Healthcare operations management 3rd edition pdf free

Daniel B. McLaughlin John R. Olson

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

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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

vii

BRIEF CONTENTS

Preface ......................................................................................................xv

Part I Introduction to Healthcare Operations

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

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

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

Part II Setting Goals and Executing Strategy

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

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

Part III Performance Improvement Tools, Techniques, and Programs

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

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

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

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

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

Part IV Applications to Contemporary Healthcare Operations Issues

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

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

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

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

viii Brief Contents

Part V Putting It All Together for Operational Excellence

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

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

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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

xii Detai led Contents

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

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

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

Part IV Applications to Contemporary Healthcare Operations Issues

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

xiiiDetai led Contents

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

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

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

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

xiv Detai led Contents

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

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

Part V Putting It All Together for Operational Excellence

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

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

xv

PREFACE

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

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

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

How This Book Is Organized

We have organized this book into five parts:

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

xvi Preface

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

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

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

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

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

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

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

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

xviiPreface

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

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

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

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

Acknowledgments

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

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

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

xviii Preface

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

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

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

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

Instructor Resources

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

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

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

Student Resources

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

PART

INTRODUCTION TO HEALTHCARE OPERATIONS

I

CHAPTER

3

THE CHALLENGE AND THE OPPORTUNITY

The Purpose of This Book

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

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

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

1 OVE RVI EW

The challenges and opportunities in today’s complex healthcare

delivery systems demand that leaders take charge of their opera-

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

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

an organization to compete effectively in an aggressive marketplace.

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

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

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

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

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

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

However, that era is ending. Payer resistance to cost

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

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

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

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

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

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

enterprise must focus on making significant improvements in its

core operations.

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

It offers an integrated, systematic approach and set of contemporary

operations improvement tools that can be used to make significant

gains in any organization. These tools have been successfully deployed

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

now are being used by leading healthcare delivery organizations.

This chapter outlines the purpose of the book, identifies

challenges that healthcare systems currently face, presents a systems

view of healthcare, and provides a comprehensive framework for the

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

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

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

Healthcare Operat ions Management4

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

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

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

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

The Challenge

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

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

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

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

On the web at ache.org/books/OpsManagement3

Chapter 1 : The Chal lenge and the Oppor tunity 5

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

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

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

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

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

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