An Overview To Healthcare Operations

PART I
An Overview
to Healthcare
Operations
CHAPTER 1 Operations Management and
Decision-Making. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
CHAPTER 2 Hospitals and the Healthcare Industry . . . . . . . . . . . 25
CHAPTER 3 Operational Finance . . . . . . . . . . . . . . . . . . . . . . . . . . 33
CHAPTER 4 Health Plan Operations. . . . . . . . . . . . . . . . . . . . . . . . 49
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CHAPTER 1
Operations Management
and Decision-Making
GOALS OF THIS CHAPTER
1. Describe a systems approach to management.
2. Define healthcare operations management.
3. Describe the roles and responsibilities of healthcare operation managers.
4. Examine the management decision-making process.
5. Understand the goals of operations management.
6. Describe the management discipline and where operations management fits.
H
ealthcare operations management is a disci- start with a foundation to understand the industry, the
pline that integrates scientific principles of organization, and then provide the necessary toolkit to
management to determine the most efficient guide improvements across organizations. Throughout
and optimal methods to support patient care delivery. this text we focus on understanding the organization
Given the interrelatedness of processes across most as a system, improving processes and productivity,
organizations, a systems approach, which encour- analyzing and measuring operational performance,
ages optimizing the whole rather than simply parts, using data and systems to guide improvements, and
is essential. Most employment positions in health- streamlining the healthcare supply chain. FIGURE 1-1
care organizations today are, in fact, roles that involve presents the common themes in this text.
coordination and execution of day-to-day operations. An organization is a group of people who work
This chapter provides the rationale for operations together, through interconnected processes and
management and describes its evolving role in help- behaviors, to achieve a common purpose. Therefore,
ing both hospitals and other clinical organizations a healthcare organization is a specific type of orga-
become more competitive. nization engaged in either production or delivery of
health goods and services. Types of healthcare orga-
▸▸ A Systems Approach nizations include primary care clinics, urgent care
centers, hospitals, freestanding emergency depart-
This text is fundamentally about providing practical ments, retail pharmacies, physician offices, device and
information to guide management of operations in a equipment firms, and pharmaceutical manufacturers,
healthcare organization. In order to do this, we have to to name a few.
4 Chapter 1 Operations Management and Decision-Making
yields, making hospitals less than stellar investments

for bondholders.
Most importantly, the term limited profit margins
Process and Operational implies there will be fewer dollars to invest back in
quality analysis and the business to ensure that buildings are updated, that
improvement performance
management equipment is replaced and technology is modern, and
that clinical programs will continue to expand and be
enhanced. Without these investments, hospitals will
Healthcare probably be unable to attract the most qualified phy-
operations
management sicians and administrators, which will continue the
downward spiral. While some hospitals and health-
care systems wait for changes in the public health pol-
icy to save them, the more competitive and successful
Systems and Supply chain hospitals are acting now to protect their margins.
technology management
In this era of continual pricing pressures affect-
ing the top line of the income statement, and with a
large majority of all hospitals reporting negative profit
margins, it is essential that hospitals begin to look
toward more sophisticated business strategies to suc-
FIGURE 1-1 Operations Management in Health Care ceed. Differentiated marketing programs and strate-
gies, broader use of advertising, and more careful and
One of the key terms used in organization involves precise long-term planning about service lines are all
the interconnection or interrelationships between strategies that must be utilized (Rovin, 2001).
workflows and people. This is aligned with the systems There needs to be a broader adoption of operations
perspective or systems thinking, which entails a focus management techniques into health organizations.
on the whole, rather than just on the parts. Health- Monitoring and maximizing labor productivity for
care operations management is about planning and all medical support and allied health professionals is
directing these interconnected processes or systems. critical to maintaining salary expenses. Incorporating
When we use the term system, we refer to a set of queuing theory and scheduling optimization meth-
connected parts that fit together to achieve a purpose. ods helps drive waste and cycle time out of facilities.
Healthcare operations and systems management is Incorporating logistical and supply chain manage-
the set of diverse and interrelated activities that allow ment techniques helps reduce operational expenses,
for diagnosis, treatment, payment, and administrative eliminate excess safety stocks, and generally improve
management in healthcare facilities. working capital management. Most importantly,
using technology to further automate and streamline
all processes in healthcare operations can help reduce
▸▸ The Healthcare Industry costs and maximize efficiencies. Yet, this is only pos-
sible through systems thinking, encouraging a better
Many healthcare organizations are nonprofit in nature, understanding of how all of the parts are connected
which influences management styles and thinking. and influence each other.
For example, nearly 80% of hospitals are considered Hospitals and other healthcare organizations can-
not-for-profit and exist solely to serve the community not rely on the extrinsic factors (such as health policy,
in which they operate, although this has decreased federal payer regulation changes, or shifts in managed
in recent years. As nonprofits, these organizations care market structures) to change their margin poten-
are exempt from most federal and state taxation and tial. That is to say that these are important and prob-
are not expected to show continuous positive growth ably very significant issues; however, they are covered
rates or large profit margins, as most publicly traded in other texts and will evolve regardless of the manage-
firms do. However, if a hospital or healthcare orga- rial behavior that hospitals employ. These macro-level
nization cannot show some return on the capital or issues are important, but equally significant are the
dollars invested, there will be negative consequences. micro-economic and organization factors that can be
For example, failure to show reasonable margins will affected by operations management. Operations man-
likely cause the public bond market (which finances agement can help organizations succeed today.
most healthcare growth today) to assign subpar credit Think of healthcare profit margins as a balloon,
ratings; therefore, the bonds themselves will have poor where a variety of extrinsic, or external, factors cause
Key Functions of Healthcare Operations Management 5
Reimbursement Value-based
practices purchasing/
managed care
Operational management
(cost, productivity, process,
Fragmented technology)
industry Consumer
apathy
Strategic management
(competitive positioning,
branding, mergers)
Federal health Competitive
policy structure
Lack of
transparency Incentive
and information misalignment
FIGURE 1-2 Operations Management Counters the Extrinsic Pressures Deflating Healthcare Margins
deflationary pressure from the outside. On the inside resources (or inputs) into healthcare services (out-
is the set of decisions and management systems put in puts). Inputs are defined as the resources and assets,
place to combat these pressures and essentially inflate such as labor and capital, including cash, technology,
the balloon, or expand the margin. In effect, operations personnel, space, equipment, and information. Out-
management is the set of intrinsic, or internal, pro- puts include the actual production and delivery of
cesses and decisions that help address costs, process, healthcare services. Quantitative management implies
technology, and productivity. Strategic management, a heavy use of analytical and optimization tools, as
although equally important, is not a focus of this text. well as extensive use of process and quality improve-
FIGURE 1-2 shows conceptually the margin-expansion ment techniques to drive improved results.
role that operations management plays. Healthcare operations management is a discipline
Health care is primarily a service sector, in that of management that integrates scientific or quanti-
the industry provides intangible or nonphysical tative principles to determine the most efficient and
“goods,” as opposed to physical objects that can be optimal methods to support patient care delivery. This
seen or touched. Hospital services primarily deliver field is relatively new to health care, but it has existed
care through providers to patients and therefore lack a in other industries for nearly a hundred years.
manufacturing or assembling process. These services
are unique and somewhat differentiated from other
hospitals, are knowledge based, and have high levels ▸▸ Key Functions of Healthcare
of customer interaction. Of course, there is a physi-
cal good that accompanies the service, which is the Operations Management
focus of supply chain management in hospitals that The scope of healthcare operations management
procures, replenishes, and stores medical supplies and includes all functions related to the management sys-
pharmaceuticals as well. In this regard, hospitals have tems and business processes underlying clinical care.
a mix of both tangible and intangible characteristics. This includes extensive focus on the following: work-
All of these attributes make operations management flow, physical layout, capacity design, physical network
in health care somewhat different than in industries optimization, staffing levels, productivity manage-
that strictly produce and market physical goods or ment, supply chain and logistics management, quality
widgets. management, and process engineering. TABLE 1-1 sum-
marizes these key functions and illustrates some of the
critical issues and questions that must be addressed in
▸▸ Defining Operations the healthcare enterprise.
Management Healthcare operations management includes
all of these managerial functions and provides job
Healthcare operations management can therefore opportunities for people with titles such as admin-
be defined as the management of the supporting busi- istrator, scheduling manager, operations supervisor,
ness and clinical systems and processes that transform vice president of support services, quality manager,
TABLE 1-1 Key Functions and Issues in Healthcare Operations Management
OM Function Objective or Issue to Consider
Organization ■■ Are there too many departments or people performing the same task?
■■ Do we have an end-to-end map of our major clinical and business processes?
■■ Are there manual processes that can be automated?
■■ Are there ways to reduce cycle time, steps, and choke points for key processes?
■■ Can we improve speed and patient satisfaction?
Financial ■■ Do we understand the cost accounting behind key processes?

■■ How can we improve our revenue cycle metrics?
Physical layout ■■ Are our facilities designed with the consideration of speed, capacity, traffic flow, and
operational efficiency?
■■ Are unit or floor layouts designed to eliminate redundancy (e.g., safety stock on all
resources)?
Capacity design and ■■ How can we reduce bottlenecks to improve patient throughput for each area?
planning ■■ In which cases should we increase the use of technology to improve labor
productivity?
Physical network ■■ Where should we position appropriate par locations, pharmacy satellites,
optimizations warehouses, and supplies to minimize resources and costs?
■■ Do we strategically utilize vendors and their facilities?
■■ How can we design and position optimal locations for clinics or resources to ensure
the lowest total costs?
Staffing and productivity ■■ How much output can we expect from our staff?
management ■■ Have we maximized the use of automation and electronic commerce to increase
productivity?
■■ Have we implemented sophisticated analytical models to optimize labor and
resource scheduling?
Supply chain ■■ Have we built collaborative planning and forecasting processes to standardize items
and reduce total costs?
■■ Should we use “just in time” operations?
■■ Do we use automated, optimized replenishment of medical–surgical supplies to
increase turns and asset utilization?
■■ How much inventory of each item do we need?
■■ Do we use perpetual inventory systems to ensure stringent internal controls and
accurate financial reports?
Quality management ■■ Do we use advanced tools for tracking projects?

■■ Are we measuring the right performance indicators to bring visibility to trends and
exceptions?
■■ Do we know how we compare to our key competitors?
■■ Have we identified the quality issues that affect goals of customer satisfaction and
efficacy, in addition to efficiency, costs, and speed?
operations analyst, director of revenue cycle, procure- also play a key role in managing service operations.
ment manager, management engineer, inventory ana- The advance of operational management positions in
lyst, facilities manager, supply chain consultant, and healthcare organizations will continue as the need for
so on. Nurses, technicians, and other health providers increased cost efficiency and accountability rises.
Goals of the Operations Manager 7
▸▸ The Need for Operations quality of customer service, and continuously improve
business processes. These are outlined in more detail
Management in the following sections.
In 2006, the Institute of Medicine of the National

Academy of Sciences produced a report called The Improve Financial Results
Future of Emergency Care, which is a series of docu- Operations managers’ primary role is to both take
ments that describe the problems facing health care at costs out of the healthcare system and increase revenue
that time (and are still relevant today), especially the opportunities, while simultaneously maintaining and
emergency care arena. The report outlines a number of enhancing quality. Finding waste, improving utiliza-
recommendations for solving the current crisis. One tion, and generally stabilizing and reducing the over-
of the key recommendations calls for the following: all cost of delivering services are essential functions.
“. . . hospitals should reduce crowding by improving A hospital with appropriate tracking and management
hospital efficiency and patient flow, and using oper- systems—that can isolate all personnel, material, and
ational management methods and information tech- other resources utilized for delivery of care—will be
nologies” (Institute of Medicine, 2006). much more likely to reduce costs because it under-
Even others outside of the healthcare industry stands the underlying cost structure. Identifying costs
have identified weaknesses in how healthcare manag- and eliminating unnecessary waste and effort are at
ers manage the processes and systems. McKinsey Con- the forefront of an operations manager’s priority list.
sulting, one of the premier consulting firms, recently
found that over $500 billion in opportunities exist
for improvement (Singhal, Latko, & Martin, 2018). A Reduce Variability and Improve
New York Times report citing multiple research studies Logistics Flow
found that 30% of average healthcare costs per year are Operations managers continuously look for the most
spent on administrative costs alone (Frakt, 2018). efficient and optimal paths for movement of resources,
Many other researchers and associations have whether those resources are physical or information
called for operations management to help drive flows. Similarly, there is a continuous focus on reduc-
improvements and efficiencies into the healthcare ing variability. Variability is the inconsistency or
system through efforts such as Six Sigma, Lean, and dispersion of inputs and outputs. Variability threat-
process improvement (Herzlinger, 1999; Langabeer, ens processes because it results in uncertainty, too
DelliFraine, Heineke, & Abbass, 2009). Hopefully, the many or too few resources, and generally inconsistent
rest of this text will help students and practitioners do results. For example, if there are 10 patients typically
just that. seeking care in a specific clinic within a certain time
period, and then 20 appear the following period, it
will be difficult to staff, to control waiting times, and
▸▸ Goals of the Operations to manage patient flows.
Manager Improving flow means seeking higher through-
put or yields for the same level of resource input.
Today’s modern operations executive and manager Throughput is the rate or velocity at which services
may hold any number of job titles discussed earlier, are performed or goods are delivered. For example,
but generically we will refer to the role “operations if a hospital typically sees four patients an hour and
manager” to describe all such positions in this text. A can increase throughput to six per hour, this is a 50%
clinic manager who ensures that processes are in place improvement in logistical flow and throughput. Sim-
so patients efficiently move from registration to treat- ilarly, a hospital that doubles patient volume while
ment rooms to payment is an operations manager. An maintaining the same historic inventory levels of sup-
administrative director who oversees financial opera- plies would show significant improvements in mate-
tions is an operations manager. An operations manager rial flow because the assets have higher utilization and
is any individual that directs and transforms processes turns.
to improve the delivery of patient care. So, what else Staffing and resource consumption should be tied
do operations managers do? They have multiple broad directly with patient volumes and workload: if patient
goals and functions in the hospital, including all of volumes increase, so too should resources. Unfortu-
the following: reduce costs, reduce variability and nately, many healthcare facilities do not understand
improve logistics flow, improve productivity, improve patient volumes and the variability that exists from
Are we staffed and

resourced for peaks,
40
valleys, or the
35 average?
30
Number of Patients 25
20
15
10
5
0
pm
pm
pm
pm
am
am
am
am
am
pm
30
30
30
30
30
30
30
0
:3
:3
:3
1:
2:
3:
4:
7:
8:
9:
10
11
12
Time of Day
FIGURE 1-3 Variability Creates Chaos and Inefficiency
hour to hour and day to day. Managing this variabil- outputs to inputs. Improving productivity implies a
ity allows a change in staffing mix and scheduling to search for higher levels of output from all employees
accommodate the changes—without staffing at the and other assets. This is one of the most vital roles of
peaks (which causes excessive costs), overstaffing the an operations manager.
valleys or low points (which will cause long lines peri-
odically due to limited resources and therefore service
quality issues), or staffing for the average (which is
Improve Quality of Service
the most common suboptimal approach). FIGURE 1-3 Health care cannot become so focused on cost and effi-
shows how variability changes over time, which neces- ciency that quality starts to diminish. Improved quality
sitates both capacity and demand analyses. implies reduced medical errors and improved patient
Logistics is defined as the efficient coordination safety, in addition to higher levels of patient satisfac-
and control of the flow of all operations—including tion. Maintenance and improvement of high quality
patients, personnel, and other resources. The role of and service levels, both from patient care and other
operations managers is to facilitate improved logis- business services (such as the cafeteria or admissions),
tics and throughput by using streamlined process and are expected from an operations manager. Across all
facility designs to increase capacity, workflow, and industries, higher quality services lead to the ability to
throughput. secure higher prices, which drives increased market
shares and operating margins (Buzzell & Gale, 1987).
Ensuring that services continue to improve
Improve Productivity patient satisfaction levels while simultaneously reduc-
Hospitals have a tendency to hire additional staff ing response and waiting times are key deliverables to
faster than in other industries. This is partly driven by providing higher quality services. The cost–quality
the highly structured organizations that are common continuum refers to a theoretical trade-off in which
in health care and partly because of the historical lack a focus on one side of the equation leads to diminish-
of focus on costs. In years past, hospitals were reim- ing returns on the other. A focus on costs might lead
bursed from government and other payers on a “cost- a hospital to reduce services provided, which might
plus” basis—meaning that whatever the cost to deliver, affect overall quality. Operations professionals must
hospitals would be reimbursed fully plus a small profit balance both and help make optimal decisions on
margin. When pricing is guaranteed to cover costs, many fronts.
there is not a tendency to be overly cost conscious.
Even though the industry continues to move toward
a prospective payment system and managed care (two Continually Improve Processes
terms we will learn about in future chapters), the Since operations management is systems-focused,
mentality and behavior of many hospitals have been it is essential to manage holistically all processes in
slow to adapt. Productivity is defined as the ratio of an organization. In highly structured organizations,
Factors Driving Increased Healthcare Costs 9
Creating value by converting inputs (resources) into efficient and effective

outputs (services)
Supplies and
Personnel Technology Equipment
resources
Process tools Analytics and

and management optimization
systems techniques
Healthcare
services
FIGURE 1-4 The Operations Management Process
business processes tend to be unique to each depart- and competitor’s actions (such as adding new facilities
ment and are not highly cross-functional or integrated. or expanding existing service lines). If a hospital can
The operating room in one hospital may handle pro- achieve a competitive edge or advantage over other
curement of goods one way, while the same hospital’s hospitals, and can sustain this position, it will have
gynecology department may handle procurement higher operating margins and will be able to continue
another way. There is typically no sharing of best prac- improving, expanding, and surviving. Operations
tices internally or standardization of processes that can management is critical to this outcome.
lead to improved learning and economies of scale and Competitiveness is often driven by innovation.
very little multi-department workflow automation. Innovation is the continuous search for a way to do
Today, each department in large hospitals operates new things or just do current things better. Organi-
as an independent business, which creates multiple zations innovate by using new technologies or find-
efficiency problems. The role of operations manage- ing ways to change the playing field so that processes
ment is to find ways to carry out business processes that once were considered essential are no longer
while improving process efficiency and effectiveness. necessary. The electronics industry is an example of
FIGURE 1-4 shows the operations management process an industry in which firms continuously innovate. A
of converting inputs into outputs. firm that was competitive based on analog technology
had its perspective of the world shaken up consid-
erably when digital technology was created, and the
▸▸ Competitive Advantage products that the firm once made were completely
irrelevant. In addition, continuous innovation often
of Operations results in hypercompetition, which ultimately is char-
Overall, if a hospital is successful at delivering each acterized by economics wherein both prices and costs
of these goals throughout the facility, it will deliver decline (D’Aveni, 2006). For example, when digital
improved operational effectiveness. Operations video disc players were first introduced, prices were
effectiveness is a measure of how well the orga- nearly $1000. Today they can be purchased for as little
nization is run. It considers both the efficiency of as $30 in discount stores. The prices of cell phones,
resource inputs and usage and the effectiveness of televisions, computers, fax machines, and many other
overall management in achieving desired goals and electronics all follow the same pattern. In health care,
outcomes (Kilmann & Kilmann, 1991). Operational innovation also helps to improve competitiveness.
excellence is a term often used to describe a business
strategy that focuses exclusively on maximizing oper-
ational effectiveness. ▸▸ Factors Driving Increased
A hospital that is operationally effective is heading
toward increased competitiveness. Competitiveness
Healthcare Costs
is management’s ability to respond to environmental Imagine that a healthcare organization’s expenses
changes (such as changes in reimbursement practices) could be maintained and even show signs of deflation,
464 475 485

447
435
414 425
400
388
364 375
351
336
323
251
245
230 233 237 237 240
215 215 218 224
195 202 207
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Medical care
General CPI–all items
FIGURE 1-5 Controlling Exponential Price Increases in Health Care

Data from US Department of Labor, Bureau of Labor Statistics, 2019.
or negative price/cost growth, rather than its annual its consumer price index (CPI). The CPI is a mathe-
budget increasing between 5% and 15% (which is the matical calculation of the average pricing changes over
range of industry average annual changes). This would time, using a market basket approach. The general CPI
be very beneficial to a hospital’s financial condition if it for all items in years 2005 through 2018 showed an
could reduce costs and maintain similar pricing levels. increase of less than 29% over 14 years, or around 2%
The historical argument justifying continuously per year (Bureau of Labor Statistics, 2019). Compare
growing healthcare inflation rates typically focuses on that with the cost of medical care, which rose nearly
five points: 50% in that same time period, or 3.5% per year—
1. Consumers are aging and living longer and are 1.5 times that of the rest of all other goods tracked.
increasingly consuming or utilizing a greater FIGURE 1-5 shows this growth over time.
number of services than in prior years. Overall spending for health care in the United
2. The costs of medical technology and equip- States has risen steadily. In 1993, healthcare costs rep-
ment continue to rise, and this represents a resented 13% of the national gross domestic product
growing percentage of capital budgets for most (GDP); in 2006, it was more than 16.5% of the GDP;
organizations. and today, it is nearly 18%–19%. While some hospitals
3. The labor costs of key resources (such as phy- wait for the national debate to continue, it is important
sicians and nurses) are governed by market to first look at the intrinsic factors in the organization
shortages for these positions, which have that are driving excessive costs: redundancy, ineffi-
increased steadily the past few decades. ciency, bureaucracy, waste, paper, limited productiv-
4. Prices of pharmaceuticals, which represent ity, lack of performance monitoring, poor deployment
a sizable portion of medical treatment plans, of information technology, and generally unsophisti-
continue to escalate to cover high costs of cated levels of management.
research and development, long U.S. Food
and Drug Administration approval cycles,
and generally high industry margins for ▸▸ Learning from
pharmaceuticals.
5. Emphasis on strict managed care, which Other Industries
appeared to be the predominant model a Although health care is unique and has its own set of
decade ago, is slowly shifting and diminishing challenges, hospitals can learn a great deal from other
in practice. industries that have evolved faster due to technology or
The result has been a steadily increasing cost of process innovation, industry economics, more aggres-
care. Using the Department of Labor, Bureau of Labor sive competition, reduced barriers to entry and exit, or
Statistics (BLS) data highlights this fact. The BLS just better trained business managers. For example, if
tracks inflation growth through eight major groups in managers looked at a hospital as being similar to the
Principles of Management 11
TABLE 1-2 Teachings from Other Industries

Retail Building layout and configuration, customer flows, use of forecasts and planning, electronic
commerce
Airlines Scheduling, logistics, strategic pricing (yield management)
Chemicals Efficiencies, economies of scale, extensive use of linear programming and quantitative modeling
Electronics Technology innovation, product life-cycle management, pricing strategy
Telecommunications Command and control center
retail industry, they could better understand how to functions: planning, organizing, leading, and con-
lay out floors, design configurations to achieve more trolling. Planning involves the establishment of goals
efficient movement and handling, and use analytical and a strategy to achieve these goals. In health care,
forecasts to drive all aspects of the business. There is planning can be strategic (such as deciding which
a lot to learn from the more operationally effective geographic region to invest in a new facility), or it
industries. The tools and techniques that are most can be operational (such as determining how many
similar should be borrowed and applied to health care employees to have on staff for each shift). Organizing
where appropriate. includes making decisions about what tasks will be
For example, in the airline industry, thousands of done, where, when, and by whom. Organizing uses a
planes move through the sky fairly seamlessly. A plane variety of tools, such as an organization chart to man-
lands every few seconds at major airports throughout age people’s roles and reporting relationships, process
the world, yet there are very few accidents (as a per- flow charts for improving activities, and Gantt charts
centage of total flights), very high levels of on-time rates for managing projects. Leading includes motivating
(given numerous factors, such as weather and security), employees, building support for ideas, and generally
and very little lost baggage. Nearly 850 million passen- getting things done through people. Providing direc-
gers board planes every year in the United States alone tion and clarification to expectations, as well as the
(Bureau of Transportation Statistics, 2019). Airlines role of change management, or preparing the orga-
have learned to operate using speed and volume as an nization for changes to come, is instrumental to pro-
advantage. When an airplane lands, it has very little time viding leadership in hospital operations management.
before it must be turned around and take off to another Controlling includes all tasks to monitor and track
destination. This changeover process allows less than progress toward goals, ensure performance improve-
30 minutes, on average, to completely refuel, check ment, and make corrective changes in strategy where
maintenance and mechanical conditions, validate avi- necessary. The use of status reports, budgets, proce-
ation systems, restock food and supplies, change over dures, and a multitude of other tracking tools is useful
personnel, and unload and reload hundreds of passen- in helping enhance management control.
gers. Think of this changeover as it relates to the pro- Managers wear many hats and play many roles.
cess a hospital goes through when changing out beds They might serve as a figurehead, make decisions,
after a patient is discharged (i.e., admitting and bed reward employees, and handle conflicts and solve
management process). A lot can be learned from how problems. Managers help plan tasks, organize them,
another industry approaches a somewhat similar prob- direct them, and continually adjust and control.
lem. TABLE 1-2 summarizes what operations managers Henry Mintzberg (1973), one of the earliest research-
in health care can learn from other industries. ers on management processes, described the nature of
managers’ work as grouped around three key themes:
informational, decisional, and interpersonal. Infor-
▸▸ Principles of Management mational roles refer to collecting, monitoring, and dis-
seminating information from the external and internal
Operations management is one of the disciplines of environments to work teams. Decisional roles refer to
the broader field of management. According to most making key decisions for the organization, such as
theorists, management concerns itself with four key allocation of scarce resources, rewards and penalties
for employees, and negotiations with employees and significantly alter physician productivity. The intro-
others. Interpersonal roles include training and moti- duction of a surgical nurse—to help provide surgical
vating employees, serving as spokesperson, facilitat- instruments and supplies when needed to free up the
ing communication exchanges among various groups, surgeon, thereby improving overall productivity—was
and serving as a liaison. one of the key recommendations made. In addition,
The study of management continues to evolve. It the Gilbreths recommended other hospital improve-
has moved through a variety of schools of thought: ments, such as a tray to hold common surgical instru-
from scientific management, to process-focused, to ments. These are just two of the contributions made by
human behavior, to decision or management sciences scientific management to health care.
theory, to social and open systems (Certo & Certo, Frederick Taylor, one of the original management
2005). These schools of thought represent different researchers and the “father of scientific management,”
contexts or perspectives upon which a manager’s role was often quoted as saying that scientific management
and tasks should be based. For example, systems the- is a great “mental revolution” (Matteson & Ivancev-
ory emphasizes that a manager views the organization ich, 1996). By this, he meant that a scientific approach
as a living organism, which is changing and adapting encourages a different perspective or outlook that can
and which operates by an integrated network of open change management behaviors and results. This revo-
processes. Behavioral schools tend to focus on view- lution led to some key concepts, such as specialization,
ing management from a psychological perspective, division of labor, and mass production. The concept
highlighting the importance of understanding what of specialization suggests that if a person repeat-
motivates employees and how human and cognitive edly performs just one task, he or she will be able to
factors influence work environments. perform that task faster and with higher quality than
For the purposes of operations management and others, because he or she has repeated exposure to
looking for the ways to improve operational effective- the process and has learned from his or her experi-
ness, the school of thought that is the most relevant is ences. Specialization, in many regards, is what leads
that of scientific management. hospitals to structure their organization around units
such as nursing or materials management. Continued
specialization helps to produce well-defined roles and
▸▸ The Scientific and tasks, concentrated work efforts, and higher efficien-
cies. This is also known as division of labor. Mass
Mathematical Schools production is the concept of the creation of rapid
of Management production processes through the use of assembly-line
techniques. Mass production has been embraced by
Operations management seeks to apply quantita- most other industries, but, in many respects, it is not
tive and analytical techniques to achieve the goals relevant in health care.
of reduced costs, higher quality, higher productivity, The scientific era has been shown to have a num-
improved processes, and improved logistical flows. ber of failings and issues, which led to several other
The role of mathematics started to drive concepts of schools of thought. The lack of focus on human behav-
industrial efficiency in what is now known as the sci- ior, on aligning employees’ rewards with those of the
entific management era, which began prior to the turn organization, and on understanding the need for job
of the 20th century. rotations and expansion all are major issues that well-
Scientific schools of thought historically focused rounded managers have to consider. Thus, many of the
on use of concepts such as “time and motion” studies, analytical concepts of scientific management remain
which measured how long business processes took, vital to healthcare operations management. First, sci-
seeking ways to reduce the variability of the results entific management suggests the need for a strong
and continuously shrinking the times and associated understanding of processes, their costs and resource
costs. Early work by Frank and Lillian Gilbreth helped utilizations, constraints, and cycle times. Second, sci-
drive a focus on continual improvements—finding entific management encourages an initial focus on
ways to do things faster and with fewer resources. In understanding expected outcomes and subsequently
fact, the Gilbreths’ research has had a profound impact designing management systems and business pro-
on health care as well (Gilbreth & Carey, 1966). In cesses around this operational strategy. Third, the
the early 1900s, they were credited for observing the variability of processes has to be smoothed out and
productivity of surgeons and found that the introduc- consistently managed. Finally, scientific management
tion of changes in both staffing and work flow could shows that in many cases, quantitative approaches can
Management Decision-Making 13
help create mathematically optimal results for com-

mon management decisions and problems. These four Define
problems and
fundamental concepts are the foundation of the oper- goals
ations management discipline.
Identification
▸▸ Management Establish
criteria and key
Decision-Making variables
Management decision-making is a process in an

organization in which decisions are made (Yates, 2003)
and reflects the major processes involved in managing Weigh
the work of organizations (Szilagyi & Wallace, 1990). criteria
Decisions are the output of the process. Decisions are
typically described as a choice between two or more Information
alternatives (Rowe, Boulgarides, & McGrath, 1984). processing/
search
Decisions can also be described as an “action” taken as Generate
a result of a process. As Hoch and Kunreuther (2001) choices or
alternatives
state “…the strength or weakness of managerial deci-
sions is the linchpin of the business enterprise.”
Herbert Simon (1960), one of the first researchers
on decision-making in organizations, describes the
decision-making process as a three-step process: Evaluate
alternatives
1. Finding occasions to make a decision,
2. Finding possible courses of action, and
3. Choosing among many options. Selection
Choose
Browne (1993) describes it similarly as “that optimal or
which occurs at the highest level of an organization.” satisficing
decision
Schwenk (1988) describes management or strategic
decisions as ill structured, nonroutine, important to
the organization, involving large resource commit- FIGURE 1-6 Traditional Decision-Making Process
ments, and generally very complex. A traditional
management decision process, adapted from Browne operations research (OR) methods. The latter is more
(1993), is shown in FIGURE 1-6. unstructured and relies more on judgment and gen-
Decision-making theory has been defined by a eral problem-solving approaches. This approach has
number of perspectives: sociology, psychology, eco- generally been considered to emphasize behavioral
nomics, engineering, and business. Since management processes over quantitative ones, since they involve
decisions are made within organizations, organiza- ambiguity, conflict, negotiations, and bias created by
tional theorists early on shaped the field by suggesting the interaction of individuals and personalities.
a rational approach in which decision-makers make Similarly, Allison (1971) outlined three perspec-
decisions in the best interest of the organization and tives on strategic decision-making: rational, organiza-
emphasize “information processing.” More recently, tional, and political.
there has been a strong emphasis on decision-making ■■ Rational. It has been suggested that decisions
as a behavioral process, since decisions are made by are made in a rational, logical, or systematic
individuals, in which personality and judgment rep- way. The rational, conscious choice emphasizes
resent both a source of bias and influence on decision a “search and selection” process that has lim-
processes. ited alternatives, maximizes decision outcomes,
Harrison (1987) describes decisions as either and adjusts for risks. Christensen, Andrews,
“routine and programmable” or “complex and unique.” Bower, Hammermesh, and Porter (1982) have
If decisions are routine, then they are procedural and outlined structured methods for organizational
can use computation and rational models for deci- decision-makers to follow to reach optimal or
sion support. This area is obviously well suited for maximizing outcomes.
■■ Organizational. Henry Mintzberg (1978) is Wang, Keil, & Ahluwalia, 2007). Simon envisioned an
generally recognized as one of the leading “aspiration point” where managers determine what is
researchers on decision-making from an organi- “good enough.” This process of terminating the search
zational theory perspective. The organizational process without incorporating more extensive infor-
perspective views decisions as the outputs of mation is called “satisficing,” as discussed earlier. This
organizational processes, not individual ones, obviously creates biases and risks for managers.
and includes adapting strategy to the environ- The concept of “trade-offs” is related to “satisfic-
ment. The organizational approach emphasizes ing,” a term coined by Herbert Simon many years ago
“satisficing.” Satisficing is a process of making (Simon, 1965). Trade-offs represent a cognitive pro-
a less than optimal decision, but one that can cess of balancing the pros and cons of attributes or
be supported and is acceptable since it meets decision criteria, in an effort to accept less of some-
the minimal criteria (e.g., decision is reached thing to get more of something else (Luce, Payne, &
quickly, is adequate, and/or is the result of con- Bettman, 2001).
sensus between parties). Satisficing terminates Browne (1993) describes four models or perspec-
the search for alternative processes early. Ambi- tives in decision theory: normative, descriptive, analyt-
guity plays a critical part, as does the concept ical, and behavioral. Normative, or prescriptive, models
of “randomness,” which leads to models of describe what managers should be doing to produce
decision-making that are less than rational, and optimal outcomes. Normative models he suggests are
can be described as “organized anarchies” or the contributions of scientific management. Simon
“garbage can” models (March & Olsen, 1979). (1965) argues that rational models of management
■■ Political. From this perspective, decisions are the science are valuable contributions toward normative
result of bargaining among individuals attempt- decision-making theory. Descriptive models describe
ing to achieve their own personal goals (Abell, what actually occurs in organizations, not what should
1975). This would include social, nonprofit, occur. Analytical models, which are the contribution
educational, and other organizations. Political of management science, involve risk and uncertainty
models tend to redefine the decision processes, quantification and the role of modeling decisions and
structures, and goals on a continual basis, mak- predicting outcomes. Finally, behavioral models exam-
ing evaluation difficult. Behavioral concepts, ine the role of bias and cognition in humans as well as
such as the role of judgment, biases, emotions, how information is processed and used.
and heuristics, are often a component of this As theory has established, decision-making is not
perspective. Bazerman (2005) is one of the prom- necessarily a rational search and evaluation process, in
inent researchers on individuals and behavior in which alternatives are clearly defined, evaluated, and
decision-making processes. then the best alternative is selected. Brunsson (1985)
argued that decision-making is less about finding the
From both the organizational and political per- right choice and more about giving an impression
spectives, the concept of “bounded rationality” has of rationality in organizational processes. He also
emerged. Bounded rationality suggests that humans describes other more common irrational processes
or individuals have only a limited, finite capacity to used by managers.
understand all options available to them and process In decision-making, decisions are sometimes cat-
them in an evaluation mode (Simon, 1979). Bounded egorized into one of the following two types: routine
rationality can also be described as limits on the or complex. Routine decisions have been described as
human’s ability to process and interpret large volumes “programmable” and are sometimes associated with
of data (Bazerman, 2005). While rational models selection and evaluation methods that can be mech-
assume all alternatives are known, they usually are not anized or automated (Harrison, 1987). These routine
and there is no known probability or consequences of decisions are often supported by methods such as OR.
the actions. Also, goals are changing and the process is The more complex the decisions are, the greater the
not always as sequential as it would appear. Complex- use of intuition or judgment in the process, and pre-
ity of decision processes is also often used to describe sumably the less likely that methods such as OR will
why rational models are not appropriate. be used. Discussion in strategic management literature
There are two components of bounded ratio- about the role of intuition versus analytics touches on
nality: search and satisficing (Simon, 1979). Search this subject, but does not comprehensively address
refers to how extensively a decision-maker searches the role of quantitative methods using the routine-
for information to guide decision-making (Tiwana, complex dimension (Miller & Ireland, 2005).
Power and Decision-Making in Health Care 15
In summary, organizational decision-making pro- industries, making relationships important for

cesses are quite complex and appear to be variable in purposes of mutual support as allies. Also, there
nature. In addition, both the complexity of the deci- are continuous power struggles in the healthcare
sion and the cognitive capacity of the decision-makers arena between different factions of employees.
influence the form of decision processes. As a result, This creates ambiguity in decision-making.
some healthcare organizations might find a quantita-
tive component of operations management decision- Physicians are typically the most dominant players,
making more useful or relevant, while others may given their clinical expertise and control over the “pro-
value it to a lesser extent. duction” of healthcare services, and have a very substan-
tial role in most major organizational decisions (Young
& Saltman, 1985). Power conflicts with nurses and other
▸▸ Power and Decision-Making providers are frequent and have developed (for struc-
tural reasons) in the struggle for control over patients,
in Health Care their care, and overall patient management processes
(Coombs, 2004). As such, several formal power bases
Decisions in health care do not follow the traditional, have emerged: business managers, who increasingly are
logical processes used in industrial organizations. becoming more professional and sophisticated; physi-
In other industries, where profit maximization and cian leadership, which historically dominates the power
shareholder wealth are the primary motives, decisions pendulum; and nursing leadership, which probably has
are primarily driven by goal alignment for both man- the most intimate knowledge of patients and their needs.
agers (those who run the business) and owners (share- Those who control the “production” process in
holders who invest in equity or debt and have a claim most industries tend to have the most influence and
on the profits and assets). Decision-making tends to can control decision-making for many things. In
follow cost–benefit models and focus on risk minimi- the production of health care (i.e., delivery of treat-
zation, cash flows, and return on investment (ROI). ments and provision of care), physicians are by far the
Although disputes and conflicts may arise because of dominant players, yet their role in most operational
incomplete or imperfect information (as described in management processes in most hospitals is waning as
the agency theory of economics), these disputes can professional business managers evolve.
typically be minimized by changing incentives, behav- Decision-making in teaching hospitals and aca-
iors, and structural mechanisms. demic medical centers is even more complicated—
In health care, however, there is incomplete align- through the introduction of another dominant party:
ment of goals between different agents, or managers, academic faculty and researchers (Choi, Allison, &
in the organization because of three issues: Munson, 1986). In the largest hospitals, this complex-
1. Goals are unclear. There are clinical goals, ity in decision-making is complicated by large busi-
financial goals, educational or academic goals ness infrastructures, which may employ hundreds or
in some cases, societal goals, community goals, thousands of individuals in all types of support func-
and so on. The ambiguity that exists in terms tions, from admissions to patient finance to facilities.
of priorities and focus makes goals much less Three characteristics define this complexity of
acute than in other industries. decision processes: problematic preferences, unclear
2. Organizations are complex. In industrial organi- technology, and fluid participation (Cohen, March,
zations, the organization is focused clearly on the & Olsen, 1972). These characteristics, together with
key aspects of buying, making, selling, and mov- “streams” of both problems and choices, can be com-
ing products to the marketplace. In health care, bined in unclear decision processes in a “garbage can,”
reporting relationships often involve complex where they can often address the wrong problems at
matrices and dual-reporting structures. This is the wrong time. This garbage can tends to allow issues
definitely not the “command and control” struc- and solutions to resurface in strange ways, which often
ture, focused on speed and efficiency of decision- results in a lack of clarity and focus.
making, that might work in other places. With all of these dominant players and complexi-
3. Relationships are ambiguous. Many business ties, many hospitals have become large bureaucracies.
units in health care are interconnected, but they These bureaucracies make it difficult to make import-
often behave as if they were not. Independence of ant decisions, address financial and business issues,
departments and providers helps create an envi- change behaviors and business processes, and imple-
ronment that is less team focused than in other ment new technology.
Sophistication in operations and logistics man- the modern operations manager’s mind. Technology
agement requires not only understanding concepts should be considered whenever quality and efficiency
and their application to health care, but also under- is low. Processes that are repetitive in nature and that
standing the persuasive and leadership characteristics can be replaced by less expensive automation are also
necessary to navigate the bureaucracy, influence dom- suitable for a technology investment.
inant power groups, engage support for ideas, and Technology often serves one of the three roles:
ultimately gain approval and acceptance of changes. 1. Automate manual processes.
These changes will come only if business executives 2. Improve transaction processing capabilities.
achieve more dominant power positions, which can 3. Improve the quality of analysis, reports, and
evolve only when operations and logistics executives decisions.
are recognized for their contributions, specialized
education, professional expertise, and leadership Technology has the ability to substantially alter
skills. Collaboration within these multidisciplinary the economics of a process. Processes that can be
organizations is just one way to retain more control in mechanized allow for faster production or delivery
the decision-making process. with less resource usage—two keys to improving oper-
ational effectiveness. The decision to substitute capital,
or technology, for labor—especially in areas of busi-
▸▸ The Role of Technology ness support services—is the only way to reduce pro-
cessing and transactional costs over the long run. For
and Systems this reason, several other chapters in this text address
the issue of technology and its role in productivity
With its focus on improvements, operations man-
enhancements.
agement rests highly on the use of technology and
automation. Many new technologies—including
mobile devices, handhelds, scanning capabilities,
asset tracking, database management, health infor- ▸▸ Trends in Operations
mation exchanges, and electronic health records—all
help managers to improve their capture of data and
Management
transformation of this into improved decisions. Deci- There are several trends that are being widely con-
sions about capital investment in new information sidered and adopted in hospitals. These are depicted
and management systems are always at the forefront of in TABLE 1-3, and the trends correspond to the role
TABLE 1-3 Roles and Trends in Healthcare Operations Management
Primary Role of Operations Managers Evolving Trends
1. Reduce costs Standardization

Optimization
Resource tracking systems
2. Reduce variability and improve logistical flow Integrated service delivery

Analytics
Supply chain management
3. Improve productivity Information technology; mobile devices; asset and

patient tracking systems
ROI
4. Provide higher quality services Evidence-based health care

Six Sigma
5. Improve business processes Outsourcing

Globalization
Trends in Operations Management 17
or function of operations management most closely for business in retail and other industries. Health care
related to it. Some of these will be highlighted in this has only recently felt the effects, but this trend will
section, while others will be discussed in other parts continue. When firms look for outsourcing oppor-
of this text. tunities (e.g., in information technology), they are
Outsourcing is the contracting of an outside firm now able to turn to vendors as far away as Ireland and
to perform services that were once handled internally. India to help manage their information technology
Outsourcing is quite common in many industries, operations infrastructure. Medical care that might
and in health care, it has been used successfully for once have required specialists on site is now only a
cafeteria operations, bookstore management, invest- television away, allowing physicians to practice med-
ments, and even nursing and other clinical care areas. icine without even setting foot in the hospital. Ven-
Outsourcing is not a new concept, but it has a slow dors for certain medical supplies, pharmaceuticals,
adoption rate in health care, where decisions such as and equipment are emerging and starting to compete
these are often quite difficult to make, especially when for business as potential suppliers, requiring hospi-
they result in the dismissal of employees from hospital tal managers to understand global logistics. As more
payrolls. However, outsourcing, when used selectively and more hospital services become automated, the
to target the right areas, can be quite beneficial from a location of the technology does not matter. This is the
cost perspective. true impact of globalization, and it will require adjust-
Outsourcing relies on the notion that a hospital ments by hospital management.
should focus on its core competencies—delivering Investments in a hospital’s information technol-
clinical care—and not on some of the less mission- ogy infrastructure are quite common today. Electronic
centric functions, such as housekeeping, materials medical records (EMRs), computerized physician
management, finance, and information technology. order entry, enterprise resource planning, picture
When analyzing pre- and post-performance improve- archival communication systems, supply chain man-
ment, the evaluation of internally performed or selec- agement, and many other systems are much more
tive outsourcing costs needs to be undertaken to prevalent today than in years past. Investments in a
ensure all options are explored and the most opera- number of lesser-known technologies for admissions,
tionally effective process remains. cashiering, inventory management, and even bed
Integrated service delivery is another trend that management are also becoming more common.
has been developing over the past few years. Many The basic premise of most technologies is that
researchers have pointed to the excessive cost of care they provide some return that, when quantified, is
as being driven by the medical community’s contin- greater than the costs associated with it. In some cases,
ued desire for specialization and concentration on this is simple to calculate, as when a system creates
discrete diseases and treatments, rather than on inte- known financial value and has well-defined costs. In
grative, comprehensive care (Porter & Teisberg, 2006). others, when the information technology produces
In response to this, hospitals are looking for ways to vague benefits (such as extending a system’s end of
push care toward more integrative medicine, including life or improving clinical quality), the returns are
higher sharing of information, resources, and collab- more difficult to measure and quantify and thus are
oration. The impact on operations management will more complex if creating a cost–benefit comparison.
include redesign of business processes and changes in Regardless, the trend in leading hospitals is to conduct
the number and frequency of logistics networks. thorough ROI analyses that clearly define the pre- and
Supply chain management is the integrated man- post-environment and then make comparisons of the
agement of all products, information, and financial delivered or earned value for the project. Significantly
flows in a network designed to pull products from more about this will be discussed later in this text.
manufacturers to consumers. In health care, there has The growth in deployment of resource tracking
been widespread adoption of improved sourcing and systems is also quite interesting. Information systems
inventory techniques designed to lower overall supply and technology are being developed specific to health
expense ratios (which typically account for 25%–50% care to allow for tracking of patients, equipment, sup-
of all hospital costs). Significantly more detail about plies, pharmaceuticals, bed occupancy, and much
the use of supply chain and logistics management will more. Microprocessor chips, bar coding technology,
be covered in Part III. global positioning systems, and radio frequency iden-
Another trend in healthcare operations manage- tification systems are all technologies that are being
ment is globalization. The world is becoming smaller, slowly adopted in larger hospitals. Many of these use
and vendors from all around the globe are competing existing wireless frequencies and infrastructure, so
they are becoming easier to implement at lower costs. analyzed for the effects each would have on operations.
These tracking systems allow for closer monitoring For example, if a certain piece of equipment needs to
of utilization patterns, location analysis, stationary be replaced, evidence-based medicine suggests that
or downtimes, and logistical flows, which thus helps the true costs and outcomes associated with this item
better manage the number, type, and mix of resources be carefully analyzed over time; a replacement piece of
required. Improved operational effectiveness results equipment undergoes the exact same controls to guar-
from improved utilization and higher asset productivi- antee and quantify the total impacts of this change on
ties. Many of these technologies will be described later. the system. Evidence-based health care, in its use of
Another trend that is being followed closely in quantitative methods and in seeking to comprehen-
operations management is that of standardization. sively analyze operations, is completely in alignment
Standardization is the use of consistent procedures, with operations management theory. The use of qual-
resources, and services to achieve consistent results ity management processes such as Six Sigma, which
across multiple departments. In a system or network, attempts to improve process and outputs through con-
standardization suggests that two hospitals could use tinuous improvement techniques, is beginning to gain
the same basic medical supplies for multiple procedures, a solid foundation in the healthcare industry.
rather than a wide variety of them, which helps reduce
inventory and purchasing costs and creates some econ-
omies of scale. Standardization also refers to the use of ▸▸ Best Practices for Successful
common standards for information systems, as well as
personnel and operational processes. Standardization
Operations Managers
helps ensure alignment among departments, helps pro- Operations managers will become more integral. It is
mote familiarization and learning curves, and helps necessary and vital for managers in healthcare orga-
reduce the number of transactions processed—which nizations to fully understand how clinical processes
all result in lower costs and higher productivity. are paid for, how supplies and products are moved
Finally, many hospitals practice what is called between units, how billing and cost management are
evidence-based health care. Evidence-based connected, and how facility layouts can improve flows
medicine applies the scientific method to medi- of patients.
cal practice and seeks to quantify the true outcomes The types of operations and productivity analyses
associated with certain medical practices by applying we describe in this text are perfectly aligned with the
statistical and research methods (Heneghan & Bade- evolving direction of healthcare in the United States.
noch, 2006). Evidence-based health care, as it applies The direction of health care is being shaped by a num-
to operational management, emphasizes that prior to ber of trends. We see at least eight broad trends in
decisions being made, the options are conscientiously operations management, as shown in FIGURE 1-7.
Agility and
visibility
Optimization and Technology and

analytics system integration
Enterprise-level
Future of
management,
operations ABC and lean
consolidation,
management
and integration
Operations analysis Collaboration and

and focus on value partnerships
Learning and
improving
FIGURE 1-7 The Future of Healthcare Operations Management

Best Practices for Successful Operations Managers 19
Remain Strategically Focused on Agility, will have a limited ROI, but will eventually dictate the
need for further system integration (discussed later) to
Speed, and Transparency achieve greater benefits throughout the entire organi-
One of the biggest challenges in large hospitals and zation. This will eventually lead to the need for a new,
systems is the inability to know where patients and integrated department that can monitor and control
expensive resources are at all times, which effectively the flow and throughput of resources throughout the
reduces capacity and causes excessive amounts of entire system. A control center concept—staffed by
resources to be deployed. Imagine, however, the fol- professionals focused on operational efficiencies and
lowing scenario. A new patient is finalizing registra- driven by new metrics of speed, agility, and acuity—
tion in admissions; subsequently, an order is given to that can significantly decrease the organizational bar-
housekeeping to make the room ready; a request also riers and process inefficiencies will be implemented.
is made to materials management to order the typical
procedural supplies required for the patient’s stay and Embrace and Integrate Technology
to simultaneously update the census, EMRs, and other
key systems. If this same hospital tracks the flow and
into Operations
movements of all wheelchairs, infusion pumps, med- When harnessed, data are converted into useful
ications, crash carts, and other key resources as well, information. But, what do we do with all this data?
there would be higher utilization and throughput with Technology plays a vital role in integrating disparate
reduced level of investments. All of the manual bed processes and automating manual ones. As operations
boards, tracking sheets, and paper processes could be management begins to understand and influence the
discontinued, and in its place would be real-time visi- infrastructure to produce better costs and outcomes,
bility shared by all clinical and support services. technology will become even more pervasive. Much of
Healthcare strategy is moving toward greater this technology will be focused less on clinical needs
agility and speed in business processes in an effort than on business needs.
to improve throughputs and service simultaneously. Technology deployment will continue to rise.
These strategic capabilities will drive decision-making Consumer-based technology that allows patients
processes and will ultimately result in greater opera- access to better information will prevail, but manage-
tional excellence. ment technology that supports evidence-based med-
In the long run, hospitals and other organizations icine, reporting, and better operations is starting to
will evolve over time much the same way that other reach a tipping point. These technologies are being
low-margin, operationally focused industries have, pushed from clinic managers, physicians, and IT exec-
such as telecommunications, retail, and energy. The utives. This will involve much more than just EMRs,
technology and processes in these industries have but also mobile apps, tele-medicine, analytics, and
evolved to where a continuous, real-time monitor- population health.
ing environment is used to manage the key aspects of Most large hospitals have hundreds of enterprise
the business. In health care, the use of scorecards (or and stand-alone systems, many of which are quite
dashboards) is primarily retrospective, in that it looks interdependent. Health care in the future will have
back over the previous day or month for metrics and much broader integration of these key systems and
results. As health care improves its operational focus, technology to allow for sharing and linking of data
a control center concept using tracking technologies so that applications can operate as one large system.
supports: This is called interoperability, and extensive work is
currently underway to define integration standards,
■■ Radio frequency identification (RFID) tags for middleware, and platforms on which this can occur.
use on key resources. Interoperability ensures that all key systems—such as
■■ Visibility of patients from admit to discharge— EMRs, a picture archiving and communication sys-
and all departments that are visited in between. tem, medication administration, enterprise resource
■■ Movement of expensive drugs and supplies to planning, charge description master, and many
reduce the risk of theft or loss. more—work together seamlessly. This interoperabil-
Health care is in the early phases of this evolu- ity will allow the first trend (strategy) to be fully real-
tion. Organizations are selectively putting tracking ized. Interoperability is also encouraging connection
technologies such as patient bar coding and RFID between different hospital systems, via health infor-
on equipment and are simultaneously implementing mation exchange. A health information exchange
real-time clinical systems to improve processes such is the electronic movement of patient records between
as discharge planning. These systems will prove useful, hospital systems.
Integrate Service Delivery with all aspects of a business process directly. A shift toward
more selective outsourcing, in both clinical and busi-
Activity-Based Costing and Lean ness areas, will be significantly greater in the future
Healthcare organizations are moving away from ver- than what currently exists.
tical, stand-alone, silo-based business units, where Vendors will also control much more of the supply
patients are treated differently at each department chain in many areas. Vendors possess more special-
or clinic. More streamlined business processes will ized knowledge and technology, which will penetrate
result in an integrated, or horizontal, service deliv- deeper into many organizations, and complicated
ery. The current redundancy that exists—where each mechanisms will be used to better align incentives
unit captures similar patient data, creates its own between vendors and providers—in a much differ-
schedules, and manages separate systems—will be ent way than the cost-plus arrangement that is com-
replaced by a more holistic and integrated service mon today. The large healthcare distributors will have
line approach. an expanded role. Incentive payments for improved
This new approach will help drive improved bottom-line performance in key metrics will be used,
throughput and patient flow through Lean and Six and vendors will offer more attractive solutions that
Sigma, but it will do little to reduce costs if it is not are comprised of labor, technology, and process.
paired with an activity-based costing approach. Different managerial skills are required to manage
Activity-based costing (ABC) defines total costs at vendor arrangements such as these, and operational
a detailed level where activity drivers and resource managers must also include business acumen such as
consumers are used. Understanding the costs at an contract administration, performance management,
activity level is necessary because, in most healthcare and vendor collaboration.
organizations, there has been very little work done to
understand what drives costs and where the true costs
lie. Many of the hidden or fixed costs that are dormant
Continue Learning and Improving
in vertical processes are more easily exposed in a hor- A continuous improvement mentality is necessary in
izontal cross-functional approach, which is why ABC today’s post-modern healthcare enterprise. We are
should be used in conjunction with integrated service going to see a change in how health care is opera-
delivery. tionalized. There will be plenty of hospital beds and
clinical treatment rooms, but we will also find ways
to explore use of improved technologies that allow
Work Toward Greater Collaboration patients to treat themselves, or provide health care at
New forms of partnerships and collaboration will home. The rise of chronic conditions will encourage
focus on interorganizational processes. Once you have a change in how care is delivered, and from where.
your own internal operations mastered, be prepared Tele-medicine, for example, might help allow the
to understand and improve upon these boundary- patient to communicate directly with her provider
spanning processes. This also includes enhancing the without leaving the confines of her home. Emergency
continuum of care and vertically/horizontally inte- medical services (EMS) will also begin providing
grating with other practices, payers, and acute ser- field-based medicine and using emergency medical
vices. There are opportunities in the healthcare value technicians to provide care proactively (in advance
chain for significantly higher levels of collaboration of a 911 call) instead of waiting for the emergency to
internally with physicians and providers, and exter- happen. Changes in how care is delivered are coming.
nally with vendors and payers. Interactions with all of Operations managers need to be in a position to sup-
these stakeholders today are still highly manual and port these changes.
do not involve electronic commerce and collaborative Many administrators can benefit from improved
processes. Collaboration can take the form of auto- management and business education. There are nearly
mated reconciliations of charges and patients, shared 75 accredited graduate-level programs in healthcare
business plans, and collocation of employees. administration, yet far too many programs focus
In many large facilities, limited outsourcing is predominantly on public and social policy and not
already in use for support services, such as gift shops enough on management, financial, and business issues.
and cafeterias. As health care continues to focus on While most healthcare degree programs focus on the
operational efficiencies, many organizations will dis- healthcare enterprise as a governmental organization,
cover that their core competency (or expertise that this will change as programs evolve to teach a broader
underlies their reason for existing and the source of curriculum focusing on operations, finance, and tech-
the competitive advantage) does not involve operating nology. In those facilities governed by physicians,
Best Practices for Successful Operations Managers 21
the pursuit of the MBA degree has risen steadily and and demand utilization to understand the financial
a large number of physicians are obtaining graduate impact on operations.
business degrees, such as an MHA or MBA. Yet, far The healthcare industry will most likely continue
too many physicians are relatively inexperienced in to consolidate, as it has over the past few decades.
business practices that will help improve financial and Horizontal integration—through mergers, acqui-
operational performance. sitions, and joint ventures—will probably be used
As the healthcare industry continues to change (much more than vertical integration) to create inte-
into a more dynamic one, where financial pressures grated delivery networks, as organizations attempt to
force administrators to act as true business man- use their current skills to manage similar operations in
agers, there will be a much higher need for well- other geographic areas. This will require management
rounded graduates with advanced business skills. of the healthcare organization as an enterprise, or a
Being able to use accounting and financial data to complex, multidimensional organization that is inter-
help drive improved decision-making and processes connected as a whole (and not just specific depart-
currently relies on skills that are better developed ments or activities).
outside of health care. Having and using these skills, This consolidation will create the need for a sys-
though, is necessary if hospitals are to manage tems approach that can manage the interrelated
increasing scale, horizontal integration, and effec- facilities to achieve better results. Standardization,
tive operations. aggregation, and alignment are all necessary if hos-
pitals are to achieve any synergistic effects from inte-
gration. Operational management, therefore, has to
Conduct Operations Analysis and evolve from a narrow perspective to a much larger
Demonstrate Financial Value network view that can take disparate operations
Operations analysis is fundamental to understanding and connect them to achieve better results. This will
your organization or department’s performance and require better leadership skills and the ability to man-
to continue to focus on improving productivity and age and align processes that are expansive and cur-
combating downward margin pressures. Clinical and rently decentralized.
support services need to continuously measure and
improve the financial value offered. As health care Deploy Big Data and Analytical Techniques
becomes more sophisticated, organizations will be
managed much more like a financial portfolio, where Data are collected everywhere—from patients (in
departments and units that offer the greatest value at EMRs and registration systems), from payers (in
the lowest risk are cultivated, while those that destroy payer databases), from activities and events (from
value (i.e., where total costs of operations are greater radio frequency identification tags on equipment and
than the returns provided) are mitigated or elimi- devices), and from procedures (activities performed
nated. As healthcare organizations continue to mea- on patients). Harnessing this large amount of data
sure performance more holistically, the emphasis on (or big data, as it is called) is complicated since it
tracking ROI and value creation will force differential derives from multiple sources and is extremely large
management of service lines. This emphasis on finan- and complex to manage with traditional tools. Health
cial value will ultimately help each unit deliver better care has significantly greater potential for utilization
and more competitive services. of optimization and analytical techniques. As dis-
cussed in this text, all of the key operational processes
in most healthcare organizations have developed over
Manage the “Enterprise” Through time using trial and error and do not deliver optimal
Consolidation and Horizontal results. The use of game theory, process engineering,
Six Sigma, and other techniques will help augment
Management Processes the deployment of analytical techniques. Use of lin-
New payment and practice models will continue to be ear programming, simulation modeling, and other
created. These are highly experimental, so operations mathematical tools will become much more wide-
managers should be prepared to have multiple types of spread in hospitals of the future than they are today.
contracts in place. Insurance exchanges will obviously The use of analytics and optimization in the future
mean a different set of payer plans and models, but in will support a broad range of processes, including
addition, there will be other forms of experimentation labor scheduling, patient routing, wait line and ser-
from payers. These should be viewed as positive—they vice delivery, and department or resource location
force you to know how to use simulation, forecasting, analysis, to name just a few.
▸▸ Tips for Success 3. Always look for analytical or quantitative

approaches to problems. Operations managers
With the concepts and tools learned from this text, should not settle for outdated heuristics (i.e.,
there should be a number of opportunities for improve- rules of thumb) or other biased methods for
ment that can quickly be addressed. Here are some final making decisions. Quantitative techniques,
thoughts on how operations managers can get started wherever possible, should be used to model
in the process of improvement and change by applying processes, productivity, and performance and
their knowledge to achieve better results quickly. to substantially improve decision-making
processes. Quantitative data form the basis for
1. Learn as much as possible about the organiza-
many operations techniques, such as forecast-
tion. Develop a list of the high-priority prob-
ing demand and capacity and then aligning
lems that the organization faces. Create a list
healthcare operations strategies accordingly.
or a plan of the processes that need the most
4. Comprehensively analyze and measure every-
improvement. Chart those initiatives that have
thing important about the process and organiza-
the highest value and that can be achieved with
tion. Relying on text reports and tables makes
minimal risks and faster timelines. This will
trends and changes over time very difficult
allow for some “quick hits” or initial success to
to identify and measure. Whether looking at
build an improvement program, one process at
statistical control charts of clinical procedures
a time.
or financial outcomes, viewing data graphi-
2. Innovate and challenge the status quo. To a
cally in a scorecard puts things in perspective.
large extent, healthcare organizations are gov-
All key processes and business units should
erned by the people who are the most averse to
have scorecards developed, so that pre- and
change or who do not understand the financial
post-project performance can be measured and
or business reasons that make change neces-
planned results can be achieved. Comparison
sary. Many clinicians and administrators will
of trends to published benchmarks or targets
not see the need for continuously improving
helps instantly focus management on opportu-
processes, managing performance on a rou-
nity areas.
tine basis, and identifying opportunities for
breaking down barriers to increased through- Of course, these are just some of the things that
put and operational efficiencies. Challenging must be done if operations management is to be suc-
this behavior and thought process is required cessful in transforming healthcare organizations. All
if health care is to improve cost and quality of these will be covered in subsequent chapters of this
simultaneously. Operations managers must be text. Remember, there are always new tools and tech-
change agents. niques that can be adopted to improve outcomes.
Chapter Summary
Operations management is the quantitative manage- business processes. Operations management is a field
ment of the supporting business systems and processes within the discipline of management, and it evolved
that transform resources into healthcare outputs. initially from the scientific management school of
Operations management is fundamentally about coor- thought. The process of management decision-making
dinating diverse, complicated activities into a compre- supports the choices for how operations management
hensive system. It is focused on achieving operational occurs. The decisions made impact the quality and
effectiveness—defined as lower costs, higher produc- efficiency of operations. With the increased emphasis
tivity, and continuous process improvement. There on efficiency and quality in healthcare organizations,
are five key goals of the operations manager: enhance operations management has progressed and become
financial effectiveness, reduce variability and improve more comprehensive and valuable. There are many
logistics flows, improve productivity, improve qual- trends evolving that are changing healthcare opera-
ity of customer service, and continuously improve tions, and many of these are discussed in later chapters.
Chapter Summary 23
Key Terms
Activity-based costing Healthcare operations Organizing
(ABC) management Outsourcing
Big data Health information exchange Planning
Competitiveness Innovation Productivity
Controlling Interoperability Satisficing
Core competency Leading Specialization
Cost–quality continuum Logistics Standardization
Decision-making Mass production System
Division of labor Operational excellence Throughput
Enterprise Operations effectiveness Variability
Evidence-based medicine Organization
Discussion Questions
1. Why do we need operations management for health care?
2. How does health care represent a system?
3. What are the key goals of operations managers?
4. Does operations management impact a hospital’s competitive advantage?
5. What are three of the key trends affecting hospital operations?
6. Who is considered the “father” of scientific management?
7. How are decisions made in organizations?
8. What are the basic steps of a rational management decision-making process?
9. What are the common sources of cost increases in health care?
10. How does the medical care CPI relate to cost increases for other items?
Exercise Problems
1. Healthcare organizations routinely make complex organizational decisions. As an example, a decision to
modify the physical layout or space of a department, or alter the schedules of a nursing unit, will impact
patient care in many ways. Since there are so many stakeholders involved, what process for making man-
agement decisions do you think will be followed? How would you use the decision-making process to
make important decisions such as this in an organization?
2. Richmond Community Hospital currently receives more than 10,000 boxes of pharmaceutical supplies
per month. All of these items are manually inspected and logged to ensure adequate receipt prior to pay-
ment. Eight employees manage receipts and deliveries, while four employees manually record and track
them. A new software package that allows automated scanning of bar codes will replace all or some of the
employees used for manual tracking, or at least allow redeployment to other areas of the hospital. What
are some of the key questions that must be explored to fully understand the impacts of technology and
whether a capital investment should be made to substitute capital for labor?
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An Overview To Healthcare Operations

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PART I

yields, making hospitals less than stellar investments

TABLE 1-1 Key Functions and Issues in Healthcare Operations Management

OM Function Objective or Issue to Consider

Financial ■■ Do we understand the cost accounting behind key processes?

Quality management ■■ Do we use advanced tools for tracking projects?

In 2006, the Institute of Medicine of the National

Are we staffed and

FIGURE 1-3 Variability Creates Chaos and Inefficiency

Creating value by converting inputs (resources) into efficient and effective

Process tools Analytics and

FIGURE 1-4 The Operations Management Process

464 475 485

FIGURE 1-5 Controlling Exponential Price Increases in Health Care

TABLE 1-2 Teachings from Other Industries

Airlines Scheduling, logistics, strategic pricing (yield management)

Electronics Technology innovation, product life-cycle management, pricing strategy

Telecommunications Command and control center

help create mathematically optimal results for com-

Management decision-making is a process in an

In summary, organizational decision-making pro- industries, making relationships important for

TABLE 1-3 Roles and Trends in Healthcare Operations Management

Primary Role of Operations Managers Evolving Trends

1. Reduce costs Standardization

2. Reduce variability and improve logistical flow Integrated service delivery

3. Improve productivity Information technology; mobile devices; asset and

4. Provide higher quality services Evidence-based health care

5. Improve business processes Outsourcing

Optimization and Technology and

Operations analysis Collaboration and

FIGURE 1-7 The Future of Healthcare Operations Management

▸▸ Tips for Success 3. Always look for analytical or quantitative

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