Kicab Castaneda-Mendez  |  05/01/1995

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Performance Measurement in Health Care

Health care organizations should be able to quickly improve their performance measurement systems by following some simple rules.

The changing nature of today's health care organizations, including pressure to reduce costs, improve the quality of care and meet stringent guidelines, has forced health care professionals to re-examine how they evaluate their performance. While many health care organizations have long recognized the need to look beyond financial measures when evaluating their performance, many still struggle with what measures to select and how to use the results of those measures. Because a growing number of health care professionals have readily adopted quality concepts, health care organizations should be able to quickly improve their performance measurement systems by following a few simple rules.


A brief look at the evolution of quality in modern health care systems may help understand the need to improve performance measurement.

More than 30 years ago, a physician named Avedis Donabedian proposed a model for assessing health care quality based on structures, processes and outcomes. He defined structure as the environment in which health care is provided, process as the method by which health care is provided, and outcome as the consequence of the health care provided. As a result, process management is limited, and often temporary, when the structure isn't also improved.

Two decades later health care adopted continuous quality improvement, which uses teams to improve processes. According to Donabedian's model, processes are constrained by the structures in which they operate. To date, few health care organizations have addressed these structures because health care senior managers have replicated the behavior of most industrial senior managers by focusing on the process level.

The popularity of Robert S. Kaplan and David P. Norton's balanced scorecard method--popularized in their book The Balanced Scorecard (1996, Harvard Business School Press)--expanded health care organization measures beyond financial analysis. They led to the development of measures in four or more areas, including patient/customer, financial, internal operations and clinical. However, in creating a balanced scorecard, many organizations failed to do the critical, difficult part: develop a cause-and-effect relationship among these measures. Consequently, health care organizations typically generate lists of strategies and goals as if they are independent of each other.

An additional impetus for health care organizations to adopt quality principles has been the Joint Commission on Accreditation of Healthcare Organizations' standards. While the JCAHO standards have evolved during the past decade, swayed in part by the Baldrige criteria, health care organizations have been slow to use this organizational assessment as a way to drive performance improvement.

The demand from JCAHO for performance improvement drove many health care organizations to learn as much as possible about continuous quality improvement. They began implementing ideas such as: teams and facilitators with training on conflict resolution; problem solving with use of statistical tools and standardized problem-solving procedures; data collection, including patient, physician and employee satisfaction surveys; process management using clinical algorithms and practice guidelines with training on pathway development; and planning using balanced scorecards and performance measurements. With continuous quality improvement often delegated to levels below senior management, organizations struggled to integrate and justify their many initiatives.

Selecting the right measures

An effective measurement system integrates initiatives, aligns organizational units and resources, and improves performance.

Paradoxically, most people select measures before they decide how to use them. While it makes sense to discuss selection and use of measures in that order, the effective order in practice is the reverse.

Organizations need performance measures in three areas:

  •  To lead the entire organization in a particular direction.
  •  To manage the resources needed to travel in this direction.
  •  To operate the processes that make the organization work.

Most organizations typically don't use leadership measures. However, many health care organizations have struggled to move beyond their heavy emphasis on financial measures to include leadership measures. With continuous quality improvement entrenched at the process level, these same organizations struggle to better manage their resources because they don't consider the effects of structures. Without an integration of clinical and financial measures, the same organizations will find it nearly impossible to effectively operate the processes they are so keen on improving.

To overcome these barriers, organizations need measures for three purposes:

  •  Strategic--to drive strategies into action and change the organizational culture
  •  Diagnostic--to evaluate the effectiveness of these actions and the extent of change
  •  Operational--to improve continuously

Senior managers are responsible for ensuring that measures exist for these three purposes at the organizational level. These measures can be placed in a cycle to reveal the three phases that organizations with excellent performance go through (see Figure 1 below).

Unlike the usual approach to quality management, the strategic plan must direct teams focused on processes. That plan must have goals with clear measures. Then systems (structural elements run by senior management) and processes can be managed operationally according to continuous improvement principles. Finally, results from system and process measures are used to diagnose the effectiveness of the strategic plan's actions.

The hypothesis tested by this cycle can be stated from the two goals of the Malcolm Baldrige National Quality Award for Health Care criteria (rearranged):

Cause: improvement of overall organizational performance and capabilities as a health care provider

(leads to):
Intermediate effect/cause: delivery of ever-improving value to patients and other customers

(contributes to)
Final Effect: improved health care quality

A strategic plan defines the specific cause-and-effect relationship through strategic measures. Performance improvement is accomplished by using measures of processes and outcomes to operate the processes.

Cause-and-effect relationships

By understanding how measurements will be used, it becomes easier to understand what measures to have. Measures are needed to test various cause-and-effect relationships at the organizational, process and individual level.

By their very existence, organizations create the basis for an interdependency among themselves (and partners) and their customers and employees (see Figure 2 below). This interdependency weakens when one or more parties do not receive value or perceive the value as insufficient. Organizations can strengthen this interdependency by integrating and aligning structures, processes, results, quality and costs. Strengthening the interdependency requires measuring the value each party needs.

Thus, health care organizations need to implement measures of business, patient and employee value. While many do, these measures typically are not developed in a way that shows this interdependency. They are not selected to show that a cause-and-effect relationship exists among the three types of values.

During the universal fee-for-service period, hospitals and health care professionals didn't need to worry about costs--as evidenced by the number of providers who until recently had charge and no-cost accounting systems. With the combination of managed care penetration and public ire about health care costs, health care organizations began focusing on costs and patient satisfaction. They now need to add employee satisfaction and value to finish the value-added picture.

The second cause-and-effect relationship organizations must test is their strategic plan. Kaplan and Norton define a strategy as a hypothesis about a cause-and- effect relationship. Therefore, a health care strategy postulates how (cause) a specific level of clinical quality (effect) will be achieved. The how must be explained by the specific level of organizational operations' effectiveness and efficiency.

Organizational operations include information systems, process management, human resource management and the leadership system. These, too, must be arranged in a cause-and-effect relationship. Each component of the strategic cause-and-effect relationship requires effectiveness and efficiency measures.

The third critical cause-and-effect relationship is at the process level and explains how processes affect specific outcomes. When managing (maintaining and improving performance) and operating systems and processes, managers should continually increase their understanding of how processes affect outcomes. That understanding comes from establishing relationships between process measures and outcome measures. Too often, process improvement teams fail to establish that relationship because they focus only on process measures or only on outcome measures. Their resulting control system then becomes a barrier to effective continuous improvement.

The organization has direct control over the process measures and can more easily collect data on these measures. Data on outcome measures is often more difficult and more costly to collect. Understanding the relationship between the two measures helps reduce data-collection costs.

The three critical types of systems and process measures are quality, time and cost. Here again, there is a cause-and-effect relationship that supports an interdependency. The common perspective is that time, quality and cost are opposing forces. For example, a customer who wants a product or service sooner is often told by the supplier that it will cost more and that quality is not assured. However, by defining time as cycle time to complete a process and quality as defect-free, these forces will support each other. Reducing cycle time increases the amount of data on a process and creates more opportunities for a fixed period to improve quality.

Practical rules

While health care professionals, especially physicians, tend to shy away from leading and managing organizations as businesses, their scientific background gives them one advantage in developing measures and analyzing the results. The approach described here is based on scientific principles of generating hypotheses about cause-and-effect relationships and testing those hypotheses.

The leadership part focuses on developing the measures for all three critical cause-and-effect relationships and analyzing the results. The management part focuses on deciding what action to take based on the analysis and then allocating resources to carry out those actions.

Three actions to effectively lead are:

  •  Develop measures to build the value-added interdependency
  •  Manage activities, time and quality to strengthen this interdependency
  •  Analyze performance to determine the effectiveness of those measures and management

At the strategic level, the first two cause-and-effect relationships are combined.

Rule 1: Have your strategic cause-and-effect relationship explain how all three types of value will be increased.

Your top-level measures are the three types of value. After developing the strategies, develop specific action plans, allocate resources and communicate the plan. When you are done, you should be able to answer the following questions:

  •  Are strategies operationally defined?
  •  Are the causal relationships among the strategies clear?
  •  Will all constituents receive strategic value?
  •  Does everyone know what the strategic direction is and remain committed to it?
  •  Does each person know how he or she can contribute to the organization's success?

Rule 2: Measure time, quality and cost at the process level. Time and cost are relatively easy to define and measure. The key to defining quality measures is in knowing the purpose of process steps and the outcome. Defining these purposes operationally yields quality measures.

Rule 3: Develop information systems after deciding on the measures. Because few people have the luxury or inclination to develop information systems after having defined measures, they should always have information systems that are flexible enough to include any measures developed later.

Rule 4: Analyze results to test the three critical cause-effect relationships. The distinguishing feature of excellent organizations is their analysis. They don't necessarily have greater ability, they are just committed to analyzing the data to see what works and what doesn't. Then they take action.


About The Author

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Kicab Castaneda-Mendez

Kicab Castaneda-Mendez is managing member of Aejes LLC, based in Ridgefield, Connecticut.