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Daniel B. McLaughlin John R. Olson

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

AUPHA/HAP Editorial Board for Graduate Studies

Nir Menachemi, PhD, Chairman Indiana University

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

Jan Clement, PhD Virginia Commonwealth University

Michael Counte, PhD St. Louis University

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

Mark L. Diana, PhD Tulane University

Peter D. Jacobson, JD University of Michigan

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

Mark A. Norrell, FACHE Indiana University

Maia Platt, PhD University of Detroit Mercy

Debra Scammon, PhD University of Utah

Tina Smith University of Toronto

Carla Stebbins, PhD Des Moines University

Cynda M. Tipple, FACHE Marymount University

Health Administration Press, Chicago, Illinois

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Copyright © 2017 by the Foundation of the American College of Healthcare Executives. Printed in the United States of America. All rights reserved. This book or parts thereof may not be reproduced in any form without written permission of the publisher.

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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

ix

DETAILED CONTENTS

Preface …………………………………………………………………………………………xv

Part I Introduction to Healthcare Operations

Chapter 1. The Challenge and the Opportunity …………………………….3 Overview ………………………………………………………………..3 The Purpose of This Book ………………………………………….3 The Challenge ………………………………………………………….4 The Opportunity ……………………………………………………..6 A Systems Look at Healthcare …………………………………….8 An Integrating Framework for Operations Management

in Healthcare ……………………………………………………..12 Conclusion …………………………………………………………….15 Discussion Questions ………………………………………………15 References ……………………………………………………………..15

Chapter 2. History of Performance Improvement ………………………..17 Operations Management in Action …………………………….17 Overview ………………………………………………………………17 Background……………………………………………………………18 Knowledge-Based Management …………………………………20 History of Scientific Management ………………………………22 Project Management ……………………………………………….26 Introduction to Quality ……………………………………………27 Philosophies of Performance Improvement ………………….34 Supply Chain Management ……………………………………….38 Big Data and Analytics …………………………………………….40 Conclusion …………………………………………………………….41 Discussion Questions ………………………………………………41 References ……………………………………………………………..42

Chapter 3. Evidence-Based Medicine and Value-Based Purchasing ….45 Operations Management in Action …………………………….45

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

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

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

Part II Setting Goals and Executing Strategy

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

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

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

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

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

Part III Performance Improvement Tools, Techniques, and Programs

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

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

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

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

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

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

Part IV Applications to Contemporary Healthcare Operations Issues

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

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

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

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

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

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

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