and performance. A successful project has a scope that specifies
the resulting performance level, how much time it will take to complete, and
its budgeted cost. A change in any one of these factors affects the other three,
as expressed mathematically in the following equation:

Scope = f (Time, Cost, Performance),

where f is the function of the four factors in a project. Similarly,

Time = f (Cost, Scope, Performance),

and so on.
Exhibit 5.4 demonstrates these relationships graphically. Here, the area

of the triangle is a measure of the scope of the project. The length of each side
of the triangle indicates the amount of time, amount of money, or level of per-
formance needed to complete the project. Because each side of the triangle is
connected, changing any of these parameters affects the others. Exhibit 5.5 shows
this same project with an increase in required performance level and shortened
timelines. With the same scope, this “new” project will incur additional costs.

Measures Possible Points Project A Project B

Strategy alignment 5 3 5

Financial impact 10 4 8

Quality and productivity
impact

5 2 3

Customers/patients impact 7 4 4

Staff availability and training 2 2 1

Probability of success (time,
cost)

3 3 1

Total 32 18 22

EXHIBIT 5.3
Project

Management
Matrix

Chapter 5: Project Management 103

Although determining the relationship between all four factors specifi-
cally and exactly is difficult, the successful project manager understands this
general relationship well and communicates it to project sponsors. A useful
analogy is the balloon: If you push hard on one part of it, a different part bulges
out. The classic project management dilemma is an increase in scope without
additional time or funding (sometimes termed scope creep). Many project failures
are directly attributable to ignoring this unyielding formula.

Stakeholder Identification and Dialogue
The first step in developing a project charter is to identify the stakeholders—in
general, anyone who has an investment in the outcome of the project. Key
stakeholders on a project include the project manager; customers; users; project
team members; any contracted organizations involved; the project sponsor;
those who can influence the project; and the project management office, if
one exists in the organization.

The project manager is the individual held accountable for the project’s
success and, therefore, represents the core of the stakeholder group. The
customer or user of the service or product is an important stakeholder who
influences and helps determine the performance of the final product. Even
if project team members serve on the project in a limited part-time role, the

Stakeholder
Anyone who has a
vested interest in
the outcome of a
project, including
(but not limited
to) employees,
customers,
users, partner
organizations,
project sponsors,
and the project
manager.

Cost = f (Performance, Time, Scope)

Performance

Scope

Time

Cost

EXHIBIT 5.4
Relationship of
Project Scope
to Performance
Level, Time, and
Cost

Performance

Scope

Time

Cost

EXHIBIT 5.5
Project with
Increased
Performance
Requirement
and Shortened
Schedule

Healthcare Operat ions Management104

success of the project reflects on them; therefore, they become stakeholders
as well. A common contracting relationship in healthcare involves large IT
installations provided through an outside vendor, which also is included as
a project stakeholder. A project should always have a sponsor with enough
executive-level influence to clear roadblocks as the project progresses; hence,
such individuals need to be included in the stakeholder group. A project
may be aided or hindered by many individuals or organizations that are not
directly part of it; a global systems analysis should be performed (the system
as depicted in exhibit 1.2, chapter 1) to identify which of these should be
included as stakeholders.

Once stakeholders have been identified, they need to be interviewed by
the project manager to develop the project charter. If an important stakeholder
is not available, the project manager should interview someone who represents
the stakeholder’s interests. At this point, differentiating between the needs and
the wants of stakeholders is important. Adequate detail must be gathered in
this process to construct the project charter.

When the project team is organized, it need not include all stakeholders,
but the team should be vigilant in attempting to meet all stakeholder needs.
The project team should also be cognizant of the culture of the organization,
sometimes defined as “how things get done around here.” Projects that chal-
lenge an organization’s culture encounter frequent difficulties.

Feasibility Analysis
An important activity in developing the project charter is determining the
project’s feasibility. Feasibility analysis is the review of all the elements of a
project that are judged by the project’s sponsor to be acceptable, leading to
approval of the project. Because the project should already have undergone
an initial prioritization review by the senior management team, the link to
the organization’s strategy likely has already been made. To reinforce that
linkage, it should be documented in the feasibility analysis. The operational
and technical feasibility should also be examined. For example, a new clinical
project that requires the construction of new facilities may be impeded in its
execution because its timing is contingent on completion of the new buildings.

An initial schedule should be created as part of the feasibility analysis to
avoid committing to a requested completion date that is impossible to meet.
Finally, both financial benefit and marketplace demand should be considered
here. Conducting a financial feasibility analysis is beyond the scope of this text;
consult Gapenski and Reiter (2016) to view numerous examples of financial
analysis.

All elements of the feasibility analysis should be included in the project
charter document, which is described next.

Chapter 5: Project Management 105

Project Charter Document
The project charter authorizes the project and serves as an executive summary.
A formal charter document should be constructed with the following elements:

• Project mission statement
• Project purpose or justification and connection to strategic goals
• High-level requirements that satisfy customers, sponsors, and other

stakeholders
• Assigned project manager and authority level
• Summary milestones
• Stakeholder influences
• Functional organizations and their expected level of participation
• Organizational, environmental, and external assumptions and

constraints
• Financial business case, budget, and return on investment
• Project sponsor with approval signature

A project charter template is provided on the
companion website to this book. The initial descrip-
tion of the project scope is found in the Requirements,
Milestones, and Financial sections of the template.

A project charter can be illustrated with an example from Vincent Valley
Hospital and Health System (VVH). The hospital operates an oncology clinic,
Riverview Clinic, in the south suburban area of Bakersville. Recently, the three
largest health plans in the area instituted pay-for-performance (P4P) programs
to encourage the use of precision medicine in the care of patients with cancer.
Precision medicine focuses on identifying which therapeutic approaches will be
effective for which patients on the basis of genetic, environmental, and lifestyle
factors. For cancer care, pharmacogenomics—the study of how genes affect a
person’s response to particular drugs—is a key element of precision medicine.
This therapeutic approach combines pharmacology (the science of drugs) and
genomics (the study of genes and their functions) to develop effective, safe medi-
cations and doses tailored to variations in a person’s genes (Lister Hill 2016).

The health plans will pay the clinic bonuses if Riverview achieves spe-
cific levels of performance in the use of precision medicine. The P4P system is
being initiated because precision medicine has been shown to provide better
results for the patient and to reduce the health plans’ costs over the course of
treatment (van den Akker-van Marle et al. 2006). Riverview Clinic staff have
decided to embark on a project to increase their use of precision medicine;
their project charter is displayed in exhibit 5.6.

On the web at
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Healthcare Operat ions Management106

Project Mission Statement

This project for Vincent Valley Hospital and Health System (VVH) will
increase the level of use of precision medicine—pharmacogenomic drugs—
to improve outcomes, lower the long-term costs of care to our patients, and
increase reimbursements to the clinic.

Project Purpose and Justification

Health plans in Bakersville have begun to provide additional funding to clin-
ics that meet pharmacogenomic use guidelines. Although a number of condi-
tions are covered by these new payment systems, VVH leadership feels that
pharmacogenomic drug use should be the first project executed because it
is likely to be accomplished in a reasonable time frame with the maximum
financial benefit to our patients and the clinic. Once this project has been
executed, the clinic will move on to more complex clinical conditions.

The project team will be able to incorporate what it has learned
about some of the barriers to success and methods to succeed in pay-for-
performance (P4P) projects. This project is a part of the larger VVH strategic
initiative of maximizing P4P reimbursement.

High-Level Requirements

Once completed, a new prescribing process will
• continue to meet patients’ clinical needs and provide high-quality care and
• increase pharmacogenomic drug use by 4 percent from baseline within six

months.

Assigned Project Manager and Authority Level

Sally Humphries, RN, will be the project manager. Sally has authority to
make changes in budget, time, scope, and performance by up to 10 percent.
Any larger change requires approval from the clinic operating board.

Summary Milestones

• The project will commence on January 1.
• A system to identify approved pharmacogenomic drugs will be available on

February 15.
• The system will go live on March 15.

Stakeholder Influences

The following stakeholders will influence the project:
• Clinicians will strive to provide the best care for their patients.
• Patients will need to understand the benefits of this new system.
• Clinic staff will need training and support tools.
• Health plans should be a partner in this project as part of the supply chain.
• Pharmaceutical firms should provide clinical information on the efficacy of

certain pharmacogenomic drugs.

EXHIBIT 5.6
Project

Charter for
VVH Precision

Medicine
Project

(continued)

Chapter 5: Project Management 107

Project Scope and Work Breakdown

Once a project has been chartered, the detailed work of planning can begin.

Tools
At this point, the project manager should consider acquiring two important
tools. The first is the lowest of low tech, the humble three-ring binder. All
projects need a continuous record of progress reports, team meetings, approved
changes, and so on. A complex project requires many binders, and they will
prove invaluable to the project manager. The classic organization of the bind-
ers is by date, so the first pages should be the project charter. Of course, if the
organization has an effective imaging and document management system, this
can substitute for the binders.

The second tool is project management software. Although many options
are available, the market leader is Microsoft Project, which is used for the

Functional Organizations and Their Participation

• Clinic management staff will lead.
• Compcare (electronic health record vendor) will perform software

modifications.
• VVH information technology (IT) department will support.
• VVH main pharmacy department will support.

Organizational, Environmental, and External Assumptions and Constraints

• Success depends on appropriate substitution of pharmacogenomics for
more traditional therapeutic approaches.

• Patients need to understand the benefits of this change.
• Health plans need to continue to fund this project over a number of years.
• IT modifications need to be approved rapidly by the VVH central IT

department.

Financial Business Case—Return on Investment

The project budget is $161,000 for personnel. Software modifications are
included in the master VVH contract and, therefore, have no direct cost
impact on this project. If the 4 percent increase in pharmacogenomic drug
use is achieved, the two-year revenue increase should be approximately
$175,000.

Project Sponsor with Approval Signature

Dr. Jim Anderson, Clinic President

James Anderson, MD

EXHIBIT 5.6
Project
Charter for
VVH Precision
Medicine
Project
(continued from
previous page)

Healthcare Operat ions Management108

examples throughout the remainder of the chapter. Microsoft Project is part
of the Microsoft Office suite and may already be on many computers in the
organization. If not, a demonstration copy can be downloaded from Microsoft.

The companion website for this book provides addi-
tional explanation related to the use of Project, along
with detailed illustrations of the software’s use for the
Riverview Clinic precision medicine drug project.

Project management software is not essential for small projects, but it
is helpful and almost required for any project that lasts longer than six months
and involves a large team of individuals. Although the Riverview Clinic pharma-
cogenomic drug project is relatively small, Project software is used to manage
it to provide an illustration of the program’s applicability.

Scope
The project scope determines what activities fall within the parameters of a
project—a good scope document is specific about these boundaries. The start-
ing point for developing the detailed scope document is the project charter.
To provide the level of detail needed for this document, the project manager
revisits many of the same stakeholders who contributed to the charter to
acquire specific inputs and requirements. A simple methodology is to interview
stakeholders and ask them to list the three most important outcomes of the
project, which can be combined into project objectives. The objectives must
be specific, achievable, measurable, and comprehensible to stakeholders. In
addition, they should be stated in terms of time-limited “deliverables.” For
example, the objective “Improve the quality of care to patients with diabetes”
is a poor one, whereas “Improve the rate of foot examinations for patients
with diabetes by 25 percent in one year” is a much better objective because it
states a specific, measurable goal that makes sense to stakeholders and is likely
achievable.

The scope document also provides detailed requirements and descrip-
tions of expected outcomes, and it often specifies what types of outcomes are
not being sought. For example, the Riverview Clinic project scope document
might state that the project does not include the use of pharmacogenomic
drugs that are still undergoing clinical trials.

The types of deliverables should be specified in the project scope as
well, such as implementation of a new process, installation of a new piece of
equipment, or presentation of a report. The organization of the project’s per-
sonnel is also clarified in the scope document. It names the project manager
and team members and defines their relationships in terms of their roles in the
overall organization.

An initial evaluation of potential risks to the project should be presented
in the scope document. As with other details, the schedule length and milestones

On the web at
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Chapter 5: Project Management 109

should be more detailed in the scope statement than in the charter. As discussed
in the next section, the final schedule is developed on the basis of the work
breakdown structure. Finally, the scope document should include methods
for monitoring progress and making changes where necessary, including the
formal approvals required.

The individual assigned to create the project scope document must avoid
expanding the scope of the project beyond its original intent: “While we are at
it, we might as well ____.” These add-ons, sometimes called “gold plating,”
tend to be some of the most dangerous occurrences in the world of project
management because they can result in projects going over budget, not being
completed on time, and not meeting performance goals.

Work Breakdown Structure
The second major component of the scope document is the work breakdown
structure (WBS), considered the engine of the project because it determines
how the project’s goals are to be achieved. The WBS lists the tasks that need
to be accomplished, including an estimate of the resources required (e.g., staff
time, services, equipment). For complex projects, the WBS is a hierarchy of
major tasks, subtasks, and work packages (subdivisions of the work contained
in a subtask). Exhibit 5.7 demonstrates this framework graphically.

The size of each task should be planned carefully. A task should not be
so small that its monitoring consumes a disproportionate share of the task itself.
Similarly, an overly large task cannot be effectively monitored and should be
divided into subtasks and then work packages. The task should be described

Work breakdown
structure (WBS)
A list of the tasks
that need to be
accomplished,
their relationship
to each other,
and the resources
required for a
project to meet its
goals.

Project

3ksaT2ksaT1ksaT

1.3ksatbuS1.2ksatbuS1.1ksatbuS Subtask 1.3Subtask 1.2

Work package 1.1.1

Work package 1.1.2

Work package 1.1.3

Work package 2.1.1 Work package 2.1.2

Note: This type of diagram can be generated in Microsoft Word and other Microsoft Office products
by using the commands Insert → Smart Art → Hierarchy. WBS = work breakdown structure.

EXHIBIT 5.7
General Format
for WBS

Healthcare Operat ions Management110

in enough detail that the individual responsible, the cost, and the duration
can be identified.

A reasonable guideline in terms of duration is that a task should be one
to three weeks in length to be effectively monitored. Some tasks are particu-
larly critical to the success of the project. These tasks should be identified as
milestones. The completion of milestones provides a convenient shorthand
method to communicate overall project progress to stakeholders.

The WBS can be developed by the project team itself or with the help
of outside experts who have executed similar projects. At this point in the
project, the WBS is the best estimate of how the project will be executed. Of
course, WBSs are almost always inaccurate in some way, so the formal control
and change procedures described in this section are essential to successful
project management.

After the WBS has been constructed, the resources required and esti-
mated time for each element must be refined. Estimating the time a task will
require is an art and is best exercised by a team of individuals. Any previous
experiences and data can be helpful in this phase. One group process that has
proved useful is the program evaluation and review technique (PERT) for time
estimation. Team members individually estimate the time a task will take at its
best, worst, and most likely progression. After averaging the team’s responses
for each of the times, the final PERT time estimate is computed as

Estimated task time
Best (4 Most likely) Worst

6
=

+ × +

After a number of meetings, the Riverview Clinic team has determined
that the pharmacogenomic drug project includes three major tasks, each with
two subtasks, that needed to be accomplished to meet the goals of the project.
The subtasks are as follows:

• Develop a clinical strategy that maintains quality care with the increased
use of pharmacogenomics.

• Develop a system to inform clinicians of approved pharmacogenomics.
• Update systems to ensure that timely patient medication lists are

available to clinicians.
• Develop and deploy a staff education plan.
• Develop a system to monitor performance.
• Develop and begin to distribute patient education materials.

The WBS for Riverview Clinic’s project is displayed in exhibit 5.8. The
actions listed in the bottom tier represent the higher-level tasks for this project.
For a project of this scope to proceed effectively, many more subtasks, perhaps

Chapter 5: Project Management 111

50 to 100, are generally required; we are limiting this example to higher-level
tasks to illustrate the principles of project management.

It is important to note that the time estimate for each task is the total
time needed to accomplish a task, not the calendar time it will take—a three-
day task can be accomplished in three days by one person or in one day by
three people.

The next step is to determine what resources are needed to accomplish
these tasks. Riverview Clinic has decided that this project will be accomplished
by four existing employees and the purchase of consulting time from VVH’s
IT supplier. The individuals involved are

• Tom Simpson, clinic administrator;
• Dr. Betsey Thompson, oncologist;
• Sally Humphries, RN, nursing supervisor;
• Cindy Tang, billing manager; and
• Bill Onku, IT vendor support consultant.

The Project software provides a convenient window in which to docu-
ment these individuals’ participation and their cost per hour. The program
also provides higher levels of detail, such as the hours an individual can devote
to the project and actual calendar days that they are available. When asking
clinicians to contribute to a project, the project manager should consider the
revenue per hour generated by these individuals, as opposed to their salaries
and benefits, because most organizations lose this revenue if the clinician has a
busy practice. Exhibit 5.9 shows the Project window for the Riverview Clinic
staff who will work on the pharmacogenomic drug project.

Pharmacogenomic
drug project

Management
and

administration
gniniarTsmetsyS

Develop
clinical

strategy
(10 days)

Develop
monitoring

system
(27 days)

Identify
approved

pharmacogenomic
drugs (22 days)

Supply current
patient

medication
list (33 days)

Train staff
(17 days)

Provide patient
education

(9 days)

Note: WBS = work breakdown structure.

EXHIBIT 5.8
WBS for River-
view Pharmaco-
genomic Drug
Project

Healthcare Operat ions Management112

Team members should be clear about their accountability for each task.
A functional responsibility chart, such as the RASIC framework (which stands
for responsible, approval, support, informed, and consult) is helpful; the Riverview
project RASIC is displayed in exhibit 5.10. The RASIC diagram is a matrix
of team members and tasks from the WBS. For each task, one individual is
responsible (R) for ensuring that the task is completed. Other team members
may need to approve (A) the completion of the task. Additional team members
may work on the task as well, so they are considered support (S). Assigning
to a team member the obligation to inform (I) other members helps a team
communicate effectively. Finally, some team members need to be consulted
(C) as a task is implemented.

RASIC
A chart delineating
all project team
members’ roles
for each task in
a project. The
acronym comes
from the members’
roles: responsible,
approval, support,
informed, consult.

EXHIBIT 5.9
Resources for
the Riverview

Clinic Pharma-
cogenomic Drug

Project

WBS Task

Clinic
Board of
Directors

Lead MD
Betsey

Thompson

Adminis-
trator

Tom

Simpson

Project
Manager

Sally

Humphries

Billing
Lead

Cindy Tang

IT Lead
Bill Onku

Develop clinical

strategy
A R C C I I

System to

identify approved

pharmacogenomics

A R S R S

Updated

medication lists
R I S I S

Patient education A S S R I I

Staff education A R C S I

Monitoring system A C R C S C

Note: R = responsible; A = approval; S = support; I = inform; C = consult. WBS = work breakdown
structure.

EXHIBIT 5.10
RASIC for the

Riverview
Pharma-

cogenomic Drug
Project

Chapter 5: Project Management 113

Scheduling
Network Diagrams and Gantt Charts
Because the WBS does not specify a sequence of activities, the next step is to
schedule each task to complete the total project. First, the logical order of the
tasks must be determined. For example, the Riverview Clinic project team has
determined that the system to identify appropriate pharmacogenomic drugs
must be developed before the training of staff and education of patients can
begin. Other constraints must also be considered in the schedule, including
required start or completion dates and resource availability.

Two tools are used to visually display the schedule. The first is a net-
work diagram that connects each task in precedence order. This is essentially
a process map (chapter 6) in which the process is performed only once; the
main difference is that network diagrams do not display paths that return to the
beginning (as happens frequently in process maps). A practical way to develop
an initial network diagram is to place each task on a sticky note and arrange,
and rearrange, the notes on a set of flip charts until they meet the logical and
date-imposed constraints. The tasks can then be entered into a project man-
agement software system.

Exhibit 5.11 is the network diagram developed by the team for the
Riverview Clinic pharmacogenomic drug project. This schedule can be entered
into Project to generate a similar diagram. Another common scheduling tool
is the Gantt chart, which lists each task on the left side of the page with a bar
indicating the start and end times. The Gantt chart for the Riverview Clinic
project, generated by Project, is shown in exhibit 5.12. Each bar indicates the
duration of the task, and the small arrows connecting the bars indicate the
predecessor–successor relationship of the tasks.

Network diagram
A scheduling tool
that connects
tasks in order of
precedence.

Gantt chart
A scheduling tool
that lists project
tasks, with bars
indicating start
and end dates for
each task.

Develop
clinical
strategy

Patient
education

Staff
education

Updated
medication

lists

Monitoring
system

Start

Implement

System to
identify

approved
pharma-

cogenomics

EXHIBIT 5.11
Network
Diagram for
Riverview
Pharma-
cogenomic
Drug Project

Healthcare Operat ions Management114

The next step is to assign resources to each task. Exhibit 5.13 shows
how the resources are assigned for each day in the project. Care must be taken
when assigning resources, as no person works 100 percent of the time. If any
single individual is allocated at more than 80 percent in any period, the schedule
may need to be adjusted to reduce this allocation. Adjusting the schedule to
accommodate this constraint is known as “resource leveling.”

A fi nal review of this initial schedule is undertaken to assess how many
tasks are being performed in parallel (simultaneously). A project with few

EXHIBIT 5.12
Riverview

Pharma-
cogenomic Drug

Project Gantt
Chart

EXHIBIT 5.13
Riverview

Pharma-
cogenomic Drug

Project Tasks
with Resources

Assigned

Chapter 5: Project Management 115

parallel tasks takes longer to complete than does one with more total tasks
of which many are parallel. Another consideration may be date constraints.
Examples include a task that cannot begin until a certain date because of staff
availability and a task that must be completed by a certain date to meet an
externally imposed deadline (e.g., new Medicare billing policy). The Project
software provides tools to set these constraints in the schedule.

Slack and the Critical Path
To optimize a schedule, the project manager must pay attention to slack in
the schedule and to the critical path. A task that takes three days but does not
need to be completed for five days is said to have two days of slack. The criti-
cal path is the longest sequence of tasks with no slack, or the shortest possible
completion time of the project.

Slack is determined by the early finish and late finish dates. The early
finish date is the earliest date that a task could possibly be completed, as
determined by the early finish dates of predecessor tasks. The late finish date
is the latest date that a task can be completed without delaying the finish of
the project; it is based on the late start and late finish dates of successor tasks.
The difference between early finish and late finish dates equals the amount of
slack. For critical path tasks (which have no slack), the early finish and late fin-
ish dates are identical. Tasks with slack can start later based on the amount of
slack they have available. In other words, if (1) a task takes three days, (2) the
early finish date is day 18 (based on its predecessors), and (3) the late finish
date is day 30 (based on it successors), the slack for this task is 12 days; this
task could start as late as day 27 without affecting the completion date of the
project. The critical path, which determines the duration of a project, is the
connected course through a project of critical tasks.

Calculating slack and the critical path can be complex and time consum-
ing. Fortunately, Project performs these functions automatically. However, in
some cases (e.g., a basic clinical research project), estimating the duration of
tasks is difficult. If a project includes many tasks with high variability in their
expected durations, the PERT estimating system should be used. Note that,
although PERT employs probabilistic task times to estimate slack and criti-
cal paths and is good for time estimation prior to the start of the project, the
critical path method is better suited for project management once a project has
begun. Having a range of start dates for a task is not particularly useful—what
is really important is knowing when a task should have started and whether
the project is ahead of or behind schedule.

Although Project provides a PERT scheduling function, the use of PERT
is infrequent in healthcare and beyond the scope of this book. Exhibit 5.14
displays a Gantt chart for the Riverview Clinic pharmacogenomics project,
with both slack and critical path calculated.

Healthcare Operat ions Management116

Schedule Compression
Say the president of Riverview Clinic has been notifi ed by one health plan that
if the Riverview pharmacogenomic drug project is implemented by March 1,
the clinic will receive a $20,000 bonus. He asks the project manager to consider
speeding up, or “crashing,” the project.

The term project crashing has negative associations, as the thought of a
computer crashing stirs up dire images. However, a crashed project is simply
one that has had its schedule compressed. Schedule compression of a project
requires reducing the length of the critical path and can be achieved by using
any of the following techniques (PMI 2013, 181):

• Shortening the duration of work on a task on the critical path
• Changing a task constraint to allow for more scheduling fl exibility
• Breaking a critical task into smaller tasks that can be worked on

simultaneously by different resources
• Revising task dependencies to allow more scheduling fl exibility
• Performing tasks in parallel as opposed to a linear sequence

(fast-tracking)
• Setting lead time between dependent tasks where applicable
• Scheduling overtime
• Bringing in additional staff
• Paying for expedited delivery of needed supplies
• Assigning additional resources to work on critical path tasks
• Lowering performance goals (not recommended without strong

stakeholder agreement)

The scope, time, duration, and performance relationships need to be
considered in a crashed project. A crashed project has a high risk of costing
more than the original schedule predicted, so the formal change procedure,
discussed in the next section, should be used.

EXHIBIT 5.14
Gantt Chart

for Riverview
Clinic Pharma-

cogenomic
Drug Project

with Slack and
Critical Path

Calculated
Slack for
each task

Critical
path

Chapter 5: Project Management 117

Project Control

Project management would be straightforward if every project’s schedule and
costs occurred according to the initial project plan. However, because this
is almost never the case, an effective project monitoring and change control
system must be in place throughout the life of a project.

Monitoring Progress
The first important monitoring element is a system to measure schedule comple-
tion, cost, and expected performance against the initial plan. Microsoft Project
provides a number of tools to assist the project manager in this area. After the
plan’s initial scope document, WBS, staffing, and budget have been determined,
they are saved as the “baseline plan.” Any changes during the project can be
compared to this baseline.

On a disciplined time basis (e.g., once per
week), the project manager needs to receive a prog-
ress report from each task manager—the individual
designated as responsible on the RASIC chart (see
exhibit 5.10 and the companion website for examples)—regarding schedule
completion and cost.

Change Control
The project manager should hold a status meeting at least once a month, and
preferably more frequently. At this meeting, the project team should review
the actual status of the project in terms of task completion, expenses, person-
nel utilization, and progress toward expected project outcomes. The majority
of time spent in these meetings should be devoted to problem solving, not
reporting.

Once deviations are detected, their source and causes must be deter-
mined by the team. For major or complex deviations, diagnostic tools such as
fishbone diagrams (chapter 6) can be used. Three courses of action are now
available: Ignore the deviation if it is small, take corrective action to remedy the
problem, or modify the plan by using the formal change procedure developed
in the project charter and scope document.

One major cause of deviations is an event that occurs outside the proj-
ect. The environment constantly changes during a project’s execution, and
modifications of the project’s scope or performance level may be necessary.
For example, the application of a new clinical breakthrough may take priority
over projects that improve support systems, or a competitor may initiate a new
service that requires a response.

A formal change mechanism is a key tool used by high-performing
project managers. Resistance to communicating a schedule or cost problem to

On the web at
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Healthcare Operat ions Management118

project sponsors and stakeholders is part of human nature. However, the con-
sequences of this inaction can be significant, if not fatal, to large projects. The
change process forces all parties involved in a project to subject themselves to
disciplined analysis of options and creates disincentives for scope creep. Changes
to the initial plan should be documented in writing and formally approved by
the project sponsor as appropriate. They should then be added to the project
records (three-ring binders or equivalent).

The Riverview Clinic project charter (and subsequent scope document)
states that changes in plan that constitute less than 10 percent of the total
affected resource can be made by project manager Sally Humphries. There-
fore, she is authorized to adjust the schedule by up to 4.9 days, the cost by up
to $6,100, and the performance goal by 0.4 percent. For deviations greater

than these amounts, Sally needs the clinic board to
review and sign off on the adjustment. The compan-
ion website contains project change documentation
and a sign-off template.

Communications
A formal communications plan should be developed as part of scope creation.
Communications to both internal and external stakeholders are critical to the
success of a project. Many types of communications media can be used, from
simple oral briefings to e-mails to formal reports. One approach used by many
organizations today is to establish a web-based intranet that contains detailed
information on the project, combined with a periodical e-mail update sent to
stakeholders with a summary progress report and links back to the intranet
site for more detailed information. A sophisticated communications plan is
fine-tuned to meet stakeholder needs and interests and communicates only
those issues of interest to each stakeholder. As part of the communications
strategy, feedback from stakeholders should always be solicited, as changes in
the project plan may affect one or more stakeholders in ways unknown to the
project manager.

The project update communications should contain information gath-
ered from quantitative reports. At a minimum, these communications should
provide progress against baseline on schedule, cost, scope, and expected per-
formance. Any changes to project baseline or the approval process should be
noted, as should those issues that need resolution or are being resolved. The
expected completion date is always of interest to all stakeholders and should
be a prominent part of any project plan communication.

Risk Management
Comprehensive prospective risk management is another element of successful
projects. A risk is an event that, if realized, causes the project to experience a

On the web at
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Risk management
Within a project,
the identification
of possible events
that, if realized,
will affect the
execution of the
project and a plan
to mitigate these
events.

Chapter 5: Project Management 119

substantial deviation from the planned schedule, cost, scope, or performance.
Like many other aspects of project management, developing a risk manage-
ment plan at the beginning of a project—and updating it continuously as the
project progresses—takes discipline.

The most direct way to develop a risk management plan is to begin with
the WBS. Each task in the WBS should be assessed for risks, both known and
unknown. Risks can occur for each task in its performance, duration, or cost.
If a project includes 50 tasks, it has 150 potential risks.

A number of techniques can be used to identify risks; the most straight-
forward is a brainstorming exercise by the project team. (Some of the tools
found in chapter 6, such as mind mapping, root-cause analysis, and force field
analysis, can also be used in risk assessment.) Another useful technique is to
interview stakeholders to identify risks to the project as viewed from their
perspective. The organization’s strategic plan is also a resource, especially if it
contains a strengths, weaknesses, opportunities, and threats analysis (frequently
referred to as a SWOT analysis). The weaknesses and threats sections may
contain clues as to potential risks to a project task.

Once risks have been identified for each task in the WBS structure, the
project team should assign a risk probability to each. Those risks with the highest
probability, or likelihood, of occurring during the project should be analyzed
in depth and a risk management strategy devised. The failure mode and effects
analysis method (chapter 6) can also be used for a more rigorous risk analysis.

For tasks that are critical to project execution or that carry high risk, a
quantitative analysis can be conducted. Assuming that data can be collected for
similar tasks in multiple circumstances, probability distributions can be created
and used for simulation and modeling. An example of the applicability of this
technique is in remodeling space in an older building. If an organization were
to review a number of recent remodeling projects, it might determine that the
average cost per square foot of remodeled space is $200 with a normal distribu-
tion (think bell curve; distribution is discussed in more detail later in the book).
This information may be used as the basis of a Monte Carlo simulation or as
part of a decision tree (chapter 6). The results of these simulations provide the
project manager with quantitative boundaries on the possible risks associated
with the task and project and are useful in constructing mitigation strategies.

Tasks with the following characteristics may be high risk and thus should
be considered carefully:

• Long duration
• Highly variable estimates of duration
• Dependence on external organizations
• Requirement of a unique resource (e.g., a physician who is on call)
• Likely to be affected by external government or payer policies

Healthcare Operat ions Management120

The management strategy for each identified risk should have three
components. First, risk avoidance initiatives should be identified. Avoiding an
adverse event is always preferable to dealing with its consequences. An example
of a risk avoidance strategy is to provide mentoring to a young team member
who has responsibility for key tasks in the project plan.

The second element of the risk management strategy is to develop a
mitigation plan. One example of a mitigation response is to bring additional
people and financial resources to a task. Another is to call on the project spon-
sor to help break an organizational logjam.

Third, a project team may decide to transfer the risk to an insurance
entity. This strategy is common in construction projects through the use of
bonding for contractors.

All identified risks and their management plans should be outlined in a
risk register, a listing of each task, identified risks, and prevention and mitiga-
tion plans. This register should be updated throughout the life of the project.

The Riverview Clinic project team has identified three serious risks,
which are listed in exhibit 5.15 with their mitigation plans.

Quality Management, Procurement, the Project
Management Office, and Project Closure
Quality Management
The majority of the focus in this chapter has been on managing the scope,
cost, and schedule of a project. The performance, or quality, of an operational
project is the fourth key element in successful project management. In general,
quality can be defined as meeting specified performance levels with minimal
variation and waste.

Mitigation plan
A set of tasks
intended to reduce
or eliminate the
effect of risk in a
project.

Risk Mitigation Plan

Pharmacogenomic drug
use is not as effective as
traditional methods.

Assistance will be sought from
• VVH hospital pharmacy
• Pharmaceutical firms
• Health plans

Computer systems do not
work.

• IT vendor has specialists on call who will be
flown to Riverview Clinic.

• Assistance will be sought from VVH IT
department.

Software modifications
are more expensive than
budgeted.

• Contingency funding has been earmarked in
clinic budget.

EXHIBIT 5.15
Risk Mitigation

Plan for the
Riverview

Clinic Pharma-
cogenomic Drug

Project

Chapter 5: Project Management 121

The fundamental tools for accomplishing these goals are described in
chapters 6 and 9. More advanced techniques for reducing variation in outcomes
can be found in chapter 9 (quality and Six Sigma), and chapter 10 discusses
tools for waste reduction (Lean).

Throughout the life of a project, the project team should monitor the
expected quality of the final product. Individual tasks that are part of a qual-
ity management function within a project should be created in the WBS.
For example, one task in the Riverview Clinic pharmacogenomics project is
to develop a monitoring system. This system will not only track the use of
pharmacogenomic drugs but also ascertain whether their use results in any
negative clinical effects.

Procurement
Many projects depend on outside vendors and contractors, so a procurement
system integrated with the organization’s project management system is essen-
tial. The organization’s purchasing or procurement department can be helpful
in this process as well. Procurement staff have developed templates for many of
the processes described in the following paragraphs. They also have knowledge
of the latest legal constraints an organization may face. However, the most useful
attribute of the procurement department may be the frequency with which it
executes the purchasing cycle. By performing this task frequently, its staff have
developed expertise in the process and are aware of common pitfalls to avoid.

Contracting
Once an organization has decided to contract with a vendor for a portion of a
project, three basic types of contracting are available. The fixed-price contract is
an agreement that features a lump sum payment for the performance of speci-
fied tasks. Fixed-price contracts sometimes contain incentives for early delivery.

Cost-reimbursement contracts call for payment to be made to the vendor
on the basis of the vendor’s direct and indirect costs of delivering the service
for a specified task. Clearly documenting in advance how the vendor will cal-
culate its costs is important.

The most open-ended type of contract is known as a time-and-materials
contract. Here, the task itself may be difficult to define, and the contractor is
reimbursed for her actual time, materials, and overhead. A time-and-materials
contract is commonly used for remodeling an older building, where the con-
tractor is not certain of what she will find in the walls. Great caution and
monitoring are needed when an organization uses this type of contracting.

Any contract should contain a statement of work (SOW). The SOW
contains a detailed scope statement, including WBS, for the work to be per-
formed by the contractor. It also includes expected quantity and quality levels,

Statement of work
(SOW)
A detailed set of
tasks, expected
outcomes, dates,
and costs of a
project undertaken
by an external
contractor.

Healthcare Operat ions Management122

performance data, task durations, work locations, and other details used to
monitor the work of the contractor.

Selecting a Vendor
Once a preliminary SOW has been developed, the organization solicits propos-
als and selects a vendor. A useful first step is to issue a request for information
(RFI) to as many possible vendors as the project team can identify. The RFIs
generate responses from vendors about their products and experience with
similar organizations. On the basis of these responses, the number of feasible
vendors can be reduced to a manageable set for consideration.

A more formal request for proposal (RFP) can then be issued to the
remaining vendors under consideration for the task. The RFP asks for a detailed
proposal, or bid. The following criteria should be applied in the process of
reviewing RFPs and awarding the contract:

• Does the vendor clearly understand the organization’s requirements?
• What is the vendor’s total cost estimate for completing the task?
• Does the vendor have the capability and correct technical approach to

deliver the requested service?
• Does the vendor have a management approach to monitor successful

execution of the SOW?
• Can the vendor provide maintenance or meet future requirements and

changes?
• Does the vendor provide references from clients that are similar to the

contracting organization?
• Does the vendor assert intellectual or proprietary property rights in the

products it supplies?

Project Management Office
Many types of organizations outside the healthcare industry (e.g., architecture,
consulting) are primarily project oriented. Such organizations often have a
centralized project management office (PMO) to oversee the work of their
staff. Because healthcare delivery organizations are primarily operational, the
majority do not use this structure.

However, departments in large hospitals and clinics, such as IT and
quality, have begun to use a centralized project office approach. In addition,
some organizations have designated and trained project leaders in Six Sigma
or Lean techniques. These project leaders are assigned from a central PMO.

PMOs provide a single structure through which to monitor progress
on all projects in an organization and reallocate resources as needed when

Chapter 5: Project Management 123

projects encounter problems. They also serve as a resource for the training
and development of project managers. PMOs support the project manager in
many ways, including but not limited to the following (PMI 2013):

• Managing shared resources across all projects administered by the PMO
• Identifying and developing project management methodology, best

practices, and standards
• Coaching, mentoring, training, and oversight
• Developing and managing project policies, procedures, templates, and

other shared documentation
• Monitoring compliance with project management standards, policies,

procedures, and templates via project audits
• Coordinating communications across all projects

Another useful function of a PMO is that it maintains an information
system that can provide reports to project stakeholders and senior management.
The contents of this information system may include the following:

• Progress reports on individual projects (schedule, cost, performance)
• Risk management (tasks with high risks and their current status)
• Performance failures and remediation steps
• A log of lessons learned

Project Closure
A successful project should have an organized closure process, which includes
a formal stakeholder presentation and approval process. In addition, the proj-
ect sponsor should sign off at project completion to signify that performance
levels have been achieved and all deliverables have been received. During
the closeout process, special attention should be paid to project staff, who
will be interested in knowing their next assignment. A disciplined handoff of
staff from one project to the next allows successful completion of the closure
process.

All documents related to the project should be indexed and stored. This
process can be helpful if outside vendors have participated in the project and
a contract dispute arises in the future. Historical documents can also provide
a good starting point for the next version of a project.

The project team should conduct a final session to identify lessons
learned—good and bad—in the execution of the project. These lessons should
be included in the project documentation and shared with other project man-
agers in the organization.

Healthcare Operat ions Management124

Agile Project Management

In some situations, knowledge of the tasks necessary for project success is not
available as the project is chartered and scheduled. In these cases, agile project
management often works better than other methods. Agile project management
is adaptive, in contrast to the predictive style of formal project management.

Characteristics of agile project management include the following:

• Customer satisfaction is achieved by rapid, continuous delivery of
services or new processes.

• Newly prototyped services or processes are delivered frequently (weekly
rather than monthly).

• The effectiveness and ease of use of these prototypes are the principal
measures of progress.

• The project team can easily incorporate late changes.
• The project team and customer interact informally and frequently.
• The project team and customer are colocated.
• The project team is cross-functional across the organization.
• Continuous attention is given to technical excellence and good design

in the new services or processes.
• The project team regularly adapts to changing circumstances.

Exhibit 5.16 illustrates agile project management.
Agile project management is best used for “mysteries,” to which there

are no known answers (e.g., finding the best treatment for an emerging disease),

Build prototype service
or process.

Collaborate with customers
to define and refine

requirements.

Does it meet
expected

performance?
Implement—go

to scale.

N
o

Yes

Charter project.
Determine expected time

frame, cost, and performance.

EXHIBIT 5.16
Agile Project

Management

Chapter 5: Project Management 125

as opposed to “puzzles,” to which the solution is known but complex (e.g.,
building a new clinic).

Innovation Centers

Mergers and consolidations of providers and health plans have increased since
the enactment of the Affordable Care Act in 2010. A key strategic objective
of the law was to encourage the development of systems of care, as they have
demonstrated superior cost-effectiveness and quality. However, as these systems
have proliferated, their leaders have realized that growth in size also frequently
means growth in bureaucracy and the consequent loss of rapid innovation.

To remedy this dilemma, many systems have created innovation centers.
The Commonwealth Fund conducted a survey in 2014–2015 of innovation
centers in 31 healthcare systems. The authors of this study reviewed charac-
teristics of these centers and determined that, in general, the innovation cen-
ters were “‘places that are working to discover, develop, test, and/or spread
new models of care delivery’—in hospitals, clinics, and patients’ homes. The
innovations they test may be internally developed or adopted from elsewhere”
(Commonwealth Fund 2015). These centers focused on a variety of topics, as
displayed in exhibit 5.17.

Care coordination
Disease-specific outcomes

Access
Patient engagement

Workflow efficiencies
Population health

Clinical decision support
Intraprofessional communication

Utilization
Home-based care

Wellness
Patient safety

Devices
Community-based services

Price transparency
Other responses

0% 50%

30%
35%

55%
61%
61%

65%
65%

68%
71%

74%
77%
77%

84%
87%
87%

90%

100%

Percentage of Innovation Center Survey Respondents

EXHIBIT 5.17
Focus of
Innovation
Centers

Source: Commonwealth Fund (2015). Used with permission.

Note: Percentages based on 31 innovation center respondents. “Other responses” include spending
reductions, the uninsured, helping seniors age in place, teaching/education, data mining, and data
analysis.

Healthcare Operat ions Management126

Disruptive Innovation
McLaughlin and Militello (2015) conducted a review of disruptive innovation
literature and noted the following:

Clayton Christensen [(Christensen, Grossman, and Hwang 2008)] introduced the con-

cept of creative disruption to the healthcare industry. His basic theory of disruption

is a process by which complicated, expensive products and services are transformed

into simple, affordable ones. Disruptive solutions emerge almost always through

new companies or totally independent business units that create new, value-added

processes. However, significant disruption has arrived in the healthcare sector in a

way not imagined by Christensen. It came from the Affordable Care Act (ACA). . . .

Under Christensen’s idea of disruptive solutions, it seems that managers should

be at the forefront of knitting together new concepts of cost containment, quality,

and exceptional service to transform their organization into providers of simple and

affordable solutions within the context of ACA principles.

The review identified three key steps for creating effective disruptive
innovations in healthcare (McLaughlin and Militello 2015):

1. Test the business model against the needs of the customer.
2. Pilot test one or two ideas to create or counter disruption.
3. Look across disciplines and organizational boundaries for ideas and

encouragement.

All of the project management tools and approaches contained in this chap-
ter are being used by organizations to undergird the work of innovation centers.

The Project Manager and Project Team

The project manager’s role is pivotal to the success of any project, as he must
select, develop, and nurture high-functioning team members, among other
critical activities. The project manager’s skills also include running effective
meetings and facilitating optimal dialogue during these meetings.

Team Skills
A project manager can take on multiple roles in a project. In many smaller
healthcare projects, the project manager is the person who actually accomplishes
several of the project tasks. In larger or more complex projects, the project
manager’s job is solely to lead and manage the individuals performing the
tasks. Slack (2005) provides a useful matrix to determine what role a project
manager should assume in projects of varying sizes (exhibit 5.18).

Chapter 5: Project Management 127

Team Structure and Authority
Team members may be selected and the project structure determined by the
project manager, but in many cases they are outlined by the project sponsor and
other members of senior management. Formally documenting the team makeup
and how team members are assigned in the project charter and scope is impor-
tant in clarifying team roles for both team members and project stakeholders.

A number of key issues must be addressed as the project team is formed.
The most important is the project manager’s level of authority to make deci-
sions. Can the project manager commit resources, or must he ask senior man-
agers or department heads each time a new resource is needed? Is the budget
controlled by the project manager, or does a central financial authority control
it? Is administrative support available to the team, or do the project team
members need to perform these tasks themselves?

Finally, care should be taken to avoid overscheduling team members.
All members must have the availability to work on the project as expected.

Team Meetings
A weekly or biweekly project team meeting is highly recommended to keep a
project on schedule. At this meeting, the project’s progress can be monitored
and discussed and actions initiated to resolve deviations and problems.

All good team meetings include a comprehensive agenda and a complete
set of minutes. Minutes should be action oriented (e.g., “The schedule slippage
for task 17 will be resolved by assigning additional resources from the temporary
pool”). In addition, the individual accountable for following through on the issue
should be identified. If the meeting’s deliberations and actions are confidential,
everyone on the team should be aware of the policy and adhere to it uniformly.

The decision-making process should be clear and understood by all
team members. In some situations, all major decisions are made by the project
manager. In others, team members may have veto power if they represent a
major department that is expected to commit resources. Some major decisions
may require review and approval by individuals external to the project team.
The use of data and analytical techniques is strongly encouraged as part of the
decision-making process.

Variable Small Project Medium Project Large Project

Effort range 40–400 hours 400–2,400 hours 2,400+ hours

Duration 1 week–3 months 3–6 months 6 months–2 years

Project leader
role

“Doer” with some
help

Manage and “do
some”

Manage

Source: Slack (2005). Used with permission.

EXHIBIT 5.18
Project
Manager’s Role
Based on Effort
and Duration of
a Project

Healthcare Operat ions Management128

Team members need to take responsibility for the success of the team.
They can demonstrate this acceptance by following through on commitments,
contributing to discussions, actively listening, and giving and being receptive to
feedback. Everyone on a team should feel that she has a voice, and the project
manager needs to lead the meeting in such a way as to balance the “air time”
among team members. This approach requires occasionally interrupting—
politely and artfully—the wordy team member and summarizing her point; it
also means calling on the silent team member to solicit input.

At the end of a meeting, one useful activity is to evaluate the meeting
itself. The project manager and team can spend a few minutes reviewing ques-
tions such as the following:

• Did we accomplish our purpose?
• Did we take steps to maintain our gains?
• Did we document actions, results, and ideas?
• Did we work together successfully?
• Did we share our results with others?
• Did we recognize everyone’s contribution and celebrate our

achievements?

Leadership Skills
Although this book is not primarily concerned with leadership, clearly the
project manager must be able to lead a project forward. Effective project
leadership requires the following skills:

• The ability to think critically using complex information
• The strategic capability to take a long-term view of the organization
• The ability to gain and maintain a systems view of the organization and

its environment (discussed in chapter 1)
• The ability to create and lead change
• The capacity to understand oneself to permit positive interactions,

conflict resolution, and effective communication
• The ability to mentor and develop employees into high-performing

team members
• The ability to develop a performance-based culture

Additional resources on leadership are available from Health Administration
Press at www.ache.org/pubs/topic.cfm#Leadership.

Chapter 5: Project Management 129

Conclusion

This chapter provides a basic introduction to the science and discipline of
project management. The field is finding a home in healthcare IT departments
and has a history in construction projects. Successful healthcare organizations
of the future will use this rigorous methodology to make significant changes
and improvements throughout their operations.

Discussion Questions

1. Who should be included as members of the project team, key
stakeholders, and project sponsors for a clinical project in a physician’s
office? In a hospital? Support your choices.

2. Identify five common risks in healthcare clinical projects, and develop
contingency responses for each.

Exercises

1. Download the project charter and project
schedule from the companion website, and
perform the following activities:
a. Complete the missing portions of the

charter.
b. Develop a risk assessment and mitigation plan.
c. Add tasks to the schedule for those areas that require more

specificity.
d. Apply resources to each task, determine the critical path, and devise

a method to crash the project to reduce its total duration by 20
percent.

2. Review the Institute for Healthcare Improvement website (see especially
www.ihi.org/knowledge/Pages/ImprovementStories/default.aspx),
and select one of the quality improvement projects described. Although
you will not know all the details of the organization that executed this
project, create a charter document for your chosen project.

3. For the project identified in exercise 2, create a feasible WBS and
project schedule. Enter the schedule into Microsoft Project.

On the web at
ache.org/books/OpsManagement3

Healthcare Operat ions Management130

References

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Management? The Search for Quality Publications Relevant to Nontraditional
Industries.” Project Management Journal 39 (3): 6–27.

Christensen, C. M., J. H. Grossman, and J. Hwang. 2008. The Innovator’s Prescription: A
Disruptive Solution for Health Care. New York: McGraw-Hill.

Commonwealth Fund. 2015. “Findings from a Survey of Health Care Delivery Innova-
tion Centers.” Published April 28. www.commonwealthfund.org/publications/
chartbooks/2015/apr/survey-of-health-care-delivery-innovation-centers.

Gapenski, L. C., and K. L. Reiter. 2016. Health Care Finance: An Introduction to Accounting
and Financial Management. Chicago: Health Administration Press.

Lister Hill National Center for Biomedical Communications, US National Library of
Medicine, National Institutes of Health. 2016. “Help Me Understand Genetics:
Precision Medicine.” Published August 16. https://ghr.nlm.nih.gov/handbook/
precisionmedicine.pdf.

McLaughlin, D. B., and J. Militello. 2015. “Thinking Beyond the Affordable Care Act.”
Journal of Healthcare Management 60 (3): 160–63.

Project Management Institute (PMI). 2015. “Connections: Project Management Institute
2014 Annual Report.” Accessed August 1, 2016. www.pmi.org/~/media/PDF/
Publications/pmi-annual-report-2014.ashx.

———. 2013. 2013 Guide to the Project Management Body of Knowledge: PMBOK® Guide—
Fifth Edition. Newton Square, PA: PMI.

Quora. 2016. “How Many People Have PMP Certification in the U.S.?” Accessed August
1. www.quora.com/How-many-people-have-PMP-certification-in-the-U-S.

Slack, M. P. 2005. Personal communication, August 15.
Thomson, L. 2013. “HealthCare.gov Diagnosis: The Government Broke Every Rule of

Project Management.” Forbes. Published December 3. www.forbes.com/sites/
lorenthompson/2013/12/03/healthcare-gov-diagnosis-the-government-broke-
every-rule-of-project-management/#2e03a6aa3d44.

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Further Reading

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New-Product Development.” Harvard Business Review 86 (3): 96–102.

Chapter 5: Project Management 131

Chesbrough, H. W., and A. R. Garman. 2009. “How Open Innovation Can Help You Cope
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Curlee, W., and R. L. Gordon. 2010. Complexity Theory and Project Management. Hobo-
ken, NJ: Wiley.

Kendrick, T. 2010. The Project Management Tool Kit: 100 Tips and Techniques for Getting
the Job Done Right, 2nd edition. New York: AMACOM American Management
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Meredith, J. R., and S. J. Mantel. 2009. Project Management: A Managerial Approach, 7th
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ment and Its Success—A Conceptual Framework.” International Journal of Project
Management 28 (8): 807–17.

Taylor, H. 2006. “Risk Management and Problem Resolution Strategies for IT Projects:
Prescription and Practice.” Project Management Journal 37 (5): 49–63.

Thamhain, H. J., and D. L. Wilemon. 1975. “Conflict Management in Project Life Cycles.”
Sloan Management Review 16 (3): 31.

Wheelwright, S. C., and K. B. Clark. 1992. “Creating Project Plans to Focus Product
Development.” Harvard Business Review 70 (2): 70–82.

Wills, K. R. 2010. Essential Project Management Skills. Boca Raton, FL: Taylor & Francis.
Young, T. L. 2010. Successful Project Management, 3rd edition. London: Kogan Page.

PART

III
PERFORMANCE IMPROVEMENT

TOOLS, TECHNIQUES, AND
PROGRAMS

CHAPTER

135

TOOLS FOR PROBLEM SOLVING AND
DECISION MAKING

Operations Management
in Action

At Allegheny General Hospital in Pitts-
burgh, the organization’s two intensive
care units had been averaging about 5.5
infections per 1,000 patient days, most
of them bloodstream infections from
catheters. That infection rate was a bit
higher than the Pittsburgh average but a
bit lower than the national average, says
Dr. Richard Shannon, chair of medicine
at Allegheny General.

Over the prior 12 months, 37
patients, already some of the sickest
people in the hospital, had a total of 49
infections. Of those patients, 51 percent
died. Shannon and the staff in the two
units—doctors, residents, and nurses—
applied the Toyota Production System
root-cause analysis process, investigat-
ing each new infection immediately.

Their main conclusion was that
femoral intravenous lines, inserted into
an artery near the groin, had a particu-
larly high rate of infection. The team
made an all-out effort to replace these
lines with less risky ones in the arm
or near the collarbone. Shannon, who
oversaw the two units, gave the direc-
tive to keep femoral lines to an absolute
minimum. The result was a 90 percent decrease in the number of
infections after just 90 days of using the new procedures.

Source: Adapted from Wysocki (2004).

6
OVE RVI EW

This chapter introduces the basic tools associated with problem solv-

ing and decision making. Much of the work of healthcare profession-

als is just that—making decisions and solving problems—and in an

ever-changing landscape, that work must be accomplished well and

quickly. A structured approach can enable problem solving and deci-

sion making that is efficient and effective.

Major topics in this chapter include the following:

• The decision-making process, with a focus on framing the

problem or issue

• Mapping techniques, including mind mapping, process mapping,

activity mapping, and service blueprinting

• Problem identification tools, including root-cause analysis (RCA),

failure mode and effects analysis (FMEA), and the theory of

constraints (TOC)

• Analytical tools, such as optimization using linear programming

and decision analysis

• Force field analysis to address implementation issues

This chapter helps readers gain a basic understanding of vari-

ous problem-solving tools and techniques, enabling them to

• frame questions or problems,

• analyze a problem and various solutions to it, and

• implement one or more of those solutions.

The tools and techniques outlined in this chapter should pro-

vide a basis for tackling difficult, complicated problems.

Healthcare Operat ions Management136

Decision-Making Framework

A structured, rational approach to problem solving and decision making includes
the following steps:

1. Identify and frame the issue or problem.
2. Generate or determine possible courses of action, and evaluate those

alternatives.
3. Choose and implement the best solution or alternative.
4. Review and reflect on the previous steps and outcomes.

Decision Traps: The Ten Barriers to Brilliant Decision-Making and How
to Overcome Them (Russo and Schoemaker 1989) outlines these steps (exhibit
6.1) and the barriers encountered in decision making (exhibit 6.2).

Framing

Typical amount of time: 5%

Recommended amount of
time: 20%

Structuring the question. This means defining what
must be decided and determining in a preliminary way
what criteria would cause you to prefer one option over
another. In framing, good decision makers think about
the viewpoint from which they and others will look at the
issue and decide which aspects they consider important
and which they do not. Thus, they inevitably simplify the
world.

Gathering intelligence

Typical amountof time: 45%

Recommended amount of
time: 35%

Seeking both the knowable facts and the reasonable
estimates of “unknowables” that you will need to make
the decision. Good decision makers manage intelligence
gathering with deliberate effort to avoid such failings as
overconfidence in what they currently believe and the
tendency to seek information that confirms their biases.

Coming to conclusions

Typical amountof time: 40%

Recommended amount of
time: 25%

Sound framing and good intelligence don’t guarantee
a wise decision. People cannot consistently make good
decisions using seat-of-the-pants judgment alone,
even with excellent data in front of them. A systematic
approach forces you to examine many aspects and often
leads to better decisions than hours of unorganized
thinking would.

Learning from feedback

Typical amount of time: 10%

Recommended amount of
time: 20%

Everyone needs to establish a system for learning from
the results of past decisions. This usually means keeping
track of what you expected would happen, systematically
guarding against self-serving explanations, then making
sure you review the lessons your feedback has produced
the next time a similar decision comes along.

Source: Russo and Schoemaker (1989).

EXHIBIT 6.1
Decision

Elements and
Activities

Chapter 6: Tools for Problem Solving and Decis ion Making 137

The plan-do-check-act process for continuous improvement (discussed
in depth in chapter 10), the define-measure-analyze-improve-control process
of Six Sigma (chapter 9), and process improvement (chapter 11) all follow the
same basic steps as presented in this chapter for the decision-making process.
The tools and techniques found in this book can be used not only in the process
of decision making but also to help in gathering the right information to make
optimal decisions and learn from those decisions. Often, the learning step in
the decision-making process is neglected, but it should not be. It is important

Framing the Question
Plunging in—Beginning to gather information and reach conclusions without first tak-
ing a few minutes to think about the crux of the issue you’re facing.

Frame blindness—Setting out to solve the wrong problem because you have created a
mental framework for your decision with little thought, which causes you to overlook
the best options or lose sight of important objectives.

Lack of frame control—Failing to consciously define the problem in more ways than one
or being unduly influenced by the frames of others.

Gathering Intelligence
Overconfidence in your judgment—Failing to correct key factual information because
you are too sure of your assumptions and opinions.

Shortsighted shortcuts—Relying inappropriately on “rules of thumb,” such as implicitly
trusting the most readily available information or anchoring too much on convenient
facts.

Coming to Conclusions
Shooting from the hip—Believing you can keep straight in your head all the informa-
tion you’ve discovered, and therefore you “wing it” rather than follow a systematic
procedure.

Group failure—Assuming that with many smart people involved, good choices will fol-
low automatically, and therefore you fail to manage the group decision process.

Learning/Failing to Learn from Feedback
Fooling yourself about feedback—Failing to interpret the evidence from past outcomes
for what it really says, either because you’re protecting your ego or because you are
tricked by hindsight.

Not keeping track—Assuming that experience will make its lessons available automati-
cally, and therefore you fail to keep systematic records to track results of your decisions
and fail to analyze these results in ways that will reveal their true lessons.

Failure to audit your decision process—You fail to create an organized approach to
understanding your own decision making, so you remain constantly exposed to all the
aforementioned mistakes.

EXHIBIT 6.2
The Ten Barriers
to Brilliant
Decision
Making and the
Key Elements
into Which They
Fall

Source: Russo and Schoemaker (1989).

Healthcare Operat ions Management138

to evaluate and analyze both the decision made and the process(es) used to
reach the decision to ensure learning and enable continuous improvement.

Framing
The frame of a problem or decision encompasses the assumptions, attitudes,
and preconceived limits that an individual or a team brings to the analyses.
These assumptions can stifle the ability to solve the problem by reducing or
eliminating creativity and causing the decision maker(s) to overlook possibili-
ties. Alternatively, these assumptions can aid in problem solving by eliminating
wildly improbable paths. That said, they usually hinder a team’s ability to find
the best solution or even a possible solution.

Millions of dollars and working hours are wasted in finding solutions to
the wrong problems. An ill-defined problem or mistaken premise can eliminate
promising solutions before they are even considered. People tend to identify
convenient problems and find solutions that are familiar to them rather than
looking more deeply for problems that are meaningful to solve.

People also have a tendency to want to do something; quick and decisive
action is seen as necessary in today’s rapidly changing environment. Leaping
to the solutions before taking the time to properly frame the problem usually
results in suboptimal solutions.

However, framing the problem can be difficult, as it requires an under-
standing of the issue at hand. If the problem is well understood, the solution is
more likely to be obvious; therefore, when framing a problem, it is important
to approach it in an expansive way by soliciting many different viewpoints and
considering many possible scenarios, causes, and solutions. The tools outlined
in this chapter are designed to help with this process.

Mapping Techniques
Mind Mapping
Tony Buzan is credited with developing the mind-mapping technique (Buzan
1991; Buzan and Buzan 1994). Mind mapping develops thoughts and ideas
in a nonlinear fashion and typically uses pictures or phrases to organize and
further develop those thoughts. In this structured brainstorming technique,
ideas are organized on a “map” and the connections between them are made
explicit. Mind mapping can be an effective technique for problem solving
because thinking linearly is not necessary. Making connections that are not
obvious or linear can lead to innovative solutions.

Mind mapping starts with the issue to be addressed placed in the cen-
ter of the map. Ideas on causes, solutions, and so on radiate from the central
theme. Questions in the form of who, what, where, why, when, and how are
often helpful for problem solving. Exhibit 6.3 illustrates a mind map related
to high accounts receivables.

Mind mapping
A nonlinear
technique used to
develop thoughts
and ideas by
placing pictures or
phrases on a map
to show logical
connections.

Chapter 6: Tools for Problem Solving and Decis ion Making 139

Process Mapping
A process map, or flowchart, is a graphic depiction of a process showing inputs,
outputs, and steps in the process. Depending on the purpose of the map, it
can be high level or detailed. Exhibit 6.4 shows a high-level process map for

Process map
A graphic
depiction of a
process showing
the sequence of
events, including
tasks, decisions,
and other activities
from inputs to
outputs. A process
map is a type of
flowchart.

Data
entry
error

Doctor
coding

Incorrect
coding

Incorrect
information

Documentation
problems

Insufficient
information

Electronic
medical
records

Slow
billing

Slow
payment

or no
payment

Claim
denied

Procedure
not medically

necessary

Complicated
system

New
computer
systems

Funding
Missing
revenue

Private
insurance

Identify
and fix

systematic
problems

Medicare/
Medicaid

No
insurance

Type of
insurance

High
accounts

receivable

Procedure
not

covered

EXHIBIT 6.3
Mind Map:
High Accounts
Receivables

Note: Diagram created in Inspiration by Inspiration Software, Inc.

Healthcare Operat ions Management140

Vincent Valley Hospital and Health System’s (VVH) Riverview Clinic, and
exhibit 6.5 shows a more detailed map of the check-in process at the clinic.

Process maps offer a clear picture of what activities are carried out as
part of the process, where they occur, and how they are performed. Typically,
process maps are used to understand and optimize a process. The process is
commonly charted from the viewpoint of the material, information, or cus-
tomer being processed (often the patient in healthcare) or the staff member
carrying out the work. Process mapping is one of the seven basic quality tools
(see chart below) and an integral part of most improvement initiatives (e.g.,
Six Sigma, Lean, balanced scorecard, RCA, FMEA).

The steps for creating a process map or flowchart are as follows:

1. Assemble and train the team. The team should consist of people from all
areas and levels in the process of interest to ensure that the real process
is captured.

2. Determine the boundaries of the process (where it starts and ends) and the
level of detail desired. The level of detail desired, or needed, depends on
the question or problem the team is addressing.

3. Brainstorm the major process tasks and subtasks. List them, and then
arrange them in order. (Sticky notes are often helpful here.)

4. Create a formal chart. Once an initial flowchart has been generated,
the chart can be formally drawn using the standard symbols of

Physician exam
and consultation

Visit
complete

Wait

Patient
arrives

Patient
check-in

Wait

Move to
examining

room

Nurse does
preliminary

exam

Wait

EXHIBIT 6.4
Riverview Clinic

High-Level
Process Map

Seven Fundamental Quality Tools

• Check sheet
• Pareto diagram
• Histogram
• Scatterplot

• Process map
• Cause-and-effect diagram
• Run chart or control chart

Chapter 6: Tools for Problem Solving and Decis ion Making 141

process mapping (exhibit 6.6). (This formal graphic can be completed
most efficiently using software such as Microsoft Visio.) When first
developing a flowchart, the important point is to obtain an accurate
picture of the process rather than worrying about using the correct
symbols.

5. Make corrections. The formal flowchart should be checked for accuracy
by all relevant personnel. Often, inaccuracies are found in the flowchart
and must be corrected in this step.

6. Determine any need for additional information. Depending on the
purpose of the flowchart, data may need to be collected or information
added at this stage. Often, data specifically related to process
performance are collected and added to the flowchart.

Measures of Process Performance
Measures of process performance include throughput time, cycle time, and
percentage of value-added time (chapter 10). Another important measure of
process, subprocess, task, or resource performance is capacity utilization.
Capacity is the maximum possible amount of output (goods or services) that a
process or resource can produce or transform. Capacity measures can be based
on outputs or on the availability of inputs. For example, if a hospital’s food
service department or vendor can provide, at most, 1,000 meals in one day,
the food service has a capacity of 1,000 meals/day. If all magnetic resonance
images (MRIs) take one hour to perform, the MRI machine has a capacity of 24
MRIs/day. The choice of appropriate capacity measure varies with the situation.

Ideally, demand and capacity are perfectly matched. If demand is greater
than capacity, some customers will not be served. If capacity is greater than
demand, resources will be underutilized. In reality, perfectly matching demand

Capacity
utilization
The percentage
of time that a
resource (worker,
equipment, space,
etc.) or process
is actually busy
producing or
transforming
output.

HIPAA
forms

HIPAA
on file ?

No

Yes
Same

Wait

Move to
examining

room

Patient
arrives

Line?

ChangedNew

Medical
information

Insurance
information

No

Yes

Existing Infor-
mation

Patient
type

Wait

EXHIBIT 6.5
Riverview
Clinic Detailed
Process Map:
Patient Check-In

Healthcare Operat ions Management142

and capacity can be difficult because of fluctuations in demand. In a manufactur-
ing environment, inventory can be used to compensate for demand fluctuations.
In a service environment, this type of trade-off is not possible; therefore, excess
capacity or a flexible workforce is often required to meet demand fluctuations.
Advanced-access scheduling (chapters 10 and 12) is one way for healthcare
operations to more closely match capacity to demand.

Capacity utilization is defined as the percentage of time that a resource
(worker, equipment, space, etc.) or process is actually busy producing or trans-
forming output. If the hospital’s food service provides 800 meals/day, the
capacity utilization is 80 percent. If the MRI machine operates 18 hours/day,
the capacity utilization is 75 percent [(18 ÷ 24) × 100]. Generally, higher-
capacity utilization is better, but caution must be used in this evaluation. If the
hospital’s food service has a goal of 95 percent capacity utilization, it can meet
that goal by producing 950 meals/day, even if only 800 meals/day are actually
consumed and 150 meals are discarded. Obviously, this solution would not
result in the effective use of resources, but food service would have met its goal.

Typically, the more costly the resource, the greater is the importance
of maximizing capacity utilization. For example, in a hospital emergency

An oval is used to
show inputs/outputs

to the process or start/
end of the process.

A block arrow is
used to show a
transport.

Feedback
loop

A D-shape is
used to show
a delay.

An arrow shows the
direction of flow of

the process.

A
triangle

shows inventory.
For services,

it can represent
customer waiting.

End

A
diamond

is used to show
those points in the

process where a choice can
be made or alternative

paths can be
followed.

A
rectangle
is used to

show a
task or
activity.

EXHIBIT 6.6
Standard

Flowchart
Symbols

Chapter 6: Tools for Problem Solving and Decis ion Making 143

department, the most costly resource is often the physician. In this case, with
other resources (e.g., nurses, housekeeping staff, clerical staff) being less
expensive, maximizing the utilization of the physicians is more important than
maximizing the utilization of the other resources. In fact, underutilizing less
expensive resources in an effort to maximize the utilization of more expensive
resources is more economical. Simulation (chapter 11) can be used to help
determine the most effective use of various types of resources.

Cross-Functional Process Maps
The cross-functional process map, or “swim lane” map, is a specialized pro-
cess map that follows the flow of a process through the various departments
of the organization. The swim lanes indicated by the dashed lines between
departments show the work being completed by a particular department or
individual in the process. The swim lane chart is useful for viewing the number
of times an item is handed off between departments and how many times the
process is creating duplication and rework.

Exhibit 6.7 is an example of a presurgery holding room (the area where
patients are staged, vital signs are taken, consent forms are completed, surgery
type is confirmed, etc., just prior to entering surgery) for a Veterans Admin-
istration hospital.

Service Blueprinting
Service blueprinting (Shostack 1984) is a special form of process mapping (as
is value stream mapping, covered in chapter 10). Service blueprinting begins
by mapping the process from the point of view of the customer. The typical
purpose of a service blueprint is to identify points where the service might fail to
satisfy the customer and then redesign or add controls to the system to reduce
or eliminate the possibility of failure. The service blueprint separates onstage
actions (those visible to the customer) from backstage actions and support
processes (those not visible to the customer). A service blueprint specifies the
line of interaction, where the customer and service provider come together,
and the line of visibility, or what the customer sees or experiences—the tangible
evidence that influences perceptions of the quality of service (exhibit 6.8).

Problem Identification Tools
Root-Cause Analysis
Root-cause analysis (RCA) is a generic term used to describe structured,
step-by-step techniques for problem solving. It aims to determine and correct
the ultimate cause(s) of a problem, not just the visible symptoms, to ensure
that the problem does not recur. Specifically, RCA consists of determining what
happened, why it happened, and what can be done to prevent it from recurring.

Cross-functional
process map
A map that follows
the flow of a
process through
the various
departments of
the organization
using dashed lines
to show the work
being completed
by a particular
department or
individual in the
process. Also
called swim lane
process map.

Service
blueprinting
A style of process
mapping that
separates actions
into onstage
(visible to the
customer) and
backstage
(not visible to
the customer)
activities.

Root-cause
analysis (RCA)
A generic term
describing
structured, step-
by-step techniques
for problem
solving.

Healthcare Operat ions Management144

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