Healthcare Operations Management

Uncategorized

Daniel B. McLaughlin John R. Olson

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

AUPHA/HAP Editorial Board for Graduate Studies

Nir Menachemi, PhD, Chairman Indiana University

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

Jan Clement, PhD Virginia Commonwealth University

Michael Counte, PhD St. Louis University

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

Mark L. Diana, PhD Tulane University

Peter D. Jacobson, JD University of Michigan

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

Mark A. Norrell, FACHE Indiana University

Maia Platt, PhD University of Detroit Mercy

Debra Scammon, PhD University of Utah

Tina Smith University of Toronto

Carla Stebbins, PhD Des Moines University

Cynda M. Tipple, FACHE Marymount University

Health Administration Press, Chicago, Illinois

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

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Health Administration Press Association of University Programs A division of the Foundation of the American in Health Administration College of Healthcare Executives 1730 M Street, NW One North Franklin Street, Suite 1700 Suite 407 Chicago, IL 60606-3529 Washington, DC 20036 (312) 424-2800 (202) 763-7283

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

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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

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Part V Putting It All Together for Operational Excellence

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

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

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

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

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

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

Part II Setting Goals and Executing Strategy

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

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

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

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

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

Part III Performance Improvement Tools, Techniques, and Programs

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

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

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

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

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

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

Part IV Applications to Contemporary Healthcare Operations Issues

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

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

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

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

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

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

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

Part V Putting It All Together for Operational Excellence

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

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

CHAPTER

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

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

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).

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