Daniel B. McLaughlin

SACS

Healthcare NTT ENTS PUREST THIRD EDITION

AUPHA/HAP Editorial Board for Graduate Studies

Nir Menachemi, PhD, Chairman Indiana University

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

Jan Clement, PhD Virginia Commonwealth University

Michael Counte, PhD St. Louis University

Joseph F. Crosby Jr, PhD Armstrong Atlantic State University

Mark L. Diana, PhD Tulane University

Peter D. Jacobson, JD University of Michigan

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

Mark A. Norrell, FACHE Indiana University

Maia Platt, PhD University of Detroit Mercy

Debra Scammon, PhD University of Utah

Tina Smith University of Toronto

Carla Stebbins, PhD Des Moines University

Cynda M. Tipple, FACHE Marymount University

Daniel 8. McLaughlin John R. Olson

Healthcare

fee

Denes

THIRD EDITION

AUPHA

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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 8. McLaughlin and John R. Olson.

Description: Third edition. | Chicago, Illinois : Health Administration Press; Wash- ington, 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.

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To my wife, Sharon, and daughters, Kelly and Katie, for their love and support through- out 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 ca reer and is dedicated to her legacy.

—Dan McLaughlin and John Olson

BRIEF CONTENTS

Part lIntroduction to Healthcare Operations

Chapter 1.The Challenge and the Opportunity

1D hapter 2.History of Performance Improvement

# |

apter 3.Evidence-Based Medicine and Value-Based Purchasing

Part l1Setting Goals and Executing Strategy

Chapter 4.Strategy and the Balanced Scorecard Chapter 5,Project Management

Part Il1Performance Improvement Tools, Techniques, and Programs

and Decision Making

Chapter 6.Tools for Problem Solvin;

Chapter 7.Statistical Thinking and Statistical Problem Solving Chapter 8.Healthcare Analytics

Chapter 9.Quality Management: Focus on Six Sigma Chapter 10.The Lean Enterprise

Part IVApplications to Contemporary Healthcare Operations Issues

Chapter 11.Process Improvement and Patient Flow

Chapter 12.Scheduling and Capacity Management

Chapter 13,Supply Chain Management coving Financial Performance with Operations Management

Chapter 14lin

Part VPutting It All Together for Operational Excellence

Chapter 15,Holding the Gains

Glossary

Index

About the Authors

DETAILED CONTENTS

Preface

Part lIntroduction to Healthcare Operations

Chapter 1.The Challenge and the Opportunity Overview The Purpose of This Book The Challenge The Opportunity A Systems Look at Healthcare An Integrating Framework for Operations Management in Healthcare Conclusion Discussion Questions References

Chapter 2.History of Performance Improvernent Operations Management in Action Overview Background Knowledge-Based Management History of Scientific Management

Philosophies of Performance Improvemes

Supply Chain Management Big Data and Analytics Conclusion Discussion Questions References

Chapter 3, Evidence-Based Medicine and Value-Based Purchasing Operations Management in Action Overview Evidence-Based Medicine

Too! Medicine 1¢ Use of Evidence-Based Clinical Decision Support The Future of Evidence-Based Medicine and Value Purchasing

Vincent Valley Hospital and Health System and Pay for Performance

Conclusion Discussion Questions

Part l1Setting Goals and Executing Strategy

Chapter 4.Strategy and the Balanced Scorecard Operations Management in Action Overview ‘Moving Strategy to Execution The Balanced Scorecard in Heal

e The Balanced Scorecard as

of a Strategic Ma:

ment System,

Elements of the Balanced Scorecard System Conclusion Discussion Questions Exercises

References

Furth

eading

Chapter 5.Project Management Operations Management in Action Overview Definition of a Project Project Selection and Chartering

Project Scope and Work Breakdown Scheduling Project Control

ment, Procurement, the Project Management Office, and Project Quality Manag

Closure Agile Project Management

novation Cent

The Project Manager and Project Team Conclusion Discussion Questions Exercises References

Further Reading

Part Il1Performance Improvement Tools, Techniques, and Programs

Chapter 6.Tools for Problem Solving and Decision Making Operations Management in Action Overview

Decision-Making Framework Techniques

Problem Identification Tools Analytical Tools

tion: Force Field Analysis

Discussion Questions Exercises References

Chapter 7.Statistical Thinking and Statistical Problem Solvi

Operations Management in Action Overview: Statistical Th

Probabil

lence Intervals and Hypothesis Testing

‘Simple Linear Regression Conclusi Discussion Questions Exercises

References

Chapter 8.Healthcare Analytics Operations Management in Action Overview What Is Analytics in Healthcare?

duction to Data Analytics Data Visualization Data Mining for Discovery

Conclusion Discussion Questions

Chapters ality Management—Focus on Six Sigma Operations Management in Action

The Six Sigma Quality Program ‘Additional Quality Tools Riverview Clinic Six S

1a Generic Drug Project Conclusion Discussion Questions

Chapter 10. The Lean Enterprise Operations Management in Action Overview What Is Lean?

‘Types of Waste

Kaizen Value Stream Mapping Additional Measures and Tools

of Lean and Six Sigma Pro}

Discussion Questions Exercises

ences

ications to Contemporary Healthcare Operations Issues

Chapter 11.Process Improvement and Patient Flow Operations Management in Action Overview Problem Types, Patient Flow Process Improvement Approaches The Science of Lines: Queuing Theory. Process Improvement in Practice Conclusion Discussion Questions Exercises References

Further Reading

Chapter 12,Schedu and Capacity Manag

Operations Management in Action

Census and Rough-Cut Capacity Planning

Scheduling

Job and Operation Scheduling and Sequencing Rules

Scheduling Models

Discussion Questions Exercises Ref

Chapter 13,Supply Chain Mana Operations Management in Action

Overview Chain Manageme

acking and Managing Inven

Demand For

Orde

urement and Vendor Relatio:

epic View

Conclusi Discussion Questions Exercises

Chapter 14.Improving Financial Performance with Operations Management

Operations Management in Action

Making Ends Meet on Medicare and the Pressure of Narrow Networks

Conclusion

Discussion Questions Exercises Note References

Part VPutting It All Together for Operational Excellence

Chapter 15,Holding the Gains

Overview

Which Tools to U:

Data and Statistics

ganization of tl

Discussion Questions Study

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 in- creasing costs, inadequate access, and uneven quality, lie in organizational opera- tions—the nuts and bolts of healthcare delivery. The healthcare arena is filled with opportunities for significant operational improvements. We hope that this book en- courages healthcare management students and working professionals 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 healthcare organizations have now begun to employ the same tools. Although numerous other operations management texts are available, few focus on healthcare opera: tions, 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 over- view 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 reimbursement systems, physi- cian relations, workforce challenges, and governmental regulations. This integrated approach helps healthcare professionals gain an understanding of strategic opera- tions 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 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 envi- ronment (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 influ ential environmental changes facing healthcare today: evidence-based medicine and value-based purchasing, or simply value purchasing (chapter 3)

In part LI, Setting Goals and Executing Strategy, chai

pter_4 highlights the importance of tying the strategic direction of the organization to operational initia- tives. This chapter outlines the use of the balanced scorecard technique to execute and monitor these initiatives toward achieving organizational objectives. Typically, strategic initiatives are large in scope, and the tools of project management (chapters) 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 re- mainder of this book.

The next part of the book, Performance Improvement Tools, Techniques, and Programs, provides an introduction to basic decision-making and problem-solving processes and describes some of the associated tools (chay

ter 6). Most perfor-

‘mance improvement initiatives (e.g., Six Sigma, Lean) follow these same processes and make use of some or all of the tools discussed in chapter

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 ap- proaches of cha

ter_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 Healthcare

Operations Issues, begins with an integrated approach to applying the various tools and techniques for process improvement in the healthcare environment

(chapter 11). We then focus on a special and important case of process improve- ‘ment: patient scheduling in the ambulatory setting (chapter 12)

Supply chain management extends the boundaries of the hospital or health- care system to include both upstream suppliers and downstream customers, 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

1. Part V, Putting It All Together for Operational Excellence, concludes the book

with a discussion of strategies for implementing and maintaining the focus on con. tinuous improvement in healthcare organizations (chapter 15)

Many features in this book should enhance student understanding and learn- ing. 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 Il through IV in- clude exercises to be solved

We include abundant examples throughout the text of the use of various con- temporary 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 application 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 management 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 health care 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 Minne sota Hospital Association (MHA). Attributing much of his understanding of healthcare analytics to working with the highly professional staff 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 organi- zation 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 Adminis- tration Press for their support, especially Janet Davis, acquisitions editor, 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 accom- panying 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 Re sources, visit ache.org/HAP and browse for the book's title or author names

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

Student Resources

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

PART '

INTRODUCTION TO HEALTHCARE OPERATIONS

CHAPTER 1

‘THE CHALLENGE AND THE OPPORTUNITY

The challenges and opportunities in today's complex healthcare deliv- ery systems demand that leaders take charge of their operations. A strong operations focus can reduce costs, increase safety—for patients, visitors, and staff alike—improve clinical outcomes, and allow an or ganization 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 tech- nology and specialty care services. Finally, find new methods to maxi- mize the organization's reimbursement for these services. In most or- ganizations, new services, not ongoing operations, were the key to suc cess.

However, that era is ending. Payer resistance to cost increases and a surge in public reporting on the quality of healthcare are forces driv- ing a major change in strategy. The passage of the Affordable Care Act (ACA) in 2010 represented a culmination of these forces. Although por- tions 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 of- fers an integrated, systematic approach and set of contemporary opera tions 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 chal- lenges 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.

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 organization's success, this book focuses on operations—how to deliver high-quality health services in a con- sistent, efficient manner.

Many books cover operational improvement tools, and some focus on using these tools in healthcare 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 treatment 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 tech- niques currently being deployed in leading healthcare organizations are covered, in part so that we may describe them in enough detail to enable students and practi tioners to use them in their work. Each chapter provides many references for fur- ther 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: Visio