Key Challenges Facing Medical Device Manufacturers

Read text chapter 9. Next, carefully read the attached Inter-Systems White Paper, “The Key Challenges Facing Medical Device Manufacturers”, offered by HealthShare.

Today’s shift to value-based reimbursement is causing a shift in how devices and medical products are marketed and sold, and how the new buyers value what is being offered.

Review and analyze the attached business report and answer the following questions in essay format.

1. Who are the new influencers of this market?

2. How has technology driven change? Give an example.

3. How is this data driving clinical expertise?

4. What is strategic interoperability and how is it creating solutions to serve customers?

Using Microsoft Word, write a response paper that is a minimum of two pages. Include a minimum of 3 scholarly sources that address the questions above. Your paper should be double-spaced and include a centered title. Any sources used should be properly cited in APA formatI n t e r S y S t e m S

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The Key Challenges FaCing MediCal deviCe ManuFaCTurers (and how to meet them with strategic interoperability)

The Key Challenges FaCing MediCal deviCe ManuFaCTurers (and how to meet them with strategic interoperability) Executive Overviewaccountable care and value-based reimbursement models are causing a seismicshift in the medical device industry. in the new medical device market, the valueof the device and data alone will not drive sales. instead, it will be solutions thatbundle device, data, and real-time analytics that clinicians, health systems, andpayers will want to buy. For improved decision-making and outcomes, they needthese solutions to deliver actionable information into existing electronic medicalrecord systems and health information exchanges. and they need them to providethe efficacy and results data required in value-based reimbursement models. in this environment, nearly every manufacturer of medical devices faces two key,interrelated challenges: n how to adapt to the shift to value-based payment models n how to protect margins with products that elude commoditization you can meet these challenges by using a strategic interoperability platform tocreate solutions with leading-edge integration, data aggregation, and analytics capabilities. Adapting to value-based payment models: A focus on analyticsToday’s shift to value-based reimbursement is also causing shifts in to whom devices are marketed and sold, and how the new buyers value what you’re offer-ing. From 2005 to 2009, the yearly average number of announced us hospitalmergers and acquisitions was 56. in 2012 that number was 94. From 2005 to 2009the average percentage of physicians in private practice was 33. in 2012 the aver-age was 24 percent. These rates of change show no signs of more physicians become employees of large medical groups, hospitals, andidns, and payer and provider organizations merge, the influence of individualphysicians on medical device sales is waning. The new influencers, the hospitalgroups, idns, and payers, have the clout to secure large purchases of a device foruse across entire healthcare systems and in homes. But their decisions will bebased on more than just ease-of-use, or how compatible the device is with otherequipment.

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“Value in medtech will increas-

ingly be defined by a company’s

ability to use analytics to prove

the effectiveness and efficiency

of its products and actions.”

Ernst & Young, Pulse of the Industry Medical Technology Report, 2013.

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as the excellent ernst & young 2013 “Pulse of the industry, Medical Technologyreport” notes, “Companies need to invest significantly in expanding beyond prod-ucts and in developing new business models for a world of value-driven health-care.” Preferred products will be a combination of devices and services builtaround delivering solutions for payers, providers, and patients. “These businessmodels will frequently be created in collaboration with a diverse set of playersfrom across the spectrum of health care. Many of them will be built around data and analytics — capabilities that medtech companies need to expand to demon-strate value to payers and influence the behavior of patients.”Opportunity waits during this time of change for those with the vision to see itand the agility and technology to act on it. Re-inventing the wheel not requiredWhere does this ability come from? The long answer is that your organization canbuild data aggregation, management, and analytics software to complement yourdevices – if you have the expertise, time, money, and will. The short answer is thatyou don’t have to build it. you can rapidly incorporate proven, powerful, strategicinteroperability and analytics capabilities, such as provided by intersystems, intoa solution offering. With this approach you can provide solutions that: n interface devices quickly with nearly any electronic health record n Monitor device performance for proactive maintenance and product improvement n aggregate and analyze data for trending that helps customers manage population health n Turn aggregated data into revenue by providing it for other companies’ research efforts n deliver actionable information directly into clinician workflows n reduce alert fatigue by applying analytics and rules to the data before clinicians are notified n support multiple industry standards as they evolve and new ones are developedinnovation in the use of data is a natural path to becoming a solution provider, andnot just a device vendor. using the services of a strategic interoperability platformenables you to focus on your core competency in device innovation, while gaininga ready-made solution for device connectivity, data aggregation and normalization,workflow, and active analytics.

“Companies need to invest

significantly in expanding

beyond products and in

developing new business

models for a world of value-

driven healthcare.”

Ernst & Young, Pulse of the Industry Medical Technology Report, 2013.

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Protect margins, elude commoditizationsuccess in meeting customer demand for integration of devices and data with theirelectronic health records (ehrs) – either by writing code or using an open sourceinterface engine to handle connectivity and data formatting – doesn’t change howcustomers value your product. it is still a piece of hardware. it may be the best,but eventually it becomes a commodity that can be replaced by another piece ofhardware from another company, perhaps at a lower price. Computer manufac-turers have fought this dynamic for years. Those still thriving do so by offeringservices, support, and hardware wrapped into solutions that address businessproblems.innovation at the device level stays the tide of commoditization only for a shortwhile.

Fine-tuning pacemaker data models, improving population health

A strategic interoperability platform can give makers of implantable devices

a new way to gather and analyze data to improve products and processes,

and demonstrate efficacy. A maker of pacemakers might use such a platform

to aggregate data from all patients using the device over a given time period,

including relevant information from the electronic health record. The analy-

sis could look at outcomes from use of the device and help the manufacturer

fine-tune its data models. With access to the health record and information

such as demographics and medications, the manufacturer could determine

who responds best to its device, or if one segment of the population

responds better than another to a particular model. The end result for

providers, patients, and payers would be better population health, increased

patient safety as each person would get the best device for their profile, and

lower overall costs.

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Use data to establish clinical expertiseinnovation at the data and solutions level provides additional long-term value toyour organization and customers. across locations, therapeutic areas, and popu-lations of patients your devices generate and share critical data. With the growingemphasis on population health management and accountable care, having theability to aggregate, analyze, and understand this data means that you can be positioned as the clinical experts in improving outcomes using your devices. Thisis a key to avoiding the commoditization trap and thriving during this time ofhealthcare transformation. “Clinically interoperable” camera increases accuracy, speeds workflow, improves communication

A major manufacturer of cameras sold to healthcare organizations for use

during surgery needed a breakthrough to differentiate its product, increase

its value to buyers, and become more strategic to its customers’ business. The

company understood that in the increasingly interconnected world of health-

care, the value of stand-alone devices was declining. A rapid and successful

proof of concept project with InterSystems gave this company’s business

executives the technology, product, and value proposition they needed to

ignite sales. They now have a clinically interoperable device that uses

InterSystems HealthShare to transform camera image and meta-data into

a format that HealthShare can insert automatically into electronic medical

record systems. Combined with HealthShare’s workflow and analytics

capabilities, the company is gaining an edge not only in its camera business,

but also in consulting opportunities for information integration and work-

flow improvements using its other products throughout the hospital.

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Long-term success: The advantages of strategic interoperability and partnership with InterSystemsstrategic interoperability is the new paradigm for creating solutions to serve cus-tomers who are transforming the way they buy medical technology, improve care,and control costs. a strategic interoperability platform like intersystemshealthshare brings together all the technology needed for medical device solu-tions in a single, integrated platform that: n reduces complexity and risk n reduces design, testing, and implementation costs n increases maintainability n accommodates innovation n includes strong security and privacy capabilities n is highly scalable in both directions n supports a wide array of industry standards covering the gamut of healthcare clinical and business needs n helps you bring products to market faster

Home care device gains advantage for reducing readmissions

A leading manufacturer of home health devices, including blood pressure

and heart monitors, uses the strategic interoperability capabilities of

InterSystems HealthShare to make its products more compelling to providers

and payers, and less likely to be dislodged. When measures taken by a device

or devices cross a pre-defined threshold, an “exception report” and message is

generated and sent automatically to alert relevant providers, based on rules

created and stored in HealthShare. The report includes information on the

threshold that was crossed and related health data for that patient. For a

patient with congestive heart failure, such a threshold might be too much

weight gained over too short a period. The device manufacturer is able to

deliver what clinicians want – trustworthy alerting and important informa-

tion from home care inserted directly into their workflow. Patients appreciate

knowing that their care is being monitored and coordinated. Hospitals and

payers appreciate improved care, fewer readmissions, and lower costs.

InterSystemsintersystems healthshare comes with the full support, reliability, and experienceof intersystems, a leader in healthcare information technology and interoperabil-ity since 1978, with offices in 25 countries. healthshare is widely used as a strate-gic interoperability platform in the us and internationally. in sweden it is used toprovide a national health information exchange with real-time access for the coun-try’s clinicians. in the us, it powers statewide exchanges serving more than 60million americans, and is widely used by integrated delivery networks for inter-operability, data aggregation and normalization, and analytics.intersystems data management technology is behind many of the leading health-care applications worldwide, including those from epic, ge, 3M, the us depart-ment of veterans affairs, Baxter healthcare, Beckman Coulter, Bio-rad, sunquest,verizon Mobile health, and many others. Learn moreTo learn more about using healthshare in medical device solutions, contact usnow at 800-753-2571, or visit

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Supercharged infusion pumps give nurses more time with patients

A global supplier of infusion pumps is supercharging its products with

advanced capabilities, independent of core FDA regulated components,

using InterSystems technology. The goal is to free nursing staff to spend more

time directly with patients. These capabilities include: EHR connectivity;

automatic recording of input/output in the medical record when drip rates

change frequently; automated monitoring to determine if a device is OK to

use, and to alert staff when maintenance is needed; “score cards” to compare

device maintenance performance between hospitals as a baseline for

improved training; making it easier to positively associate device data with

specific patients; and tracking of patient data against outcomes to determine

best practices.

intersystems CorporationWorld headquartersOne Memorial driveCambridge, Ma 02142-1356Tel: +1.617.621.0600Fax:

intersystems Caché, intersystems ensemble, intersystems healthshare, intersystems deepsee and intersystems TrakCare are registered trademarks of intersystems Corporation. iKnow is a trademark of intersystems. Other product names are trademarks of their respective vendors. Copyright © 2014 intersystems Corporation. all rights reserved. 2-14THIRD EDITION

Introduction to Health Care Management

Edited by

Sharon B. Buchbinder, RN, PhD Professor and Program Coordinator

MS in Healthcare Management Program School of Graduate and Professional Studies

Stevenson University Owings Mills, Maryland

Nancy H. Shanks, PhD Professor Emeritus

Department of Health Professions Health Care Management Program

Metropolitan State University of Denver Denver, Colorado

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Printed in the United States of America 20 19 18 17 16 10 9 8 7 6 5 4 3 2 1
We dedicate this book to our loving husbands, Dale Buchbinder and Rick Shanks—

Who coached, collaborated, and coerced us to “FINISH THE THIRD EDITION!”



CHAPTER 1 An Overview of Health Care Management Jon M. Thompson, Sharon B. Buchbinder, and Nancy H. Shanks Introduction The Need for Managers and Their Perspectives Management: Definition, Functions, and

Competencies Management Positions: The Control in the

Organizational Heirarchy Focus of Management: Self, Unit/Team, and

Organization Role of the Manager in Establishing and Maintaining

Organizational Culture Role of the Manager in Talent Management Role of the Manager in Ensuring High Performance Role of the Manager in Leadership Development and

Succession Planning Role of the Manager in Innovation and Change

Management Role of the Manager in Health Care Policy Research in Health Care Management Chapter Summary

CHAPTER 2 Leadership Louis Rubino Leadership vs. Management History of Leadership in the U.S. Contemporary Models Leadership Styles Leadership Competencies Leadership Protocols Governance Barriers and Challenges Ethical Responsibility Important New Initiatives Leaders Looking to the Future Special Research Issues Conclusion

CHAPTER 3 Management and Motivation Nancy H. Shanks and Amy Dore Introduction Motivation—The Concept History of Motivation Theories of Motivation A Bit More About Incentives and Rewards Why Motivation Matters Motivated vs. Engaged—Are the Terms the Same? Measuring Engagement Misconceptions About Motivation and Employee

Satisfaction Motivational and Engagement Strategies Motivating Across Generations Managing Across Generations Research Opportunities in Management and

Motivation Conclusion

CHAPTER 4 Organizational Behavior and Management Thinking Sheila K. McGinnis Introduction The Field of Organizational Behavior Organizational Behavior’s Contribution to

Management Key Topics in Organizational Behavior Organizational Behavior Issues in Health

Organizations Thinking: The “Inner Game” of Organizational

Behavior The Four Key Features of Thinking Mental Representation: The Infrastucture of Thinking Processing Information: Fundamental Thinking

Habits Decision Making, Problem Solving, and Biased

Thinking Habits Social Cognition and Socio-Emotional Intelligence Research Opportunities in Organizational Behavior

and Management Thinking Conclusion

CHAPTER 5 Strategic Planning Susan Casciani Introduction Purpose and Importance of Strategic Planning The Planning Process SWOT Analysis Strategy Identification and Selection Rollout and Implementation

Outcomes Monitoring and Control Strategy Execution Strategic Planning and Execution: The Role of the

Health Care Manager Opportunities for Research in Strategic Planning Conclusion

CHAPTER 6 Healthcare Marketing Nancy K. Sayre Introduction What Is Marketing? A Brief History of Marketing in Health Care The Strategic Marketing Process Understanding Marketing Management Health Care Buyer Behavior Marketing Mix Marketing Plan Ethics and Social Responsibility Opportunities for Research in Health Care Marketing Conclusion

CHAPTER 7 Quality Improvement Basics Eric S. Williams, Grant T. Savage, and Patricia A. Patrician Introduction Defining Quality in Health Care Why Is Quality Important? The Relevance of Health Information Technology in

Quality Improvement Quality Improvement Comes (Back) to America Leaders of the Quality Movement Baldrige Award Criteria: A Strategic Framework for

Quality Improvement

Common Elements of Quality Improvement Three Approaches to Quality Improvement Quality Improvement Tools Opportunities for Research in Health Care Quality Conclusion

CHAPTER 8 Information Technology Nancy H. Shanks and Sharon B. Buchbinder Introduction Information Systems Used by Managers The Electronic Medical Record (EMR) The Challenges to Clinical System Adoption The Future of Health Care Information Technology The Impact of Information Technology on the Health

Care Manager Opportunities for Research on Health Care

Professionals Conclusion

CHAPTER 9 Financing Health Care and Health Insurance Nancy H. Shanks Introduction Introduction to Health Insurance Brief History of Health Insurance Characteristics of Health Insurance Private Health Insurance Coverage The Evolution of Social Insurance Major “Players” in the Social Insurance Arena Statistics on Health Insurance Coverage and Costs Those Not Covered—The Uninsured Opportunities for Research on Emerging Issues Conclusion

CHAPTER 10 Managing Costs and Revenues Kevin D. Zeiler Introduction What Is Financial Management and Why Is It

Important? Tax Status of Health Care Organizations Financial Governance and Responsibility Structure Managing Reimbursements from Third-Party Payers Coding in Health Care Controlling Costs and Cost Accounting Setting Charges Managing Working Capital Managing Accounts Receivable Managing Materials and Inventory Managing Budgets Opportunities for Research on Managing Costs and

Revenues Conclusion

CHAPTER 11 Managing Health Care Professionals Sharon B. Buchbinder and Dale Buchbinder Introduction Physicians Registered Nurses Licensed Practical Nurses/Licensed Vocational Nurses Nursing Assistants and Orderlies Home Health Aides Midlevel Practitioners Allied Health Professionals Opportunities for Research on Health Care

Professionals Conclusion

CHAPTER 12 The Strategic Management of Human Resources Jon M. Thompson Introduction Environmental Forces Affecting Human Resources

Management Understanding Employees as Drivers of

Organizational Performance Key Functions of Human Resources Management Workforce Planning/Recruitment Employee Retention Research in Human Resources Management Conclusion

CHAPTER 13 Teamwork Sharon B. Buchbinder and Jon M. Thompson Introduction What Is a Team? The Challenge of Teamwork in Health Care

Organizations The Benefits of Effective Health Care Teams The Costs of Teamwork Electronic Tools and Remote and Virtual Teams Face to Face Versus Virtual Teams Real-World Problems and Teamwork Who’s on the Team? Emotions and Teamwork Team Communication Methods of Managing Teams of Health Care

Professionals Opportunities for Research on Emerging Issues Conclusion

CHAPTER 14 Addressing Health Disparities: Cultural Proficiency Nancy K. Sayre Introduction Changing U.S. Demographics and Patient Populations Addressing Health Disparities by Fostering Cultural

Competence in Health Care Organizations Best Practices Addressing Health Disparities by Enhancing Public

Policy Opportunities for Research on Health Disparities and

Cultural Proficiency Conclusion

CHAPTER 15 Ethics and Law Kevin D. Zeiler Introduction Legal Concepts Tort Law Malpractice Contract Law Ethical Concepts Patient and Provider Rights and Responsibilities Legal/Ethical Concerns in Managed Care Biomedical Concerns Beginning- and End-of-Life Care Opportunities for Research in Health Care Ethics and

Law Conclusion

CHAPTER 16 Fraud and Abuse Kevin D. Zeiler Introduction

What Is Fraud and Abuse? History The Social Security Act and the Criminal-Disclosure

Provision The Emergency Medical Treatment and Active Labor

Act Antitrust Issues Physician Self-Referral/Anti-Kickback/Safe Harbor

Laws Management Responsibility for Compliance and

Internal Controls Corporate Compliance Programs Opportunities for Research in Fraud and Abuse Conclusion

CHAPTER 17 Special Topics and Emerging Issues in Health Care Management Sharon B. Buchbinder and Nancy H. Shanks Introduction Re-Emerging Outbreaks, Vaccine Preventable

Diseases, and Deaths Bioterrorism in Health Care Settings Human Trafficking Violence in Health Care Settings Medical Tourism Consumer-Directed Health Care Opportunities for Research on Emerging Issues

CHAPTER 18 Health Care Management Case Studies and Guidelines Sharon B. Buchbinder, Donna M. Cox, and Susan Casciani Introduction Case Study Analysis

Case Study Write-Up Team Structure and Process for Completion

CASE STUDIES* Metro Renal—Case for Chapters 12 and 2 United Physician Group—Case for Chapters 5, 9, 11,

and 15 Piecework—Case for Chapters 9 and 10 Building a Better MIS-Trap—Case for Chapter 8 Death by Measles—Case for Chapters 17, 11, and 15 Full Moon or Bad Planning?—Case for Chapters 17,

11, and 15 How Do We Handle a Girl Like Maria?—Case for

Chapters 17 and 4 The Condescending Dental Hygienist—Case for

Chapters 7, 12, 15, and 4 The “Easy” Software Upgrade at Delmar Ortho—Case

for Chapters 8 and 13 The Brawler—Case for Chapters 11, 12, and 17 I Love You…Forever—Case for Chapters 17, 12, and

11 Managing Health Care Professionals—Mini-Case

Studies for Chapter 11 Problems with the Pre-Admission Call Center—Case

for Chapters 13 and 10 Such a Nice Young Man—Case for Chapters 17, 11,

and 12 Sundowner or Victim?—Case for Chapters 15 and 17 Last Chance Hospital—Case for Chapters 5 and 6 The Magic Is Gone—Case for Chapters 3, 12, and 13 Set Up for Failure?—Case for Chapter 3 Sustaining an Academic Food Science and Nutrition

Center Through Management Improvement—Case

for Chapters 2 and 12 Giving Feedback—Empathy or Attributions?—Case for

Chapter 4 Socio-Emotional Intelligence Exercise: Understanding

and Anticipating Major Change—Case for Chapter 4

Madison Community Hospital Addresses Infection Prevention—Case for Chapters 7 and 13

Trouble with the Pharmacy—Case for Chapter 7 Emotional Intelligence in Labor and Delivery—Case

for Chapters 2, 12, and 13 Communication of Patient Information During

Transitions in Care—Case for Chapters 7 and 12 Multidrug-Resistant Organism (MDRO) in a

Transitional Care Unit—Case for Chapters 7 and 12 Are We Culturally Aware or Not?—Case for Chapters

14 and 5 Patients “Like” Social Media—Case for Chapters 6

and 5 Where Do You Live? Health Disparities Across the

United States—Case for Chapter 14 My Parents Are Turning 65 and Need Help Signing

Up for Medicare—Case for Chapter 9 Newby Health Systems Needs Health Insurance—

Case for Chapter 9 To Partner or Not to Partner with a Retail Company—

Case for Chapters 17, 5, and 6 Wellness Tourism: An Option for Your Organization?

—Case for Chapters 17 and 5 Conflict in the Capital Budgeting Process at University

Medical Center: Let’s All Just Get Along—Case for Chapter 10

The New Toy at City Medical Center—Case for Chapters 11 and 13

Recruitment Challenge for the Middle Manager—Case for Chapters 2 and 12

I Want to Be a Medical Coder—Case for Chapter 10 Managing Costs and Revenues at Feel Better

Pharmacy—Case for Chapter 10 Who You Gonna Call?—Case for Chapter 16 You Will Do What You Are Told—Case for Chapter




In the U.S., health care is the largest industry and the second-largest employer, with more than 11 million jobs. This continuous growth trend is a result of many consequences, including: the large, aging Baby Boomer population, whose members are remaining active later in life, contributing to an increase in the demand for medical services; the rapidly changing financial structure and increasingly complex regulatory environment of health care; the integration of health care delivery systems, restructuring of work, and an increased focus on preventive care; and the ubiquitous technological innovations, requiring unceasing educational training and monitoring.

Given this tremendous growth and the aforementioned causes of it, it is not surprising that among the fastest-growing disciplines, according to federal statistics, is health care management, which is projected to grow 23% in the next decade. Supporting this growth are the increasing numbers of undergraduate programs in health care management, health services administration, and health planning and policy—with over 300 programs in operation nationwide today.

The health care manager’s job description is constantly evolving to adapt to this hyper-turbulent environment. Health care managers will be called on to improve efficiency in health care facilities and the quality of the care provided; to manage, direct, and coordinate health services in a variety of settings, from long-term care facilities and hospitals to medical group practices; and to minimize costs and maximize efficiencies, while also ensuring that the services provided are the best possible.

As the person in charge of a health care facility, a health care administrator’s duties can be varied and complex. Handling such responsibilities requires a mix of business administration skills and knowledge of health services, as well as the federal and state laws and regulations that govern the industry.

Written by leading scholars in the field, this compendium provides future and current health care managers with the foundational knowledge needed to succeed. Drs. Buchbinder and Shanks, with their many years of clinical,

practitioner, administration, and academic experience, have assembled experts in all aspects of health care management to share their knowledge and experiences. These unique viewpoints, shared in both the content and case studies accompanying each chapter, provide valuable insight into the health care industry and delve into the core competencies required of today’s health care managers: leadership, critical thinking, strategic planning, finance and accounting, managing human resources and professionals, ethical and legal concerns, and information and technology management. Contributing authors include clinicians, administrators, professors, and students, allowing for a variety of perspectives.

Faculty will also benefit from the depth and breadth of content coverage spanning all classes in an undergraduate health care management curriculum. Its most appropriate utility may be found in introductory management courses; however, the vast array of cases would bring value to courses in health care ethics, managerial finance, quality management, and organizational behavior.

This text will serve as a cornerstone document for students in health management educational programs and provide them with the insight necessary to be effective health care managers. Students will find this textbook an indispensable resource to utilize both during their academic programs, as well as when they enter the field of health care management. It is already on its way to becoming one of the “classics” in the field!

Dawn Oetjen, PhD Associate Dean, Administration and Faculty Affairs

College of Health and Public Affairs University of Central Florida

Orlando, FL


The third edition of Introduction to Health Care Management is driven by our continuing desire to have an excellent textbook that meets the needs of the health care management field, health care management educators, and students enrolled in health care management programs around the world. The inspiration for the first edition of this book came over a good cup of coffee and a deep-seated unhappiness with the texts available in 2004. This edition builds on the strengths of the first two editions and is based on an ongoing conversation with end users—instructors and students—from all types of higher education institutions and all types of delivery modalities. Whether your institution is a traditional “bricks and mortar” school or a fully online one, this book and its ancillary materials are formatted for your ease of use and adoption.

For this edition, many of the same master teachers and researchers with expertise in each topic revised and updated their chapters. Several new contributors stepped forward and wrote completely new cases for this text because we listened to you, our readers and users. With a track record of more than eight years in the field, we learned exactly what did or did not work in the classrooms and online, so we further enhanced and refined our student- and professor-friendly textbook. We are grateful to all our authors for their insightful, well-written chapters and our abundant, realistic case studies.

As before, this textbook will be useful to a wide variety of students and programs. Undergraduate students in health care management, nursing, public health, nutrition, athletic training, and allied health programs will find the writing to be engaging. In addition, students in graduate programs in discipline-specific areas, such as business administration, nursing, pharmacy, occupational therapy, public administration, and public health, will find the materials both theory-based and readily applicable to real-world settings. With four decades of experience in higher education, we know first and foremost that teaching and learning are not solo sports, but a team effort —a contact sport. There must be a give-and-take between the students and the instructors for deep learning to take place. This text uses active learning

methods to achieve this goal. Along with lively writing and content critical for a foundation in health care management, this third edition continues to provide realistic information that can be applied immediately to the real world of health care management. In addition to revised and updated chapters from the second edition, there are learning objectives, discussion questions, and case studies included for each chapter, with additional instructors’ resources online and Instructor’s Guides for all of the case studies. PowerPoint slides, Test Bank items, and research sources are also included for each chapter, as well as a glossary. A sample syllabus is also provided. Specifically, the third edition contains:

Significantly revised chapters on organizational behavior and management thinking, quality improvement, and information technology.

Revisions and updates to all chapters, including current data and recent additions to the literature.

A new emphasis on research that is ongoing in each of the areas of health care.

A new chapter on a diverse group of emerging issues in health care management including: re-emerging outbreaks, vaccine-preventable diseases, and deaths; bioterrorism in health care settings; human trafficking; violence in health care settings; medical tourism; and consumer-directed health care.

Forty cases in the last chapter, 26 of which are new or totally revised for this edition. They cover a wide variety of settings and an assortment of health care management topics. At the end of each chapter, at least one specific case study is identified and linked to the content of that chapter. Many chapters have multiple cases.

Guides for all 40 cases provided with online materials. These will be beneficial to instructors as they evaluate student performance and will enable professors at every level of experience to hit the ground running on that first day of classes.

Totally revised test banks for each chapter, providing larger pools of questions and addressing our concerns that answers to the previous test banks could be purchased online.

Never underestimate the power of a good cup of joe. We hope you enjoy this book as much as we enjoyed revising it. May your classroom and online discussions be filled with active learning experiences, may your teaching be filled with good humor and fun, and may your coffee cup always be full.

Sharon B. Buchbinder, RN, PhD Stevenson University

Nancy H. Shanks, PhD Metropolitan State University of Denver


This third edition is the result of what has now been a 10-year process involving many of the leaders in excellence in undergraduate health care management education. We continue to be deeply grateful to the Association of University Programs in Health Administration (AUPHA) faculty, members, and staff for all the support, both in time and expertise, in developing the proposal for this textbook and for providing us with excellent feedback for each edition.

More than 20 authors have made this contributed text a one-of-a-kind book. Not only are our authors expert teachers and practitioners in their disciplines and research niches, they are also practiced teachers and mentors. As we read each chapter and case study, we could hear the voices of each author. It has been a privilege and honor to work with each and every one of them: Mohamad Ali, Dale Buchbinder, Susan Casciani, Donna Cox, Amy Dore, Brenda Freshman, Callie Heyne, Ritamarie Little, Sheila McGinnis, Mike Moran, Patricia Patrician, Lou Rubino, Sharon Saracino, Grant Savage, Nancy Sayre, Windsor Sherrill, Jon Thompson, Eric Williams, and Kevin Zeiler.

And, finally, and never too often, we thank our husbands, Dale Buchbinder and Rick Shanks, who listened to long telephone conversations about the book’s revisions, trailed us to meetings and dinners, and served us wine with our whines. We love you and could not have done this without you.

About the Editors

Sharon B. Buchbinder, RN, PhD, is currently Professor and Program Coordinator of the MS in Healthcare Management Program at Stevenson University in Owings Mills, Maryland. Prior to this, she was Professor and Chair of the Department of Health Science at Towson University and President of the American Hospital Management Group Corporation, MASA Healthcare Co., a health care management education and health care delivery organization based in Owings Mills, Maryland. For more than four decades, Dr. Buchbinder has worked in many aspects of health care as a clinician, researcher, association executive, and academic. With a PhD in public health from the University of Illinois School of Public Health, she brings this blend of real-world experience and theoretical constructs to undergraduate and graduate face-to-face and online classrooms, where she is constantly reminded of how important good teaching really is. She is past chair of the Board of the Association of University Programs in Health Administration (AUPHA) and coauthor of the Bugbee Falk Award–winning Career Opportunities in Health Care Management: Perspectives from the Field. Dr. Buchbinder also coauthors Cases in Health Care Management with Nancy Shanks and Dale Buchbinder.

Nancy H. Shanks, PhD, has extensive experience in the health care field. For 12 years, she worked as a health services researcher and health policy analyst and later served as the executive director of a grant-making, fund- raising foundation that was associated with a large multihospital system in Denver. During the last 20 years, Dr. Shanks has been a health care administration educator at Metropolitan State University of Denver, where she has taught a variety of undergraduate courses in health services management, organization, research, human resources management, strategic management, and law. She is currently an Emeritus Professor of Health Care Management and an affiliate faculty member, after having served as Chair of the Department of Health Professions for seven years. Dr. Shanks’s research interests have focused on health policy issues, such as providing access to health care for the uninsured.


Mohamad A. Ali, MBA, MHA, CBM Healthcare Strategy Consultant MASA Healthcare, LLC Washington, DC

Dale Buchbinder, MD, FACS Chairman, Department of Surgery and Clinical Professor of Surgery The University of Maryland Medical School Good Samaritan Hospital Baltimore, MD

Susan Casciani, MSHA, MBA, FACHE Adjunct Professor Stevenson University Owings Mills, MD

Donna M. Cox, PhD Professor and Director Alcohol, Tobacco, and Other Drugs Prevention Center Department of Health Science Towson University Towson, MD

Amy Dore, DHA Associate Professor, Health Care Management Program Department of Health Professions Metropolitan State University of Denver Denver, CO

Brenda Freshman, PhD

Associate Professor Health Administration Program California State University, Long Beach Long Beach, CA

Callie E. Heyne, BS Research Associate Clemson University Clemson, SC

Ritamarie Little, MS, RD Associate Director Marilyn Magaram Center for Food Science, Nutrition, & Dietetics California State University, Northridge Northridge, CA

Sheila K. McGinnis, PhD Healthcare Transformation Director City College Montana State University, Billings Billings, MT

Michael Moran, DHA Adjunct Faculty School of Business University of Colorado, Denver Denver, CO

Patricia A. Patrician, PhD, RN, FAAN Colonel, U.S. Army (Retired) Donna Brown Banton Endowed Professor School of Nursing University of Alabama, Birmingham Birmingham, AL

Louis Rubino, PhD, FACHE Professor & Program Director Health Administration Program Health Sciences Department California State University, Northridge Northridge, CA

Sharon Saracino, RN, CRRN Patient Safety Officer Nursing Department Allied Services Integrated Health Care System–Heinz Rehab Wilkes-Barre, PA

Grant T. Savage, PhD Professor of Management Management, Information Systems, & Quantitative Methods Department University of Alabama, Birmingham Birmingham, AL

Nancy K. Sayre, DHEd, PA, MHS Department Chair Department of Health Professions Coordinator, Health Care Management Program Assistant Professor, Health Care Management Program Metropolitan State University of Denver Denver, CO

Windsor Westbrook Sherrill, PhD Professor of Public Health Sciences Associate Vice President for Health Research Clemson University Clemson, SC

Jon M. Thompson, PhD Professor, Health Services Administration

Director, Health Services Administration Program James Madison University Harrisonburg, VA

Eric S. Williams, PhD Associate Dean of Assessment and Continuous Improvement Professor of Health Care Management Minnie Miles Research Professor Culverhouse College of Commerce University of Alabama Tuscaloosa, AL

Kevin D. Zeiler, JD, MBA, EMT-P Associate Professor, Health Care Management Program Department of Health Professions Metropolitan State University of Denver Denver, CO


An Overview of Health Care Management

Jon M. Thompson, Sharon B. Buchbinder, and Nancy H. Shanks

LEARNING OBJECTIVES By the end of this chapter, the student will be able to:

Define healthcare management and the role of the health care manager; Differentiate among the functions, roles, and responsibilities of health care managers;

Compare and contrast the key competencies of health care managers; and

Identify current areas of research in health care management.

INTRODUCTION Any introductory text in health care management must clearly define the profession of health care management and discuss the major functions, roles, responsibilities, and competencies for health care managers. These topics are the focus of this chapter. Health care management is a growing profession with increasing opportunities in both direct care and non–direct care settings. As defined by Buchbinder and Thompson (2010, pp. 33–34), direct care settings are “those organizations that provide care directly to a patient, resident or client who seeks services from the organization.” Non-direct

care settings are not directly involved in providing care to persons needing health services, but rather support the care of individuals through products and services made available to direct care settings. The Bureau of Labor Statistics (BLS, 2014) indicates health care management is one of the fastest- growing occupations, due to the expansion and diversification of the health care industry. The BLS projects that employment of medical and health services managers is expected to grow 23% from 2012 to 2022, faster than the average for all occupations (see Figure 1-1).

These managers are expected to be needed in both inpatient and outpatient care facilities, with the greatest growth in managerial positions occurring in outpatient centers, clinics, and physician practices. Hospitals, too, will experience a large number of managerial jobs because of the hospital sector’s large size. Moreover, these estimates do not reflect the significant growth in managerial positions in non–direct care settings, such as consulting firms, pharmaceutical companies, associations, and medical equipment companies. These non–direct care settings provide significant assistance to direct care organizations, and since the number of direct care managerial positions is expected to increase significantly, it is expected that growth will also occur in managerial positions in non–direct care settings.

Health care management is the profession that provides leadership and direction to organizations that deliver personal health services and to divisions, departments, units, or services within those organizations. Health care management provides significant rewards and personal satisfaction for those who want to make a difference in the lives of others. This chapter gives a comprehensive overview of health care management as a profession. Understanding the roles, responsibilities, and functions carried out by health care managers is important for those individuals considering the field to make informed decisions about the “fit.” This chapter provides a discussion of key management roles, responsibilities, and functions, as well as management positions at different levels within health care organizations. In addition, descriptions of supervisory level, mid-level, and senior management positions within different organizations are provided.

FIGURE 1-1 Occupations with the Most New Jobs in Hospitals, Projected 2012–2022. Employment and Median Annual Wages, May 2013

Source: U.S. Bureau of Labor Statistics, Employment Projections program (projected new jobs, 2012– 2022) and Occupational Employment Statistics Survey (employment and median annual wages, May 2013).

THE NEED FOR MANAGERS AND THEIR PERSPECTIVES Health care organizations are complex and dynamic. The nature of organizations requires that managers provide leadership, as well as the supervision and coordination of employees. Organizations were created to achieve goals beyond the capacity of any single individual. In health care organizations, the scope and complexity of tasks carried out in provision of services are so great that individual staff operating on their own could not get the job done. Moreover, the necessary tasks in producing services in health care organizations require the coordination of many highly

specialized disciplines that must work together seamlessly. Managers are needed to ensure organizational tasks are carried out in the best way possible to achieve organizational goals and that appropriate resources, including financial and human resources, are adequate to support the organization.

Health care managers are appointed to positions of authority, where they shape the organization by making important decisions. Such decisions relate, for example, to recruitment and development of staff, acquisition of technology, service additions and reductions, and allocation and spending of financial resources. Decisions made by health care managers not only focus on ensuring that the patient receives the most appropriate, timely, and effective services possible, but also address achievement of performance targets that are desired by the manager. Ultimately, decisions made by an individual manager impact the organization’s overall performance.

Managers must consider two domains as they carry out various tasks and make decisions (Thompson, 2007). These domains are termed external and internal domains (see Table 1-1). The external domain refers to the influences, resources, and activities that exist outside the boundary of the organization but that significantly affect the organization. These factors include community needs, population characteristics, and reimbursement from commercial insurers, as well as government plans, such as the Children’s Health Insurance Plans (CHIP), Medicare, and Medicaid. The internal domain refers to those areas of focus that managers need to address on a daily basis, such as ensuring the appropriate number and types of staff, financial performance, and quality of care. These internal areas reflect the operation of the organization where the manager has the most control. Keeping the dual perspective requires significant balance and effort on the part of management in order to make good decisions.

MANAGEMENT: DEFINITION, FUNCTIONS, AND COMPETENCIES As discussed earlier, management is needed to support and coordinate the services provided within health care organizations. Management has been defined as the process, comprised of social and technical functions and activities, occurring within organizations for the purpose of accomplishing predetermined objectives through human and other resources (Longest, Rakich, & Darr, 2000). Implicit in the definition is that managers work through and with other people, carrying out technical and interpersonal activities to achieve the desired objectives of the organization. Others have stated that a manager is anyone in the organization who supports and is responsible for the work performance of one or more other persons (Lombardi & Schermerhorn, 2007).

While most beginning students of health care management tend to focus on the role of the senior manager or lead administrator of an organization, it should be realized that management occurs through many others who may not have “manager” in their position title. Examples of some of these managerial positions in health care organizations include supervisor, coordinator, and director, among others (see Table 1-2). These levels of managerial control are discussed in more detail in the next section.

Managers implement six management functions as they carry out the process of management (Longest et al., 2000):

Planning: This function requires the manager to set a direction and determine what needs to be accomplished. It means setting priorities and determining performance targets.

Organizing: This management function refers to the overall design of the organization or the specific division, unit, or service for which the manager is responsible. Furthermore, it means designating reporting relationships and intentional patterns of interaction. Determining positions, teamwork assignments, and distribution of authority and responsibility are critical components of this function.

Staffing: This function refers to acquiring and retaining human resources. It also refers to developing and maintaining the workforce through various strategies and tactics.

Controlling: This function refers to monitoring staff activities and performance and taking the appropriate actions for corrective action to increase performance.

Directing: The focus in this function is on initiating action in the organization through effective leadership and motivation of, and communication with, subordinates.

Decision making: This function is critical to all of the aforementioned management functions and means making effective decisions based on consideration of benefits and the drawbacks of alternatives.

In order to effectively carry out these functions, the manager needs to possess several key competencies. Katz (1974) identified key competencies of the effective manager, including conceptual, technical, and interpersonal skills. The term competency refers to a state in which an individual has the requisite or adequate ability or qualities to perform certain functions (Ross, Wenzel, & Mitlyng, 2002). These are defined as follows:

Conceptual skills are those skills that involve the ability to critically analyze and solve complex problems. Examples: a manager conducts an analysis of the best way to provide a service or determines a strategy to reduce patient complaints regarding food service.

Technical skills are those skills that reflect expertise or ability to perform a specific work task. Examples: a manager develops and implements a new incentive compensation program for staff or designs and implements modifications to a computer-based staffing model.

Interpersonal skills are those skills that enable a manager to communicate with and work well with other individuals, regardless of whether they are peers, supervisors, or subordinates. Examples: a manager counsels an employee whose performance is below expectation or communicates to subordinates the desired performance level for a service for the next fiscal year.

MANAGEMENT POSITIONS: THE CONTROL IN THE ORGANIZATIONAL HEIRARCHY Management positions within health care organizations are not confined to the top level; because of the size and complexity of many health care organizations, management positions are found throughout the organization. Management positions exist at the lower, middle, and upper levels; the upper level is referred to as senior management. The hierarchy of management means that authority, or power, is delegated downward in the

organization, and lower-level managers have less authority than higher-level managers, whose scope of responsibility is much greater. For example, a vice president of Patient Care Services in a hospital may be in charge of several different functional areas, such as nursing, diagnostic imaging services, and laboratory services; in contrast, a director of Medical Records—a lower-level position—has responsibility only for the function of patient medical records. Furthermore, a supervisor within the Environmental Services department may have responsibility for only a small housekeeping staff, whose work is critical, but confined to a defined area of the organization. Some managerial positions, such as those discussed previously, are line manager positions because the manager supervises other employees; other managerial positions are staff manager positions because they carry out work and advise their bosses, but they do not routinely supervise others. Managerial positions also vary in terms of required expertise or experience. Some positions require extensive knowledge of many substantive areas and significant working experience, and other positions are more appropriate for entry-level managers who have limited or no experience.

The most common organizational structure for health care organizations is a functional organizational structure, whose key characteristic is a pyramid-shaped hierarchy that defines the functions carried out and the key management positions assigned to those functions (see Figure 1-2). The size and complexity of the specific health services organization will dictate the particular structure. For example, larger organizations—such as large community hospitals, hospital systems, and academic medical centers—will likely have deep vertical structures reflecting varying levels of administrative control for the organization. This structure is necessary due to the large scope of services provided and the corresponding vast array of administrative and support services that are needed to enable the delivery of clinical services. Other characteristics associated with this functional structure include a strict chain of command and line of reporting, which ensure communication and assignment and evaluation of tasks are carried out in a linear command and control environment. This structure offers key advantages, such as specific divisions of labor and clear lines of reporting and accountability.

Other administrative structures have been adopted by health care organizations, usually in combination with a functional structure. These include matrix, or team-based, models and service line management models.

The matrix model recognizes that a strict functional structure may limit the organization’s flexibility to carry out the work, and that the expertise of other disciplines is needed on a continuous basis. An example of the matrix method is when functional staff, such as nursing and rehabilitation personnel, are assigned to a specific program, such as geriatrics, and they report for programmatic purposes to the program director of the geriatrics department. Another example is when clinical and administrative staff are assigned to a team investigating new services that is headed by a marketing or business development manager. In both of these examples, management would lead staff who traditionally are not under their direct administrative control. Advantages of this structure include improved lateral communication and coordination of services, as well as pooled knowledge.

In service line management, a manager is appointed to head a specific clinical service line and has responsibility and accountability for staffing, resource acquisition, budget, and financial control associated with the array of services provided under that service line. Typical examples of service lines include cardiology, oncology (cancer), women’s services, physical rehabilitation, and behavioral health (mental health). Service lines can be established within a single organization or may cut across affiliated organizations, such as within a hospital system where services are provided at several different affiliated facilities (Boblitz & Thompson, 2005). Some facilities have found that the service line management model for selected clinical services has resulted in many benefits, such as lower costs, higher quality of care, and greater patient satisfaction, compared to other management models (Duffy & Lemieux, 1995). The service line management model is usually implemented within an organization in conjunction with a functional structure, as the organization may choose to give special emphasis and additional resources to one or a few services lines.

FIGURE 1-2 Functional Organizational Structure

FOCUS OF MANAGEMENT: SELF, UNIT/TEAM, AND ORGANIZATION Effective health care management involves exercising professional judgment and skills and carrying out the aforementioned managerial functions at three levels: self, unit/team, and organization wide. First and foremost, the individual manager must be able to effectively manage himself or herself. This means managing time, information, space, and materials; being responsive and following through with peers, supervisors, and clients; maintaining a positive attitude and high motivation; and keeping a current understanding of management techniques and substantive issues of health care management. Drucker (2005) suggests that managing yourself also involves knowing your strengths, how you perform, your values, where you belong, and what you can contribute, as well as taking responsibility for your relationships. Managing yourself also means developing and applying appropriate technical, interpersonal, and conceptual skills and competencies and being comfortable with them, in order to be able to effectively move to the next level—that of supervising others.

The second focus of management is the unit/team level. The expertise of the manager at this level involves managing others in terms of effectively completing the work. Regardless of whether you are a senior manager, mid- level manager, or supervisor, you will be “supervising” others as expected in your assigned role. This responsibility includes assigning work tasks, review and modification of assignments, monitoring and review of individual performance, and carrying out the management functions described earlier to ensure excellent delivery of services. This focal area is where the actual work gets done. Performance reflects the interaction of the manager and the employee, and it is incumbent on the manager to do what is needed to shape the performance of individual employees. The focus of management at this echelon recognizes the task interdependencies among staff and the close coordination that is needed to ensure that work gets completed efficiently and effectively.

The third management focus is at the organizational level. This focal area reflects the fact that managers must work together as part of the larger organization to ensure organization-wide performance and organizational viability. In other words, the success of the organization depends upon the success of its individual parts, and effective collaboration is needed to ensure that this occurs. The range of clinical and nonclinical activities that occur within a health care organization requires that managers who head individual units work closely with other unit managers to provide services. Sharing of information, collaboration, and communication are essential for success. The hierarchy looks to the contribution of each supervised unit as it pertains to the whole. Individual managers’ contributions to the overall performance of the organization—in terms of various performance measures such as cost, quality, satisfaction, and access—are important and measured.

ROLE OF THE MANAGER IN ESTABLISHING AND MAINTAINING ORGANIZATIONAL CULTURE Every organization has a distinct culture, known as the beliefs, attitudes, and behavior that are shared among organizational members. Organizational

culture is commonly defined as the character, personality, and experience of organizational life i.e., what the organization really “is” (Scott, Mannion, Davies, & Marshall, 2003). Culture prescribes the way things are done, and is defined, shaped, and reinforced by the management team. All managers play a role in establishing the culture of a health care organization, and in taking the necessary leadership action to sustain, and in some cases change, the culture. Culture is shaped by the values, mission, and vision for the organization. Values are principles the organization believes in and shape the organization’s purpose, goals, and day-to-day behaviors. Adopted values provide the foundation for the organization’s activities and include such principles as respect, quality service, and innovation. The mission of the organization is its fundamental purpose, or what the organization seeks to achieve. The vision of the organization specifies the desired future state for the organization and reflects what the organization wants to be known and recognized for in the future. Statements of values, mission, and vision result from the organizational strategic planning process. These statements are communicated widely throughout the organization and to the community and shape organizational strategic and operational actions. Increasingly, organizations are establishing codes of conduct or standards of behavior that all employees must follow (Studer, 2003). These standards of behavior align with the values, mission, and vision. The role of managers in the oversight of standards of behavior is critical in several respects: for setting expectations for staff behavior, modelling the behavior, measuring staff performance, and improving staff performance. Mid-level and lower-level managers are instrumental to organization-wide adoption and embracing of the culture as they communicate desired behaviors and reinforce culture through modelling expectations through their own behaviors. For example, a value of customer service or patient focus requires that managers ensure proper levels of service by their employees via clarifying expectations and providing internal customer service to their own staff and other managers. Furthermore, managers can measure and evaluate employee compliance with organizational values and standards of behavior by reviewing employee performance and working with staff to improve performance. Performance evaluation will be explored in a later chapter in this text.


MANAGEMENT In order to effectively master the focal areas of management and carry out the required management functions, management must have the requisite number and types of highly motivated employees. From a strategic perspective, health care organizations compete for labor, and it is commonly accepted today that high-performing health care organizations are dependent upon individual human performance, as discussed further in Chapter 12. Many observers have advocated for health care organizations to view their employees as strategic assets who can create a competitive advantage (Becker, Huselid, & Ulrich, 2001). Therefore, human resources management has been replaced in many health care organizations with talent management. The focus has shifted to securing and retaining the talent needed to do the job in the best way, rather than simply filling a role (Huselid, Beatty, & Becker, 2005). As a result, managers are now focusing on effectively managing talent and workforce issues because of the link to organizational performance (Griffith, 2009).

Beyond recruitment, managers are concerned about developing and retaining those staff who are excellent performers. Many health care organizations are creating high-involvement organizations that identify and meet employee needs through their jobs and the larger organizational work setting (Becker et al., 2001). One of the critical responsibilities of managers in talent management is promoting employee engagement, which describes the motivation and commitment of staff to contribute to the organization. There are several strategies used by managers to develop and sustain employee engagement, as well as to develop and maintain excellent performers. These include formal methods such as offering training programs; providing leadership development programs; identifying employee needs and measuring employee satisfaction through engagement surveys; providing continuing education, especially for clinical and technical fields; and enabling job enrichment. In addition, managers use informal methods such as conducting periodic employee reviews, soliciting employee feedback, conducting rounds and employee huddles, offering employee suggestion programs, and other methods of managing employee relations and engagement. These topics are explored in more detail in a later chapter in this book.

ROLE OF THE MANAGER IN ENSURING HIGH PERFORMANCE At the end of the day, the role of the manager is to ensure that the unit, service, division, or organization he or she leads achieves high performance. What exactly is meant by high performance? To understand performance, one has to appreciate the value of setting and meeting goals and objectives for the unit/service and organization as a whole, in terms of the work that is being carried out. Goals and objectives are desired end points for activity and reflect strategic and operational directions for the organization. They are specific, measurable, meaningful, and time oriented. Goals and objectives for individual units should reflect the overarching needs and expectations of the organization as a whole because, as the reader will recall, all entities are working together to achieve high levels of overall organizational performance. Studer (2003) views the organization as needing to be results oriented, with identified pillars of excellence as a framework for the specific goals of the organization. These pillars are people (employees, patients, and physicians), service, quality, finance, and growth. Griffith (2000) refers to high-performing organizations as being championship organizations—that is, they expect to perform well on different yet meaningful measures of performance. Griffith further defines the “championship processes” and the need to develop performance measures in each of the following: governance and strategic management; clinical quality, including customer satisfaction; clinical organization (caregivers); financial planning; planning and marketing; information services; human resources; and plant and supplies. For each championship process, the organization should establish measures of desired performance that will guide the organization. Examples of measures include medication errors, surgical complications, patient satisfaction, staff turnover rates, employee satisfaction, market share, profit margin, and revenue growth, among others. In turn, respective divisions, units, and services will set targets and carry out activities to address key performance processes. The manager’s job, ultimately, is to ensure these targets are met by carrying out the previously discussed management functions. A control process for managers has been advanced by Ginter, Swayne, and Duncan (2002) that describes five key steps in the performance

management process: set objectives, measure performance, compare performance with objectives, determine reasons for deviation, and take corrective action. Management’s job is to ensure that performance is maintained or, if below expectations, improved.

Stakeholders, including insurers, state and federal governments, and consumer advocacy groups, are expecting, and in many cases demanding, acceptable levels of performance in health care organizations. These groups want to make sure that services are provided in a safe, convenient, low-cost, and high-quality environment. For example, The Joint Commission (formerly JCAHO) has set minimum standards for health care facilities operations that ensure quality, the National Committee for Quality Assurance (NCQA) has set standards for measuring performance of health plans, and the Centers for Medicare and Medicaid Services (CMS) has established a website that compares hospital performance along a number of critical dimensions. In addition, CMS has provided incentives to health care organizations by paying for performance on measures of clinical care and not paying for care resulting from never events i.e., shocking health outcomes that should never occur in a health care setting such as wrong site surgery (e.g., the wrong leg) or hospital-acquired infections (Agency for Healthcare Research and Quality, n.d.). Health insurers also have implemented pay-for- performance programs for health care organizations based on various quality and customer service measures.

In addition to meeting the reporting requirements of the aforementioned organizations, many health care organizations today use varying methods of measuring and reporting the performance measurement process. Common methods include developing and using dashboards or balanced scorecards that allow for a quick interpretation of organizational performance across a number of key measures (Curtright, Stolp-Smith, & Edell, 2000; Pieper, 2005). Senior administration uses these methods to measure and communicate performance on the total organization to the governing board and other critical constituents. Other managers use these methods at the division, unit, or service level to profile its performance. In turn, these measures are also used to evaluate managers’ performance and are considered in decisions by the manager’s boss regarding compensation adjustments, promotions, increased or reduced responsibility, training and development, and, if necessary, termination or reassignment.

ROLE OF THE MANAGER IN LEADERSHIP DEVELOPMENT AND SUCCESSION PLANNING Because health care organizations are complex and experience challenges from internal and external environments, the need for leadership skills of managers at all levels of the organization has become paramount. Successful organizations that demonstrate high operational performance depend on strong leaders (Squazzo, 2009). Senior executives have a primary role in ensuring managers throughout the organization have the knowledge and skills to provide effective leadership to achieve desired levels of organizational performance. Senior management also plays a key role in succession planning to ensure vacancies at mid- and upper levels of the organization due to retirements, departures, and promotions are filled with capable leaders. Therefore, key responsibilities of managers are to develop future leaders through leadership development initiatives and to engage in succession planning.

Leadership development programs are broadly comprised of several specific organizational services that are offered to enhance leadership competencies and skills of managerial staff in health care organizations. Leadership development is defined as educational interventions and skill- building activities designed to improve the leadership capabilities of individuals (Kim & Thompson, 2012; McAlearney, 2005). Such initiatives not only serve to increase leadership skills and behaviors, but also ensure stability within organizational talent and culture through career advancement and succession planning (Burt, 2005). In order to embrace leadership development, managers provide technical and psychological support to the staff through a range of leadership development activities:

Leadership development program: Training and leadership development on a variety of required topics, through a formally designated program, using structured learning and competency-based assessment using various formats, media, and locations (Kim & Thompson, 2012)

Courses on leadership and management: Didactic training through specific courses offered face-to-face, online, or in hybrid form (Garman, 2010; Kim & Thompson, 2012)

Mentoring: Formal methods used by the organization for matching aspiring leaders with mid-level and senior executives to assist in their learning and personal growth (Garman, 2010; Landry & Bewley, 2010)

Personal development coaching: Usually reserved for upper-level executives; these formal organizational efforts assist in improving performance by shaping attitudes and behavior and focusing on personal skills development (Garman, 2010; Scott, 2009)

Job enlargement: The offering of expanded responsibilities, developmental assignments, and special projects to individuals to cultivate leadership skills for advancement advance within the organization (Fernandez-Aaroz, 2014; Garman, 2010; Landry & Bewley, 2010)

360-degree performance feedback: Expensive, labor-intensive, and usually reserved for upper-level executives; a multisource feedback approach where an individual staff member or manager receives an assessment of performance from several key individuals (e.g., peers, superiors, other managers, and subordinates) regarding performance and opportunities for improvement (Garman, 2010; Landry & Bewley, 2010)

Leadership development programs have shown positive results. For example, health systems report benefits such as improvement of skills and quality of the workforce, enhancing organizational efficiency in educational activities, and reducing staff turnover and related expenses when leadership training is tied to organization-wide strategic priorities (McAlearney, 2005). In addition, hospitals with leadership development programs have been found to have higher volumes of patients, higher occupancy, higher net patient revenue, and higher total profit margin when compared to hospitals without these programs (Thompson & Kim, 2013). Studies have also shown that leadership development programs in health systems are related to greater focus on employee growth and development, improved employee retention, and greater focus on organizational strategic priorities (McAlearney, 2010). Finally, within a single health system, a leadership

development program led to greater market share, reduced employee turnover, and improved core quality measures (Ogden, 2007). However, one of the key drawbacks to leadership development programs is the cost of developing and operating the programs (Squazzo, 2009).

Due to the competitive nature of health care organizations and the need for highly motivated and skilled employees, managers are faced with the challenge of succession planning for their organizations. Succession planning refers to the concept of taking actions to ensure staff can move up in management roles within the organization to replace those managers who retire or move to other opportunities in other organizations. Succession planning has most recently been emphasized at the senior level of organizations, in part due to the large number of retirements that are anticipated from Baby Boomer chief executive officers (CEOs) (Burt, 2005). To continue the emphasis on high performance within health care organizations, CEOs and other senior managers are interested in finding and nurturing leadership talent within their organizations who can assume the responsibility and carry forward the important work of these organizations.

Health care organizations are currently engaged in several practices to address leadership succession needs. First, mentoring programs for junior management that includes the participation of senior management have been advocated as a good way to prepare future health care leaders (Rollins, 2003). Mentoring studies show that mentors view their efforts as helpful to the organization (Finley, Ivanitskaya, & Kennedy, 2007). Some observers suggest having many mentors is essential to capturing the necessary scope of expertise, experience, interest, and contacts to maximize professional growth (Broscio & Scherer, 2003). Mentoring middle-level managers for success as they transition to their current positions is also helpful in preparing those managers for future executive leadership roles (Kubica, 2008).

A second method of succession planning is through formal leadership development programs. These programs are intended to identify management potential throughout an organization by targeting specific skill sets of individuals and assessing their match to specific jobs, such as vice president or chief operating officer (COO). One way to implement this is through talent reviews, which, when done annually, help create a pool of existing staff who may be excellent candidates for further leadership development and skill strengthening through the establishment of development plans. Formal programs that are being established by many

health care organizations focus on high-potential people (Burt, 2005). Thompson and Kim (2013) found that 48% of community hospitals offered a leadership development program, and McAlearney (2010) reported that about 50% of hospital systems nationwide had an executive-level leadership development program. However, many health care organizations have developed programs that address leadership development at all levels of the organization, not just the executive level, and require all managers to participate in these programs to strengthen their managerial and leadership skills and to contribute to organizational performance.

ROLE OF THE MANAGER IN INNOVATION AND CHANGE MANAGEMENT Due to the pace of change in the health services industry and the complexity of health services organizations, the manager plays a significant role in leading innovation and spearheading change management. Health services organizations cannot remain static. The environmental forces discussed earlier in this chapter strongly point to the need for organizations to respond and adapt to these external influences. In addition, achieving and maintaining high performance outcomes or results is dependent on making improvements to the organizational structure and processes. Moreover, managers are encouraged to embrace innovation to identify creative ways to improve service and provide care effectively and efficiently.

Innovation and change management are intricately related, but different, competencies. Hamel (2007) describes management innovation and operational innovation. Management innovation addresses the organization’s management processes as the practices and routines that determine how the work of management gets conducted on a daily basis. These include such practices as internal communications, employment assessment, project management, and training and development. In contrast, operational innovation addresses the organization’s business processes. In the health care setting, these include processes such as customer service, procurement of supplies and supply chain changes, care coordination across staff, and development and use of clinical procedures and practices. Some operational innovation is structural in nature and involves acquisition of

information and clinical products, such as electronic medical/health records, or a new device or procedure, such as robotic surgery or new medications (Staren, Braun, & Denny, 2010). There are specific skills needed by managers to be innovators in management. These skills include thinking creatively about ways to proactively change management and operational practices to improve the organization. It also involves a willingness to test these innovative practices and assess their impact. Also, a manager must facilitate recruitment and development of employees who embrace creativity and innovation. Having innovative clinical and administrative staff is critical to implementing operational innovation. A culture of innovation depends upon staff who are generating ideas for operational innovation, and the manager is a linchpin in establishing a culture of innovation that supports idea generation. Recent studies of innovative and creative companies found that leaders should rely on all staff collaborating by helping one another and engaging in a dynamic process of seeking and giving feedback, ideas, and assistance (Amabile, Fisher, & Pillemer, 2014). Several barriers to innovation have been identified. These barriers include lack of an innovation culture that supports idea generation, lack of leadership in innovation efforts, and high costs of making innovative changes (Harrington & Voehl, 2010). In addition, formal rules and regulations, professional standards, and administrative policies may all work against innovation (Dhar, Griffin, Hollin, & Kachnowski, 2012). Finally, daily priorities and inertia reflecting the status quo that cause managers to focus on routines and day-to-day tasks limit staff ability to be creative, engage in discovery, and generate ideas (Dhar et al., 2012).

Organizational change, or change management, is related to but different from innovation. Organizational change is a structured management approach to improving the organization and its performance. Knowledge of performance gaps is a necessary prerequisite to change management, and managers must routinely assess their operational activities and performance and make adjustments in the work structure and processes to improve performance (Thompson, 2010). Managing organizational change has become a significant responsibility of managers and a key competency for health care managers (Buchbinder & Thompson, 2010). Managing the change process within health care organizations is critical because appropriately and systematically managing change can result in improved organizational performance. However, change is difficult and the

change process creates both staff resistance and support for a change. A process model of change management has been suggested by Longest

et al. (2000). This rational, problem-based model identifies four key steps in systematically understanding and managing the change process: (1) identification of the need for change, (2) planning for implementing the change, (3) implementing the change, and (4) evaluating the change.

There are several key management competencies that health care managers need to possess to effectively manage change within their organizations. Thompson (2010) suggests that managers:

–Embrace change and be a change agent; –Employ a change management process; –Effectively address support and resistance to change; –Use change management to make the organization innovative and

successful in the future; and, –Recruit staff and succession plan with change management in mind.

ROLE OF THE MANAGER IN HEALTH CARE POLICY As noted earlier in this chapter, managers must consider both their external and internal domains as they carry out management functions and tasks. One of the critical areas for managing the external world is to be knowledgeable about health policy matters under consideration at the state and federal levels that affect health services organizations and health care delivery. This is particularly true for senior-level managers. This awareness is necessary to influence policy in positive ways that will help the organization and limit any adverse impacts. Staying current with health care policy discussions, participating in deliberations of health policy, and providing input where possible will allow health care management voices to be heard. Because health care is such a popular yet controversial topic in the U.S. today, continuing changes in health care delivery are likely to emanate from the legislative and policy processes at the state and federal levels. For example, the Patient Protection and Affordable Care Act, signed into law in 2010 as a

major health care reform initiative, has had significant implications for health care organizations in terms of patient volumes, reimbursement for previously uninsured patients, and the movement to improve population health and develop value-based purchasing. Other recent federal policy changes include cuts in Medicare reimbursement and increases in reporting requirements. State legislative changes across the country affect reimbursement under Medicaid and the Children’s Health Insurance Program, licensure of facilities and staff, certificate of need rules for capital expenditures and facility and service expansions, and state requirements on mandated health benefits and modified reimbursements for insured individuals that affect services offered by health care organizations.

In order to understand and influence health policy, managers must strive to keep their knowledge current. This can be accomplished through targeted personal learning, networking with colleagues within and outside of their organizations, and participating in professional associations, such as the American College of Healthcare Executives and the Medical Group Management Association. These organizations, and many others, monitor health policy discussions and advocate for their associations’ interests at the state and federal levels. Knowledge gained through these efforts can be helpful in shaping health policy in accordance with the desires of health care managers.

RESEARCH IN HEALTH CARE MANAGEMENT Current research in management focuses on best practices. For example, the best practices of managers and leaders in ensuring organizational performance has been the focus of work by McAlearney, Robbins, Garman, and Song (2013) and Garman, McAlearney, Harrison, Song, and McHugh (2011). The best practices identified by these researchers include staff engagement, staff acquisition and development, staff frontline empowerment, and leadership alignment and development. Understanding what leaders do to develop their staff and prepare lower-level managers for leadership roles has been a common research focus as well. Leadership development programs have been examined in terms of their structure and

impact. McAlearney (2008) surveyed health care organizations and key informants to determine the availability of leadership development programs and their role in improving quality and efficiency, and found these programs enhanced the skills and quality of the workforce, improved efficiency in educational development, and reduced staff turnover. A study of high- performing health organizations found various practices are used to develop leaders internally, including talent reviews to identify candidates for upward movement, career development planning, job rotations, and developmental assignments (McHugh, Garman, McAlearney, Song, & Harrison, 2010). In addition, a 2010 study examined leadership development in health and non- health care organizations and found best practices included 360-degree performance evaluation, mentoring, coaching, and experiential learning (National Center for Healthcare Leadership, 2010). A study of U.S. health systems found about half of health systems offered a leadership development program and also found that leadership development initiatives helped the systems focus on employee growth and development and improved employee retention (McAlearney, 2010). As noted earlier in this chapter, some recent studies have examined the characteristics of leadership development programs in hospitals, finding correlations of programs with size, urban location, and not-for-profit ownership status (Kim and Thompson, 2012; Thompson and Kim, 2013). A new area of management research is the participation of early careerists in leadership development programs, and recent evidence shows that some leadership development activities are of more interest to staff than others (Thompson and Temple, 2015). A number of important areas of management research exist today, and include looking at the effect of leadership development training on specific decision-making by managers, career progression due to participation in leadership development, and the impact of collaboration among staff on firm innovation and performance (Amabile, Fisher, & Pillemer, 2014).

CHAPTER SUMMARY The profession of health care management is challenging yet rewarding, and requires persons in managerial positions at all levels of the organization to possess sound conceptual, technical, and interpersonal skills to carry out the necessary managerial functions of planning, organizing, staffing, directing,

controlling, and decision making. In addition, managers must maintain a dual perspective where they understand the external and internal domains of their organization and the need for development at the self, unit/team, and organization levels. Opportunities exist for managerial talent at all levels of a health care organization, including supervisory, middle-management, and senior-management levels. The role of manager is critical to ensuring a high level of organizational performance, and managers are also instrumental in establishing and maintaining organizational culture, talent recruitment and retention, leadership development and succession planning, innovation and change management, and shaping health care policy.

Note: Portions of this chapter were originally published as “Understanding Health Care Management” in Career Opportunities in Healthcare Management: Perspectives from the Field, by Sharon B. Buchbinder and Jon M. Thompson, and an adapted version of this chapter is reprinted here with permission of the publisher.


1. Define health care management and health care managers.

2. Delineate the functions carried out by health care managers and give an example of a task in each function.

3. Explain why interpersonal skills are important in health care management.

4. Compare and contrast three models of organizational design.

5. Why is the health care manager’s role in ensuring high performance so critical? Explain.

6. Characterize the health care manager’s role in change management and assess the extent to which this has an impact on the success of the change process.

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Leadership Louis Rubino

LEARNING OBJECTIVES By the end of this chapter, the student will be able to:

Distinguish between leadership and management; Summarize the history of leadership in the U.S. from the 1920s to current times;

Compare and contrast leadership styles, competencies, and protocols; Summarize old and new governance trends; Analyze key barriers and challenges to successful leadership; Provide a rationale for why health care leaders have a greater need for ethical behavior;

Explore important new initiatives requiring health care leaders’ engagement; and

Discuss special research issues related to leadership.

LEADERSHIP VS. MANAGEMENT In any business setting, there must be leaders as well as managers. But are these the same people? Not necessarily. There are leaders who are good managers and there are managers who are good leaders, but usually neither case is the norm. In health care, this is especially important to recognize because of the need for both. Health care is unique in that it is a service industry that depends on a large number of highly trained personnel as well

as trade workers. Whatever the setting, be it a hospital, a long-term care facility, an ambulatory care center, a medical device company, an insurance company, an accountable care organization, or some other health care entity, leaders as well as managers are needed to keep the organization moving in a forward direction and, at the same time, maintain current operations. This is done by leading and managing its people and assuring good business practices.

Leaders usually take a focus that is more external, whereas the focus of managers is more internal. Even though they need to be sure their health care facility is operating properly, leaders tend to spend the majority of their time communicating and aligning with outside groups that can benefit their organizations (partners, community, vendors) or influence them (government, public agencies, media). See Figure 2-1. There is crossover between leaders and managers across the various areas, though a distinction remains for certain duties and responsibilities.

Usually the top person in the organization (e.g., Chief Executive Officer, Administrator, Director) has full and ultimate accountability. This type of leader may be dictated by the current conditions faced by the organization. A more strategic leader, who defines purpose and vision and aligns people, processes, and values, may be needed. Or, a network leader, who could connect people across disciplines, organizational departments, and regions, may be essential. Whichever type surfaces, there will be several managers reporting to this person, all of whom have various functional responsibilities for different areas of the organization (e.g., Chief Nursing Officer, Physician Director, Chief Information Officer). These managers can certainly be leaders in their own areas, but their focus will be more internal within the organization’s operations. They are the operational leaders of the organization. Together, these three types of leaders/followers produce an interdependent leadership system, a team which will prove more high performing in the current health care field (Maccoby, Norman, Norman, & Margolies, 2013).

FIGURE 2-1 Leadership and Management Focus

Leaders have a particular set of competencies that require more forward thinking than those of managers. Leaders need to set a vision or direction for the organization. They need to be able to motivate their employees, as well as other stakeholders, so the business continues to exist and, hopefully, thrive in periods of change. No industry is as dynamic as health care, with rapid change occurring due to the complexity of the system and government regulations. Leaders are needed to keep the entity on course and to maneuver around obstacles, like a captain commanding his ship at sea. Managers must tend to the business at hand and make sure the staff is following proper procedures and meeting established targets and goals. They need a different set of competencies. See Table 2-1.

HISTORY OF LEADERSHIP IN THE U.S. Leaders have been around since the beginning of man. We think of the strongest male becoming the leader of a caveman clan. In Plato’s time, the Greeks began to talk about the concept of leadership and acknowledged the political system as critical for leaders to emerge in a society. In Germany during the late 19th century, Sigmund Freud described leadership as unconscious exhibited behavior; later, Max Weber identified how leadership is present in a bureaucracy through assigned roles. Formal leadership studies in the U.S., though, have only been around for the last 100 years (Sibbet, 1997).

We can look at the decades spanning the 20th century to see how leadership theories evolved, placing their center of attention on certain key components at different times (Northouse, 2016). These emphases often matched or were adapted from the changes occurring in society.

With the industrialization of the U.S. in the 1920s, productivity was of paramount importance. Scientific management was introduced, and researchers tried to determine which characteristics were identified with the most effective leaders based on their units having high productivity. The Great Man Theory was developed out of the idea that certain traits determined good leadership. The traits that were recognized as necessary for effective leaders were ones that were already inherent in the person, such as being male, being tall, being strong, and even being Caucasian. Even the idea that “you either got it or you don’t” was supported by this theory, the notion being that a good leader had charisma. Behaviors were not

considered important in determining what made a good leader. This theory discouraged anyone who did not have the specified traits from aspiring to a leadership position.

Fortunately, after two decades, businesses realized leadership could be enhanced through certain conscious acts, and researchers began to study which behaviors would produce better results. Resources were in short supply due to World War II, and leaders were needed who could truly produce good results. This was the beginning of the Style Approach to Leadership. Rather than looking at only the characteristics of the leader, researchers started to recognize the importance of two types of behaviors in successful leadership: completing tasks and creating good relationships. This theory states leaders have differing degrees of concern over each of these behaviors, and the best leaders would be fully attentive to both.

In the 1960s, American society had a renewed emphasis on helping all of its people and began a series of social programs that still remain today. The two that impact health care directly, by providing essential services, are Medicare for the elderly (age 65 and over) and the disabled and Medicaid for the indigent population. The Situational Approach to Leadership then came into prominence and supported this national concern. This set of theories focused on the leader changing his or her behavior in certain situations in order to meet the needs of subordinates. This would imply a very fluid leadership process whereby one can adapt one’s actions to an employee’s needs at any given time.

Not much later, researchers believed perhaps leaders should not have to change how they behaved in a work setting, but instead the appropriate leaders should be selected from the very beginning. This is the Contingency Theory of Leadership and was very popular in the 1970s. Under this theory, the focus was on both the leader’s style as well as the situation in which the leader worked, thus building upon the two earlier theories. This approach was further developed by what is known as the Path–Goal Theory of Leadership. This theory still placed its attention on the leader’s style and the work situation (subordinate characteristics and work task structure) but also recognized the importance of setting goals for employees. The leader was expected to remove any obstacles in order to provide the support necessary for them to achieve those goals.

In the later 1970s, the U.S. was coming out of the Vietnam War, in which

many of its citizens did not think the country should have been involved. More concern was expressed over relationships as the society became more psychologically attuned to how people felt. The Leader–Member Exchange Theory evolved over the concern that leadership was being defined by the leader, the follower, and the context. This new way of looking at leadership focused on the interactions that occur between the leaders and the followers. This theory claimed leaders could be more effective if they developed better relationships with their subordinates through high-quality exchanges.

After Vietnam and a series of weak political leaders, Americans were looking for people to take charge who could really make a difference. Charismatic leaders came back into vogue, as demonstrated by the support shown to President Ronald Reagan, an actor turned politician. Unlike the Great Man Theory earlier in the century, this time the leader had to have certain skills to transform the organization through inspirational motivational efforts. Leadership was not centered upon transactional processes that tied rewards or corrective actions to performance. Rather, the transformational leader could significantly change an organization through its people by raising their consciousness, empowering them, and then providing the nurturing needed as they produced the results desired.

In the late 1980s, the U.S. started to look more globally for ways to have better production. Total Quality Management became a popular concept and arose from researchers studying Japanese principles of managing production lines. In the health care setting, this was embraced through a process still used today called Continuous Quality Improvement or Performance Improvement. In the decade to follow, leaders assigned subordinates to a series of work groups in order to focus on a particular area of production. Attention was placed on developing the team for higher level functioning and on how a leader could create a work environment that could improve the performance of the team. Individual team members were expendable, and the team entity was all important.

We have entered the 21st century with some of the greatest leadership challenges ever in the health care field. Critical personnel shortages, limited resources, and increased governmental regulations provide an environment that yearns for leaders who are attentive to the organization and its people, yet can still address the big picture. Several of today’s leadership models relate well to the dynamism of the health care field and are presented here.

Looking at these models, there seems to be a consistent pattern of self-aware leaders who are concerned for their employees and understand the importance of meaningful work. As we entered the 2000s, leaders needed to use Adaptive Leadership to create flexible organizations able to meet the relentless succession of challenges faced in health care and elsewhere (Heifetz, Grashow, & Linsky, 2009). Plus, today’s astute health care leaders recognize the importance of considering the global environment, as health care wrestles with international issues that impact us locally, such as outsourcing services, medical tourism, and over-the-border drug purchases, giving rise to the global leader. See Table 2-2.

CONTEMPORARY MODELS Today’s health care industry does not prescribe any one type of leadership model. Many leaders are successful drawing from a variety of traditional and contemporary models. It is wise for the leadership student, as well as the practitioner, to become familiar with the various contemporary models so they can be utilized when appropriate. See Table 2-3.

Emotional Intelligence (EI) Emotional Intelligence (EI) is a concept made famous by Daniel Goleman in the late 1990s. It suggests that there are certain skills (intrapersonal and interpersonal) that a person needs to be well adjusted in today’s world. These skills include self-awareness (having a deep understanding of one’s emotions, strengths, weaknesses, needs, and drives), self-regulation (a propensity for reflection, an ability to adapt to changes, the power to say no to impulsive urges), motivation (being driven to achieve, being passionate about one’s profession, enjoying challenges), empathy (thoughtfully considering others’ feelings when interacting), and social skills (moving people in the direction you desire by your ability to interact effectively) (Freshman & Rubino, 2002).

Since September 11, 2001, leaders have needed to be more understanding of their subordinates’ world outside of the work environment. EI, when applied to leadership, suggests a more caring, confident, enthusiastic boss who can establish good relations with workers. Researchers have shown that EI can distinguish outstanding leaders and strong organizational performance (Goleman, 1998). For health care as an industry and for health care managers, this seems like a good fit, especially during this time of change (Delmatoff & Lazarus, 2014). See Table 2-4.

Authentic Leadership The central focus of authentic leadership is that people will want to naturally associate with someone who is following their internal compass of true purpose (George & Sims, 2007). Leaders who follow this model are

ones who know their authentic selves, define their values and leadership principles, understand what motivates them, build a strong support team, and stay grounded by integrating all aspects of their lives. Authentic leaders have attributes such as confidence, hope, optimism, resilience, high levels of integrity, and positive values (Brown & Gardner, 2007). Assessments given to leaders in a variety of international locations have provided the evidence- based knowledge that there is a correlation between authentic leadership and positive outcomes based on supervisor-rated performance (Walumbwa, Avolio, Gardner, Wernsing, & Peterson, 2008).

Diversity Leadership Our new global society forces health care leaders to address matters of diversity, whether with their patient base or with their employees. This commitment to diversity is necessary for today’s leader to be successful. The environment must be assessed so goals can be set that embrace the concept of diversity in matters such as employee hiring and promotional practices, patient communication, and governing board composition, to name a few. Strategies have to be developed to make diversity work for the organization. The leader who recognizes the importance of diversity and designs its acceptance into the organizational culture will be most successful (Warden, 1999). Health care leaders are called to be role models for cultural competency (see Chapter 14 for more on this important topic) and to be able to attract, mentor, and coach those of different, as well as similar, backgrounds (Dolan, 2009).

Servant Leadership Many people view health care as a very special type of work. Individuals usually work in this setting because they want to help people. Servant leadership applies this concept to top administration’s ability to lead, acknowledging that a health care leader is largely motivated by a desire to serve others. This leadership model breaks down the typical organizational hierarchy and professes the belief of building a community within an organization in which everyone contributes to the greater whole. A servant leader is highly collaborative and gives credit to others generously. This leader is sensitive to what motivates others and empowers all to win with shared goals and vision. Servant leaders use personal trust and respect to build bridges and use persuasion rather than positional authority to foster cooperation. This model works especially well in a not-for-profit setting, since it continues the mission of fulfilling the community’s needs rather than the organization’s (Swearingen & Liberman, 2004).

Spirituality Leadership The U.S. has experienced some very serious misrepresentations and misreporting by major health care companies, as reported by U.S. governmental agencies (e.g., Columbia/HCA, GlaxoSmithKline, HealthSouth). Trying to claim a renewed sense of confidence in the system, a model of leadership has emerged that focuses on spirituality. This spiritual focus does not imply a certain set of religious beliefs but emphasizes ethics, values, relationship skills, and the promotion of balance between work and self (Wolf, 2004). The goal under this model is to define our own uniqueness as human beings and to appreciate our spiritual depth. In this way, leaders can deepen their understanding and at the same time be more productive. These leaders have a positive impact on their workers and create a working environment that supports all individuals in finding meaning in what they do. They practice five common behaviors of effective leaders as described by Kouzes and Posner (1995): (1) Challenge the process, (2) Inspire a shared vision, (3) Enable others to act, (4) Model the way, and (5) Encourage the heart, thus taking leadership to a new level.

Resilient Leadership

Being a health care leader is an exciting yet challenging job. Much stress is placed on the executive and its takes a strong, resilient leader to overcome these pressures, bounce back, and keep the organization moving forward. Certain resilience-building practices can be used by the leader to build inner strength and perseverance (Wicks & Buck, 2013). A self-care protocol that includes self-awareness, alone time, mindfulness, and keeping a healthy perspective can be essential to not only the individual leader but also to coach his/her team members to avoid burnout and foster high staff morale.

The Emerging Health Care Leader Students of health administration do not become successful leaders overnight. It usually takes years of study and experience to become comfortable and proficient in the role. A basic foundation is necessary before a leader can emerge and certain strategies can be applied to help an individual build and grow their career (Baedke & Lamberton, 2015). Some of these include paying attention to one’s character, examining self- discipline, cultivating your personal brand, and to constantly network. The best leaders are ones who are continually learning and using this new knowledge to further their development as a leader in today’s changing health care world.

LEADERSHIP STYLES Models give us a broad understanding of someone’s leadership philosophy. Styles demonstrate a particular type of leadership behavior that is consistently used. Various authors have attempted to explain different leadership styles (Northouse, 2015; Studer, 2008). Some styles are more appropriate to use with certain health care workers, depending on their education, training, competence, motivation, experience, and personal needs. The environment must also be considered when deciding which style is the best fit.

In a coercive leadership style power is used inappropriately to get a desired response from a follower. This very directive format should probably not be used unless the leader is dealing with a very problematic subordinate or is in an emergency situation and needs immediate action. In health care

settings over longer periods of time, three other leadership styles could be used more effectively: participative, pacesetting, and coaching.

Many health care workers are highly trained, specialized individuals who know much more about their area of expertise than their supervisor. Take the generally trained chief operating officer of a hospital who has several department managers (e.g., Imaging, Health Information Systems, Engineering) reporting to him or her. These managers will respond better and be more productive if the leader is participative in his or her style. Asking these managers for their input and giving them a voice in making decisions will let them know they are respected and valued.

In a pacesetting style, a leader sets high performance standards for his or her followers. This is very effective when the employees are self-motivated and highly competent—e.g., research scientists or intensive care nurses. A coaching style is recommended for the very top personnel in an organization. With this style, the leader focuses on the personal development of his or her followers rather than the work tasks. This should be reserved for followers the leader can trust and those who have proven their competence. See Table 2-5.

LEADERSHIP COMPETENCIES A leader needs certain skills, knowledge, and abilities to be successful. These are called competencies. The pressures of the health care industry have initiated the examination of a set of core competencies for a leader who works in a health care setting (Dye & Garman, 2015). Criticism has been directed at educational institutions for not producing administrators who can begin managing effectively right out of school. Educational programs in health administration are working with the national coalition groups (e.g., Health Leadership Council, National Center for Healthcare Leadership, and American College of Healthcare Executives) and health care administrative practitioners to come up with agreed upon competencies. Once identified, the programs can attempt to have their students learn how to develop these traits and behaviors.

Some of the competencies are technical—for example, having analytical skills, having a full understanding of the law, and being able to market and write. Some of the competencies are behavioral—for example, decisiveness, being entrepreneurial, and an ability to achieve a good work/life balance. As people move up in organizations, their behavioral competencies are a greater determinant of their success as leaders than their technical competencies (Hutton & Moulton, 2004). Another way to examine leadership competencies is under four main groupings or domains. The Functional and Technical Domain is necessary but not sufficient for a competent leader. Three other domains provide competencies that are behavioral and relate both to the individual (Self-Development and Self-Understanding) and to other people (Interpersonal). A fourth set of competencies falls under the heading Organizational and has a broader perspective. See Table 2-6 for a full listing of the leadership competencies under the four domains.

LEADERSHIP PROTOCOLS Health care administrators are expected to act a certain way. Leaders are role models for their organizations’ employees, and they need to be aware that their actions are being watched at all times. Sometimes people at the top of an organization get caught up in what they are doing and do not realize the message they are sending throughout the workplace by their inappropriate behavior. Specific ways of serving in the role of a health care leader can be demonstrated and can provide the exemplary model needed to send the correct message to employees. These appropriate ways in which a leader acts are called protocols.

There is no shortage of information on what protocols should be followed by today’s health care leader. Each year, researchers, teachers of health administration, practicing administrators, and consultants write books filled

with their suggestions on how to be a great leader (for some recent examples, see Dye, 2010; Ledlow & Coppola, 2011; and Rath and Conchie, 2008). There are some key ways a person serving in a leadership role should act. These are described here and summarized in Table 2-7.

Professionalism is essential to good leadership. This can be manifested not only in the way people act but also in their mannerisms and their dress. A leader who comes to work in sloppy attire or exhibits discourteous or obnoxious behavior will not gain respect from followers. Trust and respect are very important for a leader to acquire. Trust and respect must be a two- way exchange if a leader is to get followers to respond. Employees who do not trust their leader will consistently question certain aspects of their job. If they do not have respect for the leader, they will not care about doing a good job. This could lead to low productivity and bad service.

Even a leader’s mood can affect workers. A boss who is confident, optimistic, and passionate about his or her work can instill the same qualities in the workers. Such enthusiasm is almost always infectious and is passed on to others within the organization. The same can be said of a leader who is weak, negative, and obviously unenthusiastic about his or her work—these poor qualities can be acquired by others.

Leaders must be very visible throughout the organization. Having a presence can assure workers that the top people are “at the helm” and give a sense of stability and confidence in the business. Quint Studer (2009), founder and CEO of Studer Group, states how rounding can help leaders

meet certain standard goals: making sure staff know they are cared about, know what is going on (what is working well, who should be recognized, which systems need to work better, which tools and equipment need attention), and know that proper follow-up actions are taking place. Leaders must be open communicators. Holding back information that could have been shared with followers will cause ill feelings and a concern that other important matters are not being disclosed. Leaders also need to take calculated risks. They should be cautious, but not overly so, or they might lose an opportunity for the organization. And finally, leaders in today’s world need to recognize that they are not perfect. Sometimes there will be errors in what is said or done. These must be acknowledged so they can be put aside and the leader can move on to more pressing current issues.

Health care leaders today need to balance many agendas. To do so, a set of protocols needs to be followed which allows a systems-thinking perspective. The Master Leadership framework takes into account these competing values and encourages the leader to shift to being a motivator, vision-setter, analyzer, and task-master depending upon the immediate concern (Belasen, Eisenberg, & Huppertz, 2016). All of these roles though must be followed, and it is the accomplished leader who can develop a sense of equilibrium when he/she acts between them.

GOVERNANCE Individuals are not the only ones to consider in leadership roles. There can be a group of people who collectively assume the responsibility for strategic oversight of a health care organization. The term governance describes this important function. Governing bodies can be organized in a variety of forms. In a hospital, this top accountable body is called a board of trustees in a not-for-profit setting and a board of directors in a proprietary, or for- profit, setting. Since many physician offices, long-term care facilities, and other health care entities are set up as professional corporations, these organizations would also have boards of directors.

Governing boards are facing heightened scrutiny due to the failure of many large corporations in the last decade. The U.S. government recognizes the importance of a group of people who oversee corporate operations and

give assurances for the fair and honest functioning of the business. Sarbanes-Oxley is a federal law enacted in 2002 that set new or enhanced standards for proprietary companies that are publicly traded. Financial records must be appropriately audited and signed off by top leaders. Operations need to be discussed more openly so as to remove any possibility of cover-up, fraud, or self-interest. Each governing board member has fiduciary responsibility to forgo his or her own personal interests and to make all decisions concerning the entity for the good of the organization. Many believe the not-for-profits should have the same requirements and are applying pressure for them to fall under similar rules of transparency.

Although health care boards are becoming smaller in size, they recognize the importance of the composition of their members. A selection of people from within the organization (e.g., system leaders, the management staff, physicians) should be balanced with outside members from the community who represent the populations served by the organization (see Table 2-8). The trend is to appoint members who have certain expertise to assist the board in carrying out its duties. Also, having governing board members who do not have ties to the health care operations will reduce the possibility of conflicts of interests. Board meetings have gone from ones in which a large volume of information is presented for a “rubber stamp” to meetings that are well prepared, purposeful, and focused on truly important issues. A self- assessment should be taken at least annually and any identified problem areas (including particular board members) addressed. This way, the governing board can review where it stands in its ability to give fair, open, and honest strategic oversight (Gautam, 2005). A new way of looking at governance goes beyond fiduciary and strategic responsibility, whereby the board serves as the generative source of leadership, espousing the meaning for the organization’s health care delivery and reframing the priorities (Chait, Ryan, & Taylor, 2005). The American Hospital Association Center for Healthcare Governance (2012) produced a Blue Ribbon Panel Report which identified recommendations for health care governance during this period of transformation. These included: strengthen the board and organizational capacity to manage change; encourage collaboration among providers; actively oversee physician alignment, integration, engagement and development; and create a compelling vision for the future.

BARRIERS AND CHALLENGES Health care leaders are confronted with many situations that must be dealt with as they lead their organizations. Some can be considered barriers that, if not managed properly, will stymie the capacity to lead. Certain other areas are challenges that must be addressed if the leader is to be successful. A few of the more critical ones in today’s health care world are presented here. See Table 2-9.

Due to the complex health care system in the U.S., many regulations and laws are in place that sometimes can inhibit innovative and creative business practices. Leaders must ensure the strategies developed for their entity comply with the current laws, or else they jeopardize its long-term survivability. Leaders are expected to sometimes think “outside the box,” i.e., go beyond the usual responses to a situation, to provide new ideas for the development of their business. This can be challenging when many constraints must be considered. Some examples are the government’s antitrust requirements, which can affect developing partners; federal privacy laws, which can prevent sharing patient information needed for collaboration; and safe harbor requirements, which can affect physician relations. These and other laws and regulations can affect a health care leader’s ability to lead.

The health care industry is unique. Major players in the arena, physicians,

are not always easily controlled by the medical organizations where they work (e.g., hospitals, medical groups, insurance companies). Yet this very influential group of stakeholders has substantial input over the volume of patients that a health care facility receives and revenues produced. This necessitates that the health care leader find ways to include doctors in the process of setting a direction, monitoring the quality of care, and fulfilling other administrative functions. The wise health care leader will include physicians early on in any planning process. Doctors are usually busy with their own patients and practices, but if they are not looked to for their expertise and advice on certain important matters in the facilities where they work, they will become disengaged. Everybody would much rather work at a place where their opinions are requested and respected. Health care leaders must pay special attention to physicians during the current period to overcome any resistance to change as the health care system evolves (Kornacki & Silversin, 2012).

Technology is a costly requirement in any work setting. Information systems management and new medical equipment are especially expensive for the modern health care facility or practice due to the rapidly changing data collection requirements and medical advances in the field. Health care leaders must assess the capabilities of their entities for new technology and determine if their systems and equipment are a barrier to making future progress. The U.S. Department of Health and Human Services (2009) has provided incentives for health care organizations to promote the adoption and meaningful use of health information technology through the HITECH Act (Health Information Technology for Economic and Clinical Health Act) (U.S. Department of HHS, 2009). Health care leaders cannot be

successful if their organizations have antiquated systems and out-of-date support devices in today’s high-tech world. Computer hardware and clinical software must be integrated to provide the quality and cost information needed for an efficient medical organization. Electronic medical records, wireless devices, and computerized order entry systems, as well as advanced medical equipment and new pharmaceuticals, will be items the leader must have in place in order to lead his or her health care organization in the 21st century.

Safety concerns have traditionally been a management responsibility. However, safety has become such an important issue in today’s health care world that leaders must be involved in its oversight. A top-down direction must be given throughout the organization that mistakes will not be tolerated. Coordinated efforts must shift from following up on errors to preventing their recurrence to developing systems and mechanisms to prevent them from ever occurring. The Joint Commission (TJC) has leadership standards for all sectors, calling for the leaders in the health care entity to accept the responsibility for fostering a culture of safety. The focus of attention is on the performance of systems and processes instead of the individual, although reckless behavior and blatant disregard for safety are not tolerated (The Joint Commission, 2010).

Value-based purchasing is quickly becoming the norm. The Centers for Medicare and Medicaid Services’ game-changing initiative is being adopted by private payers. It provides reimbursement incentives to accountable providers who produce high-quality outcomes, and disincentives for the provision of poor-quality outcomes (i.e., read-missions within 30 days for some diagnoses). Health care leaders need to focus on demonstrating achievement of high-quality standards to ensure not only the operational excellence but also the fiscal stability of their organizations (Chan & Rubino, 2014).

Even though women make up the majority of the health care workforce, they are under-represented in the top leadership positions. One recent study showed that only 24% of the senior health care executives were women and only 14% were members of boards of directors (Hauser, 2014). A call must be made to existing health care leaders to pave the way for women to be given the opportunity for these executive jobs by removing traditional barriers and providing active mentoring, introduction into the promotion pipeline, and leadership development programs.

ETHICAL RESPONSIBILITY Ethics are principles determining behavior and conduct appropriate to a certain setting. It is a matter of doing right vs. wrong (see Chapter 15 for a detailed discussion of ethics and law). Ethics are especially important for health care leadership and require two areas of focus. One area is biomedical ethics and the actions a leader needs to consider as he or she relates to a patient. Another is managerial ethics. This involves business practices and doing things for the right reasons. A leader must ensure an environment in which good ethical behavior is followed.

The American College of Healthcare Executives (ACHE, 2014) does an excellent job in educating its professional membership as to the ethical responsibilities of health care leaders. Ethical responsibilities apply to several different constituencies: to the profession itself, to the patients and others served, to the organization, to the employees, and to the community and society at large (see Table 2-10). A health care leader who is concerned about an ethical workplace will not only model the appropriate behavior but will also have zero tolerance for any deviation by a member of the organization. A Code of Ethics gives specific guidelines to be followed by individual members. An Integrity Agreement would address a commitment to follow ethical behavior by the organization.

IMPORTANT NEW INITIATIVES The world is constantly changing all around us and health care is no different. Several new initiatives are coming on to the scene in which a health care leader must demonstrate active engagement in order to have everyone in the organization recognize its importance.

With health care reform comes a need for a population health approach to health care education, delivery, and policy. The distribution of health outcomes within a specific population will be used to measure a health care organization’s success and determine its reimbursement under new payment methods. A movement away from focusing on individualized care to group

performance will require the health care leader to shift his/her team’s attention to innovative strategies to promote wellness and coordination of care. Productive interactions are necessary if the organization is to be successful in the new health care environment (Nash, Reifsnyder, Fabius, & Pracilio, 2011).

Health care is moving away from a provider-centeredness to patient- family centeredness. An astute health care leader will recognize the importance in such a shift as consumers are making more direct health care decisions based on the information now readily available. All leaders of a health care organization, from the board level down, need to embrace this concept and be actively engaged in its roll-out, serving as a role model for others (Cliff, 2012).


Some people believe leaders are born and that one cannot be taught how to be a good leader. The growing trend, however, is that leaders can, in fact, be taught skills and behaviors that will help them to lead an organization effectively (Parks, 2005). In health care, many clinicians who do well at their jobs are promoted to supervisory positions. Yet they do not have the management training that would help them to be successful in their new roles. For example, physicians, laboratory technologists, physical therapists, and nurses are often pushed into management positions with no administrative training. We are doing a disservice to these clinicians and setting them up for failure.

Fortunately, this common occurrence has been recognized, and many new programs have sprouted to address this need. Universities have developed executive programs to attract medical personnel into a fast-track curriculum to attempt to give them the essential skills they need to be successful. Some schools have developed majors in health care leadership or created online programs for better accessibility, and some health care systems have started internal leadership training programs. This trend will continue into the future, since health care services are expected to grow due to the aging population, and thus there will be a need for more people to be in charge. In addition, leaders should continually be updated as to the qualities that make a good leader in the current environment, and therefore, professional development, provided through internal or external programs, should be encouraged.

The Baldrige National Quality Program recognizes in its most recent criteria for performance excellence the need for senior leaders to create a sustainable environment for their organizations through the continual development of future leaders by enhancing their personal leadership skills, such as communicating with the entire workforce and key customers and focusing on action that will achieve the organizations’ mission (Baldrige Excellence Framework, 2015). Yet Garman and Dye (2009) caution us to distinguish leader development from leadership development. They call for the need to bind leadership development activities into a collective network of leaders who are linked to organizational level goals rather than each leader’s individual performance. Further understanding of the difference can be explained through decision making. A leader collaborating with his or her superior would be considered leader development, but in leadership development, the process would be team based.

Each of the different sectors in health care has a professional association that will support many aspects of its particular career path. These groups provide ongoing educational efforts to help their members lead their organizations. Another benefit for leaders is that these groups provide up-to- date information about their particular field. Professional associations are a good way to network with people in similar roles, a highly desirable process for health care leaders. Also, ethnic professional associations link health care leaders from representative minority groups as they attempt to increase diversity in the health care profession and improve health status, economic opportunities, and educational advancement for their communities. Most of these various professional groups have student chapters, and early involvement in these organizations is highly recommended for any future health care leader. Table 2-11 lists some of these associations.

To prepare an organization for the future, its leader needs to be looking out for opportunities to partner with other entities. Health care in the U.S.

is fragmented, and to be successful, different services need to be aligned and networks need to be created that will allow patients to flow easily through the continuum of care. Leaders must determine who are the best partners and negotiate a way to have a win–win situation. Of course, these efforts to develop partnerships must be in line with the organization’s mission and vision, or the strategic direction will have to be reexamined. The health care leader who is concerned about the future, as well as today’s business, must continuously reassess how he or she fits in the organization. Nothing could be worse than a disenchanted person trying to lead a group of followers without the motivation and enthusiasm needed by great leaders. A leader should consider his or her own succession planning so that the organization is not left at any time without a person to lead. Truly unselfish leaders think about their commitment to their followers and do their best to ensure that consistent formidable leadership will be in place in the event of their departure. This final act will allow adequate time for a smooth transition and ensure the passage of accountability so that the followers can realign themselves with the new leader.

SPECIAL RESEARCH ISSUES A leader who is concerned about the future will stay on top of things in the health care industry. Reading newspapers, industry journals, and Web reports, as well as attending industry conferences, helps to keep leaders in the know and allows them to determine how changes in the field could impact their organization. Leaders who remain current will be better positioned to act proactively and to provide the best chance for their organizations to seize a fresh opportunity.

A new appreciation for evidence-based management commands today’s health care leader go beyond the typical sources of current information and dive deeper into the latest peer-reviewed research articles on health administration. These secondary sources of information will review how to improve leadership capabilities, and thus organizational performance, based on demonstrated studies in the field. White papers prepared by government, as well as private agencies, are easily obtainable through the Internet and can provide important insight on how to address common industry issues.

An exciting opportunity is upon us to go beyond what has been analyzed before due to the emergence of big data sets. With electronic medical records, various information systems, and advanced biomedical devices, organizations have more data and information than ever before. The potential benefits of integrating and analyzing the abundance of cost and clinical information exist to support data driven decision making. Leaders must become executive champions in knowledge management and use technology to have their teams develop new projects which will reduce costs, optimize quality, and increase performance. Better strategic planning resource utilization, unit productivity, and insurance contract risk management are just a few of the areas which could be enhanced by leveraging new information technology and putting big data to good use (Hood, 2011). Some examples of big data sets available to the public are at the end of this chapter.

CONCLUSION There has been a lot of struggle to roll out the Patient Protection and Affordable Care Act. This Act may not have provided the U.S. with full health care reform, but it has dramatically altered the way health insurance is administered and care is delivered. Millions of Americans have selected affordable health plans through insurance exchanges and many have qualified under Medicaid expansion. Yet, there will continue to be challenges to the Act in the years to come (Antos, 2014).

A call is made for a new breed of leaders at every level to tame the chaos associated with this dynamic industry (Lee, 2010). Johansen (2012) writes how leaders will make the future by continuously cycling through phases of foresight (seeing the big picture), insight (being able to sense what is important), and action (being able to decide on a strong path ahead). These will certainly be challenging times for health care leaders, and some of the key elements identified for success will be perspective, adaptability, and finding their inner passion as a personal driving force (Sukin, 2009). There is no doubt there will be opportunities for leaders in all disciplines to make a difference for their organizations and their communities as we enter this exciting new phase of American health care delivery.


1. What are the key differences between leadership and management?

2. Are leaders born, or are they trained? How has the history of leadership in the U.S. evolved to reflect this question?

3. List and describe the contemporary models of leadership. What distinguishes them from past models?

4. What are the leadership domains and competencies? Can you be a good leader and not have all the competencies listed in this model?

5. Why do health care leaders have a higher need for ethical behavior than might be expected in other settings?

6. Do health care leaders have a responsibility to be culturally competent? Why or why not?

7. Why is emotional intelligence (EI) important for health care managers? Identify three ways someone who is new to the field can assess and develop his or her EI quotient.

8. What are some ways health care leaders can use research to improve their ability to lead?

Cases in Chapter 18 that are related to this chapter include:

Metro Renal Sustaining an Academic Food Science and Nutrition Center Through Management Improvement

Emotional Intelligence in Labor and Delivery Recruitment Challenge for the Middle Manager

Case study guides are available in the online Instructor’s Materials.

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Dolan, T. C. (2009). Cultural competency and diversity. Healthcare Executive, 24(6), 6.

Dye, C. F. (2010). Leadership in healthcare: Essential values and skills (2nd ed.). Chicago, IL: Health Administration Press.

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Garman, A., & Dye, C. (2009). The healthcare c-suite: Leadership development at the top. Chicago, IL: Health Administration Press.

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Additional Websites to Explore American College of

Healthcare Executives

Center of Healthcare Governance

Coach John Wooden’s Pyramid of Success

Healthcare Leadership Alliance Competency Directory

Health Leadership Council

Institute for Diversity of Health Management

National Center for Healthcare Leadership

National Quality Forum

World Health Organization Leadership Service

White Papers for Healthcare Leaders American Hospital Association. (2004). Strategies for leadership: Does your

hospital reflect the community it serves? A diversity and cultural proficiency assessment tool for leaders. Chicago, IL: Author. Retrieved from
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Management and Motivation Nancy H. Shanks and Amy Dore

LEARNING OBJECTIVES By the end of this chapter, the student will be able to:

Conceptualize who and what motivates employees; Examine the relationship between engagement and motivation; Explain why motivation is important; Differentiate between the different theories of motivation; Compare and contrast extrinsic and intrinsic factors of motivation; Assess misconceptions about motivation; Analyze issues relating to motivating and managing across generations; and

Critique strategies to enhance employee motivation.

INTRODUCTION Managers are continually challenged to motivate a workforce to do two things. The first is to motivate employees to work toward helping the organization achieve its goals. The second is to motivate employees to work toward achieving their own personal goals.

Meeting the needs and achieving the goals of both the employer and the employee is often difficult for managers in all types of organizations. In health care, however, this is often more difficult, in part as a result of the

complexity of health care organizations, but also as a function of the wide array of employees who are employed by or work collaboratively with health care providers in delivering and paying for care. Workers run the gamut from highly trained and highly skilled technical and clinical staff members, e.g., physicians and nurses, to relatively unskilled workers (see Chapter 11 for more on this topic). To be successful, health care managers need to be able to manage and motivate this wide array of employees.

MOTIVATION—THE CONCEPT According to Webster’s New Collegiate Dictionary, a motive is “something (a need or desire) that causes a person to act.” Motivate, in turn, means “to provide with a motive,” and motivation is defined as “the act or process of motivating.” Thus, motivation is the act or process of providing a motive that causes a person to take some action. In most cases, motivation comes from some need that leads to behavior which, in turn, results in some type of reward when the need is fulfilled. This definition raises a couple of basic questions.

What Are Rewards? Rewards can take two forms. They can be either intrinsic/internal rewards or extrinsic/external rewards. Intrinsic rewards are derived from within the individual. For a health care employee, this could mean taking pride and feeling good about a job well done (e.g., providing excellent patient care). Extrinsic rewards pertain to those reinforcements that are given by another person, such as a health care organization giving bonuses to teams of workers when quality and patient satisfaction are demonstrated to be exceptional.

Who Motivates Employees? While rewards may serve as incentives and those who bestow rewards may seek to use them as motivators, the real motivation to act comes from within the individual. Managers do exert a significant amount of influence over employees, but they do not have the power to force a person to act. They

can work to provide various types of incentives in an effort to influence an employee in any number of ways, such as by changing job descriptions, rearranging work schedules, improving working conditions, reconfiguring teams, and a host of other activities. While these may have an impact on an employee’s level of motivation and willingness to act, when all is said and done, it is the employee’s decision to take action or not. In discussing management and motivation, it is important to continually remember the roles of both managers and employees in the process of motivation.

Is Everybody Motivated? As managers, we often assume that employees are motivated or will respond to inducements from managers. While this is perhaps a logical and rational approach from the manager’s perspective, it is critical to understand this is not always the case. The majority of employees do, in fact, want to do a good job and are motivated by any number of factors. Others, however, may not share that same drive or high level of motivation. Those people may merely be putting in time and may be more motivated by other things, such as family, school, hobbies, or other interests. Keeping this in mind is useful in helping health care managers understand employee behaviors that seem to be counterproductive.

HISTORY OF MOTIVATION There is a plethora of research on the topic of motivation, particularly motivation in the workplace. The concepts of management and motivation often coincide when an organization is striving toward a goal. In order to fully understand the concept of motivation, a manager must understand its significance. Motivation is not a new concept. Approximately 2,500 years ago, Athens rose to unparalleled political and economic power and allowed the citizenry to become active in civic governance. Through an engaged and participative citizenry, the Athenian people helped produce the first great Greek empire, which allowed for better commerce and trade; increased wealth of its citizens; and a culture that spawned historically known philosophers, artists, and academics. To achieve this type of success, organizations must recognize the full power of their employees and motivate

them to reach for the common good of the organization (Manville & Ober, 2003).

Fast forward to more recent times, and we can continue to identify the historical significance of motivation. In 1890, empirical psychologist William James identified aspects of motivation and its relationship with intrinsically motivated behavior. In 1943, psychologist Clark Hull published his now famous drive theory. Hull believed all behaviors to be connected to four primary drives: hunger, thirst, sex, and the avoidance of pain; according to this view, all drives provide the energy for behavior (Deci & Ryan, 1985). Research into human behavior started being recognized in the workplace in the 1940s. Researchers recognized people were motivated by several types of varying needs, not only in the workplace but also in their personal lives (Sperry, 2003). Workplace motivational theories continue to evolve, as is shown in the discussion concerning theories of motivation.

THEORIES OF MOTIVATION Psychologists have studied human motivation extensively and have derived a variety of theories about what motivates people. This section briefly highlights the motivational theories that are widely known in the field of management. These include theories that focus on motivation being a function of (1) employee needs of various types, (2) extrinsic factors, and (3) intrinsic factors. Each set of theories follows.

Needs-Based Theories of Motivation

Maslow’s Hierarchy of Needs Maslow (1954) postulated a hierarchy of needs that progresses from the lowest, subsistence-level needs to the highest level of self-awareness and actualization. Once each level has been met, the theory is that an individual will be motivated by and strive to progress to satisfy the next higher level of need. The five levels in Maslow’s hierarchy are:

Physiological needs—including food, water, sexual drive, and other

subsistence-related needs; Safety needs—including shelter, a safe home environment, employment, a healthy and safe work environment, access to health care, money, and other basic necessities;

Belonging needs—including the desire for social contact and interaction, friendship, affection, and various types of support;

Esteem needs—including status, recognition, and positive regard; and Self-actualization needs—including the desire for achievement, personal growth and development, and autonomy.

The movement from one level to the next was termed satisfaction progression by Maslow, and it was assumed that over time individuals were motivated to continually progress upward through these levels. While useful from a theoretical perspective, most individuals do not view their needs in this way, making this approach to motivation a bit unrealistic.

Alderfer’s ERG Theory The three components identified by Alderfer (1972) in his ERG theory drew upon Maslow’s theory, but also suggested individuals were motivated to move forward and backward through the levels in terms of motivators. He reduced Maslow’s levels from five to the following three:

Existence—which related to Maslow’s first two needs, thus combining the physiological and safety needs into one level;

Relatedness—which addressed the belonging needs; and Growth—which pertained to the last two needs, thereby combining esteem and self-actualization.

Alderfer also added his frustration–regression principle, which postulated that individuals would move in and out of the various levels, depending upon the extent to which their needs were being met. This approach is deemed by students of management to be more logical and similar to many individuals’ worldviews.

Herzberg’s Two-Factor Theory

Herzberg (2003) further modified Maslow’s needs theory and consolidated it down to two areas of needs that motivated employees. These were termed:

Hygienes—lower-level motivators which included, for example, “company policy and administration, supervision, interpersonal relationships, working conditions, salary, status, and security” (p. 5).

Motivators—higher-level factors which focused on aspects of work, such as “achievement, recognition for achievement, the work itself, responsibility, and growth or advancement” (p. 5).

Herzberg’s is an easily understood approach that suggests that individuals have desires beyond the hygienes and that motivators are very important to them.

McClelland’s Acquired Needs Theory The idea here is that needs are acquired throughout life. That is, needs are not innate but are learned or developed as a result of one’s life experiences (McClelland, 1985). This theory focuses on three types of needs:

Need for achievement—which emphasizes the desires for success, for mastering tasks, and for attaining goals;

Need for affiliation—which focuses on the desire for relationships and associations with others; and

Need for power—which relates to the desires for responsibility for, control of, and authority over others.

All four of these theories approach needs from a somewhat different perspective and are helpful in understanding employee motivation on the basis of needs. However, other theories of motivation also have been posited and require consideration.

Extrinsic Factor Theories of Motivation Another approach to understanding motivation focuses on external factors and their role in understanding employee motivation. The best known of these follow.

Reinforcement Theory B. F. Skinner (1953) studied human behavior and proposed that individuals are motivated when their behaviors are reinforced. His theory is comprised of four types of reinforcement. The first two are associated with achieving desirable behaviors, while the last two address undesirable behaviors:

Positive reinforcement—relates to taking action that rewards positive behaviors;

Avoidance learning—occurs when actions are taken to reward behaviors that avoid undesirable or negative behaviors. This is sometimes referred to as negative reinforcement;

Punishment—includes actions designed to reduce undesirable behaviors by creating negative consequences for the individual; and

Extinction—represents the removal of positive rewards for undesirable behaviors. Likewise, if the rewards for desirable behaviors cease, those actions can be impacted as well.

The primary criticism of the reinforcement approach is that it fails to account for employees’ abilities to think critically and reason, both of which are important aspects of human motivation. While reinforcement theory may be applicable in animals, it doesn’t account for the higher level of cognition that occurs in humans.

Intrinsic Factor Theories of Motivation Theories that are based on intrinsic or endogenous factors focus on internal thought processes and perceptions about motivation. Several of these are highlighted:

Adams’ Equity Theory—proposes individuals are motivated when they perceive they are treated equitably in comparison to others within the organization (Adams, 1963);

Vroom’s Expectancy Theory—addresses the expectations of individuals and hypothesizes they are motivated by performance and the expected outcomes of their own behaviors (Vroom, 1964); and

Locke’s Goal-Setting Theory—hypothesizes establishing goals

motivates individuals to take action to achieve those goals (Locke & Latham, 1990).

While each of these theories deals with a particular aspect of motivation, it seems unrealistic to address them in isolation, since these factors often do come into play in and are important to employee motivation at one time or another.

Management Theories of Motivation Other approaches to motivation are driven by aspects of management, such as productivity, human resources, and other considerations. Most notable in this regard are the following:

Scientific Management Theory—Frederick Taylor’s ideas, put into practice by the Gilbreths in the film Cheaper by the Dozen, focused on studying job processes, determining the most efficient means of performing them, and in turn rewarding employees for their productivity and hard work. This theory assumes people are motivated and able to continually work harder and more efficiently and that employee pay should be based on the amount and quality of the work performed. Over time, this approach is limited by the capacity of employees to continue to increase the quantity of work produced without sacrificing the quality.

McGregor’s Theory X and Theory Y—draws upon the work of Herzberg and develops a human resources management approach to motivation. This theory first classifies managers into one of two groups. Theory X managers view employees as unmotivated and disliking work. Under the Theory X approach, the manager’s role is to focus on the hygienes and to control and direct employees; it assumes employees are mainly concerned about safety. In contrast, Theory Y managers focus on Herzberg’s motivators and work to assist employees in achieving these higher levels. In assessing this theory, researchers have found approaching motivation from this either/or perspective is short- sighted.

Ouchi’s Theory Z—is rooted in the idea that employees who are involved in and committed to an organization will be motivated to

increase productivity. Based on the Japanese approach to management and motivation, Theory Z managers provide rewards, such as long- term employment, promotion from within, participatory management, and other techniques to engage and motivate employees (Ouchi, 1981). In fact, Theory Z can be considered an early form of engagement theory.

While all of these theories are helpful in understanding management and motivation from a conceptual perspective, it is important to recognize that most managers draw upon a combination of needs, extrinsic factors, and intrinsic factors in an effort to help motivate employees, to help employees meet their own personal needs and goals, and ultimately to engage employees in and to achieve effectiveness and balance within the organization. Managers typically take into account most of the aspects upon which these theories focus. That is, expectations, goal setting, performance, feedback, equity, satisfaction, commitment, and other characteristics are considered in the process of motivating employees.

A BIT MORE ABOUT INCENTIVES AND REWARDS Throughout this chapter, we have discussed what motivates employees. As the previous discussion indicates, motivation for employees results from a combination of incentives that take the form of extrinsic and intrinsic rewards. These topics warrant a bit more discussion.

Extrinsic Rewards There are a host of external things that managers can provide that may serve as incentives for employees to become more engaged in an organization and increase their productivity. These include tangible rewards, such as: money (pay, bonuses, stock options), benefits (health, dental, vision, paid time off, retirement accounts, etc.), flexible schedules, job responsibilities and duties, promotions, changes in status, supervision of others, praise, feedback and recognition, a good boss, a strong leader, other inspirational people, and a

nurturing organizational culture. As this list demonstrates, extrinsic rewards are all tangible types of

rewards. Intrinsic rewards stand in marked contrast to these.

Intrinsic Rewards Intrinsic rewards are internal to the individual and are in many ways less tangible. In fact, they are highly subjective in that they represent how the individual perceives and feels about work and its value. Five types of intrinsic rewards that have been summarized by Manion (2005) include:

Healthy relationships—in which employees are able to develop a sense of connection with others in the workplace.

Meaningful work—where employees feel they make a difference in people’s lives. This is typically a motivator for people to enter and stay employed in the health care industry. This type of work is viewed as that in which the meaningful tasks outweigh the meaningless ones. This reinforces the mantra Herzberg first espoused in 1968 and revisited in a 2003 issue of the Harvard Business Review, in which he stated: “Forget praise. Forget punishment. Forget cash. You need to make their jobs more interesting” (Herzberg, 2003, p. 87). As documentation and the hassle factor of getting approvals and reimbursement in health care have increased, managers need to be aware that such tasks and hassles detract from the meaningfulness quotient.

Competence—where employees are encouraged to develop skills that enable them to perform at or above standards, preferably the latter.

Choice—where employees are encouraged to participate in the organization in various ways, such as by expressing their views and opinions, sharing in decision making, and finding other ways to facilitate participatory approaches to problem solving, goal setting, and the like.

Progress—where managers find ways to hold employees accountable, facilitate their ability to make headway toward completing their assigned tasks, and celebrate when progress is made toward completing important milestones within a project.

Intrinsic rewards, coupled with extrinsic ones, lead to high personal

satisfaction and serve as motivators for most employees.

WHY MOTIVATION MATTERS Health care organizations face pressure externally and internally. Externally, the health care system must confront challenges such as the aging population, economic downturns, reductions in reimbursements, increases in market competition, increases in the cost of providing care, and health care reform. Internally, our health care system faces pressure stemming from challenges such as shortages of certain types of health care workers, increasing accreditation requirements, increasing regulations, dealing with limited resources, increasing responsibilities connected with providing quality care, and ensuring patient safety. These pressures can lead to employees who feel burned out, frustrated, and overworked. As health care employees are continually being asked to increase their responsibilities with fewer resources, managers must create a work environment in which employees are engaged, happy at their job, inspired, and motivated.

People spend approximately one-third of their lives at work, and managers need to recognize the workplace is one of the most important aspects of a person’s identity. In situations where people are not free to work at their maximum effectiveness and their self-esteem is constantly under attack, stress occurs, morale diminishes, illness prevails, and absenteeism goes up (Scott & Jaffe, 1991; Sherwood, 2013). As noted, motivated employees are fully engaged in their work and contribute at a much higher level than their counterparts who see their work as simply a job. Additional reasons why motivation matters include:

Employees who are motivated feel invested in the organization, are happier, work harder, are more productive, and typically stay longer with an organization (Levoy, 2007, p. 70).

Managers play important roles in the engagement process (O’Boyle & Harter, 2013), particularly with respect to providing recognition (Towers Watson, 2010a, 2010b).

Managers who understand employees’ job-related needs experience a higher level of motivated behavior from their employees (Levoy, 2007,

p. 113). All behavior is needs oriented. Even irrational behavior stems from a motivator of some sort. Once a need is satisfied, its impact as a motivator lessens. This basic foundational understanding of motivation is essential to successful motivation and management of employees (Levoy, 2007, p. 118).

Managers need to draw upon different strategies in order to engage different types of workers, such as Baby Boomers, Millennials, women, etc. (O’Boyle & Harter, 2013).

Disengaged employees, as mentioned, have significant financial impacts on an organization’s bottom line (O’Boyle & Harter, 2013). They can also act as “Debby Downers” who pull other employees down, decrease morale, and increase turnover.

A motivated and engaged workforce experiences better outcomes and provides an organization with a competitive edge to successfully compete and be viewed as a dominant force in the market.

MOTIVATED VS. ENGAGED—ARE THE TERMS THE SAME? Oftentimes when you read about motivation, the term engaged appears within the same context. In order to be motivated, employees must be engaged—and in order to be engaged, they must be motivated. Towers Watson’s definition of employee engagement encompasses three dimensions:

Rational—How well employees understand their roles and responsibilities;

Emotional—How much passion they bring to their work and their organization; and,

Motivational—How willing they are to invest discretionary effort to perform their roles well (Towers Watson, 2010a, p. 1).

This definition demonstrates the linkage between the two concepts and

the importance of focusing on both of these areas by managers and leaders. Why is this important in health care? The impacts can be significant. In

fact, Cornerstone OnDemand reported, “recent research and practical in- the-field experience demonstrates that healthcare organizations can create the most profound improvements in patient care and satisfaction levels simply by improving employee engagement” (2014, p. 3). In particular, such engagement results in:

Better quality; Increased patient safety; Higher patient satisfaction; and Stronger organization financial performance.

In addition, Gallup studies also show that engaged health care “employees are more:

loyal to the organization willing to put forth discretionary effort willing to trust and cooperate with others willing to work through challenges willing to speak out about problems and offer constructive suggestions for improvements” (Kamins, 2015, p. 1).

The health policy changes to move reimbursement to a “value-based purchasing” system, where payments from Medicare and Medicaid are tied to quality and patient care outcomes, suggest additional focus needs to be paid to those who deliver care to patients, which in turn suggests the need to enhance employee motivation and engagement (Sherwood, 2013). While several recent articles have been critical of the benefits and costs of employee engagement, the relationship to organizational outcomes and improvement efforts, and the lack of a uniform definition of the concept, Leeds and Nierle (2014) conclude continued efforts to study the concept and to utilize employee engagement strategies have been deemed effective.

This is also supported by other recent studies that suggest disengaged employees bring morale down and impact the organization’s bottom line. According to Gallup only 30% of U.S. full-time employees were highly

engaged in their work; they estimated the cost of this at between $450 billion and $550 billion in lost productivity alone as a result of the 70% who are disengaged employees (O’Boyle & Harter, 2013). Towers Watson’s (2014) Global Workforce Study found a slightly higher percentage (40%) of workers being highly engaged. While the percentage of the hospital workforce is even a bit higher, it is still estimated by Towers Watson to be only 44% (Sherwood, 2013). This suggests leaders and managers need to increase their attention to engagement and motivation of their workforces. Sherwood (2013) states, “when employees believe their organization truly values quality care – and also get the support they need on the job – their patients are more satisfied, they take less sick time and have fewer on-the-job accidents, and health outcomes are better” (p. 5). This, in turn, impacts the organization’s bottom line.

MEASURING ENGAGEMENT The issues of accurately measuring engagement have become front and center for employers. Recent backlash has taken different forms, including concerns with companies’ abilities to define “fuzzy” concepts (like engagement), to separate the concept from other ideas (such as job satisfaction and commitment), to measure accurately, and/or to link engagement to performance, and has suggested that change is needed (Bersin, 2014a; Brown & Reilly, 2013; Ott, 2011; Saks & Gruman, 2014; Shuck, Ghosh, Zigarmi, & Nimon, 2012). While some have said to just not bother to worry about engagement (Keegan, 2014), others see opportunity in the world of people analytics. According to Fuller (2014b) “People analytics is the use of people-related data to optimize business outcomes (and solve business problems) at the individual, team or organizational levels” (p. 2). Several authors, including Bersin (2014b, 2015), Fuller (2014a), Housman (2015), and Mims (2015), suggest the future holds great promise for demonstrating the use of “big data” and analytics to improve measurement, data collection, and prediction in the human resources area. That is, an evidence-based approach will be used to assess organizational, team, and individual performance in an effort to better understand the relationships between motivation and engagement with rewards, as well as to address all types of business problems such as employee retention, turnover,

fraud, customer satisfaction, absenteeism, patient safety, etc. Employee engagement will be an important area of investigation in the people analytics discussion.

MISCONCEPTIONS ABOUT MOTIVATION AND EMPLOYEE SATISFACTION Managers tend to have many misconceptions about motivation. As health care managers, it is important to assess and understand such misconceptions in an effort to become more effective managers and to not perpetuate myths about motivation. For example, research indicates managers typically make incorrect assumptions about what motivates their employees. Morse (2003) states “managers are not as good at judging employee motivation as they think they are. In fact, people from all walks of life seem to consistently misunderstand what drives employee motivation” (p. 18). The following is an enumeration of many of these misconceptions.

Although I’m not motivated by extrinsic rewards, others are. This idea is discussed by Morse (2003) in his review of Chip Heath’s study of intrinsic and extrinsic rewards. The conclusion is an “extrinsic incentive bias” exists and is, in fact, widespread among managers and employees. That is, individuals assume others are driven more by extrinsic rewards than intrinsic ones. Some studies have shown this to be a false assumption. Recent research suggests, however, employee views about extrinsic rewards do differ across generations, with Baby Boomers ranking extrinsic rewards less highly than Gen Xers and Millennials (Schullery, 2013).

All motivation is intrinsic. Managers need to remember that typically a combination of factors motivates employees, not just one type of extrinsic or intrinsic reward (Manion, 2005).

Some people just are not motivated. Everyone is motivated by something; the problem for managers is that “that something” may not be directed toward the job. This creates challenges for managers who must try to redirect the employees’ energies toward job-related behaviors (Manion, 2005).

People are motivated by money. Compensation motivates only to a point; that is, when compensation isn’t high enough or is considered to be inequitable, it’s a de-motivator. In contrast, when it is too high, it also seems to be a de-motivator, what Atchison (2003) calls the “golden handcuffs,” and results in individual performance being tempered to protect the higher compensation level. Santamour states, “Eighty-nine percent of managers believe that for their employees it is all about the money, but there is no research to support that” (2009b, p. 10). Generally, employees tend to rank pay as less important than other motivators. This is supported by the 1999 Hay Group study, in which 500,000 employees ranked fair pay and benefits as the least important of 10 motivating factors that keep them committed to staying with their companies. Chamorro-Premuzic (2013) also reviewed numerous research studies that linked pay and motivation and concluded “if we want an engaged workforce, money is clearly not the answer ….. money does not buy engagement” (p. 2). The bottom line from Atchison’s (2003) perspective is that “as soon as money is predictable, it is an entitlement, not a motivator” (p. 21).

Motivation is manipulation. Manipulation carries negative implications; in contrast, motivation is positive and benefits both management and the employee (Manion, 2005).

One-size-fits-all reward and recognition programs motivate staff. People, being people, are different, act in different ways, and are motivated by different things. Tailoring rewards and recognition is viewed as a way to focus on and understand the individual and his/her unique qualities (Atchison, 2003).

Motivational people are born, not made. Studies show that people aren’t born to motivate. In fact, Manion states, “anyone can become an effective motivator. It simply takes an understanding of the theories and basic principles” (Manion, 2005, p. 284), as well as the desire to develop these skills.

There is one kind of employee satisfaction. Atchison (2003) discusses the pros and cons of “egocentric and other-centered satisfaction” and suggests that in the short run, employees respond to specific rewards that they receive personally, but in the longer run, they respond to quality performance of the team and the organization. Thus, they

migrate from being self-centered to being other-centered in terms of job satisfaction—from a “me” to a “we” mentality.

Motivation and engagement at work only relates to what happens at work. Several authors have suggested employers need to take a more holistic approach to understand their employees (Bersin 2014a; Kilatalahti & Vittala, 2014; LaMotte, 2015). Doing this requires taking a broader view, asking questions about, and developing an understanding of employees’ lives inside and outside the work environment.

MOTIVATIONAL AND ENGAGEMENT STRATEGIES The literature provides an array of strategies for managers to use in seeking to help motivate and engage individuals. Some of these seem very obvious, while others represent the “tried-and-true” approaches to management. Still others represent innovations. No matter, they are worth enumerating here.

Expect the best. People live up to the expectations they and others have of them. As stated best by Henry Ford: “Whether you think you can or you think you can’t, you’re right!” (Manion, 2005).

Communicate and address the big picture. Employees are more engaged when their bosses communicate regularly, keep them apprised of what is happening, and what the collective purpose is of the organization. They also need to understand how what they are tasked with fits into the larger picture of the organization (Baldoni, 2008, 2013), as well as society as a whole (Kanter, 2013). The latter is particularly true in health care, whereas Herzer and Pronovost (2013) suggest “inspiring a collective purpose and vision” is an important motivator for physicians. This is also the case for other health care professions in both direct care and non-direct care settings.

Reward the desired behavior. Make sure that rewards are not given for undesirable behaviors and be sure to use many different types of rewards to achieve the desired outcomes (Manion, 2005). Do something special to recognize desired behavior; examples suggested by Studer (2003, 2014) include sending a written thank you note to an employee’s

home or using a “WOW card.” The latter is a simple card that can be filled out and sent to an employee, explaining that “Today you ‘WOWed’ me when you _____________________.” Fill in the blank with an explanation of what that special something was.

Create a “FUN (Focused, Unpredictable, and Novel) approach.” Atchison (2003, p. 21) suggests using money for a variety of creative employee rewards, such as giving $50 gift certificates to a shopping center in recognition of employees’ exceeding expected patient outcomes.

Celebration. Baldoni (2008) suggests using celebration to communicate the importance of completed projects or progress made.

Reward employees in ways that enhance performance and motivate them. Don’t waste money on traditional types of recognition. Though these are viewed as being nice, they don’t motivate (Atchison, 2003). Money is better spent on true rewards for specific types of performance and outcomes.

Tailor rewards. As mentioned earlier, Atchison (2003) steers managers away from standard types of rewards, such as giving the obligatory Thanksgiving turkey—unless the employees look forward to those turkeys. Instead, he recommends finding more creative ways to spend the organization’s money and reward employees.

Focus on revitalizing employees. Research shows that, when employees are working on overloaded circuits, motivation is diminished and productivity declines. This is particularly true in health care organizations. Hallowell (2005) suggests managers can help to motivate employees by encouraging them to eat right, exercise regularly, take “real” vacations, get organized, and slow down.

Find creative ways to obtain information and recognize excellence in employees. Studer (2003) suggests asking for feedback on service excellence when doing patient satisfaction surveys and hospital discharge phone calls. With data and information from these sources, recognition can be provided to individual employees, thereby motivating them to continue providing excellent customer service. This also communicates to the entire organization the importance of and commitment to a patient- centered and service-oriented culture.

Get subordinates to take responsibility for their own motivation. This can be achieved by managers taking steps to deal with problem employees, to

understand employees’ needs, to determine what motivates their employees, to engage employees in the problem-solving process, and to really work hard at resolving, rather than ignoring, difficult employee problems (Nicholson, 2003).

“Do unto others as you would have done unto you.” It goes without saying that everyone wants to be treated well at work, making it important for managers to respect the employees they work with (Lipman, 2013).

Focus on collaboration instead of competition. Health care is a team sport, where patient care is frequently provided by an array of employees. This is true of physicians collaborating with others to be patient- centered and work to enhance the quality of care (Herzer & Pronovost, 2013).

Play to employees’ strengths, promote high performance, and focus on how they learn. This requires managers to know what their employees’ strengths and weaknesses are, to find out what will be required to get specific employees to perform, and to understand how to capitalize on the ways those employees learn as an alternative method of encouraging and motivating them (Buckingham, 2005).

Give employees “three compliments for every criticism.” Studer states: “I thought I heard that compliments and criticism were supposed to be balanced. But the truth is, if you give a staff member one compliment and one criticism, it equals a negative relationship. If you give a staff member two compliments to one criticism, it will equal a neutral relationship. If you give a staff three compliments to one criticism, it will equal a positive relationship” (2003, p. 232).

Acknowledge the importance of work-life balance and employee well-being. Several studies, particularly those pertaining to younger generations, point out the importance of promoting well-being (Caver, Davenport, & Nyce, 2015; Gallup, 2014). A recent study of health care employees by Shuck and Reio (2014) states “high engagement group employees demonstrated higher psychological well-being and personal accomplishment, whereas low engagement group employees exhibited higher emotional exhaustion and depersonalization” (p. 43). Several other studies focus on balancing life at work with leisure activities (Kultalahti & Viitala, 2014; O’Boyle & Harter, 2013; Zwilling, 2012). As managers, it is important to recognize this for all employees and

respect their needs regarding leisure and other activities outside of work (Lipman, 2013).

MOTIVATING ACROSS GENERATIONS The U.S. has experienced a health professions labor force shortage over the last decade. By the year 2020, a nationwide shortage is projected of approximately 100,000 physicians, one million nurses, and 250,000 public health professionals (Health Resources and Services Administration, n.d.). This shortage, along with the aging Baby Boomer population, means an intense focus is vital in order for health care organizations to successfully function over the next few decades. Total employment is estimated by the U.S. Bureau of Labor Statistics (BLS) to increase by 15.6 million, or 10.8%, during the period of 2012–2022. These projections include a changing labor force, specifically one that is older, more racially and ethnically diverse, as well as more demanding. More than 50% of new jobs are projected to be in professional and service-providing occupations. Of the four fastest growing occupations, three are in the health field, i.e., health care, health care support, personal care services—the fourth being the construction field. These four occupational fields are expected to comprise over 5.3 million new jobs, or one-third of total employment growth, by the year 2022 (BLS, 2009, 2013).

Health care managers need to embrace the challenges, opportunities, and new strategies when managing such a diverse labor force (American Hospital Association, 2010). This will require managers to evaluate their current management styles, especially when considering actively engaging and motivating a labor force across multiple generations. According to the American Hospital Association’s (AHA) 2010 study, Workforce 2015: Strategy Trumps Shortage, social trends over the last several decades have been dominated by the values, preferences, and experiences of the Baby Boomer generation, which includes those born between 1946 and 1964. However, the Baby Boomers are only one of four generations that comprise today’s labor force. A generation is a “group of individuals born and living contemporaneously who have common knowledge and experiences that affect their thoughts, attitudes, values, beliefs and behaviors” (Johnson & Johnson, 2010, p. 6). Members of the four main generations include the

traditionalists, the Baby Boomers, Generation X, and the Millennials (Generation Y). One consideration not previously addressed is that our workforce is experiencing history in the making as it is on the cusp of accommodating the newest generation, Generation Z, making five generations working alongside each other in the workplace. As pointed out by the AHA (2014) and Johnson and Johnson (2010), the intergenerational workforce reflects a continuum, with each generation moving along it and eventually leaving the workforce.

Each generation has unique characteristics and expectations and is motivated in different ways. Literature might vary slightly regarding the nicknames, birth date ranges, and cohort sizes, especially when considering the newest generations entering the workforce. The key points provided in Table 3-1 illustrate an overview of generational differences among workplace characteristics and motivational preferences.

What appeals to one generation more than likely will not appeal to another generation. Motivational techniques, such as rewards and incentives, vary widely across generations. One generation might prefer recognition based on proof of their time-tested work ethic, while another generation might expect instant gratification stemming from what they consider a job well done. Schullery (2013) found “Millennials are significantly more interested in extrinsic rewards than are Boomers, although Millennials are less interested than GenX” and that “each generation is increasingly less likely to value intrinsic rewards as highly as the previous generation” (p. 260). A caveat to this is that these results may change over time.

Different standards of motivation are required for each generation. In order for health care organizations to be successful in the future, the workplace needs to be one of coexistence of all generations, even when their workplace characteristics and motivational preferences are drastically different. Managers play a key role in how the generations will work together and what it takes to engage employees to be motivated workers.

MANAGING ACROSS GENERATIONS Our current workforce is comprised of four predominant generations with the newest (and fifth) generation (Generation Z) just now entering the

workforce in various positions such as part-time, summer, or college-type jobs. This multi-faceted workforce requires awareness from managers about how to manage across generations. A one-size-fits all management theory will not produce desired organizational outcomes. Additionally, encouraging employees to reach their optimal productivity while retaining valued employees during a labor work-force shortage will continue to be at the forefront of all organizational strategic plans.

Each person holds experiences that shape their lives, form their belief system and values, and contribute to their decision-making processes. Referred to as a generational sign-post, each generation has experienced an event(s) or cultural phenomenon specific to one generation. Authors Johnson and Johnson (2010) theorize that these signposts “shape, influence, and drive expectations, actions, and mind-sets about the products we buy, the companies for which we work, and our expectations about life in general” (p. 4). Examples of these include questions like “Where were you the day Kennedy was shot?” or “Where were you when the Challenger blew up?” or “Where were you when the Twin Towers went down?” These signposts are important because they can help guide managers in managing their employees by recognizing how these signposts mold beliefs regarding company loyalty, work ethics, and creating shared values that serve as bonding mechanisms among individuals of a team (Johnson & Johnson, 2010).

Managing the Gap Managing across generations is not as simple as recognizing the workplace characteristics and motivational preferences of each generation. Managers must also be able to manage the gap that comes with different generations working side-by-side. The American Hospital Association (AHA) Committee on Performance Improvement (CPI) report titled, Managing an Intergenerational Workforce: Strategies for Health Care Transformation (2014), discusses generational diversity and its impact that is quickly altering workforce dynamics. In addition to recognizing workplace characteristics and motivational preferences, managers must also acknowledge the different priorities, communication styles, and interaction preferences, all of which influence organizational culture and performance. Tension amongst employees from different generations becomes apparent when working together, and these tensions are a result of different historical experiences and attitudes (AHA, 2014). In a survey by Lee Hecht Harrison, referenced in the AHA CPI report, “more than 60 percent of employers are experiencing tension between employees from different generations. The survey found that more than 70 percent of older employees are dismissive of younger workers’ abilities, and nearly 50 percent of younger employees are dismissive of their older colleagues’ abilities” (AHA, 2014, p. 9). Additionally, a 2013 study by Ernst & Young surveyed 1,215 professionals evenly divided across three generations—Baby Boomers, Generation X, and Generation Y

(Millennials)—to assess perceptions on a variety of topics. Some key findings include:

Many Gen Y members (87%) had moved into management roles during 2008 and 2013, while most of the Gen Xers and Boomers had been in these roles prior to that time.

Boomers were seen as being more cost-effective than Gen Xers and more than twice as cost-effective as members of Gen Y: 78% vs. 59% vs. 34%.

Both Boomers and Gen Yers were viewed as being difficult to work with, while Gen Xers were less so, but these numbers were smaller: 29% vs. 16% vs. 36%.

Of the respondents 73% saw Boomers as hardworking as compared to 69% of Gen Xers, but only 39% of Millennials.

Millennials and Gen Xers were far more tech savvy than Boomers: 85%, 77%, and 27%, respectively.

Not surprisingly, a similar finding showed these same groups as being social media opportunists as compared to Boomers.

While there were differences across the groups, the majority saw all generations as problem solvers and collaborators.

These findings indicate that managers have some significant challenges when trying to get these generations to work well together. Capitalizing on strengths and commonalities of each generational cohort can assist managers in creating a dynamic and engaged workforce. Recommended strategies for organizations to create high-performing teams that are able to evolve alongside the demands of our ever-changing health care system include the following:

Perform an intergenerational evaluation to ascertain the organization’s workforce profile and create a comprehensive plan;

Employ targeted recruitment, segmented retention, and succession planning strategies; and

Develop customized communication strategies designed to foster generational understanding and sensitivity (AHA, 2014).

These recommendations are a starting point, but it takes extensive consideration of timely and appropriate strategies to move beyond the generational gaps and tensions in the workplace. Utilizing the generational differences to work for the common good of the organization is key. Focusing on singular strategies specific to each generation is important, but not always feasible when considering five generations that vary greatly in their characteristics and motivational preferences. Consideration of universal strategies to achieve maximum productivity and increased morale will help organizations thrive when it comes to supporting and communicating with employees. We know with certainty each generation sets similar expectations from their jobs, such as work-life balance, a good salary with benefits, flexible work hours, and interesting work. It is the micro-details of each of these aspects of work that need to be designed differently for each generation in order to be effective and meaningful (Saleh, n.d.). As an example, research shows that Generation Zers have experienced a protected upbringing with extremely high parental involvement and parental mediation on their behalf. As a result, they are not experienced in dealing with conflict as compared to other generations. On the other end, Generation Xers are highly independent and grew up as “latchkey” kids. How would a manager manage these two groups?

Managers must also consider cultural factors inherent to each employee such as where people are born or where they live. Additionally, these generations are also diverse on many other factors, including politics, religion, gender, race, ethnicity, educational level, environment, disability, and socioeconomic status, all of which managers must be cognizant and make efforts to understand as they develop their cultural competence. (See Chapter 14 for more on this topic.)

As mentioned earlier in this chapter, the health care system is moving from a volume-based payment model to a value-based payment model. This movement can be paradoxical to some as it is focused on improving quality of care while lowering costs—two strategies that seemingly are difficult to achieve simultaneously. Bottom line, managers must not only manage across generations, they must also manage within this new health care paradigm. With a goal to utilize generational commonalities and differences for favorable organizational outcomes, our intergenerational workforce just might be able to make this movement work. According to the AHA (2014), a competitive advantage amongst health care leaders involves creating a

culture that supports and fosters intergenerational teams using three intergenerational management strategies:

Create a strong generational foundation; Institute effective generational management practices; and, Develop generational competence.

Competence as a managing factor includes those organizational core competencies that stem from the organization’s mission and vision statements. The AHA (2014) identified a total of 17 must-do strategies and core organizational competencies to help leaders achieve the Triple Aim of health care. Of the 17 items, six were identified to support building a strong organizational intergenerational workforce.

1. Align hospitals, physicians, and other providers across the continuum of care.

2. Instruct and engage employees and physicians to produce leaders. 3. Create and employ patient-centered, integrated care. 4. Initiate accountable governance and leadership. 5. Encourage internal and external collaboration. 6. Engage employees’ full potential.


The Triple Aim is a health care initiative that focuses on enhancing the individual experience of care; improving the health of populations; and minimizing the per capita costs of care for populations.

Berwick, D.M., Nolan, T.W. and Whittington, J. (2008). The triple aim: Care, health, and cost. Health Affairs, 27(3):759–769. Brown, D. & Reilly, P. (2013). Reward and engagement: The new realities. Compensation & Benefits Review, 45(3), 145–157.

Along with the motivational strategies listed earlier in this chapter, in consideration of managing the gap and managing across generations, managers can institute the following universal strategies:

Evaluate before implementing. Before implementing new workplace strategies, review where you are and plan where you want to go.

Obtain regular feedback and demonstrate the ability to act on suggestions.

Encourage communication, understanding, and respect for differences. Tailor your workplace strategies and avoid the temptation to use a one size fits all management model.

Focus on results, rather than process. Understand what it means to have engaged employees and strive for this goal.

Encourage formal mentorship programs within the organization. Learn to recognize when someone may need extra support. Regularly give praise, say thanks, and celebrate when an employee or team gets it right (Saleh, n.d.).

RESEARCH OPPORTUNITIES IN MANAGEMENT AND MOTIVATION Thanks to over a century of psychological investigators’ interest in management, motivation, and organizational behavior, an abundance of research on these topics and applications to health care settings await you. An organization such as the Society for Industrial-Organization Psychology (SIOP), a special interest group of the American Psychological Association (APA), is especially productive in these domains. Likewise, the Academy of Management (AOM) delves into these issues. In addition to SIOP and AOM, here are some other agencies and organizations ripe for your examination:

Agency for Healthcare Research and Quality; American College of Healthcare Executives; Health Occupations Students of America (HOSA); Hospital Research and Educational Trust (HRET); Inter-university Consortium for Political and Social Research (ICPSR);

Johari Window; MindTools; O*Net; Studer Group; SHRM Foundation; and, U.S. Department of Health and Human Services, Health Resources and Services Administration (HRSA).

CONCLUSION Motivation of employees is a tricky business. Managers often do not understand the concepts, principles, and myths about motivation well enough to put them in practice. Greater awareness and better understanding of motivation will result in better management. Managers can improve their success rate by providing extrinsic rewards that will help their employees to be intrinsically motivated to become top performers. As Studer, Hagins, and Cochrane (2014) state “without exception, we find that organizations that consistently improve their performance also have workforces that are passionate, productive, and pro-active in finding ways to better meet patient needs. In a word, they are engaged” (p. S79). Successful managers also are able to recognize the differences when managing, motivating, and engaging across varying generations.


1. Motivation is not a new concept, so why is motivation important? Is it more important for an employee to be motivated or engaged?

2. Compare and contrast needs-based theories of motivation. Which offers the most value to health care managers?

3. Discuss any limitations of the management approaches to motivation.

4. Which types of rewards are more important: intrinsic or extrinsic?

5. Does the importance of different types of rewards change over time as one progresses through one’s career? What are some examples of rewards tailored to different generations?

6. Which myth of motivation is the most important? Are there other myths you can identify?

7. What motivational strategy would you apply with an employee who you think is capable of doing the work but is underperforming?

8. What motivational strategy would you apply with a highly effective employee who you want to keep performing at a very high level?

9. Which generation resonates best with you? In your opinion, which generation do you feel would be the most difficult to manage or motivate? Why?

10. Grace Jones is a four-decade Billing department employee in Happy Hollow Hospital. A recent graduate of Whassamatter U, Lindsey Flohan is a new hire in the Billing department. Grace has been assigned to train Lindsey to do her new job. Using the generational framework provided above, what conflicts can you anticipate between Grace and Lindsey?

Cases in Chapter 18 that are related to management and motivation (or related to this chapter) include:

The Magic Is Gone Set Up for Failure?

Case study guides are available in the online Instructor’s Materials.

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Organizational Behavior and Management Thinking

Sheila K. McGinnis

LEARNING OBJECTIVES By the end of this chapter, the student will be able to:

Characterize organizational behavior and explain how thinking and soft skills relate to organizational behavior;

Critique how three management roles relate to organizational behavior and thinking;

Assess the importance of four key features of thinking; Distinguish between three types of mental structures and how they affect thinking;

Differentiate between four information processing features and how they shape the way we think;

Compare and contrast the differences in the two modes of thinking; Appraise three common distortions in decision making and how they can affect decisions in the workplace;

Analyze four social cognition distortions and how they affect social interactions in the workplace;

Apply techniques to counter negative self-talk and manage emotions; Assess how to develop empathy for others and how to manage social motivation in the workplace; and

Demonstrate how to increase the use of deliberate thinking processes in

decision-making and organization-wide.

INTRODUCTION We all want to understand ourselves and others, especially in the workplace. The well-known Shakespearean quote from Julius Caesar about our faults not lying in the stars reminds us that many thorny issues we face do not originate “out there,” caused by circumstances beyond our control. Instead they can be of our own making—or more specifically—be caused by our own thinking, much of which is beyond our awareness.

When we appreciate how we ourselves think, we will be prepared to understand the behavior of others in organizations. As an aspiring manager, you will be expected to think clearly and keep learning. Clear thinking means knowing why you think what you think, why you believe what you believe, and how you know what you know. Much of what you currently “know” is based on your prior life experiences, which most people seldom examine critically. In today’s world, we all are called upon to think deeply. By examining your own thinking and letting go of past unexamined notions and habitual thought patterns, you can become more aware and deliberate in future thinking. You discover the world anew when you take charge of your own thinking.

Health care managers, like managers in other industries, are responsible for effectively using the informational, financial, physical, and human resources of their organizations to deliver patient services. As you can see from the topics presented in this textbook, the manager’s role requires a wide range of interpersonal skills. Leadership (Chapter 2), motivation (Chapter 3), managing health care professionals (Chapter 11), and teamwork (Chapter 13) are some of the most important interpersonal skills examined at length in other chapters of this text. Organization behavior leverages these “soft skills”—arguably the hardest skills of all to master.

In today’s job market, technical skills alone are not enough. Employers seek job candidates who also have well developed soft skills. Soft skills include both thinking skills (critical thinking, reasoning, problem-solving, decision making, and flexibility) and socio-emotional skills (interpersonal relations, teamwork, communication, empathy, self-awareness, and self-

discipline). Soft skills are organizational behavior skills, and developing them is advantageous for initial hiring and future advancement in management. They can make the difference between being a manager and being a leader.

The purpose of this chapter is to see how managers think, especially the mental processes that short circuit quality thinking. As you read and participate in class discussion, pay attention to how you think. Knowledge of how your brain works gives you the ability to modify your own thinking and find ways to work more effectively with others—developing your organizational behavior skills.

THE FIELD OF ORGANIZATIONAL BEHAVIOR Organizational behavior is a broad area of management that studies how people act in organizations. Managers can use theories and knowledge of organizational behavior to improve management practices for effectively working with and influencing employees to attain organization goals. The field of organizational behavior has evolved from the scientific study of management during the industrial era to administrative theories of the manager’s role, principles of bureaucracy, human relations studies of employees’ needs, and new insights from human cognition and complexity theory. Organizational behavior is an interdisciplinary field that draws on the ideas and research of many disciplines concerned with human behavior and interaction. These include psychology, social psychology, industrial psychology, sociology, communications, anthropology, and, increasingly, neuroscience, which reveals images of our neurological responses to cognitive, emotional, and social stimuli (Becker, Cropanzano, & Sanfey, 2011; Robbins, 2003). In this chapter, we will highlight ideas from cognitive psychology (the study of human thinking) and their application to organizational behavior.

ORGANIZATIONAL BEHAVIOR’S CONTRIBUTION TO MANAGEMENT The most successful organizations make the best use of their employees’

talents and energies (Heil, Bennis, & Stephens, 2000; Huselid, 1995). Firms that effectively manage employees have a competitive advantage in their field. Pfeffer (1998) estimates that organizations can reap a 40% gain by managing people in ways that build commitment, involvement, learning, and —ultimately—organizational competence and performance. In short, as noted previously, the so-called “soft skills” matter.

Because employees drive an organization’s success, how well the manager interacts and works with a variety of individuals is key to the manager’s success. The manager who is skilled in organizational behavior will be able to work effectively with employees and colleagues across the organization, assisting and influencing them to support and achieve organization goals.

KEY TOPICS IN ORGANIZATIONAL BEHAVIOR Organizational behavior is a broad field comprised of many topics. Work behaviors are typically examined at different levels—individual behavior, group behavior, and collective behavior across the organization—with different topics prominent at each level. Studying individual behavior helps managers understand how assumptions, perceptions, and personality influence work behavior, motivation, and other important work outcomes like satisfaction, commitment, and learning. Examining interactions in the group setting provides insight into the challenges of leadership, teamwork, decision making, power, and conflict. Studying collective organization-wide behavior (sometimes referred to as organization theory) helps explain how to organize work, structure authority and power relationships, how to use systems for decision making and control, how to design human resource activities (staffing, training, appraisal, compensation), how organization culture affects behavior, how organizations learn, and how they adapt to changing competitive, economic, social, and political conditions.


Organizational behavior, whether in a health care organization or another type of organization, is concerned with behavior that occurs under the conditions found in an organizational setting. While a specific organization setting may create unique challenges or certain sets of problems, the behaviors of interest are similar to those of individuals, groups, and often organizations in other settings or industries (Weick, 1969). Thus, health care organizational behavior does not create unique management issues so much as certain issues are more prevalent in health care and can occur along with other challenges (Shortell & Kaluzny, 2000).

Many of these challenges directly or indirectly impact what is expected of health care workers and how they behave in health care organizations. Health organizations are staffed with a professional workforce and impose exacting requirements on how work is organized and accomplished. The complex work of health care has a high risk of serious or deadly error, which necessitates extremely reliable systems of practice at all organization levels. Complex technical and medical systems demand sophisticated technical expertise, which requires a highly educated, efficient, and well-coordinated workforce. Professional workers, especially physicians, work with a great deal of autonomy and control over the technical and clinical aspects of care delivery. As a result, health care managers are responsible for facilitating the delivery of complex medical services that must be carefully coordinated by autonomous professionals over whom the manager has little direct authority —all within an industry system that is facing extreme financial and policy challenges.

The work of health care is carried out against the backdrop of many complex demands. Yet every day, the health care manager must orchestrate the collective work of employees and colleagues to achieve organizational goals. Managers with organizational behavior skills can unleash the talents of others to help their organizations thrive in a demanding industry. In just one chapter we cannot examine the many interesting topics in organizational behavior such as personality, conflict, communication, or culture. Instead, this chapter starts at the very beginning, with management thinking—the “inner game” of organizational behavior.

THINKING: THE “INNER GAME” OF ORGANIZATIONAL BEHAVIOR The purpose of thinking is to inform our actions—our choices, decisions, interactions, and behaviors. Organization science explanations of human behavior increasingly draw upon human thinking, especially cognitive psychology and social cognition. In the cognitive framework, all behavior is inextricably tied to thinking, social interactions, and emotions. However, how human thinking affects life in organizations often goes unnoticed because much thinking is unspoken or beyond one’s own awareness—in our “hidden brain” (Vedantam, 2010). We cannot understand behavior—our own and others’—without understanding the thoughts, assumptions, and perceived attributes of a situation that precede behavior and its consequences. Collectively, cognitive psychology and social cognition principles demonstrate the power of thought, showing that how people view a situation has a strong effect on how they respond to and act upon that situation. They remind managers that much of organizational behavior is about each person’s “inner game,” which is often not known by the individuals themselves nor revealed during interpersonal interactions.

Cognition refers to the mental processes involved in thinking, including perceiving and attending to information, processing information, and ordering information to create meaning that is the basis for choosing, acting, learning, and other human activities. Cognitive sciences have taught us that information processing capacities and mental habits shape and govern one’s perceptions, assumptions (what we take for granted), and ultimately one’s behaviors. This focus on thinking highlights the importance of perceptions, assumptions, expectations, individual identity, and judgments. In addition, it calls attention to hidden thinking, biases in information processing, and barriers to creating common meaning during communication. Finally, thinking sets the stage for individual and organizational learning. The human capacity to adapt is rooted in learning new ways of thinking and acting, which depends upon how we perceive the facts of a situation, act upon them, and rewire our brains to retain new ways of doing things. Contrary to the idea that organizations are well-oiled machines that respond perfectly to every management command, studies of thinking teach

managers that humans have a limited capacity to process information and organizations are relational enterprises. We learn humans simplify and take shortcuts, individuals’ actions are largely determined by how they perceive the world, and humans engage in an ongoing construction of their world by using stored information structures to guide perception and interpretation of events and information (Fiske & Taylor, 1991).

Social cognition, a special branch of social psychology, provides insight into how we understand and process social situations. Social cognition “is the study of how people make sense of other people and themselves” (Fiske & Taylor, 2013, p. 1). In the social world of work, our thinking patterns affect how we perceive others and make judgements about them, and socio- emotional intelligence affects our relationships. Experts have identified predictable habits of the mind based on the power of our perceptions and patterns of thinking. Those with particular relevance for managers and organizations include schemas, mental models, mindsets, attention, perceptions, automatic processing, cognitive heuristics and biases, attributions, social biases, and social motivations.

Emotions, our feelings towards people, things, or events, are not separate from thinking. The relationship between emotions and cognitions is complex, and emotions are interwoven into our thinking in countless ways (Kahneman, 2011). Emotions can influence what we notice, perceive, and recall; how we make decisions; and distort our reasoning. Emotions can affect whether we think deliberately or reactively, and our moods can affect how we make judgments (i.e., positive moods foster positive judgments). Under stress, strong emotions can even “hijack” our reasoning brain (Goleman, 1995): the more emotionally charged a situation the harder it is to be rational. In fact, our emotions are a major reason why much of our thinking is non-rational and contribute to biases. So while this chapter only examines emotions in the final section on social thinking, keep in mind that emotions play an implicit role in nearly all aspects of thinking.

The Manager’s Job and Thinking Managers wear many hats at work. Their tasks can be divided into three main kinds of work, comprised of three key roles and ten areas within those roles. First is the informational role, where the manager acts as monitor, disseminator, and spokesperson. Second is the decisional role, where the

manager acts as entrepreneur, disturbance handler, and resource allocator. Third is the interpersonal role where the manager acts as negotiator, leader, liaison, and figurehead (Mintzberg, 1973). A manager’s day-to-day effectiveness in these informational, decisional, and interpersonal roles largely depends on human thinking processes and social interactions. Understanding the ways others think and applying cognition principles, especially to achieve group and collective understanding, is a challenging skill for managers to master.

THE FOUR KEY FEATURES OF THINKING The cognitive sciences examine numerous areas where thinking and how we see our world play a prominent role in organizational life. Daniel Kahneman, winner of the 2002 Nobel prize in economics, is actually a leading psychologist. His work on human cognition and judgment has revolutionized our understanding of thinking. Kahneman laid much of the foundation to identify many distortions (biases and shortcuts) in human reasoning. He also challenged the longstanding social science premise that humans are inherently rational decision makers. As behavioral economist Dan Ariely (2008) says, we humans are “predictably irrational,” i.e., there are patterns in our non-rationality that make it predictable. So while we like to assume thinking is a rational process, in reality, much thinking is non- rational. Non-rational does not mean erratic or illogical thinking, and it is not inherently “bad” thinking. Non-rational thinking simply means much of the time our brains do not engage in active, conscious deliberation. Non- rational thinking is normal, useful, and necessary to help us cope with the large volume of information streaming through our daily lives.

Four key areas of thinking in organizational life are most relevant to the manager’s three roles noted above (Hodgkinson & Healey, 2008). The brain is like a muscle—you need to use it properly to gain strength. You can learn to be your own coach to train your brain the right way. Consider the four factors we review next as different types of muscles. The first two are the small, seemingly insignificant muscles that are often neglected when training. They provide crucial support for the large muscle groups that actually deliver the body’s major physical movement. So you will need to learn to use all four factors, because the first two factors we discuss are like

the small muscles that support the next two factors, which are like performing large physical tasks.

MENTAL REPRESENTATION: THE INFRASTUCTURE OF THINKING We usually see thinking as a way to gain knowledge. Yet our knowledge— especially how we represent what we know and believe—is also the starting point for how we think. Our brains do not store knowledge and beliefs as facts, we store them in memory as simplified mental representations that only approximate the real world. These representations contain concepts (about objects, causal reasoning, our identity, and relationships) that translate into our knowledge and experience (Dweck & London, 2004). We construct these representations to classify and organize what we “know” and to create meaning as we interpret our world. Schemas, mental models, and mindsets are all forms of mental representation that organize our knowledge and experience and underlie our knowledge, beliefs, and assumptions. These mental representations share some similarities. The different terms reflect different ways they have been studied and used in research. Our mental representations serve as stored templates that automate much of our thinking. They are also the source of our preconceptions, beliefs, and assumptions about how we see the world, how the world works, and how we expect others to behave.

Schemas, mental models, and mindsets are networks of associated concepts that become more elaborate (though not necessarily more accurate) when we map new experience and learning onto our existing mental representations. Existing knowledge, attitudes, and beliefs are structures that both guide and filter how we perceive, interpret, and judge a situation, others, and even ourselves. Think of them as preconceptions—useful yet imperfect templates for taking in and integrating what we know and believe. As you already know from your own experience, everyone’s knowledge stuctures are unique—we start at different points of ‘knowing’ and follow our own paths to greater understanding. So a critical workplace challenge is how to reconcile all our different ways of knowing and thinking.

Schemas—Individual and Organizational Schemas are mental representations of one’s general knowledge and expectations about a concept. They contain knowledge of the concept’s attributes, connections among those attributes, and examples of the concept (Fiske & Taylor, 1991). Schemas are cognitive simplifications of what we know and believe. They are the scaffold that directs how we perceive, classify, store, and act upon schema-relevant information. They organize what we know and guide how we use our knowledge. However, because they are simplifications they are incomplete and may be inaccurate.

According to Fiske and Taylor (1991), people develop schemas for many different concepts and situations. Person schemas characterize a certain person’s traits and actions (e.g., Dad will loan me his car if I mow the lawn); role schemas define appropriate behaviors and expectations for a social category (e.g., grandmothers bake cookies, professors should grade fairly); and event schemas dictate one’s expected “scripts” for how certain events should unfold (e.g., taking final exams, interviewing for a job, conducting a performance evaluation). Schemas tell us what to do and expect in many situations without having to think deeply. In health care organizations, members may hold schemas about strategies to attract and retain nurses, the patient’s role in deciding about treatment, or how to work with other health care organizations in the local market.

We know thinking is an individual process, and can also be a collective one. As collectives of individuals, organizations are often viewed as perceiving, thinking, and learning—though collective thinking operates differently than individual thinking (Mohammed, Ferzandi, & Hamilton, 2010). While an organization does not literally think, its capacity to take collective action depends upon the degree to which organization members share a common viewpoint or common way of thinking about a situation. Organizational schemas serve as a form of organizational thinking. For managers, schemas are one way to foster the collective thinking and common understanding needed to mobilize members and coordinate organization-wide action. Interpretative schemas—commonly called “frames” or “framing”—are a way to shape collective understanding. Frames guide our interpretation of information by focusing our attention on certain elements and organizing our understanding of the social world (Goffman, 1974). Frames act as filters by structuring how we see things. Frames make it

easier to handle complex information, yet can restrict our capacity to understand something in a new way.

Shared organizational schemas support member collaboration on organizational goals and initiatives that are consistent with the schemas. Conversely, when members have conflicting schemas, collaboration on organizational goals and initiatives will be hindered. How managers frame or present important ideas and major changes to the organization can influence how the idea or change is interpreted and how well it is accepted. For example, when introducing a patient safety initiative, managers need to legitimatize key elements of the new schema (e.g., the safety initiative, its purpose, how it works, how it changes daily work, etc.) and reduce barriers posed by beliefs of the old schema (e.g., individuals are to blame for medical errors, it is not okay to challenge authority or question clinical experts, the work of independent units is more important than the work of the entire system).

Mental Models Recent efforts to understand individual and group psychology has led to the study of individual and group “mental models” and “mind-sets,” two popular terms that are often used interchangeably. Mental models are “deeply held internal images of how the world works” (Senge, 1990, p. 174). Mind-sets are assumptions about personal abilities and characteristics (Dweck, 1986). While schemas are concerned with how we take in and integrate information, mental models and mindsets are concerned with our “worldview”—how we see the world and act upon it. These beliefs and assumptions shape our attitudes, interpretations, and behaviors (Dweck, 2006).

Scholars call mind-sets “lay” theories or implicit (i.e., unconscious) theories. These implicit theories, thus, are unconscious perceptions about how people behave and how the world works (Plaks, Grant, & Dweck, 2005). Like schemas, these mindsets are the frameworks that guide how we understand and act upon our world. Like schemas, mental models are abstract representations of reality that define what we expect or perceive in a situation, and how we interpret our experience of it. Mental models are initially flexible and become resistant to change over time. People are usually unaware that “implicit” mental models guide their actions, so they also fail to

see when mental models limit their point of view. Managers can change and improve organizations by discovering, sharing, challenging, and changing the mental models and mindsets—both their own and others’.

For example, a new long-term care center manager finds the facility’s occupancy rate is too low, and the staff is convinced the center’s location is undesirable. When the manager does a market analysis, she learns that client decisions are more influenced by the range of services available rather than location alone. The staff’s mental model that location drives client choice of facility was incorrect. When they revised their shared mental model to address the variety of services offered, the center’s occupancy rate improved.

The Power of Our Beliefs Psychologist Carol Dweck (2006) popularized one specific set of mindsets. Her theory of growth mindsets and fixed mindsets demonstrates the power of our fundamental beliefs about our own and others’ abilities and personality traits. People with a growth mindset believe their intelligence and abilities are malleable, that they can be developed through learning, practice, and hard work. On the other hand, people with a fixed mindset believe their intelligence and abilities are fixed traits that cannot be cultivated or increased. The growth mindset person is curious, values learning and striving to overcome challenges. The fixed mindset person fears failing and tries to avoid situations with the potential for failure, which undermines growth and achievement.

Mindset matters. Years of research show that this fundamental belief dramatically affects how hard we work, our drive for challenge, our resilience in the face of setbacks. Our ultimate success in our careers and happiness in life depends more upon the mindset we adopt—and how we apply it—than our natural abilities and intellect (Dweck, 2006).

Mindsets have been studied extensively in many settings, including education, athletics, business, and politics. Studies show developing a growth mindset improves outcomes in math, science, sports training, interpersonal relationships, and intergroup ethnic conflict. A growth mindset can also improve business outcomes from employee hiring, training, performance appraisal, and interpersonal relations, to business innovation, negotiation, and change management (Dweck, 2014).

You may find that sometimes you approach challenges with a fixed mindset. Just as personal traits really can be developed, a fixed mindset can also be changed. First notice your self-talk—that internal coach or critic in your head—and recognize when you are using the self-defeating fixed mindset. Then confront the fixed mindset messages with growth mindset arguments to find your inner potential to stretch and learn.

Just as individuals may see their own personality traits as either changable or fixed, they may also see others’ traits as changable or fixed. Managers’ mindsets towards employees have a major impact on how they manage. Believing others have the potential to grow is critical to success in coaching and performance appraisal. Managers who believe employees’ traits are fixed do not value coaching, and they may not recognize when an employee’s performance changes, for good or bad (Heslin, Latham, & VandeWalle, 2005, 2006). On the other hand, the growth mindset manager is more apt to offer fair appaisals and coaching, thus increasing employee performance and commitment (Heslin & VandeWalle, 2011). The growth mindset manager believes all employees can succeed and helps all employees grow. The fixed mindset manager focuses attention and resouces on those employees believed to have talent, to the detriment of the total workforce.

In short, mental representations are the source of preconceptions and assumptions about how we see the world, how the world works and how we expect others to behave. Understanding schemas and mindsets leads to the important conclusion that a manager’s assumptions and beliefs in the workplace are key determinants of how a manager behaves. Arguably the first step to managerial success begins with awareness of one’s own ways of seeing the world and the ability to critically reassess our own views. Learn to recognize your personal beliefs and experiences and to think critically.

PROCESSING INFORMATION: FUNDAMENTAL THINKING HABITS The second set of factors that affects thinking in organizations is how we actually process information and our thinking habits. The use of two different thinking speeds and the sequence of processing steps contribute to non-rational thinking in several ways. Daniel Kahneman’s best-selling 2011

book, Thinking, Fast and Slow, popularized a well established principle in cognition, dual mode thinking. Human thinking occurs along a continuum of two modes or speeds—one mode is more automatic and one is more deliberate. The automatic system is fast, unconscious, effortless, and uses intuition; it includes both innate and learned skills. However, it is primed to jump to conclusions and to believe things we recall are likely to be true. The deliberate system is slow, conscious, controlled, effortful, and uses reasoning. However, it is “lazy” and often does not challenge automatic thinking patterns. These two modes jointly run our thought processes, directing what we perceive and pay attention to, and how we make decisions (Kahneman, 2011).


Critical thinking requires identifying and testing assumptions from multiple perspectives.

1. Identify the assumptions that frame our thinking and determine our actions;

2. Check out the degree to which these assumptions are accurate and valid;

3. Look at our ideas and decisions (intellectual, organizational, and personal) from several different perspectives; and

4. On the basis of these reflections, take informed actions.

Teaching for critical thinking: Tools and techniques to help students question their assumptions. San Francisco, CA: Jossey-Bass.

Much of our life is negotiated using the automatic, unconscious mode—it works continuously to sense what is happening around and to us, and often functions without conscious thought. The deliberate, conscious mode is reserved for the heavy lifting—understanding complex information or situations, solving problems, making thoughtful decisions. The automatic mode helps us move easily though the day to handle routine actions and choices quickly without consciously thinking—making breakfast, driving to

work, or operating a computer. Automatic mode also includes instinctive reactions: hitting the brakes when a car runs a red light, grabbing the toddler when she crawls towards the fireplace, or halting the watercooler chat when the boss frowns your way. We could not function without the automatic mode to efficiently process information; our brains would be overwhelmed by the sheer volume of information and stimuli encountered daily. However, automatic mode is a form of habitual thinking that is good at making “snap judgments.” Automatic mode can interfere with our ability to be rational, because it can fail to detect something unique in a familiar situation, it often relies on implicit assumptions and our mental representations, reacts to our emotions, and may stereotype others.

The conscious rationality of the deliberate mode is highly valued; we are urged to reason carefully. We need the deliberate mode to apply controlled, focused thinking to a situation or problem such as planning, accomplishing a goal, or making a decision—from getting directions or scheduling a vacation, to taking exams or buying a house. In deliberate mode, our intentions direct our thinking process and we are consciously aware of our thinking (Fiske & Taylor, 2008). However, the deliberate mode is slow, with limited processing capacity, and depends on attention—which is easily distracted by other stimuli. Deliberate processing requires effort and self-control to do its work.

One of the most important elements of automatic and deliberate processing is the interaction between the two modes. We want to believe the deliberate mode is the ultimate authority over how we think. In reality, unconscious automatic processing plays a prominent role in our decisions and reasoning (Kahneman, 2011). Our automatic system keeps tabs on our world so things run smoothly, and the deliberate system steps in to handle challenges and exceptions noticed by the automatic system. Brooks (2011, p. xi) called the conscious mind a “general” directing from afar and the unconscious mind “a million little scouts” reacting immediately and continuously feeding information to the conscious mind.

The net effect of interaction between the two systems is that automatic thinking occurs continuously, setting in motion preconscious forces (beliefs, preconceptions, and biases arising from our mental representation of knowledge). When our deliberate reasoning takes over, it is often unaware of prior automatic processes, so we never realize that our thinking begins with faulty information.

Attention, Perception, Cognitive Evaluation, and Cognitive Consistency—The Processing Steps At its simplest, thinking can be depicted as processing information, much like a computer. Human thinking is really more complicated and iterative, and we don’t simply record information. Keep in mind that we must deliberately process or “do” something with information to understand and retain it. Building on the foundation of mental representation (which informs all stages of thinking), the thinking process begins with attention (i.e., noticing) and perceptual selection. So much information is available in a situation that we cannot absorb it all. Instead, we automatically use attention processes to focus on information and selectively perceive a subset of informational cues. This selective perception is guided by our expectations, beliefs, existing knowledge, or striking cues in the situation itself. In cognitive evaluation, we categorize the new information by grouping it with similar concepts or knowledge based upon common characteristics. This sorting process of classifying and categorizing concepts and objects lies at the core of all thinking. Early on we learn to make automatic, yet meaningful, distinctions that become increasingly elaborate and abstract. The brain asks whether this is new information or is it related to something known or familiar (e.g., tables, horses, zebras, and chairs all have four legs in common, yet represent unique examples of specific categories that we developed over time).

Next we organize new information using the principle of cognitive consistency to compare it to prior knowledge (in the form of the mental representations described previously). Consistency means we integrate new information with existing information by subjectively deciding how well it fits our categories and existing knowledge and beliefs. The brain wants to know how it fits what is known, is it the same or does it add something new. In general, new information that conforms to existing beliefs is more readily integrated (and thus remembered), while information that does not fit our beliefs is harder to integrate and may not be stored in memory (and thus forgotten). Our brains naturally prefer ease of processing and agreement with what we already know. Finally, our behaviors occur as a result of perceiving, evaluating, and checking the consistency of information about

the situation.

Attention, Perception, and Preconceptions in Thinking The old adage “perception is reality” is true. Human understanding and the resulting organizational behavior are largely based upon how a person perceives and thinks about a situation (Elsbach, Barr, & Hargadon, 2005; Fiske & Taylor, 1991). Perceptions matter because how a person makes sense of a situation affects his or her attitudes, attributions, and behaviors. When we react to a situation, we are really reacting to our own unique perceptions of the situation; at the same time others are reacting to their own perceptions of the same situation.

Attention and perception are automatic processes to notice, select, and organize information in order to respond. People vary greatly in what they notice and what draws their focused attention. Their attention processes are filtered by their assumptions, expectations, values, knowledge, goals, past experiences, and other personal differences. As a result, they will only take in part of the information they are presented with and thus subsequently act upon partial information. In addition, the partial information taken in is subject to other mental processes that can create other distortions.

Attention and perception are guided by the stored mental representations or preconceptions discussed earlier. Because they are thinking templates, preconceptions signal the brain what to perceive or expect in a situation. For example, assumptions and beliefs (“my boss won’t like my idea”) or situational cues (“organic chemistry is a difficult course,” or “that teacher is a tough grader”) influence how we perceive, remember, judge, and act in certain situations and events (Bandura, 1977). In short, preconscious, automatic thoughts can focus attention and set perceptual expectations, creating a situation in which “believing is seeing” that again confounds deliberate processing and rational thinking.

In addition to individual expectations, expectations can also arise from social interactions between people. At an extreme, expectations about another’s behavior can create a “self-fulfilling prophecy.” For example, classroom teachers who expect students to perform a certain way may verbally and nonverbally transmit their expectations to students in a way that increases the likelihood that the expected effect will occur. A nurse who believes a dementia patient is aggressive may try to overcontrol the patient

and increase the patient’s agitation and resistance. Similarly, a manager who believes that a certain employee has an “attitude problem” may treat that person in a way that elicits the very behavior that is objectionable.

Scholars have found physician perception has important implications for health care quality and patient health outcomes. Researchers studying patient–physician communication have found perceptions influence a variety of patient–physician interactions and subsequent outcomes (Hall, Epstein, DeCiantis, & McNeil, 1993; Street, Gordon, & Haidet, 2007). For example, liking or disliking a patient may affect the quality of the physician–patient relationship and the patient’s ultimate health outcome. Studies show healthier patients and male patients were liked better (i.e., perceived more positively) by physicians than sicker patients and female patients (Hall, Horgan, Stein, & Roter, 2002). In addition, most patients accurately perceived physicians’ like or dislike for them. Physicians’ positive perceptions of their patients are further associated with important behaviors such as providing and eliciting information, longer visits with patients, and positive support and expectations. These physician behaviors help build trust, respect, and rapport that can improve medical diagnosis, care management, and treatment compliance. As a result, physicians’ positive perceptions of patients are associated with higher patient satisfaction with care and better patient health (Hall et al., 2002).

The bottom line in organizations is that we are working and communicating with others across our mutual yet individual preconceptions, assumptions, and thinking habits. A valuable management skill is the ability to elicit thoughts in a way that organization members can work with them and reduce differences in understanding. Preconceptions, distortions, and shortcuts are inherent to human thinking. Questions, discussion, and debate are the most effective antidote to implicit assumptions and faulty thinking habits (Heil et al., 2000). Instead of assuming that thinking and meaning are clear, effective managers check employees’ mental models and assumptions and elicit their thinking processes to help organization members think critically together. Beware of snap judgments, they may actually signal the need for deliberate thinking processes. As the ideas in this chapter suggest, effective thinking is less about following step-by-step procedures and more about deliberately working through preconceptions, assumptions, and thinking habits to create common meaning.

DECISION MAKING, PROBLEM SOLVING, AND BIASED THINKING HABITS Perhaps the most important work of a manager is to ensure decisions are made and problems are resolved. Decision-making illustrates some of the consequences of non-rational thinking. Experts identify multiple tasks in making decisions and resolving problems. The two main phases are (1) recognizing and understanding the decision situation, and (2) then choosing a course of action. The recognition phase of decision making involves recognizing and identifying the decision or problem and its causes, setting goals, and generating options. Defining the decision need or problem is considered the more important phase because it helps identify goals, underlying causes, barriers, and information needs. It is a learning process, and yet habitual thinking narrows our capacity for new information. The choice phase of decision making involves assessing options and choosing, implementing, and evaluating the chosen solution.

While it seems logical to follow these steps, actual problem solving and decision making in organizations can vary greatly from this ideal process. Decisions and problems pose challenges because managers may have incomplete information or may be unable to process all of the information related to the problem, goals and priorities may be unclear or in dispute, and results of alternatives may be uncertain.

Heuristics and Cognitive Biases Not surprisingly, a third set of cognitive factors can sabotage the decision making and problem solving process, especially when we face ambiguous and complex information inherent in important decisions. Individuals compensate for their limited capacity to effectively process information with unconscious judgment shortcuts that simplify the decision process and create serious biases that distort their judgments (Bazerman, 1998; Tversky & Kahneman, 1974). Our brains simplify the difficult task of judging complex, uncertain, and numeric or probabilistic information by using heuristics— mental or cognitive shortcuts or “rules of thumb.” Heuristics can be useful because they simplify assessing information and making judgements, often

through automatic processing. Heuristic principles can often lead to incorrect conclusions, creating biases or systematic errors in thinking and judgment.


Dr. Pat Croskerry examined an apparently healthy forest ranger experiencing chest pain and failed to recognize coronary artery disease. The ranger appeared so healthy—athletic, fit, and trim without the typical warning signs that precede a heart attack—that Croskerry failed to consider possible heart disease. The next day, the ranger was admitted and successfully treated for acute myocardial infarction. Croskerry realized he had made the cognitive mistake of representiveness error. That is, perceiving that the ranger fit a very healthy stereotype (called a prototype), Croskerry’s thinking was guided by this prototype, and he overlooked the true cause of the ranger’s symptoms. Croskerry went on to research and teach medical students about cognitive error, identifying 30 heuristics (i.e., shortcuts) and biases that can lead to error in emergency medicine (2002).

Groopman, 2007.

The cognitive simplifications provided by judgment heuristics clearly streamline information processing. These shortcuts also make the complex processes of perceiving and judging vulnerable to the influence of prior beliefs, assumptions, and experiences that are readily recalled and guide what we perceive. A perceiver may notice and select only a subset of the information to which he is exposed because he is more apt to notice familiar cues or to arrange cues into interpretations based on his preconceptions and what he has learned from his own prior experiences and the experiences of others. For example, a mother can identify her child’s cry in a noisy room, while a stargazer finds it easier to locate a constellation when she knows the pattern to expect. Similarly, a physician in the U.S. who does not expect to see an exotic condition like hantavirus or Ebola may fail to diagnose these relatively rare conditions.

Studies consistently document more than a dozen common biases, or

systematic errors of perception and judgment, that, used inappropriately, diminish decision quality by limiting the amount and richness of information processing. Let’s look at four important distortions: overconfidence, confirmation, and availability and familiarity heuristics.

Overconfidence bias is the widespread tendency to overestimate the accuracy of our own judgements (Kahneman, 2011), so we act upon opinion or intuition without searching for proven information. Across many decision settings and expertise levels, people are highly confident their conclusions are right when, in reality, they are wrong. Overconfidence occurs because automatic thinking quickly reaches plausible conclusions from available information, ignoring the reality of what is unknown about a complex issue or future state, or one’s actual ability to make an accurate decision. Instead our automatic processes conveniently accept what makes sense and choose a plausible option, rather than engaging in the work of serious reflection and analysis (Kahneman, 2011). The following are a few examples of how people overestimate judgments of their own abilities:

“94% of college professors consider themselves above-average teachers; 90% of entrepreneurs think their new business will be a success; 98% of students who take the SAT say they have average or above- average leadership skills” (Brooks, 2011, p. 218).

Confirmation bias means we unconsciously and selectively notice information that simply confirms our existing beliefs. It is easier to process information that fits our expectations, and the brain tends to avoid internal conflict by thinking recalled information is true (Kahneman, 2011). Noticing and accepting disconfirming information requires extra effort and deliberate reasoning to assess it. For example, during the 2014 Ebola outbreak in Africa, many Americans had a greater fear of contracting Ebola than contracting influenza, yet influenza was the greater threat within the U.S. However, our memory recalls the extensive news coverage of Ebola and our automatic thinking process exaggerates the remote possibility of Ebola exposure in the U.S. The so-called media “echo chamber” effect is related to confirmation bias—people follow media that align with their existing beliefs. In social situations, our initial assessment of someone (“first impressions”) creates expectations that lead us to notice subsequent actions and behaviors that reinforce our initial judgment of that person.

Availability and familiarity heuristics are two heuristics that show how our brains take the easy route to a difficult decision (Kahneman, 2011). The availability heuristic refers to judging the importance of information because it is easy to recall examples. For example, travelers may worry more about an airplane crash than a car crash, because vivid reporting of airplane crashes make them easier to recall, yet travelers are much more likely to be involved in a car accident. The familiarity heuristic refers to judging an unknown quality of something simply because we are familiar with that thing. For example, when asked which one of two cities has the larger population, most people will choose the city with name recognition, even though they don’t know the population of either. When asked to judge the probability of something without knowing its true probability, we simplify by substituting our judgment about a related dimension, such as feelings about the topic, familiarity with it, or our impressions about it. In these two heuristics, our automatic brain quickly forms the impression that recall and familiarity mean we have past experience with the thing, so we trust our intuition to make a judgment call (Kahneman, 2011).


Groopman (2007) examines physician thinking and medical reasoning, summarizing the extensive research on this subject. Experts estimate that 10–15% of all medical diagnoses are wrong and are learning that physician reasoning is a more likely culprit than lack of knowledge or technical error. Groopman explains that “cognitive traps” skew doctors’ clinical reasoning and reinforce the negative effects of biases, heuristics, and intuition.

Managers face a parallel situation when facing a problem and making a decision on how to solve it. The act of medical diagnosis is similar to problem identification in management. Identifying and solving organizational problems is a process much different from clinical diagnosis and treatment. However, organizational problem solving is probably subject to even greater cognitive distortion because management information is more ambiguous and business knowledge is evolving. When solving problems, the skilled manager will beware of

“gut feelings,” question assumptions, search for best evidence and gaps in knowledge, and be open to many ideas and alternatives.

Groopman, 2007.

Decision-making is non-rational; even when we strive to be rational these non-rational habits substantially limit understanding and analysis. The management challenge is that information is naturally lost or distorted in this unconscious, complex process. As a result, the knowledge one acts upon may be incomplete or inaccurate, yet the manager assumes it is complete.

Every day, health care organizations face decisions related to treatment plans for patients, improving patient safety and quality of care, meeting patients’ needs and expectations, determining the best mix of services to offer, and attracting and retaining the best workers. The successful manager is able to handle complex, ambiguous problems that are not clearly defined and for which opinions vary on the nature of the problem and possible solutions. Managers and clinicians use several strategies to increase deliberate processing and reduce the effects of bias, including wide participation in decision-making, evaluating multiple alternatives, decision protocols, evidence-based medicine, bias awareness and training, and use of cognitive aids and decision support systems (Croskerry, 2003). Managers who are aware of biases (including their own) can reduce bias and error through thoughtful reflection, open discussion, and appropriate use of information to significantly improve organizational decisions and actions (Bazerman, 1998).

SOCIAL COGNITION AND SOCIO- EMOTIONAL INTELLIGENCE Humans are social beings who need to be connected to other people. Recent work in cognition, neuroscience, and management underscores the importance of understanding how we think in social situations, because it dramatically affects how we perceive, judge, and influence others. Many of the previously described distortions also arise when we interact with others

(Fiske & Taylor, 2008). In social settings, we still rely on our automatic thinking mode, our perceptions are selectively filtered, and our judgments of others are guided by existing mental representations.

The fourth set of factors affecting thinking—social thinking—includes attributions, several common biases, and social categorization. While emotional factors affect our thinking in many ways, they are especially relevant to social thinking and are discussed in this section.

Types of Attribution To attribute is to make an inference, or to explain what causes something. According to attribution theory, our brains intuitively seek to explain the causes of behavior and outcomes. Attributions are a specific form of social judgment in which the presumed cause of observed behavior is attributed to either a person’s disposition and personality (internal factors), or to the situation (external factors) in which the behavior occurs.

Fundamental attribution error is a cognitive bias in which an observer makes incorrect causal attributions about the presumed cause of another’s behavior. In fundamental attribution error, we erroneously attribute another’s behavior to their internal disposition, rather than external circumstances. When we presume those dispositional factors are under the other’s control, we hold them responsible for the behavior, when the behavior may really be due to situational factors beyond their control.

For instance, if a stranger cuts in line ahead of you at the movies or in traffic, you may conclude that the action is intentional and decide the person is rude, even though it could have occurred because directional signs were not clear to the person who went ahead of you. In health care, physicians who label a patient with a negative stereotype (e.g., smokers, obese, alcoholics, homeless) risk erroneously attributing the patient’s health concerns to risky behavior brought upon themselves (Groopman, 2007). As a result, physicians may distance themselves from the patient and miss important information, resulting in poor patient compliance and low-quality care.

Managers are susceptible to fundamental attribution error when judging employee performance, sometimes blaming an employee for poor performance that may actually be caused by circumstances beyond the

employee’s control. For example, attribution error occurs when a manager decides an employee performing a task poorly is lazy or incompetent, rather than recognizing that the employee needs training, clear incentives, or improved work equipment. To avoid making an erroneous performance attribution the manager must understand how the work setting affects employee performance. We can’t read the minds of others, so a manager should ask an employee how he or she sees the work setting and its effect on job performance before inferring reasons for poor performance.

Types of Biases Our perceptions of others can be biased in multiple ways, including how we relate to them (affinity), belonging to the same social group (in-group), or through prior knowledge of someone (halo). We then make inferences about the qualities or traits they possess and make decisions that favor them instead of using concrete information to support our conclusions. It is well- documented that we often cannot recognize our own biases because they are unconscious (bias blindness), and we are better able to see others’ biases.

Affinity biases are several related biases centered on preferring others because we see them as likeable, like us, or part of our social group. Affinity bias means favoring people we like. For example, an interviewer may spend more time with an applicant who is engaging, or we may gravitate towards outgoing personalities. Similar-to-me bias refers to favoring those we see as being most like ourselves. For example, we favor people or the opinions of others in our same college major or line of work. In-group bias (also called “us vs. them” or “in-group vs. out-group”) means we make a positive judgment about someone when we both belong to the same social group, they are from “our side.” For example, we may favor someone or value their opinion because we are both directors in our organization, went to the same school, or belong to the same race or church. We believe we share a common (and thus “correct”) viewpoint. In contrast to these affinities, we may be less positive towards or discount the opinion of others simply because we don’t share one of these affinities with them.

When we make such assumptions in the workplace, affinity biases can distort thinking. They may lead to poor decisions (e.g., decision participation, job assignments, staffing, performance ratings, etc.) or cause a failure to tap all employees’ talents, thus diminishing organizational

performance. The halo effect occurs when positive or negative information about

others on one dimension colors our judgment about them on a different dimension. For example, we may infer that an outgoing person will be a good leader or that a member of a chess club is good at math, when neither is necessarily true. We could also negatively infer that a quiet person will not be an effective team member, which is not necessarily true. Halo effect is of special concern in appraisals, because the reviewer may automatically rate an employee favorably or unfavorably simply on the basis of performance in just one category, rather than rate each performance dimension independent of other categories. For example, a supervisor rates the administrative staffer excellent in all categories when she is really great with people but neglects to maintain budget accounts.

Bias blind spot occurs when we believe others are more influenced by biases than we are (Pronin, Gilovich, & Ross, 2004). It is very difficult for individuals to correct for their own biases. When we believe our own view is objective, we may dismiss differing views because we think they are biased, not us. Describing this belief in our own objectivity as “I think, therefore it’s true” mindset, researchers found managers who believed they were unbiased were more, rather than less, likely to be influenced by stereotypes in the hiring process (Uhlmann & Cohen, 2007).

Social Categorization and Biases As mentioned earlier, categorization is central to the thinking process; objects are assigned to categories with an associated set of characteristics and expectations. Similarly, social categorization means we group people into social categories. We all automatically categorize people, and then implicitly stereotype, or assume individuals possess the traits of everyone in that category. Examples of some common social categorizations include gender, race, sexual orientation, age, religion, national origin, disability, physical characteristics (height, weight), personality (e.g., introversion, extroversion), accents, social status, etc. The process of cognitive categorization simplifies our ability to organize our social world. The process can also distort our judgments of others, leading to subconscious cognitive stereotypes, prejudicial attitudes, or discriminatory behaviors, which may result in poor organizational performance and even lawsuits.

Recent research makes distinctions among cognitive biases (stereotypes), emotional biases (prejudice), and behavioral biases (discrimination) (Talaska, Fiske, & Chaiken, 2008). Stereotypes are generalized beliefs about expected attributes of individuals who belong to a group. The cognitive error of stereotyping is that we overgeneralize, thinking an entire group has the same characteristics, rather than recognizing individual differences and the real person behind the stereotype. Prejudice is holding certain attitudes (whether positive or negative) toward members of a group. Discrimination is treating members of a group differently (which may also be illegal). Stereotypes, prejudice, and discrimination are manifested in different ways:

Cognitive stereotype example: assuming women are not as strong as men;

Emotional prejudice example: expressing negative attitudes about women employed in construction; and

Discriminatory behavior example: actively discouraging women from employment in construction.

Explicit vs. Implicit Bias Our understanding of social biases today is more sophisticated than when non-discrimination practices were codified in employment law. We now distinguish between explicit and implicit bias (Fiske, 2010). Explicit bias— traditional prejudice—is overt and the actor is consciously aware of stereotyping or discriminating. Implicit bias—today’s ‘hidden bias’—is subtle and unconscious, hidden from the actor’s direct awareness, and seldom noticed in the decision process. Implicit bias has been documented in lab studies and organizational settings (schools, academia, medicine, law enforcement, courts, even politics), in a range of organizational (hiring, interviews, leadership, participation, performance evaluation), and social (policing, housing, and housing pricing) decisions, as well as across many social categories (Staats, 2014). In health care, implicit biases of physicians and other providers can affect treatment outcomes and contribute to health disparities (Sabin, Nosek, Greenwald, & Rivara, 2009).

Managers are increasingly concerned with implicit biases because these biases affect employees in social categories beyond the protected groups traditionally recognized by law. Implicit biases may hinder an organization’s

diversity efforts, leading to exclusion, isolation, reduced teamwork, low morale, and higher turnover (Jost et al., 2009). Training managers and strengthening human resource practices (hiring, promotion, training and development, appraisal, and compensation) can reduce implicit bias. By addressing implicit bias, employers can engage the talents of all workers, thereby improving business decisions and performance, workplace climate, and employee satisfaction and retention (Ernst & Young, 2013).

Empathy and Socio-Emotional Intelligence In the last decade there has been a surge of interest in non-cognitive intelligences—both social intelligence and emotional intelligence. The two overlap and are jointly called “socio-emotional intelligence” here. Socio- emotional intelligence is the ability to sense, understand, and effectively respond to others’ emotions (Zautra, Zautra, Rivers, & Rivers, 2012). Emotional intelligence (EI) is characterized as “the intelligent use of emotions” (Seal, Naumann, Scott, & Royce-Davis, 2011, p. 5). A socio- emotional intelligent person is self-aware, aware of other’s emotions, and can establish meaningful relations with others. Studies find the various forms of socio-emotional intelligence benefit organizational collaboration, problem-solving, creativity, and innovation in organizations.

Perhaps most important of all, working with others is central to management. Socio-emotional intelligence smooths employee interactions; strengthens the manager–employee relationship; and builds a positive, supportive workplace climate. Daniel Goleman, who popularized emotional intelligence (1995), concludes that high perfoming managers are high in emotional intelligence, and that EI is a better predictor of a manager’s performance than IQ (intelligence quotient).

Empathy is a fundamental skill identified by studies of socio-emotional intelligence that fosters reciprocity and connection in relationships. Empathy is being sensitive to the emotional state of others. Empathy takes three progressively more evolved forms.

Emotional empathy is sharing another’s feelings (emotional “contagion”),

Cognitive empathy is knowing and understanding another’s perspective, and

Empathic perspective-taking is cognitive understanding plus shared emotions, which supports taking appropriate action in response to those emotions (de Waal, 2008).

The importance of empathy in health care and other organizations has prompted major efforts to teach and develop empathy in clinicians, managers, and employees.

RESEARCH OPPORTUNITIES IN ORGANIZATIONAL BEHAVIOR AND MANAGEMENT THINKING Thanks to decades of psychological investigators’ interest in organizational behavior, as noted in Chapter 3, an abundance of reseach on these topics and applications to health care settings await you. An organization such as the Society for Industrial-Organization Psychology (SIOP), a special interest group of the American Psychological Association (APA), is an especially productive organization in these domains. Likewise, the Academy of Management (AOM) delves into these issues. In addition to SIOP and AOM, here are some other agencies and organizations ripe for your examination:

Agency for Healthcare Research and Quality; Center for Creative Leadership; Center for Evidence-Based Management; Consortium for Research on Emotional Intelligence in Organizations; Hospital Research and Educational Trust (HRET); Inter-university Consortium for Political and Social Research (ICPSR); The Robert Wood Johnson Foundation; and U.S. Department of Health and Human Services Health Resources and Services Administration (HRSA).

CONCLUSION Thinking is a complex and non-rational process subject to powerful unconscious forces. The four central features of cognition—mental representation, information perception and processing, decision-making, and social cognition and emotions—each play a unique role in thinking and each also has characteristic habits that can distort thinking and lead to error or bias. Knowledge of our hidden brain can’t handle every situation encountered in an organization. However, these ideas show that human and organizational behavior is best understood as driven by people’s perceptions of their individual world. What one believes about a person or a situation, even if incomplete or inaccurate, will determine how one responds to that person or situation. The adage that “perception is reality” is true in organization behavior, so knowledge of cognitive principles helps the manager work with perceived realities. The manager who is blind to assumptions and perceptions—both her own and others’—is working from an incomplete and inaccurate knowledge base.

The implication for managers is that fundamental organizational activities depend less on following a certain procedure and more on the manager’s efforts to bring employees together in defining a shared understanding that supports a focus on collective action. A critical management task is to remedy the limits of human cognition and organizational thinking to create common understanding among organization members. This is largely accomplished by sharing mental models and understandings with others through questioning, dialogue, and discussion. The process of sharing assumptions and perceived realities makes them available to others, encourages individuals to refashion their own mental constructs, and promotes elaboration of common mental frameworks. In short, the thinking manager who can work with perceptions and mental models contributes to creating a learning organization that generates common meaning and useful knowledge.


1. Review the manager’s three types of roles. Give examples you recall

from work, school, or other settings of leaders who were especially effective or ineffective in one of the roles. What was the situation, what did the person do, and what effect did it have on others? Which were instrumental in his or her effectiveness?

2. Describe an incident from a past job where you would like to better understand how the organizational setting influenced employee behavior. What was the situation, and what happened? If you had been the manager in that situation, what would you have needed to understand to handle that situation?

3. Which of the four features of cognition—mental representation, processing speed and habits, decision-making and problem-solving, or socio-emotional intelligence—do you consider most important and why? Which one would you like to further develop?

4. Think of a recent situation in which you participated where you think it would have been helpful to surface underlying assumptions. Describe the situation, who was involved, their roles, what they were trying to accomplish, and what actually happened. What did you observe that leads you to believe assumptions played a role in this situation? What could you have done differently to change the situation? What will you do or say differently in similar situations in the future?

5. Compare automatic and deliberate thinking processes. Give examples of when it would be better to use automatic processing and when it would be better to use deliberate processing.

6. Have you heard the phrase “A solution in search of a problem?” The text asserts that the first phase of decision-making and problem-solving —specifying the correct decision to be made or problem to be solved— is the more important phase. Recall problems or decisions you have observed where the nature of the problem and appropriate solutions were not clear at the outset (i.e., an “ill-structured problem”). Discuss how well the problem was found and defined (including learning about factors contributing to the problem and agreeing upon goals) and how well the solution worked. To what extent do you think the problem definition process affected the adequacy of the solution chosen? In

retrospect do you see how the quality of thinking affected the decision identification process?

7. Medical error is a serious and controversial problem for health care. Dr. Lucian Leape, a leading researcher on medical error, concludes “Errors result from faulty systems not from faulty people” (2000, p. 97). Discuss how Leape’s view fits with attribution theory, and the implications for health care managers. What does the literature say about what managers believe about the causes of medical error? What messages do organizational practices send employees about the causes of medical error?

8. Implicit bias is unconscious bias, which makes it difficult to recognize and change. What can an individual employee do to reduce bias and discrimination in the workplace?

9. Why does empathy matter in the workplace, and how would it benefit the organization and its members?

10. How are emotions handled where you have worked? How does understanding your own emotions help you at work? Why is it important to understand someone else’s emotions at work?

Cases in Chapter 18 that are related to organizational behavior and management thinking (or related to this chapter) include:

How Do We Handle a Girl Like Maria? The Condescending Dental Hygenist Giving Feedback—Empathy or Attributions? Socio-Emotional Intelligence Exercise: Understanding and Anticipating Major Change

Case study guides are available in the online Instructor’s Materials.


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Strategic Planning Susan Casciani

LEARNING OBJECTIVES By the end of this chapter, the student will be able to:

Critique strategic planning and sketch the strategic planning process; Explain the importance of strategic planning as a dynamic process; Analyze health care market powers and trends, and their potential impact on health services;

Conduct a SWOT analysis; Compare and contrast methods to monitor and control strategy execution; and

Identify the role of the manager in the strategic planning process.

INTRODUCTION Every organization needs to be successful over the long term to survive; a critical factor leading to that success lies in how well an organization can plan for the future and tap market opportunities. Strategic planning is the process of identifying a desired future state for an organization and a means to achieve it. Through an ongoing analysis of the organization’s operating environment, matched against its own internal capabilities, an organization’s leadership is able to identify strategies that will drive the organization from its present condition to that desired future state.

Strategic planning in health care has had a relatively short history. As

recently as the 1970s, strategic planning in the health care industry mainly consisted of planning for new buildings and funding expanding services in response to population growth. With the introduction of the federal Prospective Payment System (PPS) in the 1980s, the field of health care strategic planning received a transforming jolt as organizations scrambled to compete in an increasingly demanding environment. The turbulent managed care era of the 1980s and 1990s only served to further fuel the growth of the field as the cost of health care continually rose faster than the gross domestic product (GDP) and competition among providers intensified. Today, hospitals and other health care organizations have come to embrace strategic planning as a valuable tool to evaluate alternative paths and help them prepare for the future. Health care managers at all levels need to understand the purpose of strategic planning, its benefits and challenges, the key factors for its success, and their vital role in the process.

PURPOSE AND IMPORTANCE OF STRATEGIC PLANNING In any organization’s operating environment there are market forces, both controllable and uncontrollable, that will undoubtedly influence the future success of that organization. Only by identifying these forces and planning for ways to adapt to them can an organization achieve the greatest success. At the extreme, completely ignoring these forces can most certainly lead to organizational death. Although no one can predict the future, one can systematically think about it; the purpose of strategic planning is to identify market forces and how they may affect the organization and to determine an appropriate strategic direction for the organization to take that will counteract those forces and/or tap their potential.

Furthermore, strategic planning serves to focus the organization and also its resource allocation. At any given point in time, there are multiple and often competing initiatives and projects to be undertaken in an organization. By understanding the organization’s operating environment and identifying a strategy to reach a desired future state, resources can be allocated appropriately and effectively.

THE PLANNING PROCESS The strategic planning process consists mainly of two interrelated activities: the development of the strategic plan and execution of the organization’s strategy. The development of the plan is most often done with a multiyear time horizon (3, 5, or 10 years, for example) and updated annually. Strategy execution, on the other hand, is done on a continuous basis and is the critical factor in management of the organization’s strategic intentions, optimally providing continual feedback for the development of any future plans.

Although strategic planning is a dynamic and not a linear process, Figure 5-1 attempts to depict a logical progression of the steps undertaken to develop a strategic plan. As shown in Figure 5-1, the SWOT (Strengths, Weaknesses, Opportunities, Threats) Analysis provides a foundation for strategy development. This analysis serves two important functions: to gather a snapshot of how the organization is currently interacting with the market in comparison to the internal capabilities and intended strategic direction of the organization, and to identify market opportunities and threats that the organization may want to address in future strategic efforts.

FIGURE 5-1 Strategic Planning Process Through analysis of the SWOT, strategy identification can begin. In this

stage, the organization’s leadership team uses the information provided in the SWOT analysis to identify specific strategies that may be worthy of pursuit either to grow the organization or to protect current areas of strength. Once these strategies have been identified, they must be narrowed down to a manageable number through selection and prioritization, and tactical implementation plans must be created. With the strategic plan completed, operating, marketing, and other supporting plans are developed. Control and monitoring of the plan follows and is most effectively done on an ongoing basis throughout the year. We will look at each of these stages of strategic planning in more detail; however, it is important to again keep in mind that strategic planning is not a linear process. The feedback loop depicted in Figure 5-1 shows the critical nature of planning as an ongoing, dynamic, iterative process.

SWOT ANALYSIS The initial planning phase is often referred to as a SWOT analysis, as it aims to identify the internal strengths and weaknesses of an organization, along with external market opportunities and threats. It includes three distinct but intricately related components: the market assessment; the statement of the mission, vision, and values of the organization; and the organizational assessment.

Market Assessment The development of the market assessment may be the most complex and time-consuming section of the strategic plan in that, in this component, virtually all aspects of the market must be examined to determine whether they represent opportunities or threats for the organization and to determine their future implications for the organization. Any of a number of market assessment models can be utilized for this analysis, but one of the most common is the Five Forces Model developed by Harvard University professor Michael Porter (1998). In this model, Porter identifies five market or industry forces that, when combined, determine the attractiveness of competing in a particular market. For health care, this model can be adapted to analyze the interactions between the power of the health care workforce,

the power of consumers and payers, innovations in technology, the regulatory environment, and competitive rivalry, as depicted in Figure 5-2.

Power of the Health Care Workforce The power of the health care workforce can have significant strategic implications for any health care organization, as the workforce is composed of the front line of caregivers and support staff in providing services. In the SWOT analysis, an organization should look at the availability of all subsets of health care providers that are critical to its success. As an example, if obstetrics is a major clinical program of the organization, the organization should closely consider the future anticipated supply and demand of obstetricians (OBs) in its market. With the significant increases in malpractice insurance targeted at obstetricians across the country, many OBs have elected to discontinue delivering babies and focus solely on gynecology, while others have opted to retire early. This has dramatically reduced the supply of obstetricians in many areas of the country and forced some hospitals to hire their affiliated obstetrical staff in an effort to cover their malpractice insurance premiums and keep them practicing. Other hospitals have developed “laborists”—OBs who are hired solely to work in the hospital and deliver babies. These moves are examples of strategies that could be adopted by organizations to either maintain or grow their obstetrical services and are in response to market trends.

FIGURE 5-2 Market Assessment Model Another example of the power of the health care workforce is the

potential ramification of the specific personnel shortages (e.g., nursing). With a shortage of personnel, wage and hiring expenses increase, jeopardizing the ability to offer those specific services. A nursing shortage may affect a hospital’s ability to add beds to meet growing demand for services. A shortage of radiology technicians may affect an organization’s opportunity to offer new state-of-the-art technologies. The influence and availability of these and other health care personnel (and the organization’s dependency on them) must be considered when developing future strategies.

Power of Consumers and Payers At the other end of the spectrum, as the ultimate purchasers of health care, the power of consumers is becoming a more significant market force—and one that has required a dramatic shift in the way the industry offers services. Today’s consumers are demanding more and more from their health care providers on all levels (e.g., physicians, payers, and hospitals), both in terms of the availability of specific service offerings and in the delivery of those services. Historically, health care organizations viewed physicians as the primary customers; without them, the organization could not provide

services. However, in today’s world, the patient is becoming the central focus of customer service. The potential impact of this shift to a patient-centric model of care needs to be considered when developing future strategies.

Consumers can influence the health care market in other ways as well. Different communities have different health care needs—one community may need increased access to primary care channels, while another may need better health education and screenings for chronic conditions. By identifying specific community needs, health care organizations can better target their services and potential growth opportunities. The best way to do this is to understand the consumers in a particular market, and determine in what ways they may need to access health care services.

In concert with consumers is the power of payers. Some markets have multiple payers of various sizes and strengths, while others have one or two major payers that dictate market payments. In either case, a health care organization that relies on these payers must stay abreast of their needs and demands and how each may affect future operations and strategies. A good example of this is a market with one or two powerful payers that prefer a “late adopter” stance for new medical technologies. In other words, they prefer not to pay for new technologies until the technologies have been proven either medically effective or financially efficient or both. This would be a significant threat to an organization that strives for a competitive advantage by being first to market with the adoption of new medical technologies. Alternately, the power of payers may also create opportunities for an organization. An example would be the general preference of payers for less costly outpatient services. Health care organizations that specialize in these types of service offerings (e.g., ambulatory surgery centers, diagnostic/imaging centers) have capitalized on this payer influence in many areas of the country.

Innovations in Technology Another market force to be considered is innovations in technology. These innovations may represent the threat of substitute products, as new technologies often replace standard operations and services. A good example of this was the introduction of Picture Archive Communication Systems (PACS). This filmless imaging system significantly reduced the need for storage space for films and readers and the staff to maintain those areas, and

allowed for remote electronic accessing of files, ultimately requiring a potentially smaller number of physicians necessary to interpret the images. Innovations in technology may also reduce the need for other types of clinical staff, as in the case of some surgical innovations (e.g., minimally invasive surgery, robotic technologies, drug advancements, etc.), and/or they may significantly increase the requirement of financial resources, as in the case of new radiology equipment (e.g., a new CT scanner, new fluoroscopy equipment, MRI, etc.) or new electronic health record systems (EHRs). As these and other new technologies become available, their potential impact on operations and systems needs to be considered in strategy development.

The Regulatory Environment As a market force, the regulatory environment—on all levels, federal, state, and local—needs to be monitored for its effects on strategy development as well. Congress continually enacts influential legislation, such as the 1986 Emergency Medical Treatment and Active Labor Act (EMTALA), the 1996 Health Insurance Portability and Accountability Act (HIPAA), focus on mandatory error reporting and physician self-referrals, and of course the Affordable Care Act (ACA) or “Obamacare.” Legislation at all government levels can have significant and rippling effects on all participants in the health care industry. Furthermore, the Centers for Medicare and Medicaid Services (CMS) often take the lead in changes in health care payment formulas that are frequently followed by payers at local levels. Other far- reaching issues such as liability reform and quality of care measures may be dealt with on local, state, and federal levels as well. All of these actions can influence a particular health care organization’s strategy and need to be monitored and analyzed for their potential impacts.

Competitive Rivalry Competitive rivalry, the last market force to be considered, is probably given the most significant attention in most organizations’ strategy development. Whether an organization operates in a near monopoly or an oligopoly, strategically savvy organizations always track their competitors’ moves and suspected intentions. Although it is unlikely that you will gain access to the actual strategy of your competitors, much information on their

strategic intent can be gleaned from their market activities. Information on their service volumes, market share, and news coverage and press releases should be monitored. Ongoing discussions with your own physicians, staff, and suppliers will likely also yield valuable competitive intelligence. Compiling this information together to see a larger picture often leads to an indication of competitors’ strategies. Once their strategic intent has been identified, market opportunities for and threats against your own organization can be further addressed.

Mission, Vision, Values The information gleaned regarding the interaction of these five forces (health care workforce, consumers and payers, innovations in technology, regulatory environment, and competitive rivalry) in the market is matched against the organization’s Mission, Vision, and Value (MVV) statements. As the driving purpose of the organization, the MVVs are reviewed as part of the strategic planning process to ensure they continue to be aligned with the organization’s future market environment and to help identify future desired strategic directions. The mission of any organization is its enduring statement of purpose. It aims to identify what the organization does, whom it serves, and how it does it. For example, the mission statement for Genesis Healthcare, a skilled nursing and rehabilitation therapy provider, states “We improve the lives we touch…through the delivery of high quality healthcare and everyday compassion” (Genesis, 2014, para. 1). On the other hand, a vision statement strives to identify a specific future state of the organization, usually an inspiring goal for many years down the road. The vision of the American Hospital Association is “of a society of healthy communities, where all individuals reach their highest potential for health” (AHA, 2015, para. 1). The values statement should help define the organization’s culture —what characteristics it wants employees to convey to customers. An example of one such value from Duke Medicine in North Carolina is: “We hold each other accountable to constantly improve a culture that ensures the safety and welfare of all patients, visitors, and staff” (DukeMedicine, 2015, para. 6).

Although the mission statement is generally the most enduring of the three, each of these statements may be altered over time to adapt to the environment. As an example, the increasing influence of consumerism in

health care drove many an organization to revise its vision and value statements to become more customer service focused, which in turn (hopefully) helped to change the organization’s culture. Reaffirming and/or adjusting these three statements in relation to market activity is a critical step in determining the desired future state of the organization.

Organizational Assessment Now that we have an idea of what our market looks like and understand our desired intent from our (reaffirmed) MVV, it’s time to take a hard, honest look at our own organization. In conducting an internal assessment, an organization turns the analytical lens inward to examine the areas in which it has strengths and weaknesses, as well as how it may build or sustain a competitive advantage in the market. Like the market assessment, the organizational assessment has both quantitative as well as qualitative components. The quantitative section of the internal assessment consists mainly of the organizational volume forecast and an assessment of the financial condition. The qualitative section focuses on past strategic performance and leadership’s interpretation of the organization’s core capabilities (or lack thereof). Each of these components is discussed further.

Organizational Volume Forecast The volume forecast is initiated by identifying the organization’s service area—usually a zip code–defined area where 70–80% of its patients are drawn from—and determining the population use rates for applicable service lines (e.g., cardiology, orthopedics, home care visits, CT scans, etc.). These data are usually collected for several historical time periods (e.g., the previous three years or twelve quarters) and can then be forecasted out several more time periods simply by using a mathematical trend formula, resulting in a baseline scenario. Historical market share information is then applied to each service line, therein highlighting some of an organization’s strengths and weaknesses. By holding its market share growth trends constant, an organization can formulate a preliminary idea of how well it would fare if it were to stay its current course (and if its competitors do as well). Examining the forecast from the perspective of market share, contribution margin, and/or medical staff depth will also yield service lines

or areas of strength that may need to be protected and service lines or areas that could be developed further.

Financial Condition As with the volume forecast, several years’ worth of key financial indicators should be analyzed to highlight additional strengths and weaknesses of the organization. These may include indicators such as operating margin, net income, gross and net revenues, bond ratings, fund-raising, key financial ratios, payer mix, pricing, and/or rate-setting arrangements. The organization’s historical performance against budget is also helpful to analyze and should yield further insight into strengths and weaknesses. Any financial forecasts that are available should also be included, as well as any routine or planned capital spending and/or facility improvement plans. It is critical to tie the financial reserves and needs of the organization to the strategic planning process to ensure the resulting strategies can and will be funded appropriately. Tying the financial information to the volume forecast also serves to provide budget targets for the upcoming year(s).

Strategic Performance It is important to remember strategic planning is a dynamic rather than linear process and, as such, there should optimally be no distinct beginning or end. Thus, a review of the organization’s past strategic performance should be included as part of future strategy development. This review can be as simple as an assessment of whether past strategies accomplished their intended goals or as multifaceted as an ad hoc leadership meeting to discuss roadblocks that led to failure or factors that drove success. Either way, this review can and should provide valuable information for future strategy development and implementation.

Organizational Core Capabilities In addition to the more quantitative strengths and weaknesses that can be outlined through the volume forecast and financial condition review, there are subjective strengths and weaknesses that need to be identified for strategy development as well. Identifying these capabilities can be quite

challenging, as planners usually have to rely on surveys of and/or interviews with the leadership of the organization to gather this information. This can be both time-consuming and value laden, but this information will be critical input for the plan’s overall success. With that said, Table 5-1 highlights some common methods of collecting this information and the benefits and limitations of each.

The key to gathering the most value from the leadership input is to challenge leaders (e.g., executives, physicians, managers, etc.) to think within a strategic context, as opposed to the operational mode they are involved in on a day-to-day basis. Merely asking leaders to identify an organization’s weaknesses, for example, can result in responses such as poor parking or a lack of marketing, whereas framing the question to identify challenges to the organization in growing service volumes may better yield answers such as an aging medical staff, lack of capacity, etc. It is important to incorporate these identified strengths and weaknesses into the organizational assessment for further discussion.

STRATEGY IDENTIFICATION AND SELECTION Throughout the development of the SWOT, the building blocks for strategy identification begin to emerge. If the organization is at the start of the development of a multiyear plan, it will usually conduct a rather thorough SWOT analysis. However, if the organization has an identified long-term

strategic direction, the SWOT may selectively analyze only those areas that are relevant to the identified strategic direction. For example, if the organization has resolved to grow defined service lines, the analysis may focus more specifically on those areas of the market. Alternately, if the direction is diversification, the analysis may focus more on areas related to the organization’s current strengths, whether they are related to service line or internal capability. Regardless of the depth of the SWOT, it serves as input for the next step in the process, strategy identification and selection.

Scenario Development Strategy identification usually begins with the baseline scenario developed for the volume forecast. However, at this point, it is important to apply planning assumptions to the scenario and not simply accept the baseline. For example, will the organization plan to hold market share constant for a particular service, or will the organization hope to grow that market? Alternatively, the organization may decide to discontinue a specific service, perhaps due to predicted declining reimbursement or lack of physicians. By applying different planning assumptions, many different scenarios may result.

It is also critical that the information and data gathered in the market assessment, including the competitor assessment, be incorporated into this forecast in the form of further planning assumptions. For example, are there new technologies on the horizon that will affect service volumes? Or is there a dearth of providers that may counteract predicted increasing utilization of a particular service for a period of time? Desired financial targets also need to be incorporated here.

Overlaying these planning assumptions onto the baseline scenario can result in any number of future scenarios by adjusting their relative impacts. This is where strategic planning really becomes an art vs. a science, and it is often difficult to quantitatively determine the extent to which market forces may affect future market volumes. Because of this, the underlying planning assumptions should be debated extensively. To this end, there are several companies that provide assistance and/or models for quantifying market forces; a sampling of these companies is provided as additional resources at the end of this chapter.

From this scenario analysis, several potential strategic directions for the

organization may emerge. The strategic direction is the goal that the organization desires to accomplish within the planning time frame. Generally, as each scenario may have different probabilities for success and may require different levels of resource investment, the specific scenario (and strategic direction) that will ultimately be chosen will often depend on an organization’s tolerance for risk.

Outcomes Once a strategic direction is chosen, specific desired outcomes should be targeted and strategies to accomplish this identified. As an example, if an organization concludes it will differentiate itself through its orthopedic services (strategic direction), the desired outcome may be to lead the market in orthopedic service volumes within two years. To accomplish this, the organization may identify strategies to increase its surgeon base, add rehabilitation services, or develop a center-of-excellence program. A strategy is a carefully designed plan to accomplish the desired outcomes.

Even the largest and most fiscally sound organization cannot successfully implement all the strategies it can conceive of, nor should it try to. A successful strategic plan is focused and, just as importantly, executable; too many strategies may render the plan ineffective simply because there is too much to do. Strategy is all about making choices. A clear and focused strategy will guide decision making, prioritize resource allocation, and keep the organization on its desired course; in choosing which strategies to pursue, an organization is also choosing which strategies not to pursue. At this stage in the planning process, the organization’s leadership must determine its ability to successfully execute the strategies it has identified.

Factors to consider in making this determination are highlighted in Table 5-2 and include, for example, the degree to which the strategy has the ability to help the organization meet its financial targets. Alternatively, does the organization have the financial resources to fund the strategy appropriately in terms of operating and capital expense? Additionally, does the organization have the internal capabilities to successfully execute the strategy —does it have, or can it acquire, the necessary human resources? Is the strategy transformational enough to bring about the desired change? Equally important, is there a champion to take ownership of the strategy’s success? By going through the exercise of matching potential strategies to financial

and other targets, and matching implementation requirements to resource availability, strategy selection is accomplished.

Strategy Tactical Plans The final step in the actual development of the strategic plan is the creation of specific tactical plans for each strategy, which are necessary for translating the plan into action. Tactical plans answer the who, what, when, where, and how questions of strategy implementation. Table 5-3 shows an example of a basic template for a tactical plan that, when completed, will help drive implementation of the strategy.

ROLLOUT AND IMPLEMENTATION With the development of the tactical plans, the strategic plan is complete. The plan is then presented to the board of directors for approval and endorsement and is then rolled out across the organization. Rollout of the plan has two main steps: first, the plan is communicated at all levels of the organization; only by communicating the strategy to all necessary stakeholders can an organization gain the support necessary for successful execution of the strategy. Second, supporting plans such as the financial and budgeting, operating, marketing, capital, and master facilities plans are developed or updated with the intent and strategies developed in the strategic plan. Having all of the organization’s supporting plans tied to the strategic plan is a critical factor in reinforcing its strategic direction. Figure

5-3 depicts some of the supporting plans that may be drawn from the strategic plan.

FIGURE 5-3 Supporting Plans

OUTCOMES MONITORING AND CONTROL Monitoring and control of the strategic plan is most often accomplished through the use of an organizational dashboard, or scorecard. A dashboard is a visual reference used to monitor an organization’s performance against targets over time. Its simplistic design should allow for quick assessment of areas that may need adjustment, similar to an automobile dashboard. Dashboards can depict strategic, operational, and/or financial outcome indicators, depending on the organization’s needs, but care must be taken to highlight a manageable number of indicators, or the dashboard will lose its

functionality. Figure 5-4 depicts an example of a dashboard, although templates abound in the industry.

Depending on the organization’s needs and on the types of indicators management identifies, the dashboard should be monitored regularly (e.g., monthly or quarterly). At a minimum, as soon as an indicator highlights a variance from the desired target, managers must address the variance with tactics that correct or alter the results. Optimally, the dashboard should serve to facilitate ongoing management discussion regarding execution of the strategy. To help best ensure success of the strategic plan, dashboard indicators are aligned with operational plans and their associated identified goals.

FIGURE 5-4 Dashboard

STRATEGY EXECUTION Although the development of the actual strategic plan occurs in a logical progression, other than perhaps the creation of the SWOT, every stage of the plan’s development should really be viewed as part of its execution. Strategy execution is crucial for organizational success and cannot be

overstated in terms of importance; unfortunately, this is often an element of strategic planning that many organizations overlook. With the flurry of activity and intensity that usually surrounds the development of the strategic plan itself, there can be a collective sigh of relief following board approval of the plan, and leadership may be relieved to be able to return to their “real work” and the day-to-day operations. Yet successful organizations know that execution is much more important than the plan.

Barriers Execution, however, isn’t easy, and there are many roadblocks on the path to success. It has been said that “culture eats strategy for lunch.” Even that may be an understatement. If an organization’s stakeholders are not ready for the strategy, it will not be executed by even the most tenacious of leaders. With the heightened influence of consumerism, many health care organizations attempted strategies early on to shift the organization from a physician- centric to a more patient-centric focus, aiming to gain a competitive advantage on this emerging market trend. However, many of these organizations were faced with a strong undercurrent of resistance from an internal culture that was not prepared for this new paradigm, and the strategy failed. This example demonstrates the need for strategy execution to start early in the planning process, enabling the organization to either better prepare itself for implementation of the strategy or table the strategy until the organization is ready to implement it successfully.

Other barriers to successful strategy execution include a lack of focus of the strategy. Often, during the plan development phase, leadership will inevitably develop more strategies than it can successfully execute. If this list is not pared down to a reasonable number, or if the few strategies that are planned do not align appropriately, execution attempts will be futile. Additionally, as mentioned earlier, if the strategies are not appropriately funded and resourced, they cannot be executed, or if they result in competing priorities, the organization will likely be unsuccessful. All of these barriers can be overcome, however, in part by focusing on execution at the earliest stages of strategy development.

Strategy execution is also most successful with a combination of strong leadership and organizational buy-in. Although leadership will need to have flexibility to adjust strategies as market conditions and internal developments

warrant, they must also have the consistency over time to stay the course. Too often, strategies have failed because the organization has fallen to the temptation of bright and shiny new priorities, or they simply fail to resource the strategy over multiple years or time periods. Strategy is not a quick fix or immediate turnaround, and strong leadership is needed to maintain a long- term focus. In addition, organizational buy-in at all levels is critical. As demonstrated earlier in the example regarding culture, strategy cannot be implemented solely in the top layers of an organization. All stakeholders must be aware of and buy in to the desired future state and the path that leads them there in order to ensure the momentum necessary to achieve results. Optimally, a successfully conducted strategic planning process will generate “strategy champions” at all levels of the organization.

Participants All organizations generally involve key leadership in the strategic planning process, but the extent to which other stakeholders are involved varies considerably. There is no one best answer as to who should be involved in the planning process and how, because each organization and culture is different, but one caveat generally holds true: the more stakeholders that are aware of and own the strategy, the greater the chance of success. That said, the strategic planning process should involve representatives from the board of trustees, upper and middle management, the medical staff, general staff, and community leaders as much as possible to the extent appropriate throughout the process. When the plan is completed, it should be communicated to all stakeholders as discussed earlier.

STRATEGIC PLANNING AND EXECUTION: THE ROLE OF THE HEALTH CARE MANAGER A good portion of this chapter has been dedicated to discussion of the content of the strategic plan, and with good reason: health care managers need to understand the types of information and intelligence gathered and analyzed for plan development, and how that information is interpreted and acted upon. However, it has often been said that “the plan is worthless but

planning is priceless.” The value of strategic planning lies not in the plan itself, but in the planning process. Properly conducted, the strategic planning process will challenge management to robustly confront the facts of its market and the organization, to persistently test planning assumptions, and to continually refine the organization’s execution skills.

Health care managers at all levels have the responsibility to continually monitor their environment—both internal and external—and assess and act upon the possible implications of any trends or events that are of note. They have the responsibility to understand their local market on an ongoing basis and to know their organization’s strategic direction and intent. They are responsible for identifying ways to support the organization’s strategy and for ensuring that their subordinates have the knowledge and understanding of the strategy in order to do the same. Strategic planning may be driven by the planning or business development function of an organization, but it is the responsibility of leadership at all levels to help execute and manage the organization’s strategy. Strategic plans may also be developed for departments and other levels within the organization and may be helpful to the manager in achieving the department’s goals as well.

OPPORTUNITIES FOR RESEARCH IN STRATEGIC PLANNING Opportunities for in-depth research on strategic planning in health care exist in a variety of venues, including your own health care organization. Many of the resources used in writing this chapter also include extensive research holdings and data sets, which are available to students and academic researchers to utilize. Herewith is a partial listing of some resources.

American Hospital Association Data and Directories; Balanced Scorecard Institute; Center for Studying Health Systems Change (HSC): Health Care Markets;

Centers for Disease Control and Prevention Community Health Status Indicator;

Centers for Medicare and Medicaid Services Cost Reports; DataBay Resources; Esri; Hospital Consumer Assessment of Healthcare Providers and Systems; National Center for Policy Analysis; Press Ganey; Sg2 Healthcare Intelligence; Society for Healthcare Strategy and Market Development; The Dartmouth Atlas of Healthcare; The Henry J. Kaiser Family Foundation; and U.S. Department of Health and Human Services Health Resources and Services Administration.

As the need for improved strategic planning is demonstrated in every health care organization, you can be sure there will be many more research sources.

CONCLUSION Effective strategic planning is a critical element in the success of today’s health care organizations. Through understanding its competitive and other market environments, an organization can best identify a desired future state and a means to achieve it, but as discussed, the true value of strategic planning lies in the process, and less in the resulting plan (Blatstein, 2012). Strategic planning will most certainly continue to be a valued function in health care organizations in the future, and management at all levels needs to understand the process, and its purpose and their critical role in development and execution of the successful strategy.


1. What are some of the health care market trends you can identify in your market? How might they affect your job as a manager, and how

would you react to/prepare for them?

2. In what ways can you, as a manager, contribute to the management and execution of your organization’s strategy?

3. Discuss how strategic planning is a dynamic, vs. linear, process. Why is this important?

4. Summarize the purpose of the SWOT analysis and how it is best used in the planning process.

5. Describe resources you could use as a manager to stay current in your field/area. Select one research source and describe how you might apply it in strategic planning.

Cases in Chapter 18 that are related to this chapter include:

United Physician Group Last Chance Hospital Are We Culturally Aware or Not? Patients “Like” Social Media To Partner or Not to Partner with a Retail Company Wellness Tourism: An Option for Your Organization?

Case study guides are available in the online Instructor’s Materials.

REFERENCES American Hospital Association (AHA). (2015). American Hospital Association.

Retrieved from Blatstein, I. M. (2012). Strategic planning: Predicting or shaping the future?

Organization Development Journal, 30(2), 31–38. DukeMedicine. (2015). About us. Retrieved from
Genesis HealthCare. (2014). Mission & core values. Retrieved from values

Porter, M. (1998). On competition. Boston, MA: Harvard Business School Press.

Additional Readings Bossidy, L., & Charan, R. (2004). Execution: The discipline of getting things

done. AFP Exchange, 24(1), 26–30. Collins, J. (2001). Good to great: Why some companies make the leap… and others

don’t. New York, NY: Harper Business. Ginter, P., Duncan, W. J., & Swayne, L. (2013). Strategic management of

healthcare organizations (7th ed.). San Francisco, CA: Jossey-Bass. Kaplan, R., & Norton, D. (2005). The balanced scorecard: Measures that

drive performance. Harvard Business Review, 83(7), 172. Lenert, L. (2010). Transforming healthcare through patient empowerment.

Information Knowledge Systems Management, 8(1–4), 159–175. doi:10.3233/IKS-2009-0158

Porter, M. E., & Lee, T. H. (2013). The strategy that will fix health care. Harvard Business Review, 91(10), 50–70.

Senge, P., Kleiner, A., Roberts, C., Ross, R. B., Roth, G., & Smith, B. J. (1994). The fifth discipline fieldbook: Strategies and tools for building a learning organization. New York, NY: Doubleday.

Zuckerman, A. M. (2014). Successful strategic planning for a reformed delivery system. Journal of Healthcare Management, 59(3), 168–172.

Healthcare Marketing Nancy K. Sayre

LEARNING OBJECTIVES By the end of this chapter, the student will be able to:

Assess marketing and the progression of becoming a market-oriented organization;

Critique the critical link between strategic management and health care marketing;

Differentiate among the major components that are part of the marketing management process;

Compare and contrast several important marketing terms, including market segmentation, target markets, marketing mix, and positioning;

Evaluate consumer behavior and the decision making process as it relates to health care offerings and distinguish between marketing approaches;

Analyze how health care managers can integrate ethics and social responsibility into marketing strategy; and

Create marketing tactics such as using social media related to the strategic goals of a health care organization.

INTRODUCTION Today’s practicing managers are being challenged to operate in increasingly complex, interdependent, financially-relevant, and dynamic health care

markets. These same managers must understand essential principles and practices of marketing in order to support the organization’s broader strategic goals and financial objectives, as identified in the previous chapter. The extent of marketing in the health care industry is enormous.

Health care marketing consists of the kinds of activities a firm uses to satisfy customer needs; the approaches managers pursue to create, communicate, and deliver value in selected markets; and the means of capturing value in return (Kotler, Shalowitz, & Stevens, 2008). A customer is the purchaser of products, services, and ideas (Pride & Ferrill, 2009). All marketing activities should focus on the customer. In this sense, the role of health care marketing must be understood as the process of creating long- term, mutually beneficial relationships between the organization and well- defined target customers. However, as discussed later in detail, the purchaser of products, services, or ideas may not necessarily be the decision-maker or ultimate health care consumer. Nonetheless, optimal integrated marketing practice will take into consideration the various roles in the health care purchasing process.

To quote Peter Drucker, seminal management thinker and sound practitioner, “There is only one valid definition of business purpose: to create a customer…. It is the customer who determines what the business is…. Because it is its purpose to create a customer, any business enterprise has two—and only these two—basic functions: marketing and innovation” (1954, p. 37). According to Drucker (1974), “Any organization in which marketing is either absent or incidental is not a business and should never be managed as if it were one” (p. 62). Although marketing is now widely accepted as a critical organizational function, from a historical perspective, when compared to other sectors, health care has lagged in the adoption of a customer orientation. Marketing as an organizational function did not generally exist in health care before the 1980s (Berkowitz, 2011; Kotler et al., 2008; Thomas, 2005). In 1975, the appointment of a vice president of marketing at Evanston Hospital in Evanston, Illinois (now NorthShore University Health System), was one notable exception. With the growing significance of consumer-driven health care, the use of the Internet on all frontiers, and increased demand for personalized services, understanding strategic marketing has become increasingly important.

WHAT IS MARKETING? Many people mistakenly equate marketing with advertising, promotion, or selling. The American Marketing Association (2013) defines marketing as “the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large” (para. 1). What can we learn from this definition? First, it places marketing in the central role of satisfying customer needs. Second, all marketing activities center on building a sustainable value-driven system for customers, stakeholders, and society. These customers can include individual health care consumers, physicians, insurers, or other organizations. Third, health care organizations and managers with a relentless focus on creating long-term customer relationships will generally achieve superior performance over those who only focus on short-term results.

Key Components of the Marketing Concept The previous discussion introduces a managerial philosophy that suggests that all organizations, regardless of industry, must be in the business of satisfying customer needs. According to the marketing concept, an organization must create, communicate, and deliver customer value to selected target markets more effectively than its competition to achieve its goals and objectives (Kotler & Keller, 2009). Customer value is the difference between the benefits a consumer perceives from the purchase of a product, service, or idea and the cost to acquire those benefits. Through a coordinated set of well-defined activities, the marketing manager must do the right things at the right time to orchestrate individual strategies into a wholly integrated system. In general, an organization can be characterized as production oriented, sales oriented, or marketing oriented. Figure 6-1 depicts the sharp contrast between the three types of organizational orientations.


HEALTH CARE Because the health care industry is a relative newcomer to marketing, it is useful to consider a historical perspective. Prior to the past few decades, marketing lacked widespread acceptance in the health care industry. During the 1970s and 1980s in particular, it was difficult for managers to agree on the role and value of marketing for health care organizations. As a result, most hospitals, insurers, managed care organizations, nursing homes, physician and dental practices, and other health care providers had limited use for marketing (Robinson & Cooper, 1980–1981). It is not surprising that books devoted to health care marketing did not appear until the late 1970s and the first formal conference on the topic did not take place until 1977 (Keith, 1985; MacStravic, 1990; Thomas, 2005). As late as 1990, the future of marketing in health care remained unclear. In reviewing the slow progression, MacStravic (1990) presented the following reasons:

FIGURE 6-1 Production, Sales, and Marketing Orientation

Some managers supported marketing, but chose not to disclose its success.

Others were optimistic about marketing’s potential, but were experimenting.

In a number of health care organizations, managers were frustrated, but uncertain as to why marketing was not working.

Other health care administrators and managers viewed marketing as a hoax.

For the most part, organizations were only getting started in marketing.

Despite the differences in approach, early practitioners and scholars were asking precisely the same question we are asking today: “Why is marketing different in health care?” With roughly four decades of research into the nature and scope of marketing as it applies to health care, a number of issues are among the most mentioned. First, in the past (and in some cases today), health care professionals, especially physicians, scorned marketing activities based on the belief that, while suitable in non-health care entities, they were inappropriate and contemptible for health care organizations (Thomas, 2005). With respect to this issue, there was a time when even the American Medical Association declared such activities as unethical. Second, health care professionals raised considerable doubt that health care is a “market” comparable to other industries. A chorus of practitioners and scholars said health care was uniquely different from other industries. Thomas perhaps best describes this view: “Healthcare is different from other industries in terms of characteristics inherent in the industry and the attributes of its buyers and sellers” (2005, p. 47). Even the most casual observer would agree that health consumers typically have not been responsible for paying all the associated costs of medical treatment. Additionally, imperfect knowledge about costs and services constrains consumer decision making. For example, knee replacement surgery could cost anywhere between $17,000 and $61,000 depending upon where you live in the U.S. (Millman, 2015). A third major shortcoming is a weak consumer-driven health care system, where third-party payers (e.g., employers and health insurers) are in charge and neither consumers nor their providers have direct decision-making power (Herzlinger, 2002, 2004). While a totally consumer-driven health care system seems unreasonable, empowering consumers to have a greater voice and more accountability is certainly an attainable goal. A fourth issue is that the marketing function has been further constrained by the absence of value- based competition. As Porter and Teisberg (2006) point out, there is dysfunctional competition in health care where participants drive not to create value for patients but to capture more revenue, shift costs, and restrict

services. They state:

Consumers will only be able to play a bigger role in their care, and make better choices if providers and health plans re-align competition around patient results and disseminate the relevant information and advice. Reform does not require consumers to become medical experts or to manage their own care; it requires providers and health plans to compete on value, which will allow and enable consumers to make better choices and be more responsible. (Porter & Teisberg, 2006, p. 8)

Taken together, these arguments explain some of the reasons why marketing as a management tool has been neglected in the past in the health care industry. Today, however, the extent of marketing in the health care industry is enormous. In 2013 in the U.S., hospitals, clinics, and medical centers spent about $1.8 billion on media, just one aspect of marketing, to attract revenue-generating patients (Rodriguez, 2014). Now, health care managers are making the strategic choice to enable internal collaboration and enterprise-wide knowledge sharing with nurses, physicians, and other clinicians in order to build a customer-driven health care organization. As a result, understanding and applying the essential elements of marketing falls squarely into the health care manager’s domain of responsibility.

THE STRATEGIC MARKETING PROCESS The emergence of a market orientation where sustainable distinctive advantage is based on the ability of an organization to create, communicate, and deliver customer lifetime value more effectively than its competitors is creating profound changes in the practice of health care marketing. The unforgiving global competitive environment is forcing organizations to derive value not just from the production of goods and services, but also from connecting with customers and patients. This may require conducting primary or secondary research. For example, NorthShore University Health System commissioned a market research study to understand consumer motivation. By listening to patients, they learned consumers were interested in talking about their medical conditions—not hospital services. They also learned patients identify with physicians and nurses—not hospitals. With such market insights, the hospital staff was better prepared to integrate more relevant and compelling messages throughout the NorthShore University delivery system (Bendycki, 2010).

In response to many of the same market forces, challenges, and opportunities discussed in Chapter 5, the role of marketing continues to evolve as a critical strategic management function. Uncontrollable forces, i.e., the dramatic pace of technology, continuous changes in U.S. health insurance reimbursement trends, and the prospect of more empowered consumers, have elevated marketing into the strategic realm (Berkowitz, 2011).

FIGURE 6-2 Components of Strategic Marketing Although external uncontrollable (marketplace) and internal controllable

(organizational) complexities present marketing issues, agile health care organizations can achieve extraordinary results by keeping the customer front and center as the focal point in all marketing activities. Figure 6-2 depicts the essential components of strategic marketing.

As shown in Figure 6-2, organizations can formulate an effective marketing strategy within the context of the organization’s strategic plan and in concert with other functional areas (e.g., finance, human resources,

operations, etc.). Once established, the mission, vision, and value statements dictate the broad direction for the organization (as noted in Chapter 5), including strategic marketing planning. Marketing, in this sense, relies on the strategic plan to deliver a sound and reasonable fit between the external environment and internal organizational capabilities. However, from a managerial perspective, it is important to keep in mind that formulating an effective marketing plan is not an easy task. Hence, organizations often assemble cross-functional teams (see Chapter 13 for more on teamwork) to provide input and insights throughout the strategic marketing process, as shown in Figure 6-3.

FIGURE 6-3 Strategic Marketing Process Framework

The development of a marketing strategy can be viewed at three main levels:

1. Establishment of a core strategy: As linked to the organization’s strategic plan, an effective marketing strategy starts with a detailed and creative assessment of both the company’s capabilities—its strengths and weaknesses relative to the competition—and the opportunities and threats posed by the environment. This may require conducting primary or secondary market research.

2. Creation of the company’s competitive positioning: At the next level, target markets are selected, which determines who the competitors are. At the same time, the company’s differential advantage, or competitive edge in serving the customer targets, is defined. Together the identification of targets and the definition of differential advantage constitute the creation of the competitive positioning of the organization and its offerings.

3. Implementation of the strategy: At the implementation level, a marketing-oriented organization must be capable of putting the strategy into practice. Implementation is also concerned with establishing the optimal marketing mix, which will be discussed in detail later in the chapter. Control concerns both the efficiency with which the strategy is put into operation and the ultimate effectiveness of that strategy.

UNDERSTANDING MARKETING MANAGEMENT Health care marketers must continually scan the external environment and conduct a situation assessment to determine the strengths, weaknesses, opportunities, and threats (SWOT Analysis) for a given offering, set of offerings, or an entire portfolio of products and services. As such, health care marketing management is the art and science of selecting target markets and creating, communicating, and delivering value to selected customers in a manner that is both sustainable and differentiated from the competition (Kotler et al., 2008; Kotler & Keller, 2009).

Segmentation, Targeting, and Positioning

A market is a diverse group of organizations or individuals who have disparate needs for products and services. Market segmentation is the process of dividing the total market into groups or segments that have relatively similar needs for products and services. Segmentation enables organizations to design marketing activities that will more precisely match the needs of the selected segments (Kotler et al., 2008). Using this method, segmentation is most useful when buyers in target segments have the budget, authority, need, and time with a propensity to purchase products and services. In other words, attractive health care market segments must also be measureable and actionable (Kotler et al., 2008). Again, it is important to note that since it is nearly impossible for a firm to serve an entire market; marketing managers often divide a diverse heterogeneous market into smaller homogenous segments. Hence, a target market consists of a more narrowly defined group of individuals or organizations with relatively similar wants and needs. Through segmentation, a health care organization seeks to match its offerings and services to the needs of the select segments.

Target Market Segment Selection How do organizations choose some segments to serve and not others? The combination of target market needs and characteristics, the offering portfolio, and the organization’s objectives and resources must be taken into consideration. Berkowitz (2011) distinguishes between the two categories of strategies as follows:

Concentration strategy: This approach targets a single market in order to specialize with the objective of gaining a large share of the market. An orthodontic practice choosing to focus solely on children and adolescents as a niche market is an example. An advantage of this strategy is that specialization enables the health care provider to focus all marketing activities on creating, delivering, and sustaining long- term value to a distinct set of customers. The disadvantage, of course, is that specialization may preclude the organization from entering other attractive markets, such as treating adults in the orthodontic practice.

Multisegment strategy: This approach targets several segments with differentiation among the selected group of customers. For example, a general dental practice might choose to serve both children and adults,

but might also offer orthodontic services. Choosing this strategy extends the reach to a broader share of the total market. However, more organizational resources are required to satisfy the wants and needs of multiple customer segments.

To select target segments wisely, health care marketers need to determine whether the market is identifiable, divisible, and accessible, and has enough revenue potential to justify the allocation of organizational resources. After the organization identifies an appropriate marketing strategy, the next step in selecting a target market is determining which segmentation variables to use. The challenge of precisely meeting the needs of selected segments is addressed by dividing them into broad groups based on key distinguishing variables. As can be seen in Table 6-1, there are five broad groups of variables commonly used to segment health consumer markets.

Table 6-1 depicts the many layers of segmentation at the health care manager’s disposal. Market segmentation based on demographic variables is a case in point. Perhaps the most widely used, demographic segmentation is a relatively easy way to estimate customer demand, i.e., wants and needs. Marketing in long-term care is a good example of the use of demographic segmentation. Consumers ranging from age 55 to 95+ represent a diverse range of people who are at various stages with respect to retirement, but at the same time, all have needs related to quality of life. In the U.S., there are approximately 12 million Americans who belong to the pre-Depression generation (individuals born before 1930); the Depression generation (born between 1930 and 1945) is composed of another estimated 28 million; and the Baby Boomer generation (born between 1946 and 1964 and rapidly approaching the retirement phase of life) accounts for 80 million (Hawkins & Mothersbaugh, 2010). Various types of long-term care facilities (e.g., independent living, assisted living, and skilled nursing) offer different levels of care. These different services suggest a need for long-term care facilities to market themselves in different ways to these demographic segments and to overcome the negative connotations associated with words like “nursing home” (Laurence & Kash, 2010).

Positioning The positioning aspect of the strategic marketing process brings health care marketing closer to tactical implementation. Once an organization determines which portion of the larger market to serve, it then positions itself in the face of competition. Hence, health care organizations and providers must deliberately position the brand image and offerings in the mind of the target market. Kotler et al. (2008) argue that “good brand positioning helps guide marketing strategy by clarifying the brand’s essence,

what goals it helps the consumer achieve…. The result of positioning is the successful creation of a customer-focused value proposition” (p. 235). To position products or services apart from the competition, managers must determine what makes them unique or differentiates them and focus on these features in the marketing strategy.

HEALTH CARE BUYER BEHAVIOR In creating and executing marketing strategy, managers face the central question of how buyers make decisions. There are fundamental differences between organizational and consumer markets. Health care managers need to gain a deep understanding of consumer and business behavior in order to meet customer needs.

Organizational Buying Behavior The business market has been defined as all organizations that acquire goods and services (Kotler et al., 2008). For the purposes of this discussion, both for-profit and non-profit organizations are considered business markets. Business-to-business (B2B) marketing concentrates on organizational buyers. Consider the following examples:

Employers purchase health insurance coverage for employees. Local, state, and national governments hire health policy consultants. Physician practices contract with vendors of electronic health record software.

Medical devices, pharmaceuticals, and medical surgical supplies comprise a large share of virtually every hospital’s total expenditures.

Group purchasing organizations facilitate the complex task of sourcing and contracting products and services for health care systems.

These illustrations are indicative of the degree of complexity associated with organizational purchase decisions as compared with consumer buyers. With respect to health care organizations, there are many people involved in the selling and buying process. Additionally, both buyers and sellers typically

follow formal policies and procedures. Derived demand is the term given to indicate that the demand for goods, services, and ideas in organizations is derived from consumer demand. Health care managers are expected to work with various decision-making units to influence either buying or selling decisions on behalf of the organization.

Consumer Buying Behavior Consumer behavior refers to the totality of consumers’ decisions with respect to the acquisition, consumption, and disposition of goods, services, time, and ideas by humans over time (Hoyer & MacInnis, 2008). The study of consumer behavior seeks to understand how people select, secure, use, and dispose of products, services, experiences, or ideas to satisfy their needs (Hawkins & Mothersbaugh, 2010). To understand consumer behavior, health care managers must draw heavily from the field of psychology. A number of psychological theories have been used to explain the consumer decision-making process. By understanding how people make decisions and the associated internal and external influences on the consumer decision- making process, a health care manager can anticipate consumer needs and develop solutions for those needs.

Internal influences include consumers’ motivation, attitudes, perceptions, learning, memory and retrieval, personality, values, emotions, and behavioral intentions. External influences include consumers’ family and friends, reference groups, situational factors, culture and subculture, and marketing stimuli.

In addition to understanding the many influences, it is helpful to be aware of the consumer decision-making process as depicted in Table 6-2.

It is fair to say health care providers will continue to have a prominent role in the decision-making process in the foreseeable future. At the same time, the growing availability of health care information due to the Internet, mobile computing, other unprecedented technological advancements, consumer empowerment (see Chapter 17 for more on this subject), personalized health care trends, and more sophisticated and socially responsible marketing practices is giving consumers a greater role in their health care decisions.

MARKETING MIX Putting the marketing strategy into practice requires attending to the controllable variables for the organization presented earlier in Figure 6-2. The marketing mix consists of these four controllable P’s: (1) Product— goods, services, or ideas; (2) Price—value placed on the product; (3) Promotion—marketing activities used to communicate to the target market, including public relations, advertising, personal selling, and integrated

marketing campaigns; and (4) Place—the offering delivery route (e.g., a pediatric optometrist office). The promotional component of the marketing mix (e.g., advertising, sales promotion, events, etc.) is too often considered to be marketing (Clarke, 2010). Instead, the effective marketing mix considers all four factors and is closely aligned with the strategy.

MARKETING PLAN The marketing plan is a written document that serves to guide marketing initiatives across the organization. It is typically a part of the broader strategic plan that has a long-term horizon. Once the organization’s strategic plan has been written and adopted, the marketing plan is written containing specific tactical marketing activities, which are more short-term in nature. Promotional tactics such as community engagements, sponsorships, and social media are often included; but television and newspapers still comprise the largest portion of hospital advertising budgets. Digital strategies built around banner ads, wellness advice, and patient testimonials are growing in importance. Although the time frame varies, organizations usually develop tactical implementation plans on an annual or biannual basis.

Promotion via Social Media One of the most common Internet activities is looking for health information. According to a September 2012 survey, 72% of Internet users say they looked online for health information within the past year. Most start at a search engine and the most commonly researched topics are diseases or conditions, treatments or procedures, and doctors or other health professionals. Given that 87% of U.S. adults use the Internet, this is a huge audience for health marketers to consider when planning promotional tactics. “Women are more likely than men to go online to figure out a possible diagnosis. Other groups that have a high likelihood of doing so include younger people, white adults, those who live in households earning $75,000 or more, and those with a college degree or advanced degrees” (Fox & Duggan, 2013, para. 5). Others who are high users of the Internet for health information include caregivers; those with chronic or disability conditions; those who track their nutrition, exercise, and health; and those

with a recent change in health status. Given this compelling data, social media marketing experts in health care suggest producing webinars or YouTube videos on popular health topics; creating supporters by using blogs, Facebook, or on LinkedIn; using for instant messages; or any one of the sites used particularly on mobile devices to establish a sense of community. Based on the ubiquity of email, patients also desire or expect their practitioners to communicate directly with them. Even organizations such as the American Medical Association, American Nurses Association, and Centers for Disease Control and Prevention have issued comprehensive social media tips and guidelines for their members. Given the pace of change in the social media space, managers may want to consult with experts or firms working in this arena to establish a successful social media promotional strategy.

Types of Marketing Philip Kotler and numerous colleagues broadened the traditional marketing concept from the commercial for-profit sector to the not-for-profit realm (Cheng, Kotler, & Lee, 2011; Kotler & Andreasen, 1996; Kotler & Lee, 2008; Kotler & Levy, 1969; Kotler, Roberto, & Lee, 2002; Kotler & Zaltman, 1971). Kotler and Zaltman coined the term social marketing as “the design, implementation, and control of programs calculated to influence the acceptability of social ideas and involving consideration of product planning, pricing, communication, distribution, and marketing research” (Kotler & Zaltman, 1971, p. 5). In health care, social marketing is:

1. the application of commercial marketing principles and techniques; 2. used to influence behavioral change; 3. focused on a specific target audience; 4. used in order to promote public health; and 5. intended to benefit society as a whole (Andreasen, 1995; Evans, 2006;

Kotler et al., 2002).

Consider the marketing efforts inspired by Susan G. Komen for the Cure. Figure 6-4 depicts the ribbon that has come to symbolize breast cancer awareness. In 1982, Nancy Brinker, with the support of a handful of

dedicated friends and a mere $200, founded the Susan G. Komen Breast Cancer Foundation in memory of her sister. According to the Komen website, the Susan G. Komen Race for the Cure series is today “the world’s largest and most successful education and fund-raising event ever created” (Susan G. Komen for the Cure, n.d., para. 2). Since its inception, the non- profit has harnessed the power of social marketing principles and techniques to garner a vast array of strategic partners and sponsors that represent a global network for breast cancer awareness. Other nonprofit organizations have followed and created their own ribbons in a variety of colors and patterns.

FIGURE 6-4 Ribbon Used for Social and Cause-Related Marketing In contrast to social marketing, cause-related marketing links a for-

profit company and its offerings to a societal issue, such as breast cancer, with the goal of building brand equity and increasing profits. In working with Komen, global networks of corporation partnerships have leveraged cause-related marketing techniques with significant benefits to both partners in the strategic alliance. For example, manufacturers of women’s athletic clothing have aligned with the Komen Foundation to support research for breast cancer and are prominently listed on their web site.

In the past, the choice of drugs and procedures was made by physicians and insurers. Now, marketing directly to the end user of health care products and services has been recognized as extremely beneficial for pharmaceutical companies, medical device manufacturers, health plans, and certainly physicians and hospitals. Consequently, there has been tremendous growth in direct-to-the-consumer advertising (DTCA). In 1991, $55 million was spent on DTCA and in 2003, $3.2 billion was spent (Adeoye &

Bozic, 2007). This has sparked vigorous debate surrounding the benefits and drawbacks including the impact on the physician–patient relationship, inappropriate resource utilization, health care costs, and overall patient well- being. Once again, the role of marketing and advertising in health care is under scrutiny.

ETHICS AND SOCIAL RESPONSIBILITY Any chapter on marketing would be incomplete without a discussion of ethics and social responsibility. At this mature stage, the marketing discipline must take into consideration the impact that marketing activities have on individual, group, organizational, and societal outcomes. There can be a dark side of marketing such as firms that market unhealthy products such as cigarettes or encourage behaviors such as alcohol consumption and video game addiction. In addition, there are ethical issues associated with advertising to children and vulnerable populations. Social responsibility and ethical approaches need to be learned and applied to marketing (Hoyer & MacInnis, 2008). Every day, consumers are affected directly and indirectly by marketing influences. These influences can be subtle or insidious, as in the case of the food industry and the epidemic of obesity in the U.S. (Kessler, 2009).

Health care leaders and their respective organizations should model ethically responsible marketing practices. Physicians also must avoid conflict of interest whenever possible in the delivery of health care, not seeking to induce demand for unnecessary procedures. Whether for-profit or not-for- profit, successful marketing practices should be developed to promote consumer well-being. Extending the reach through community-based intervention campaigns, influencing public policy, and emphasizing prevention are just some examples. There are huge implications. Future health care leaders have both the moral responsibility and the opportunity to leverage the power of marketing to improve society as a whole.


An elderly man living in New York City went out to walk his dog one

evening in April 2011, and was struck by a sanitation truck. Immediately, he was transported to the nearest hospital with life-threatening injuries. The emergency department physicians and nurses tried to revive him, but his blood pressure continued to drop, and despite cardioversion, he died. Sixteen months later, his wife is watching television in her apartment. She is startled to see her husband’s ordeal on the show, NY Med, even though no one in the family ever gave permission to televise his situation in the emergency department. Ongoing litigation is occurring in this case.

Rules have been put in place to protect patients’ privacy and confidentiality via the Health Insurance Portability and Accountability Act (HIPAA), but real life medical shows have proliferated nonetheless, even over the protests of patients’ family members. Hospitals do not receive money for allowing reality shows to film. However, according to hospital marketing and public relations executives, “Advertising is just so saturated right now… you can’t buy that kind of publicity.” Television endorsements have been found to be beneficial to recruiting insured individuals to become hospital patients. Has health care marketing gone too far?

Ornstein, C. (2015, January 4). Dying in the E.R., and on TV. The New York Times, p. 22.

OPPORTUNITIES FOR RESEARCH IN HEALTH CARE MARKETING Opportunities for in-depth research on health care marketing exist in a variety of venues, including your own health care organization. Many of the resources used in writing this chapter also include extensive research holdings and data sets, which are available to students and academic researchers to utilize (as noted in Chapter 5). Herewith is a partial listing of some resources.

American Hospital Association Data and Directories;

Balanced Scorecard Institute; Center for Studying Health Systems Change (HSC): Health Care Markets;

Centers for Disease Control and Prevention Community Health Status Indicator;

Centers for Medicare and Medicaid Services Cost Reports; DataBay Resources; Esri; Healthcare Marketing Association; Hospital Consumer Assessment of Healthcare Providers and Systems; Medical Marketing Association; National Center for Policy Analysis; Press Ganey; Sg2 Healthcare Intelligence; Society for Healthcare Strategy and Market Development; The Dartmouth Atlas of Healthcare; The Henry J. Kaiser Family Foundation; and U.S. Department of Health and Human Services Health Resources and Services Administration.

As the need for improved marketing practices grow, you can be sure there will be many more research sources.

CONCLUSION There has never been a more exciting time for understanding the role of marketing in health care. Whereas this chapter places emphasis on the strategic view, health care marketing has many facets. Each health care organization, in its own way, leverages marketing to a greater or lesser extent in creative ways within budget constraints. As remarkable technological advancements reach more and more customers, prudent health care managers must ensure that marketing is not a random activity. Even the most attractive Internet social networking site means little without an

orchestrated marketing plan built on the strategic goals of the organization. Marketing is a management orientation centered on customer satisfaction

and an organizational function that is integrally related to the entire organization’s mission, objectives, and resources. Consistent with this view, the role of marketing in the health care organization is to create, communicate, and deliver value to customers through mutually beneficial relationships. At the same time, marketing is a discipline in itself. Health care managers should seek assistance from market researchers, strategic planners, advertising agencies, public relations firms, and other consultants.


1. Define marketing and describe why it is important for all health care managers to understand the key components of the marketing concept.

2. A few decades ago, the idea of marketing in many health care organizations was almost unthinkable. Discuss why health care organizations of the past were slow to integrate marketing principles and practices as compared to other industries. Why has it come under scrutiny again?

3. Summarize how health care managers benefit from the study of marketing.

4. You have just inherited $1 million. After paying all your outstanding student loans, you decide to start a health care enterprise. What business are you in? Is it for-profit or not-for-profit? What segments would you choose to serve? Briefly describe the steps you would take to divide the broad market into your selected segments. Will you use a concentrated or differentiated targeting strategy? Refer to Table 6-1 in this chapter; identify the key segmentation variables that you would use, and explain why.

5. Locate an ad that seeks to influence the acquisition of a health care offering or service. Identify the specific consumer decision-making unit that might be affected by this ad. How do you think this ad will affect

the consumer’s behavior?

6. Differentiate between organizational and consumer buying behavior.

7. Use an example to compare and contrast social marketing and cause- related marketing. Why is cause-related marketing often successful?

8. Today, health care marketing is a pervasive reality. What is the role of marketing ethics and social responsibility in health care today?

Cases in Chapter 18 that are related to this chapter include:

Last Chance Hospital Patients “Like” Social Media To Partner or Not to Partner With a Retail Company

Case study guides are available in the online Instructor’s Materials.

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Quality Improvement Basics Eric S. Williams, Grant T. Savage, and Patricia

A. Patrician

LEARNING OBJECTIVES By the end of this chapter, the student should be able to:

Contrast prior definitions of health care quality with current ones; Investigate the importance of quality in health care settings; Apply key quality concepts; Describe the Baldrige criteria; Assess the leading models of quality improvement; and Apply tools used in quality improvement.

INTRODUCTION Health care quality gained significant public focus in the U.S. with two publications from the Institute of Medicine (IOM): To Err Is Human (Kohn, Corrigan, & Donaldson, 2000) and Crossing the Quality Chasm (IOM, 2001). To Err Is Human first brought public attention to the issue of medical errors, concluding that between 44,000 and 98,000 people die every year from medical mistakes. It also diagnosed the quality problem as not one of poorly performing people, but of people struggling to perform within a system that is riddled with opportunities for mistakes to happen. The second IOM report, Crossing the Quality Chasm, outlined a number of goals for improving the quality and performance of the U.S. health care system, as well as some

of the methods for achieving those goals. This chapter builds on these two significant reports. The first section

presents several of the more common definitions of quality, discusses the importance of health care quality, delineates the impact of information technology on quality, and introduces key figures in quality improvement. The second section provides a strategic framework for improving quality and performance based on the Baldrige Award criteria. The third section expands on the common elements of quality improvement, while the fourth and fifth sections examine several approaches for implementing quality improvement as well as discussing many of the tools and techniques for improving health care quality.

DEFINING QUALITY IN HEALTH CARE Health care quality may be defined in various ways, with differing implications for health care providers, patients, third-party payers, policy makers, and other stakeholders. The IOM provides the most widely accepted definition of health care quality as the “degree to which health services for individuals or populations increase the likelihood of desired health outcomes and are consistent with the current professional knowledge” (IOM, 1990). This definition highlights several aspects of quality. First, high quality health services should be effective, achieving desired health outcomes for individuals. Second, health care services should achieve desired health outcomes for populations, while matching the societal preferences of policy makers and third-party payers for efficiency. And third, health care providers should adhere to professional standards and base treatments on their efficacy, as determined by the best scientific evidence available.

Another way to define quality is the result of a system with interdependent parts that must work together to achieve outcomes such as those noted above. Using this system perspective, Avedis Donabedian defined quality in terms of structures, processes, and outcomes (Donabedian, 1966). The structural elements of quality involve the material and human resources of an organization and the facility itself. The quality of personnel is documented in their numbers (nurse staffing), skill level (e.g., certified nursing assistant), and various certifications (e.g., board-

certified physician), while the quality of facilities lies in accreditation (in hospitals through The Joint Commission) and/or certification (e.g., Magnet Hospital certification). Process involves the actual delivery of care as well as its management (e.g., the quality of basic care including cleanliness, feeding, hydration, delivery of treatments, and keeping patients safe from falls and errors). Outcomes are the resulting health status of the patients (e.g., mortality, morbidity, length of stay, and functional status) and organizations (turnover of staff, cost outcomes). As a physician, Donabedian championed the development of best practices, i.e., “the ideal to which organizations should aspire” to improve care (Cooper, 2004, p. 827), linking structures, processes, and outcomes with a feedback loop, that is, information given back to providers to achieve better care. Moreover, he defined quality as having at least four components (Donabedian, 1986):

1. The technical management of health and illness; 2. The management of the interpersonal relationship between the

providers of care and their clients; 3. The amenities of care; and 4. The ethical principles that govern the conduct of affairs in general and

the health care enterprise in particular.

The four parts of this definition highlight the need to incorporate multiple stakeholder perspectives to understand health care quality. On one hand, the technical management of health focuses on the clinical performance of health care providers; on the other hand, the management of interpersonal relationships underscores the coproduction of care by both providers and patients. In other words, at the patient–provider encounter level, health service quality is driven both by clinical and nonclinical processes (Marley, Collier, & Goldstein, 2004). The amenities of care speak to the patient’s interest in being treated in comfortable, clean surroundings while the ethical principles speak to the provider’s ethical conduct in delivering care and his/her interest in furthering societal and organizational well-being (or effectiveness).

A related, but more focused, view of quality represents two fundamental questions about any clinical service, procedure, or activity occurring in a health care setting: (1) “are the right things done?” and (2) “are things done right?” The first question assesses the effectiveness of clinical care; the

second considers the efficiency of care services. Importantly, the performance of health care organizations depends on both its effectiveness and efficiency. Moreover, both are discussed in the IOM’s Crossing the Quality Chasm as specific aims for quality improvement. Effectiveness is defined as “providing services based on scientific knowledge to all who could benefit and refraining from providing services to those not likely to benefit (avoiding underuse and overuse)”; efficiency is defined as “avoiding waste, in particular waste of equipment, supplies, ideas, and energy” (IOM, 2001, p. 6).

WHY IS QUALITY IMPORTANT? One of the key issues in health care quality is the appropriate use of limited resources to improve the health of both individuals and the entire population. Problems in this domain can take three forms: underuse, overuse, and misuse. Chassin (1997) defines these terms as follows:

Underuse is the failure to provide a service whose benefit is greater than its risk. Overuse occurs when a health service is provided when its risk outweighs its benefits or it simply has no added benefit, as with overuse of certain diagnostic tests. Misuse occurs, for example, when the right service is provided badly and an avoidable complication reduces the benefit the patient receives.

Underuse is a problem since clinical research has produced a large number of effective treatments that are not widely used. One study found that it takes an average of 17 years for evidence-based practices to reach clinical practice (Balas & Boren, 2000). Even when these practices reach clinicians, evidence-based recommended treatments may not be consistently used. For example, McGlynn and colleagues (2003) found that 54.9% of participants in a nation-wide study received recommended care.

Overuse is also a quality problem, as certain treatments are provided despite evidence that the treatment is ineffective or even dangerous. Gonzales, Steiner, and Sande (1997) documented the overuse of antibiotics among their sample of adults. They found antibiotics were prescribed 51% of the time for common colds, 52% for upper respiratory infections, and 75% for bronchitis. The prescriptions were written even though these

maladies are caused by viruses, not bacteria, rendering antibiotics useless in these cases. Furthermore, the indiscriminant use of antibiotics has fed the rise of multi-drug-resistant strains of bacteria (Arias & Murray, 2009).

Misuse caught the public’s attention with the publication of the first IOM report on patient safety (Kohn et al., 2000), which examined the high rate of medical errors in hospitals, noting, as pointed out earlier, that thousands of patients die every year from preventable adverse events and another million are injured. One recent estimate suggested that at least 210,000 people die each year from medical errors in hospital settings. The cost of these errors has been estimated at $17.1 billion for 2008 (Van Den Bos et al., 2011).

The prevalence of overuse, underuse, and misuse is documented in The Dartmouth Atlas of Health Care (see The atlas, created by John Wennberg and associates, shows wide variation in medical practice. The variation has been shown to result not from severity of illness or patient preferences, but from “idiosyncratic and unscientific” practice patterns and “local supply of resources” (Wennberg, 2002). For example, Boston and New Haven—demographically similar and geographically close —might be expected to be fairly similar in their utilization of surgical services. However, there are big differences in the use of surgical services (Wennberg, 2002). Wennberg (2002) stated “residents of New Haven were more than twice as likely to receive coronary bypass surgery and 50% more likely to undergo hysterectomy” than Bostonians, while Bostonians “were two times more likely to undergo carotid artery surgery and 50% more likely to have their hip joints replaced than the residents of New Haven” (p. 962).

THE RELEVANCE OF HEALTH INFORMATION TECHNOLOGY IN QUALITY IMPROVEMENT Historically, the U.S. health care system has lagged far behind other industries in the use of information technology. For example, as noted in Chapter 8, one can use an ATM anywhere in the world—yet much health care information exists in a paper rather than electronic format. However, this is coming to an end. Clinics and hospitals spurred by The American Recovery and Reinvestment Act of 2009 have adopted electronic health

records (EHR) and have begun to integrate them with previously stand- alone systems like those for medical imaging and pharmaceutical management, as well as new innovations such as web-based patient portals. Without a doubt, these systems will be a great boon to improving quality in our health care system. However, there still remains the issue of turning raw data into actionable information for improving quality. Health informatics, health analytics, and data mining are terms used in this conversation.

Health informatics is the multidisciplinary field in which information technology is brought to bear on our health care system with a goal to improve quality, raise efficiency, and lower costs. Cortada, Gordon, & Lenihan define analytics as “the systematic use of data and related business insights developed through applied analytical disciplines (e.g., statistical, contextual, quantitative, predictive, cognitive, other models) to drive fact- based decision making for planning, management, measurement, and learning” (2012, p. 2). These data come from a broad variety of sources including electronic medical records, medical claims data, pharmaceutical records, and medical imaging. There are a number of options including “small data” analytics, predictive modeling, and real-time analytics. For example, real-time analytics transforms various types of data, such as pharmaceutical, medical, or patient-specific morbidities, to create information for decision support at the bedside (Ozga, 2013). The information collected is integrated with an electronic medical record to show drug interactions, suggest different treatment methods, or provide alerts for patient complications (Taylor, 2010).

Related to health analytics is data mining, which uses what is commonly referred to as “big data.” Using the same repositories of data mentioned above, analysts attempt to predict treatment outcomes or forecast future medical costs and utilization (Ingenix, 2006). For example, Mace (2012) discusses the predictive modeling that the Blue Cross Blue Shield of North Carolina uses to understand their enrolled patients. They found that 50% of its costs were being driven by 4% of its patients. Predictive models allowed them to implement new initiatives to improve health conditions among these costly patients.

The relevance of health informatics, health analytics, and data mining to quality improvement is that they provide a platform and set of tools that can be used to understand a population, to measure and compare responses to treatments, and to identify factors that contribute to health care errors. In

fact, many of the quality improvement tools discussed in this chapter are also used in health analytics and data mining.

QUALITY IMPROVEMENT COMES (BACK) TO AMERICA During the 1970s, oil shortages induced by the Organization of Petroleum Exporting Countries (OPEC) compelled many people in the U.S. to purchase fuel-efficient and inexpensive cars. Although U.S. automobile manufacturers tried to produce such cars, only the Japanese were manufacturing fuel-efficient, yet inexpensive automobiles that were reliable and durable. The quality of these small Japanese vehicles greatly surpassed those manufactured in the U.S. Newspapers, magazines, and television news asked the question, “Can America compete with Japan?” This rapid shift in the marketplace created a new awareness among U.S. industrial leaders that quality mattered.

To address the quality deficit, automobile and other manufacturers in the U.S. sought the help of quality improvement experts. The contributions ensured that Total Quality Management (TQM)—referred to as Continuous Quality Improvement (CQI) in health care—became the new paradigm for quality improvement within the U.S. during the 1980s and 1990s. The fundamental insight of this movement is that quality results from (continuously) upgrading the ability of the work processes to produce quality products. Put another way, when defects occur, it is more likely due to the operation of the work process rather than individual error. Thus, inspection, as a method of quality assurance, is considerably inferior to perfecting the work process through CQI (or other process-based methods).

LEADERS OF THE QUALITY MOVEMENT Walter A. Shewhart, W. Edwards Deming, and Joseph M. Juran are generally recognized as key leaders of the quality movement. During the mid-1920s, Walter A. Shewhart, a physicist at Bell Laboratories, was asked to study the variations in Western Electric’s production processes and

formulate a means to ensure that products met specifications. Rather than inspecting each product for defects, Shewhart’s practical perspective led him to try to control the source of quality variation in the entire production process (system). This led him to differentiate between common-cause and special-cause variation. He knew that common-cause variation in the production process—due to natural variations in raw materials, minor electrical voltage fluctuations, etc.—often was impractical to control. However, special-cause variation—due to operator behaviors, incorrectly calibrated machinery, the substituting of different types of raw materials, etc. —could be controlled (Kolesar, 1993). His book, Economic Control of Quality of Manufactured Product (Shewhart, 1931), articulated these principles of statistical process control (SPC) for reducing variation in production processes. With editorial assistance from his protégé, W. Edwards Deming, Shewhart also wrote a monograph on quality control, Statistical Method from the Viewpoint of Quality Control, which introduced the Plan-Do-Check-Act (PDCA) cycle model for improving production processes (Shewhart, 1939).

Known also as the Shewhart cycle in the U.S., the PDCA cycle was popularized by W. Edwards Deming, and it is called the Deming cycle in Japan. A statistician, Deming further developed the principles underlying TQM/CQI while working with the Japanese to reconstruct their industries after World War II. His approach with the Japanese was to help them fundamentally change work processes and systems to produce quality products. Deming developed a management philosophy that encouraged worker participation in process change, focused on data-based decision making, and embraced a standardized approach to quality improvement. This management philosophy was eventually codified into 14 points (Deming, 2000).

Joseph M. Juran was a contemporary and colleague of Deming’s. An engineer at Western Electric’s Hawthorne Works in 1925, he was one of the first engineers trained by Shewhart to apply the principles of SPC. While at Western Electric, Juran championed the Pareto principle from economics, focusing attention and resources on those important quality problems that are attributable to a small number of factors (e.g., the 80/20 rule, that 80% of quality problems result from 20% of the possible factors). During World War II, Juran worked as assistant to the administrator of the Foreign Economic Administration under the Office for Emergency Management. In this role, he oversaw the logistics for providing materials and supplies to

allied governments and troops on both fronts. Building on this experience, another of Juran’s important contributions was the “Juran Trilogy of quality planning, quality control, and quality improvement.” All of these notions were first codified in the 1951 publication of the Quality Control Handbook (Juran, Gryna, & Bingham, 1974).

BALDRIGE AWARD CRITERIA: A STRATEGIC FRAMEWORK FOR QUALITY IMPROVEMENT Effective quality improvement programs operate both at the top (strategic) level and at the operational (tactical) level of the organization. That is, quality improvement programs outline both an overall strategy (philosophy, framework) and a set of tactical processes and tools for quality improvement. Thus, prior to discussing the tactics of specific approaches to quality improvement, we present the Baldrige Award Criteria. These criteria are named after Malcolm Baldrige, who was President Reagan’s Secretary of Commerce and died in office in 1987. In his honor, the Malcolm Baldrige National Quality Award was created in 1988 for companies that display excellent performance across seven dimensions (the Award Criteria). These dimensions of quality have been continually refined and expanded from their original manufacturing base to include health care organizations (see Figure 7-1). The Baldrige Award models excellence using a structure-process- results framework. At the left-hand side of the figure is a set of three structural variables: leadership; strategic planning; and focus on patient, other customers, and markets. This reflects the notion that integration of customer needs (broadly defined) within the organization’s leadership and strategic planning process is necessary for creating the conditions for quality. The three process variables are performance analysis, staff focus, and process management, illustrating that quality improvement is recognized as an organization-wide responsibility. In other words, engaging staff in process management is another necessary condition for quality. Both structural and process variables interact to produce the organizational performance result variable, health care and process effectiveness. At the bottom of the figure is the diffuse influence of measurement, analysis, and knowledge management, important elements that influence the structure, process, and outcome


FIGURE 7-1 Baldrige Health Care Criteria for Performance Excellence Framework: A Systems Perspective

Reproduced from: Baldrige National Quality Award Brochure, National Institute of Standards and Technology. 2010.

The strength of the Baldrige criteria is that it encourages a systematic approach to each of the six categories and specifically links them to measureable business outcomes. These criteria provide the overall strategy and framework for success but are not prescriptive as to which approach (e.g., CQI, Six Sigma, TPS/Lean) should drive improvements in organizational performance. Instead, they leave the organization to determine which approach best fits the organization.

COMMON ELEMENTS OF QUALITY IMPROVEMENT Before we consider Continuous Quality Improvement, Six Sigma, and

Toyota Production System/Lean as methods to improve quality, we need to discuss several key concepts common to all quality improvement methods. These concepts are: measurement, process variation, and statistical process control.

Measurement The most basic concept in quality improvement is that of measurement and the metrics associated with it. Measurement is the translation of observable events into quantitative terms, while metrics are the means actually used to record these observable events. All quality improvement efforts require numerical data because “you can’t manage what you can’t measure.” In this way, quality improvement is driven by data-based evidence rather than subjective judgments or opinions.

Good measurement begins with the rigorous definition of the concept to be measured. It then requires the use of a measurement methodology that yields reliable (e.g., consistent) and valid (e.g., accurate) measures of the concept. Rigorous definition means that the concept to be measured (e.g., wait times) needs to be defined in very specific terms. This definition should be written and should include the unit of measure. For example, wait times could be defined as the time interval between the arrival of a patient at the office and the time he or she is first seen by the doctor. The unit of measure is time, but the start and end points are important for assessing the reliability and validity of the measure.

Once a good definition of the concept is developed, one challenge is to measure it reliably. If every recorded wait time starts with the arrival of the patient and ends with the patient’s first encounter with the doctor, then the measure should be consistent, or reliable. Measurement reliability means that if a measure is taken at several points over time or by various people, the measure will generally be consistent (that is, not vary too much). For example, if a person takes his or her temperature each morning, it should be close to 98.6 degrees Fahrenheit each time, assuming that he or she is not ill. If it substantially deviates from 98.6, then that person is ill, the thermometer is broken and not giving consistent readings, or the way in which the thermometer is used varies from day to day (e.g., length of time). Another example of reliability is that of reliability among people. If two nurses in a practice are measuring wait times but use different definitions of waiting,

then their measurement of waiting time will not be consistent (i.e., reliable). Another challenge is to ensure that measurement of the concept is valid.

Its validity depends on the accuracy of the measure. If two nurses use the same stopwatch to record waiting times, as long as the clock itself is accurate and the nurses adhere to the same definition of waiting, the wait times should be accurate. In other words, validity is the extent to which the measure used actually measures the concept. As with reliability, having a rigorous definition and method of data collection will yield a valid measure.

Process Variation and Statistical Process Control (SPC) Process variation is the range of values that a quality metric can take as a result of different causes within the process. As Shewhart (1931) noted, these causes can take two forms: special- and common-cause variation. Special- cause variation is due to unusual, infrequent, or unique events that cause the quality metric to deviate from its average by a statistically significant degree. Common-cause variation is due to the usual or natural causes of variation within a process. Following Shewhart, quality improvement now involves (1) detecting and eliminating special-cause variation in a process; and (2) detecting and reducing, whenever feasible, common-cause variation within a process.

Statistical Process Control (SPC) is a method by which process variation is measured, tracked, and controlled in an effort to improve the quality of the process. SPC is a branch of statistics that involves time-series analysis with graphic data display. The advantage of this method lies in the use of a visual display, which is intuitive for most decision makers. In essence, it relies on the notion that “a picture is worth a thousand words” for its import. Quality data from a particular process are graphed across time. When enough data exist, the mean and standard deviation are derived and a control chart constructed. The construction begins with graphing the data across time. It continues with the calculation of upper and lower control limits. Think of these limits as similar to the tolerances for machined parts. Complex machinery, like aircraft, requires parts that are manufactured to very tight tolerances so that they will fit together well. The larger the tolerance, the greater the likelihood that a part will not fit the way it is supposed to fit and will fall apart. These limits show the range of variation where the process is thought to be “in control.” Typically these limits are set

at plus and minus three standard deviations from the mean. With these control limits in place, the data can be interpreted and times when the process was “out of control” investigated and remedied.

THREE APPROACHES TO QUALITY IMPROVEMENT Three quality improvement approaches that have been widely used in health care are Continuous Quality Improvement, Six Sigma, and Toyota Production System/Lean. Each is discussed further below.

Continuous Quality Improvement The concept of Continuous Quality Improvement (CQI) can be defined as an organizational process in which employee teams identify and address problems in their work processes. When applied across the organization, CQI creates a continuous flow of process improvements that meet or exceed customer—or patient—expectations. Inherent within this definition are five dimensions of CQI: (1) process focus, (2) customer focus, (3) databased decision making, (4) employee empowerment, and (5) organization-wide impact.

CQI focuses on the process part of Donabedian’s quality conception as key to developing high-quality health care. Specifically, CQI promotes the view that understanding and addressing the factors that create variation in an administrative or clinical process (e.g., long wait times, high hospital readmission rates) will produce superior patient care quality and organizational performance. Furthermore, quality improvement should not be a one-time activity; rather, it should be a normal activity, resulting in a continual flow of improvements.

Underpinning this approach are the concepts and tools of statistical process control (SPC) that Shewhart developed. For example, a manager of an ambulatory clinic tracked an increase in complaints about patient wait time from quarterly patient satisfaction surveys. For the next month, the wait time for each patient was collected, and the daily average was graphed. At the same time, data were collected about why waiting time increased, and

the clinic manager found the special-cause variation was driven by (1) the number of medically complex, time-consuming patients each day; (2) the training needs of a new LPN and receptionist; and (3) the overscheduling of new patients. Armed with these findings, the manager was able to work with both clinical and administrative personnel to address these concerns and reduce the variability of the process, resulting in lower average wait time.

The second element in CQI is the focus on the customer. That is, every effort in the organization must be taken in order to “delight the customer.” CQI defines a customer in broad terms. Normally, patients are thought of as the main customers in health care. CQI’s view is that any person, group, or organization that is impacted by a process at any point is a customer. For example, a doctor ordering an MRI can be considered a customer because she receives the service of the radiology department. Thus, CQI takes the position that each process has a variety of both internal and external customers. The customer focus is best exemplified in the widespread use of patient satisfaction surveys by hospitals and physician groups.

The third element in CQI is an emphasis on using data to make all quality improvement decisions. The foundation of SPC, as discussed earlier, rests on the collection, analysis, and use of data to improve processes and monitor the success of process interventions. The use of carefully collected data reduces both uncertainty and the dependence on uninformed impressions or biases for improving an organizational process. It also provides good evidence to convince skeptics that a process problem exists. Returning to our earlier example, the collected data on waiting times enabled not only the clinic manager to understand the special-cause factors creating waiting times but also helped physicians, nurses, and front desk and other staff understand the sources of the problem.

The fourth element of CQI is employee empowerment. This empowerment is manifested by the widespread use of quality improvement teams composed of the individuals who have the most intimate knowledge of how the system works (the front line providers). Empowerment at its core suggests the individuals who do the work have a say in improving the work. The typical CQI team consists of employees whose day-to-day work gives them a unique perspective and detailed knowledge of patient care processes. Another important individual for a CQI team is the facilitator, who typically provides training on CQI tools and philosophy. Members of the CQI team are not only empowered to improve their work environment, but also can

become advocates for change, overcoming resistance among other employees. In our prior example, the clinic manager worked with both clinical employees (e.g., RNs, LPNs, and the nurse manager) and administrative employees (e.g., receptionists, admission and billing clerks, and their supervisor) to decrease the wait times and improve patients’ satisfaction with the clinic.

The final element in CQI is its strategic use across the organization, accomplished through the coordinated and continuous improvement of various operational processes across organizational levels. Quality must be recognized as a strategic priority requiring executive leadership. Supporting this priority requires substantial training in quality methods and tools as well as an organizational culture that values quality.

In order to make specific quality improvements, the Shewhart/Deming cycle of PDCA is generally used in manufacturing and other industries. However, during the early 1980s, the Hospital Corporation of America (HCA) modified the PDCA cycle to create the FOCUS–PDCA framework, which has become the most commonly used quality improvement framework in the health care industry. The addition of FOCUS clarifies the steps that need to be done prior to the implementation of any process change. The changes in the process will then be guided by the PDCA cycle.

FOCUS (Find, Organize, Clarify, Understand, and Select):

Find means identifying a process problem, preferably a “high-pain” one, to address.

Organize means to put together a team of people who work on the process. These people would then be trained on process improvement skills and tools.

Clarify results in the team moving to clarify the process problem through some type of process mapping (flowcharting).

Understanding the process problem comes next. It involves measurement and data collection of key metrics to document the dimensions of the process problem and to provide a benchmark for goal setting.

Select means to identify a set of process improvements and then select from them for implementation.

PDCA (Plan, Do, Check, and Act):

Plan means to take the process improvement from the S phase of FOCUS and create a plan for its implementation.

Do, not surprisingly, means to actually implement the process improvement.

Check means to study whether the process is improving, using the measures identified and measured in the U phase of FOCUS.

Act means to determine whether the process improvement was successful.

If the process improvement was successful, the cycle terminates. If the process improvement was not successful, then the cycle continues back to the planning stage to identify and plan the implementation of another process improvement. It is important to emphasize the iterative nature of repeated PDCA cycles. That is, if something is not working, one does not wait for an extended period of time, rather another plan is formulated and the cycle repeats until the process is back in control.

Six Sigma Six Sigma is an extension of Joseph Juran’s approach to quality improvement and was developed by Motorola and popularized by Jack Welch at General Electric. It has been defined as a “data-driven quality methodology that seeks to eliminate variation from a process” (Scalise, 2001, p. 42). Six Sigma, like CQI, is a resource-intensive tool requiring substantial up-front training in quality improvement tools and concepts, time and personnel resources to carry out quality improvement projects, and long- term management commitment. For these reasons, Six Sigma is best applied to important, costly issues in key processes.

Six Sigma employs a structured process called DMAIC (Define, Measure, Analyze, Improve, and Control):

Define includes delimiting the scope of work, determining due dates, and mapping the future state of the process, including improvements.

Measure encompasses both the creation of measures or metrics and their application to determine how well a process is performing.

Analyze further breaks down the understanding of the process and often includes flowcharting the process.

Improve specifies the steps that will be taken to meet the goals outlined during the define step.

Control is about ensuring that the improvements are permanent rather than temporary.

While DMAIC guides the actual improvement project, Six Sigma also features major training and human resource components (Six Sigma Online, n.d.). Because of these components, many large hospitals and health systems have begun adopting Six Sigma as a way to change the organization and establish a culture of quality. Such change begins with a CEO who supports the method; without top management support, efforts like this generally flounder. A champion is a senior executive (generally VP level or above) who has fulltime responsibility for quality improvement efforts. Beyond the champion are a number of experts in quality improvement generally classed into different “belts” based on their level of expertise and experience.

Toyota Production System/Lean The Toyota Production System gained prominence as Americans demanded inexpensive, fuel-efficient, reliable cars during and after the oil shocks of the 1970s. Manufacturers from around the world flocked to Toyota plants to see what made Toyota cars so competitive in the world market. They saw assembly lines not unlike their own, but with a series of innovations that revolutionized car manufacturing (Womack, Jones, & Roos, 1990). Key among these innovations were the “just-in-time” delivery of parts to the assembly line and an obsession with reducing waste characterized by a relentless experimentation by line workers and management to continually improve the manufacturing process. All of these innovations were supported by a culture characterized by continuous improvement, experimentation, innovation, and teamwork. Together these became known as the Toyota Production System (TPS) and later as Lean.

Like other quality improvement systems, Lean features both strategic (culture) and tactical elements. What distinguishes Lean from other systems are its rigorous definition of value and its relentless pursuit of the elimination of non–value added activities (waste) in a process. Lean as

applied to the health care industry views waste as coming in the following categories: overproduction, inventory, motion, transportation, overprocessing, defects, waiting, and underutilization of staff.

Overproduction can be defined as production that is in excess, early, and faster than is needed. In health care, this can be seen in the overuse of pre-operative bloodwork which research suggests as not being medically necessary in most surgical situations (Pastides et al., 2012).

Motion is wasted when patients, inventory, and personnel move inefficiently around a facility.

Overprocessing results when the product provided to the customer is complex or confusing. For example, both hospitals and physicians bill for services that are presented to the patient and insurer at different times.

Defects include medical mistakes and delays in treatment. Waiting is a feature of the U.S. health care system, from waiting for a doctor’s appointment to waiting for the insurance company and hospital to settle a claim.

Underutilization of staff is defined as not using staff time efficiently. Such inefficiency often means failing to use staff knowledge, skills, and abilities in an optimal fashion. For example, due to clinical policies and/or regulatory constraints, nurse practitioners and physician assistants are often underutilized in hospital and ambulatory settings.

Toussaint and Berry (2013) describe six principles of Lean in health care and they are summarized here:

Attitude of continuous improvement. This can be seen on multiple levels from individuals’ experimentation in reducing waste in their part of the work process, to the collaboration of a work team in a quality circle, to the overall culture of quality in an organization as reflected in its strategic plan and its everyday operations.

Value creation. Value is defined in the customers’ terms. Customers, like in other QI approaches, are broadly defined. Anyone downstream in the work process can be defined as a customer. Lean creates value by eliminating the forms of waste described above. A principal tool for this elimination of waste is the value stream map, which is a very detailed

flowchart showing the material, people, and information flows for a particular process. From this map, opportunities for waste removal can be discerned and addressed.

Unity of purpose. While a quality culture and strategic plan are necessary for Lean to have a significant effect, it is the unity of purpose across the organization that makes Lean truly effective. Lean thinking through value stream mapping clarifies priorities for improvement and focuses the attention of managers and workers. These priorities must be clearly communicated up and down the organizational hierarchy so that everyone is “on the same page.”

Respect for people who do the work. Deming, in his 14 points, and the principles of CQI drill home the point that quality improvement is a team sport. Quality is very difficult to mandate from the top. In fact, Toussant and Berry (2013) make the point that Lean actually flips leadership to those doing the work. In many ways, this is simply the most radical type of worker empowerment. Workers are assumed to have the motivation and capability (which can be developed) to improve the work process using different QI tools. In such a system, leaders are called on to support, sustain, and train.

Visualization. Visual media are necessary to communicate the Lean experience. One aspect of this is value stream mapping, which provides detailed visual representations of the people, material, and information flows in the organizations. Another aspect is the public and conspicuous display of key quality metrics (patient satisfaction, infection rate, etc.). These displays continually update workers and managers, as well as provide transparency about quality improvement goals and achievements.

Flexible regimentation. This seeming contradiction in terms refers to the necessity of standardizing every part of the work process possible to remove waste (unnecessary variation that is not valued by customers) coupled with the ongoing experimentation and improvement of the work processes. Like the successful use of the FOCUS-PDCA cycle, Lean relies on intensive iterations of process mapping, data collection, and process analysis in order to improve work processes.

QUALITY IMPROVEMENT TOOLS Both CQI and Six Sigma use a variety of tools to help improve quality. These can be divided into three categories: process mapping, data collection, and process analysis.

Mapping Processes Flowcharting (also referred to as Process Mapping) is the main way that processes are mapped (Figure 7-2). A flowchart is a picture of the sequence of steps in a process. Various geometric shapes denote different action steps within the process. A basic flowchart outlines the major steps in a process. A detailed flowchart is often more useful in quality improvement. Developing a flowchart requires not only substantial investigation (e.g., asking front-line staff and professionals how work is carried out), but also direct observation of each aspect of the process to be flowcharted. Determining the level of detail to be used should be driven by its use within the quality improvement process. A top-down flowchart is often used for providing an overview of large or complex processes. It shows the major steps in the process and lists, below each major step, the sub-steps. The development flowchart adds another dimension. Often it is useful for tracking the flow of information between people. That is, the development flowchart shows the steps of the process carried out by each person, unit, or group involved in a process. Since hand-offs are often where errors may occur, this flowchart provides a target for data collection efforts.

FIGURE 7-2 Workflow Diagram

Source: Wait time project, University of Missouri.

A marriage of geographic and processing mapping is the workflow diagram (Figure 7-3). Simply put, this reflects the movements of people, materials, documents, or information in a process. Plotting these movements on the floor plan of a building or around a paper document can present a very vivid picture of the inefficiency of a process. With the advancement of information technology, increasingly sophisticated geographic mapping and tracking programs have become available, making this complex task easier to do.

Value Stream Mapping is used to identify the seven types of waste or non–value added activities discussed in Lean. Material and information flow across the entire process of transforming raw materials into a finished product to delivery to the customer is mapped. These maps include both current value stream maps as well as future state value stream maps. Waste is documented in the gap between the current value stream map and the future stream map. These maps also provide the platform for quality improvement activities.

FIGURE 7-3 Medication Error Reporting Flowchart

Data Collection The check sheet is a simple data collection form in which occurrence of some event or behavior is tallied. At the end of the data collection period, they are added up. The best check sheets are those that are simple and have well-defined categories of what constitutes a particular event or behavior. For example, a doctor’s office staff wanted to find out the reasons why patients showed up late. This is a “high pain” problem because no or late shows result in disruptions to the clinic’s work schedule and extra work for staff. The staff asked late arrivers about the reasons for being late and after carefully defining each reason, they developed the check sheet. The check sheet was pilot tested, and several new reasons were added while other reasons were refined. The check sheet was then employed during a month- long data collection period. They found that transportation problems and babysitting problems jointly accounted for 63% of the late shows.

Another example is the use of chart abstractions or chart audits. In this process, a check sheet is used to collect information from a patient’s medical record. Often this is a manual process that involves an individual looking at the medical record and finding the requested information and recording it on a check sheet. The use of electronic medical records may take some or all of the labor out of this process, as pertinent medical information can be collected and appropriate metrics reported.

Geographic mapping is a pictorial check sheet in which an event or problem is plotted on a map. This is often used in epidemiological studies to plot where victims of certain diseases live, work, play, etc. For example, the 2014 Ebola outbreak in Western Africa was traced to a single 2-year-old in Guinea. This finding was enabled by tracing the geographic dispersion of the Ebola infections back over time to the original patient. Importantly, such maps also are helpful in then estimating the future growth of an epidemic. Within the clinical setting, geographic mapping can help track infectious disease outbreaks within a hospital, as well as trace the origin of the outbreak to a particular ward, laboratory, or operating theater.

Analyzing Processes The cause-and-effect diagram helps to identify and organize the possible cause for a problem in a structured format. It is commonly referred to as a

fishbone diagram for its resemblance to a fish (see Figure 7-4). It is also called an Ishikawa diagram, in honor of Kaoru Ishikawa, who developed it. The diagram begins with the problem under investigation described in a box at the right side of the diagram. The fish’s spine is represented by a long arrow within the box. The major possible causes of the problem are arrayed as large ribs along the spine. These are broad categories of causes to which smaller ribs are attached that identify specific causes of the problem.

A Pareto chart is a simple frequency chart. It takes advantage of the Pareto principle, or the 80/20 rule, that Juran applied to quality improvement, i.e., the observation that 80% of the problems with any process are due to 20% of the defects (Best & Neuhauser, 2006). Put another way, most of the problems in any process are due to a small number of defects in the procedure. The frequency of each problem, reason, etc. is listed on the x-axis, and the number or percentage of occurrences is listed on the y-axis. This analysis is most useful in identifying the major problems in a process and their frequency of occurrence. Another version of the frequency chart is the histogram, which shows the range and frequency of values for a measure. When complete, it shows the complete distribution of some variable. This is often useful in basic data analysis.

FIGURE 7-4 Fishbone Diagram As mentioned earlier, quality improvement has its greatest impact if it

becomes a part of the strategic mission of a health care organization. When that occurs, it is then possible to look beyond the boundaries of the organization and to consider ways in which the health care system at the local, regional, and national levels could be improved.

OPPORTUNITIES FOR RESEARCH IN HEALTH CARE QUALITY Opportunities for in-depth research in health care quality exist in a variety of venues, including your own health care organization. Many of the resources used in writing this chapter also include extensive research holdings and data sets that are available to students and academic researchers to utilize. Herewith is a partial listing of resources.

Accreditation Association for Ambulatory Health Care; Agency for Health Care Research and Quality; Agency for Health Care Research and Quality’s Healthcare Cost and Utilization Project Databases;

Agency for Health Care Research and Quality’s National Guideline Clearinghouse;

Agency for Health Care Research and Quality’s United State Health Information Database;

American College of Surgeons’ Inspiring Quality Program; American Health Quality Association; American Healthcare Association; American Nurses Association’s National Database of Quality Indicators; American Society for Quality; Baldrige National Quality Award; Center for Improvement in Healthcare Quality; Cochrane Collaboration’s Evidence Based Medicine and Guidelines Database;

Florida’s Medical Quality Assurance Services; Healthcare Team Vitality Instrument; Health Resources and Services Administration’s Quality Toolbox; Institute for Healthcare Improvement; Institute for Healthcare Improvement’s Improvement Map; Institute for Healthcare Improvement’s Outpatient Adverse Event Trigger Tool;

Institute for Healthcare Improvement’s Quality Improvement Measure Tracker;

The Joint Commission; Maryland Health Services Cost Review Commission; MATCH Medication Reconciliation Toolkit; Medicare’s Hospital Compare Database; Minnesota’s All Payer Claims Database; National Committee for Quality Assurance (NCQA) HEDIS measures; National Library of Medicine’s Health Services Research Information Central;

National Quality Forum; New York’s All Payer Claims Database; Organization for Economic Cooperation and Development’s (OECD) Health Care Quality Indicators Program;

Patient Safety Handling; Press Ganey’s Hospital and Nursing Quality Database; Texas’s Health Care Information Collection; and Understanding the Healthcare Database.

As you can see, quality is a rich area for research in health care. In the future, you can be certain this list will grow.

CONCLUSION Quality, access, and cost are the three core policy issues facing every health care system. For the U.S., improving quality is a challenge in a health care

system undergoing a vast expansion of access via health insurance reform along with continuous pressures to contain costs. A new brief from the Kaiser Family Foundation indicated that health care quality has improved in the U.S., but still lags on key measures when compared to peer countries (Claxton, Cox, Gonzales, Kamal, & Levitt, 2015). The models and tools presented earlier will be needed, along with new ones, to improve quality of care, even in a challenging environment.


1. Compare and contrast the different stakeholders’ views of health care quality.

2. Using a health care organization you are familiar with, analyze how structure, process, and outcomes interact.

3. Compare and contrast CQI (TQM) and Six Sigma (Lean) approaches to quality improvement. Provide a real world example in a health care organization of where you believe one would be preferable to another. What is your rationale for your choice?

4. Summarize the functions of the Baldrige criteria and their interaction with CQI or Six Sigma.

5. Provide three real world examples in a health care organization of underuse, overuse, and misuse for both quality and cost. What are the implications for effectiveness, efficiency, and patient for each of these examples?

Cases in Chapter 18 that are related to this chapter include:

Madison Community Hospital Addresses Infection Prevention Trouble with the Pharmacy Communication of Patient Information During Transitions in Care Multidrug Resistant Organism (MDRO) in a Transitional Care Unit

Case study guides are available in the online Instructor’s Materials.

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Kohn, J. T., Corrigan, J. M., & Donaldson, M. S. (Eds.). (2000). To err is human: Building a safer health care system. Washington, DC: National Academies Press.

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McGlynn, E. A., Asch, S. M., Adams, J., Kessey, J., Hicks, J., DeCristofaro, A., and Kerr, E. A. (2003). The quality of health care delivered to adults in the United States. New England Journal of Medicine, 348(26), 2635– 2645.

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Van Den Bos, J., Rustagi, K., Gray, T., Halford, M., Ziemkiewicz, E., & Shreve, J. (2011). The $17.1 billion problem: The annual cost of measurable medical errors. New England Journal of Medicine, 30(4), 596– 603.

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Information Technology Nancy H. Shanks and Sharon B. Buchbinder

LEARNING OBJECTIVES By the end of this chapter, the student will be able to:

Distinguish between information systems common to all industries and those unique to health care;

Appraise key systems used by health care managers; Differentiate between the electronic medical record (EMR) and the electronic health record (EHR);

Analyze the challenges to clinical system adoption; Examine the concept of meaningful use and its implications for health care providers;

Assess the future of health-care information technology (HIT) and the vision of an integrated U.S. health care system;

Critique the impact of HIT on the health care manager; Examine the impacts of HIPAA and other regulations, laws, and policies regarding confidentiality of patient information; and

Investigate sources of data for assessing the impact of electronic health record implementation.

INTRODUCTION Have you ever considered why it is so easy to get your money almost

anywhere in the world from an automated teller machine (ATM), but impossible to have easy access to your health and medical history—even during a medical emergency? Information technology has traditionally been relegated to the administrative functions of health care—in the back office with payroll and accounting. Today, as pressures mount for safer and more cost-effective care, and as software applications become easier to use, the introduction of information technology into the clinical setting has accelerated. While introducing a new complexity, this phenomenon also creates great opportunity for safer care, more standardized practice, greater accuracy and portability of data and information, and achieving the elusive vision of electronic health records for U.S. citizens. The purpose of this chapter is to explain the current state of information technology in health care and to discuss the impact the acceleration of its implementation will have on managing an already complex environment for the health care manager.

Health information systems (HIS) have been defined by Balgrosky (2015) “as including all computer systems (including hardware, software, operating systems, and end-user devices connecting people to the systems), networks (the electronic connectivity between systems, people, and organizations), and the data those systems create and capture through the use of software” (p. 13). These are the “building blocks” for all of the functions and applications that comprise the work of health care providers, organizations and professionals. It is from these basic building blocks that Balgrosky (2015) has developed the “HIS Scope Model,” shown in Figure 8- 1.

In this model, HIS are organized and managed to facilitate several higher level purposes. The main purposes of the clinical and other administrative systems are to provide the information and primary data needed to operate an efficient and effective health care organization; this occurs at the Systems and Management level of the model. Those data, in turn, provide the foundations for the other higher level purposes. That is, the data can be used in health informatics, analytics, research, and policy. The intent of this chapter is to focus primarily on HIS and the Systems and Management part of the model, but these other areas will also be defined and briefly discussed later in the chapter.

FIGURE 8-1 HIS Scope Model


A Few Basics about System Technology The foundation for all information systems applications is telecommunication, as well as a variety of types of networks and data storage capabilities. “Telecommunications is defined as the electrical transmission of data among systems, whether through analog, digital, or wireless media” (Balgrosky, 2015, p. 62). Networks can be categorized as Intranets, which are internal to an organization, or Extranets, which are external and allow users to share information. Networks also can be characterized as “local area networks (LANs), wireless LANs (WLANs), wide area networks (WANs), wireless WANs (WWANs), and storage area networks (SANs). The Internet is a well-known WAN” (Balgrosky, 2015, p. 81). As examples, when a medical assistant wheels a laptop computer into an exam room, she is using in WLAN to record vital signs and other information (Balgrosky, 2015); if

you are connecting to the Internet at Starbucks, you are using a WWAN. Data collected are stored either where the HIS are housed on a server or,

increasingly, in some remote, virtual location. Specifically, “the sizes of health data centers are decreasing due to advances in server and storage consolidation, virtualization, and cloud computing” (Balgrosky, 2015, p. 81).

System Applications in Health Care Similar to other industries, health care businesses, whether for-profit or not- for-profit, are supported by traditional software applications used to run the business. The key purpose of these systems is to manage the organization’s expenses and revenues. For most health care entities, you’ll also find more sophisticated systems to manage two of their most costly resources—staff and equipment. These common systems, some of which health care organizations widely implement, include:

Standard office applications such as word processing, spreadsheet management, and e-mail and other administrative tools to enable collaboration;

Budget systems to manage expenses and income; Cost accounting systems to model the profit (or loss) of key services/products;

Enterprise resource planning (ERP) systems, which include human resource, payroll, accounts payable, materials management, and general ledger functions;

Time and attendance, staffing and scheduling, and productivity systems to manage a diverse exempt and nonexempt, and in many health care organizations a 24/7, 365-days-a-year, workforce;

Marketing systems including customer relationship management (CRM) and typically the organization’s website, Facebook and other social media accounts;

For those health care entities that are non-profit, fund-raising systems that play a key role in identifying and managing the contributions of donors; and

Billing and accounts receivable systems used to bill clients and customers (e.g., patients and insurance companies) for the goods or

services of the entity.

Prior to the 1990s, information technology found in most health-care organizations—hospitals, physician practices, nursing homes, etc.— supported mostly the administrative transactions unique to health care. More specifically, these were systems that either assisted in the billing and accounts receivable processes, such as patient scheduling and registration systems, or systems that assisted health care entities in meeting regulatory requirements, such as The Joint Commission (TJC), Centers for Medicare and Medicaid Services (CMS), the American Association of Blood Banks (AABB), the College of Pathologists (CAP), etc. For example, a clinical information system enables a hospital to document how they reconcile the medications a patient brings into the facility with those prescribed while visiting, as required by The Joint Commission. As technology has matured and its benefits around efficiency and patient safety have been identified, information technology has begun to be seen in more clinical areas. The delivery of health care includes many repetitive workflows, such as filling prescriptions, reporting results of laboratory tests, and completing radiology images, to name but a few. These workflows lend themselves to becoming more effective and efficient through automation. As a result, clinical systems that supported these areas and patient care processes came to the forefront (see Table 8-1). Nonetheless, many of these systems didn’t effectively communicate with each other within a single organization, let alone as patients moved from one part of the industry to another. In addition, through the 1990s, systems remained so cumbersome that most direct care personnel (e.g., nurses, physicians, home health workers) were not asked to use them to support direct care processes. And if they had been asked, they probably would not have done so because of the amount of additional time it would have introduced into their workflow.

As efficiencies through automation were gained by these ancillary information systems, a parallel maturation of medical devices occurred. Many of these device types are oriented to enhancing workflow through increased throughput and reduced variation. Often they are physically connected to the ancillary system. These included robotic prescription dispensing services in the pharmacy, which pick, dispense, and label medications for delivery to patients, and analyzers in the laboratory, which afford high-speed and consistent processing of specimens. As more

information about patients became available through the use of these systems, the promise of a complete and unified place to find patient information began to become reality. While traditional business systems have become standard and pervasive for effective daily management, the recent increase in the use of clinical systems presented and continues to present a unique challenge to those managing the impacted areas. In summary, health care managers must be comfortable and confident with information technology to manage their administrative responsibilities. Health care managers should anticipate the need to be flexible and to educate and train staff as new tools become more pervasive in the areas they manage.

THE ELECTRONIC MEDICAL RECORD (EMR) In 1991, the Institute of Medicine (IOM) issued a report concluding that computer-based patient records are “an essential technology” for health care (IOM, 2001). Even so, adoption of these technologies continued to be low. Additional industry pressure came with another IOM report, To Err Is Human (Kohn, Corrigan, & Donaldson, 2000). This report highlighted the need to build a safer health care system and presented the astounding figure

of 98,000 annual preventable deaths in the U.S. due to clinical quality issues. Recommendations from the report suggested the establishment of a federal Center for Patient Safety. One of the initial areas of attention was to “increase understanding of the use of information technology to improve patient safety (e.g., automated drug order entry systems, reminder systems that prompt nurses and other care providers when a patient’s medication or other treatments are due)” (Kohn et al., 2000, p. 80). As clinicians began to realize the value of information technology, adoption of electronic medical records (EMRs) for patients accelerated.

In the mid-2000s, HIMSS Analytics characterized an EMR as an application environment composed of the clinical data repository, clinical decision support, controlled medical vocabulary, order entry, computerized provider order entry, pharmacy, and clinical documentation applications. This environment supports the patient’s electronic medical record across inpatient and outpatient environments, and is used by health care practitioners to document, monitor, and manage health care delivery within a care delivery organization (CDO). The data in the EMR are legal records of what occurred during patient encounters at the CDO and are owned by the CDO (Garets & Davis, 2006, p. 2). More recently the federal Office of the National Coordinator for Health Information Technology (ONC) has defined “electronic medical records (EMRs) [as] a digital version of the paper charts in the clinicians office” (Garrett & Seidman, 2011, p. 1).

Adoption of Clinical Systems by Hospitals The Healthcare Information and Management Systems Society (HIMSS) is a professional organization made up of members committed to leveraging information technology to better serve the health care industry. These are people who primarily have information technology jobs in hospitals, physician practices, pharmaceutical companies, insurance companies, software vendors, and so on (HIMSS, n.d.). HIMSS supports the educational and networking needs of information technology (IT) professionals who have chosen health care as their industry of focus. By 2000, HIMSS Analytics had designed a model to track EMR progress at hospitals and health systems in the U.S. called the Electronic Medical Record Analytical Model (EMRAM). See Figure 8-2. The EMRAM scores hospitals in the HIMSS Analytics database on their progress in

implementing progressively more complicated clinical systems from stage 0 to stage 7, ultimately resulting in the ability to exchange their clinical information with external partners (such as labs or physician offices) (HIMSS Analytics, 2015a).

The foundational implementation of an EMR is a hospital’s ability to first automate data in individual areas within the hospital, as represented by stages 0 and 1. Next is the ability to bring this data together for clinical decision making, stage 2. Stages 3–6 include the implementation of advanced clinical systems primarily used by direct care personnel such as nurses and physicians. In a hospital where all key clinical processes are fully automated, stage 7 represents the ability of that organization to then share or exchange data with external entities. It is at the achievement of this stage where real impacts on safety and efficiencies can be realized. Consider the impact of having all hospital-based information from a recent surgery available to your physician at your next follow-up appointment and/or the availability of your medication history and recent lab and X-ray results to a hospital’s emergency room (ER) when an unintended visit occurs. The physician can immediately identify any allergies you may have, understand what medications you are already on, and potentially avoid ordering duplicate tests and services.

FIGURE 8-2 EMRAM model

Courtesy of HIMSS ANALYTICS As shown in Table 8-2, while the EMRAM scores from 2008 compared to

the first quarter of 2015 reflect an increase of hospitals that have moved from lower to higher stages in the model, 56% of all hospitals in the U.S. had progressed past stage 4 as of the beginning of 2015. And while we see movement to stage 7, this represents only 3.7% of all hospitals: a meager 197 of 5,467 U.S. hospitals. High cost and user “unfriendliness,” combined with slow progress in developing standards for defining complex clinical information, have contributed to such slow movement to stage 7. Organizations like Kaiser Permanente currently are truly exceptions given the size of the challenges to clinical system adoption.

This slow progress is further complicated by the highly sensitive and confidential nature of patients’ clinical data. Americans are fiercely protective of patient rights, including control over access to medical information. This lack of trust that electronic clinical information will remain secure, underscored by high profile hacking of health insurance databases, has also had an impact on slow clinical system adoption; the primary stakeholder—the patient—isn’t demanding it (Vijavan, 2015). In addition to the risk of identity theft, other risks include use of medical and financial information to obtain drugs, commit health care fraud, or reveal medical conditions and sensitive lab results such as a positive HIV or pregnancy test. As much as we love our technology and convenience of having information at our fingertips, this same ease of use can be turned against us by those who want it for darker purposes. Security of health care data is crucial to ensure movement from Level 0 to Level 7.

From EMR to EHR Many people use the terms electronic medical record and electronic health record interchangeably. There is, however, a distinction beyond the mere one word difference. Garrett and Seidman (2011) point out that “EHRs focus on the total health of the patient—going beyond standard clinical data

collected in the provider’s office and inclusive of a broader view on a patient’s care….[and] are built to share information with other health care providers” (p. 2). That means EHR is a broader term than EMR. The data in the EHR are accessible to many different entities, particularly the patient, and the information goes with the patient to various health care settings, making test results, allergy information, medications, and other health care information available to other providers.

Reaching EHR status has been elusive for many hospitals. In recent years, the federal government has made a significant effort to facilitate the utilization of EHRs in all types of hospitals. Despite these efforts, adoption of EHRs by certain types of hospitals has been a challenge. This is particularly true for “small and rural hospitals [that] continue to lag behind their better resourced counterparts” (Adler-Milstein et al., 2014, p. 1670). The specific challenges for rural hospitals “include resource constraints and EHR implementation costs, availability of grants and loans to support EHR implementation, and workflow challenges” (ONC, 2014c, p. 17).

Adoption of EMRs and EHRs by Physician Practices and Other Providers Adoption rates have not just been low in hospitals, but have been even lower in the setting where Americans receive most of their health care: physician offices. Think about your own experience: unless you’ve dealt with serious or chronic health issues, the times in which you sought care in the health care industry are largely identified through visits to your physician’s office. In short, the setting where we receive most of our health care is the setting with lower levels of technology adoption, unless one is enrolled in a large managed care organization, such as Kaiser Permanente.

Currently, while 96.4% of hospitals have some semblance of an EMR (HIMSS Analytics, 2015a), 62.8% of physician offices do as of January 2015 (SK&A, 2015). The cost of purchasing and implementing EMR systems is the single greatest barrier (Runy, 2009). The larger the physician practice, the higher degree of administrative complexity, and the higher the rate of EMR adoption—77.2% of practices with more than 26 physicians have adopted EMR (SK&A, 2015). While seemingly positive, more than 40% of physician practices in the U.S. had between 1 and 5 physicians (Liebhaber &

Grossman, 2007). Although there has been a shift toward hospital employment, 60.1% of physicians still work in practices that are wholly owned by physicians and 40% are still small in size (Kane & Emmons, 2013). In these smaller practices, the adoption rate has been much lower than larger practices (S&K, 2015). In the past, physicians have had neither a compelling business reason nor the requisite resources to buy these systems, although this began to change with the federal push toward use of EHR as discussed in the next section.

There continue to be many barriers for both EHR adopters and non- adopters. In a 2014 survey conducted by the ONC and the Centers for Disease Control and Prevention (CDC), both groups reported the following “top 5 ‘major barriers’ to EHR adoption:

Cost of purchasing a system; Loss of productivity; Annual maintenance costs; Adequacy of training; and Finding EHR to meet practice needs” (ONC, 2014c, p. 15).

In addition, physician practices often have not had the depth of staffing to adequately select, implement, and support an EMR. To the extent the patient record in the physician practice has remained on paper, physicians’ notes, prescriptions, and lab and X-ray results have also remained in a format prohibitive to sharing. As mentioned earlier, there are certainly exceptions to this. Kaiser Permanente has demonstrated it is possible to have physicians practicing in an entirely automated environment with both efficiency and patient safety gains (McGee, 2010). It is important to realize Kaiser Permanente is a massive health care system with “38 hospitals, 618 medical offices, 17,425 physicians, 48,285 nurses, and 174,415 employees” as of December 31, 2013, with “$56.4 billion in annual operating revenue” for 2014 (Kaiser Permanente, 2015).

Not only has the implementation of EHRs been difficult for physicians, it has been equally, if not more difficult, in other sectors of the health care industry. Mohamoud, Byrne, and Samarth (2009) reported that long-term care settings face great challenges, including “regulatory and legal concerns, insufficient funding, technology fears, staff turnover, lack of interoperable

standards and discontinuity of care” (pp. 21–22).

THE CHALLENGES TO CLINICAL SYSTEM ADOPTION The barriers to adoption of clinical systems go back many years. The IOM report Crossing the Quality Chasm detailed numerous obstacles (IOM, 2001). Patient privacy and a patient’s desire to ensure that others could not see their health information was a primary concern. Sharing of information is all the more challenging in health care because a “standard vocabulary” doesn’t exist as it does in other industries such as banking, where information about your bank account can electronically move all over the world. This lack of one system being able to speak to another (e.g., physician’s system to insurer’s system) not only slows down productivity, but also can contribute to delays in health care delivery. As noted previously, the cost to purchase, implement, and support these systems is a core barrier in an industry where recent and extreme focus on cost exists. Finally, but not least, the majority of the health care industry–specific software applications were not developed in a manner in which the user interfaces were intuitive or easy to use, making the user, at least initially, frustrated and slower in implementing it. Based upon recent hospital EMR adoption numbers, these same barriers continue to remain relevant (IOM, 2001).


SOAPWare MEDENT Healthfusion e-MDs Epic Amazing Charts Advanced MD Practice Fusion

Modernizing Medicine athenahealth

Data from: Medical Economics, 2014. Quality of care: economics/content/tags/2014-ehr-scorecard/best-ehr-systems-2014- physicians-rank-five-key-per


Large Hospitals and Academic Medical Centers Allscripts Healthcare Solutions Epic Systems Cerner McKesson Quadramed

Community Hospitals (with 100–299 beds) Siemens McKesson Epic Allscripts Healthcare Solutions

Small Hospitals (under 100 beds) CPSI Cerner Healthland Health Management Systems Razorinsights

Data from: McCann, 2014; The Advisory Board Company, 2014.

Governmental Involvement in EHR
Concerns about the Baby Boomers’ impact on Medicare and the percentage of the gross domestic product (GDP) going to the cost of health care have been raised by the IOM and other authors (Chiplin & Lilly, 2013). Projections suggested that, within 10 years, Americans would spend one of every five dollars on health care. The Obama administration recognized the potential to reduce health care expenses through standards and automation and made the decision to jumpstart health information technology (HIT) investments. Understanding that an electronic health record would provide organization to the complex and vast amount of clinical information on patients, thus leading to better clinical decisions, a higher quality of care, and a reduction in overutilization, aggressive measures were put forward in the American Recovery and Reinvestment Act (ARRA) in 2009 around EMR adoption (CMS, 2009). Under the Health Information Technology for Economic and Clinical Health Act (HITECH) portion of the ARRA, hospitals and physicians in the U.S. were to receive funding incentives to adopt and implement clinical health care information technology. By 2015, organizations that failed to do so were to be unable to participate in the Medicare program and were to be subjected to fines and penalties. The HITECH provisions don’t sound like much, but they provided the foundation and funneled billions of dollars into the development of HIS. This, in turn, laid the foundation for achieving the health care reform goals (improved quality, reduced cost, and improved access) of the Patient Protection and Affordable Care Act (ACA) and reforming the health care system. The achievement of those goals “require[s] better methods of storing, analyzing, and sharing health information…. HITECH builds this infrastructure through incentive payments of meaningful use to doctors and hospitals, and through programs that address specific obstacles to health IT adoption and exchange” (Buntin, Jain, & Blumenthal, 2010, p. 1219).

In moving this process forward, CMS, in conjunction with ONC, developed what have become known as the meaningful use criteria for EHR. This involved defining the goals/priorities and setting a schedule for the attainment of them. “The concept of meaningful use rested on the ‘5 pillars’ of health outcomes policy priorities, namely:

1. Improve quality, safety, efficiency, and reduce health disparities 2. Engage patients and families in their health 3. Improve care coordination

4. Improve population and public health 5. Ensure adequate privacy and security for patient health information”

(CDC, 2012, para. 2).

To achieve meaningful use, providers were expected to progress through three stages of development, over the following five-year period:

1. “2011–2012 – Stage 1 – Data capture and sharing 2. 2014 – Stage 2 – Advance clinical processes 3. 2016 – Stage 3 – Improved outcomes” (HealthIT, 2015, para. 4).

Additionally, HealthIT (2013) established the Medicare and Medicaid EHR Incentive Programs for eligible professionals (EPs) and eligible hospitals “to provide financial incentives for the adoption and meaningful use of certified EHR technology to improve patient care” (ONC, 2014c, p. 13). In addition, the Regional Extension Center (REC) program was created to provide technical assistance in achieving meaningful use to “providers that historically have lower rates of EHR adoption, such as small practices, community health centers, and rural and public hospitals” (ONC, 2014c, p. 16).

One issue related to this discussion is how the meaningful use stages equate to the EMRAM stages. A comparison of the two by Murphy (2013) indicates that Stage 4 on the EMRAM model equates to Stage 1 of meaningful use in terms of data collection and using electronic means to share it. Murphy (2013) goes on to indicate “that Stage 2 Meaningful Use correlates most closely with Stage 6 of the EMR Adoption Model” (p. 3), while Stage 3 Meaningful Use correlates with Stage 7 of the EMRAM. It should be noted that the Meaningful Use Stage 3 criteria and implementation timeline were only released on March 29, 2015 (HIMSS, 2015), so this process is just beginning for providers.

“As of September 2014, only 93 hospitals and 2,282 doctors had successfully progressed to Stage 2 meaningful use” (OIG, 2014, p. 2). This fact indicates that, despite considerable effort on the part of providers and significant financial contributions by the federal government, there is a long way to go before EHR adoption reaches its potential and fulfills the federal goals.

Part of the slow progress can be attributed to push back from physicians.

Some of the push back is coming from concerns physicians are attending more to computers than to patients (Patel, 2015). Additionally, as alluded to earlier in this chapter, there has been considerable criticism of the process to move toward EHRs and meaningful use. Physicians have complained that software vendors have not kept up with the demands of the conversion, nor have the designers of the systems always listened to the end users. One example of this is not attending to the needs of different specialties. Unlike internists or primary care physicians (PCPs), surgeons do not prescribe a lot of different drugs. Yet, when a patient arrives at a surgeon’s office the EHR may report that the surgeon has ordered a laundry list of medications, when in fact he hasn’t. This raises significant liability issues for the surgeon who should not be held responsible for the PCPs prescribing practices. In situations such as this, a quick fix would be to insert a disclaimer on the screen that the surgeon is not responsible for these prescriptions. However, not all systems permit an easy or a quick fix. Some require expensive and major reprogramming, which is completed only when a critical threshold of “bugs” has been met to reduce costs.

The quality of shared medical images has been identified as a significant issue with some EHRs (Rosenfeld, 2013; Tieche, FitzGerald, & Martin, 2014). In its 2013 electronic health record study, Black Book Rankings found that “nearly one in five physician users indicated the high likelihood of shifting systems after disappointing first vendor results” (PRWeb, 2013, p. 1). A major study of physician professional satisfaction funded by the American Medical Association (AMA) and conducted by the RAND Corporation found “the current state of EHR technology significantly worsened professional satisfaction in multiple ways” and “aspects of current EHRs that were particularly common sources of dissatisfaction included poor usability, time-consuming data entry, interference with face-to-face patient care, inefficient and less fulfilling work content, inability to exchange health information, and degradation of clinical documentation” (Friedberg et al., 2013, p. xvi). Several articles also reported the dissatisfaction and concerns of physicians that EHRs were developed to facilitate reimbursement and not to collect data about patients (American College of Physicians, 2013; Chuang, 2014; Fallows, 2014; May, 2013; Modernizing Medicine, 2014). Both the AMA and the American Hospital Association (AHA) have expressed strong opinions about the timing of issuing the meaningful use criteria for the various stages, the short timeframes for

achieving various stages, the potential penalties that providers face for not meeting timeframes, and the absence of flexibility and willingness to make modifications on the part of and the heavy handedness of regulators (AHA, 2015; AMA, 2014; Fishman, 2015; Stack, 2014). As of July 2015, the President of the AMA has declared “EHR meaningful use isn’t meaningful” and called on physicians to petition Congress “to halt Stage 3 meaningful use until the program is fixed” (Stack, 2015b, para. 14).

The 2013 IOM report, Best Care at Lower Cost: The Path to Continuously Learning Health Care in America, tackled the issue of EHRs and low utilization in health care head on with the following analogy: “If banking were like health care, automated teller machine (ATM) transactions would take not seconds but perhaps days or longer as a result of unavailable or misplaced records” (IOM, 2013a, p. 5). A companion infographic called “What’s Possible for Healthcare?” provides a visual overview of how our health care system compares to other industries (IOM, 2013b). In online banking, we can have access to our financial data in seconds. In health care, 50% of patients indicated information necessary for their health care was not available, and 25% of patients reported their health care providers had to re- order tests for needed information. This loss of critical information contributes to delay of care and costs of care. Likewise, in manufacturing, companies can respond to changes in demand and track a complex network of suppliers. In health care, we have an equally complex network of supply and demand, yet one provider often cannot speak to another via an EHR. Over 200 other physicians are involved in treating the average primary care physician’s Medicare patient and over 180 tasks are managed by physicians in intensive care units. In the absence of a good health information management system to juggle all these balls, it’s a wonder more mistakes don’t occur in health care.

The complexity and cost of health care means we must have improved computing power, connectivity, organizational capabilities, and teamwork between clinicians and patients. Health care organizations must reduce financial waste and human suffering by improving the quality and quantity of information sharing. The IOM report concluded:

Advances in computing, information science, and connectivity can improve patient-clinician communication, point-of-care guidance, the capture of experience, population surveillance, planning and evaluation, and the generation of real-time knowledge—features of a continuously learning health care system. (IOM, 2013a, p. 16)

Recommendations included improvements to the digital infrastructure to “[i]mprove the capacity to capture clinical, delivery process, and financial data for better care, system improvement, and creating new knowledge” as well as “improved data utility by streamlining and revising research regulations to improve care, promote the capture of clinical data, and generate knowledge” (IOM, 2013a, p. 29).

The bottom line is that, while the barriers appear to have been lessened somewhat due to governmental involvement, many issues still remain to be resolved. The process of adopting EHRs in physician practices and hospitals will continue. However, as both the 2013 IOM and RAND Corporation reports underscore, many challenges remain to get to the point where clinical information is stored in systems that use a standard vocabulary, can communicate with each other, contain data that can be shared with patients and other providers, and include data and information to be used for a variety of purposes.

Government Involvement in Protecting Health Information In 1996, Congress passed the Health Insurance Portability and Accountability Act (HIPAA) with the intent of developing standards for health care data and their exchange and regulations on privacy protections (CMS, 2013). The concept of Protected Health Information (PHI) is to protect all

“individually identifiable health information” held or transmitted by a covered entity or its business associate, in any form or media, whether electronic, paper, or oral. The HIPAA Privacy Rule calls this information “protected health information (PHI).”

“Individually identifiable health information” is information, including demographic data, that relates to:

the individual’s past, present, or future physical or mental health or condition;

the provision of health care to the individual, or, the past, present, or future payment for the provision of health care to the individual; and

that identifies the individual or for which there is a reasonable

basis to believe it can be used to identify the individual.

Individually identifiable health information includes many common identifiers (e.g., name, address, birth date, Social Security Number). The Privacy Rule excludes from protected health information employment records that a covered entity maintains in its capacity as an employer and education and certain other records subject to, or defined in, the Family Educational Rights and Privacy Act, 20 U.S.C. §1232g (U.S. Department of Health and Human Services [DHHS], 2003, pp. 3–4).

In 2013, several changes were made to the HIPAA regulations. “The Final Rule enhances patient privacy protection, provides individuals with new rights to their health information and strengthens the government’s enforcement of and penalties under the law” (APA Practice Organization, 2013). These actions address the following:

Notice of privacy: the revisions now require patient consent for the use of PHI in marketing, the sale of PHI, and “the use and disclosures of psychotherapy notes.”

Breach notification rules and enforcement: a risk assessment of any PHI breach must now be carried out and must consider “the following factors: 1. Nature and extent of PHI involved; 2. To whom the PHI may have been disclosed; 3. Whether that PHI was actually acquired or viewed; and 4. The extent to which the risk to the PHI has been mitigated (for

example, assurances from recipient that information has been destroyed or will not be further used or disclosed)” (APA Practice Organization, 2013, para. 11).

Business associate agreements: the requirements of the law are extended to include all groups that hospitals or other covered entities do business with, as well as to the subcontractors with whom those associates do business. Contracts with business associates and subcontractors now need to address HIPAA requirements.

In addition, the fines for breaches have been increased and now “range from $100 to $50,000 per violation with a cap of $1.5 million on violations of identical provisions happening within the same calendar year” (APA Practice Organization, 2013, para. 16). The HIPAA Security Rule focuses on protecting PHI in all patient medical records, be they in paper or electronic

form. Enforcement of these rules now rests with the Office of Civil Rights (OCR), which is the agency to which any HIPAA security breach is reported (DHHS, 2015).

It is critical that today’s health care manager be aware of the impact of these laws on health care workers, as well as informed about the more significant concepts of HIPAA, such as the Notice of Privacy Practice (NOPP) and these Final Rule changes, and ensure that employees only have access to patients’ PHI on a need-to-know basis.

THE FUTURE OF HEALTH CARE INFORMATION TECHNOLOGY The era of carrying your personal EHR on a card in your purse, wallet, or embedded under your skin in a microchip with every conceivable piece of medical information about you is on the horizon (Jones, 2015). The ability to have a new physician evaluate your medical history without ever physically seeing you, and the ability to diagnose and treat you without you having to visit a doctor’s office or clinic, is definitely in the offing. A new mobile application for smartphones enables patients to track cold, flu, allergy, and other symptoms and maps them by automatically scanning social networks and media for symptoms of emerging outbreaks. This McNeil Consumer Healthcare app provides alerts and maps of sick zones on specific illnesses based on the consumer’s concerns (Barris, 2015). With re-emerging outbreaks of vaccine-preventable and other diseases, such as we discuss in Chapter 17, there will be even more of these apps for your phone. With our information becoming more mobile, we don’t need to be in the physician’s office or in the hospital to be “seen.”

This mobility, driven by a wireless world, is creating the ability for virtual care. In 2013, there were 7.1 billion people worldwide and more than 6.8 billion had cell phones—more than “ever [the number who] had land-lines” (Fernholz, 2014, para. 1). Some of the possibilities of this wired and mobile world that already exist include medications with embedded microchips that, after being ingested, send information to either the patient or the physician (Mathews, 2010); capsule endoscopy where the patient swallows a tiny wireless camera that films the digestive track (Mayo Clinic, 2012); using 3-D

printers to make artificial body parts like ears or hands (Rieland, 2014); and a plethora of wearable devises including electrocardiogram (EKG) patches, heart monitors, and breathing devices, etc. The list continues to grow, limited only by one’s imagination. There are also wearable headsets that monitor brain waves and wearable clothing, like the vest that sends physiological values (blood pressure, sugar levels, cardiac monitoring, etc.) to a remote location where nurses are monitoring the vests without the patient ever having to leave home. This boom in “wearable wireless medical devices sales will reach more than 100 million devices annually…. and is projected to exceed $2.9 billion in 2016” (McNickle, 2012, p. 1). Somehow, all of this data will need to be captured in EHRs.

Some of the areas that will likely confound this process include:

Optimizing existing vs. replacing EHRs: The trend of physician practices changing their EHRs, mentioned above, has continued. “Nearly 60% of providers are unsatisfied with their EHR system due to usability and work flow issues….this growing unrest is driving some practices to consider EHR replacement—with several reports from 2013 indicating that between 17% and 31% of physician practices were planning to replace their existing systems” (ECG Management Consultants, 2014, p. 3). Health care managers will need to make careful and difficult decisions about whether it makes sense to optimize an existing system or take on the challenge of converting to a different system.

Data integrity: The old saying “garbage in, garbage out” or GIGO is applicable to EHRs. As Chuang (2014) has pointed out, “data is king… if data is not good, the technology is meaningless” (p. 2). This is a call for data integrity and accuracy (White, 2014). Data entry and correct coding are clearly integral to the integrity of the data.

Promoting safety: A safety concerns study conducted by ECRI Institute pointed out the link between data integrity and patient safety. In fact, for 2014 information technology was the number one concern on ECRI’s list (Rice, 2014), and for 2015 it came in second. Data integrity problems relating to missing data, erroneous data, data coded to the incorrect record, and other inconsistencies were among the problems noted in 2015 (ECRI Institute, 2015). Textbox 8-3 provides an example a potential patient safety issue that resulted from EHR

miscommunication. Interoperability: This refers to the “ability of different information technology systems and software applications to communicate, exchange data, and use the information that has been exchanged” (HIMSS, 2013, para. 2). This means providers will need to have progressed through Stage 1 and be in Stage 2 of meaningful use. As pointed out above, very few hospitals and physician practices have reached these milestones. To keep moving toward the goal of an interoperable health care system, ONC has developed “A 10-Year Vison” and a draft “Roadmap” for implementing the former (ONC, 2014a; ONC, 2014b).

Cybersecurity: The issues of security of patient data have come to the fore in recent years, as significant security breaches, data spills, and data hacking threats have been prominent in the media. Incidents have included the 2011 case “where medical files belonging to nearly 300,000 Californians sat unsecure on the Internet for the entire world to see” (Robertson, 2011, para. 1), and the 2015 hack of Anthem’s data bases, exposing all types of personal data (names, addresses, birth dates, Social Security numbers, etc.) for 80 million employees and insureds (Chuang, 2015). To address these types of problems, managers need “to make sure the equipment your hospital uses has the most recent security updates installed. Any device used to store or access PHI should be encrypted, and network access should be limited only to those who need it” (White, 2014, para. 12). Jenkins (2013) lists “The ‘Dirty Dozen’ Healthcare IT Issues,” as shown in Textbox 8-4, are issues that health care executives need to address to secure data, manage risk, and prevent HIPAA violations. To address this problem, most states have now passed laws requiring companies to inform consumers about data breaches (NCSL, 2015). President Obama urged Congress to pass cybersecurity legislation, and on February 13, 2015, President Obama signed an Executive Order—Promoting Private Sector Cybersecurity Information Sharing to address some of these problems and to encourage sharing of information about cyber threats (The White House, 2015). Finally, the Office of the Inspector General (OIG) has warned efforts must be taken by providers to protect EHRs from being used for fraudulent purposes (OIG, 2014).


“The patient’s peanut allergy was listed in the EHR but the information did not cross over to the dietary department’s system. The patient questioned whether the food allergy information had been received by the dietary department after receiving a food tray that was not identified as free of peanut products.” Source: ECRI Institute, 2015, p. 10.

A new twist to cybersecurity will require health care managers to consider the new BYOD (Bring Your Own Device) to work movement and the extent to which this approach may compromise EHRs and health data systems. BYOD companies are requiring their employees to provide their own computer equipment. It is important to note that companies requiring BYOD are forecasted to reach 38% in 2016 and 50% in 2017 (Bolgar, 2014), although it is not clear whether health care organizations will be among them.


1. Unsupported, unpatched operating systems 2. Antivirus/antimalware issues 3. Poor security authentication 4. Unsecured wireless networks 5. No data redundancy, backups 6. Portable media and laptop security 7. Poor user training 8. Old, out-of-date, out-of-warranty systems 9. Lack of employee computer use policies

10. E-mail scams, hoaxes, phishing 11. Inept/untrained IT support resources 12. Data on workstations, laptops

Excerpted with permission from Jenkins, M. K. The Dirty Dozen Healthcare IT Issues, in S. T. Canale (ed): AAOS Now. Rosemont, IL,

American Academy of Orthopaedic Surgeons, November 2013.

Capturing Socioeconomic Data in EHRs became increasingly important with the passage of the ACA and its emphasis on increasing prevention and reducing health disparities. This led the IOM to convene a Committee to study and make recommendations on this topic (IOM, 2014a). The Committee found that “despite strong evidence of the influence of social and behavioral factors on health, these factors have not been well addressed in clinical care” (IOM, 2014b, p. 1). Charged with recommending specific measures to be added to EHRs, the committee narrowed these down to address the following:

• “psychosocial vital signs include four measures that are already widely collected (race/ethnicity, tobacco use, alcohol use, and residential address), and

• eight additional measures (education, financial resource strain, stress, depression, physical activity, social isolation, intimate partner violence, and neighborhood median household income)” (IOM, 2014b, p. 1).

Additionally, the IOM Committee recommended the inclusion of these measures in the ONC/CMS meaningful use criteria, that standardized measures be specified, that a plan be developed to conduct research using these measures from EHRs, and that the results of the Committee’s recommendations be reviewed for progress made. These future changes will clearly have an impact on all health care providers and require yet another set of criteria to be met by EHRs.

ICD-10 Adoption: The U.S. has continued to utilize the International Classification of Diseases ICD-9 codes to classify diagnoses and diseases since the late-1970s. The ICD-9 codes have been criticized for being “too outdated and no longer workable for treatment, reporting, and payment processes” and no longer “reflect all advances in medical technology and knowledge” (AMA, n.d., p. 3). In fact, “most other countries moved to the more granular and therefore more data-rich ICD-10 when it was released in the 1990s, leaving the U.S. behind as

far as research capabilities are concerned” (SearchHealthIT, n.d., para. 4). The conversion to the more specific ICD-10 codes has been delayed several times over the last several years. It was originally mandated by the CMS in 2009, but the conversion date was moved to October 1, 2015. This is a huge undertaking in terms of health system and software upgrades; training of clinical, coding, and billing staff, as well as management; and increased expenditures for HIS. This is yet another activity that must be achieved concurrently with EHR implementation and meeting meaningful use criteria. That said, “standardizing codes improves consistency among physicians in recording patient symptoms and diagnoses for the purposes of payer claims research and clinical research” (SearchHealthIT, n.d., para. 1), as well as for the accuracy of EHRs. In July 2015, the CMS announced that efforts will be made to ease the changeover to ICD-10 for physicians, taking steps to not deny Medicare claim payments because of coding errors and other actions to avoid disruption in payments because of transition issues during the first year of ICD-10 implementation (Stack, 2015a).

The future of information technology in health care encompasses a number of additional areas that managers need to be aware of and potentially involved in, including:

“e-health is the transfer of health resources and health care by electronic means. It encompasses three main areas:

• The delivery of health information, for health professionals and health consumers, through the Internet and telecommunications.

• Using the power of IT and e-commerce to improve public health services, e.g. through the education and training of health workers.

• The use of e-commerce and e-business practices in health systems management” (World Health Organization, n.d., p. 1).

“mHealth is the use of mobile technologies for the purposes of health care, public health, and health-related activities at the individual level” (Balgrosky, 2015, p. 243). These technologies include all types of mobile devices, such as laptops, tablets, smartphones, mobile medical devices, apps, and other wearables. In its 2014 Mobile Devices Study,

HIMSS Analytics provided data on the rapid increased use of devices and specifically “reported that smartphones and tablet computers greatly enhance [clinicians’] ability to communicate with other clinicians and healthcare providers… and that use of [these devices] will positively impact the delivery of patient care” (HIMAA Analytics, 2014, p. 4). Additionally, patients have begun to embrace what has been termed “do-it-yourself [DIY] health care,” such as mobile devices used to “monitor vital signs, analyze blood and urine, track medication adherence and more” (PwC Health Research Institute, 2014, p. 2). Some of these devices may require regulatory approval from the Food and Drug Administration (FDA) to assure patient safety. There are also concerns about how data from wearables will become part of EHRs, consistency of reported data, and data privacy and security issues (Ranney, 2015).

Telemedicine has been available for a while and relates to the use of technology to deliver clinical care to outlying and inaccessible areas. This allows for the use of sophisticated technologies and access to health care professionals and specialists in rural areas. An example of this is teledermatology, which has been used and studied as a means of bringing dermatological care to underserved populations (Armstrong, Kwong, Ledo, Nesbitt, & Shewry, 2011). If you’ve seen the commercial where the middle-aged couple re-enacts a dance scene from a popular film and crashes onto their dining room table, then have a video consultation with a puzzled physician, you are familiar with the concept of telemedicine. In the past there have been many barriers to the use of telemedicine, but as LeRoughe and Garfield (2013) point out, considerable progress has been made to address these by expanding broadband coverage to rural areas, changing licensure to allow physicians to practice outside their own states, enabling the reimbursement by Medicare and Medicaid for telemedicine services, researching and documenting the cost-effectiveness of these services, and incorporating telemedicine into organizational business strategies. That said, in April 2015 the Texas Medical Board took steps to limit the use of telemedicine in the state (Goodnough, 2015), and in May 2015 the U.S. House of Representatives passed a bill that would prohibit the obtaining of “telemed” abortion drugs (Andres, 2015). There is also pressure coming from the American Academy of Family

Physicians, AMA, AHA, American Association of Retired Persons (AARP), Anthem Blue Cross Blue Shield, and other organizations to get Congress to pass legislation to make telemedicine more accessible and convenient for Medicare patients and in turn to decrease costs and improve quality (Galewitz, 2015).

Telehealth is a related term but refers to the slightly different idea of providing “the remote delivery of health-related information from one site to another via electronic communications to improve a person’s health awareness and access to health-related information” (Balgrosky, 2015, p. 269). That is, telehealth pertains to providing a variety of non- clinical services. The Telehealth Enhancement Act of 2013 was introduced to the 113th Congress (i.e., in 2014) in an effort to focus on reimbursement and coverage issues under Medicare and Medicaid (HIMSS, 2014). This was not enacted before Congress adjourned in December 2014, and it remains to be seen if new bills will be introduced in a later legislative session. Despite the absence of legislation, the CMS did release a “Telehealth Services” fact sheet for “physicians or practitioners at the distant site” who provide services to Medicare recipients enrolled under fee-for-service plans (CMS, 2014).

Health informatics: Informatics relates to “the use of information systems and technology to redesign, improve, and create the ways disciplines such as the practice of medicine, nursing, medical imaging, and public health do their work” (Balgrosky, 2015, p. 264). That is, by aggregating and evaluating EHR data from health information systems, results can be used to make better decisions about improving the delivery of care. With the proliferation of EHRs, this will become increasingly possible and health care managers may find this a useful tool.

Analytics/Big Data: This refers to “the process of inspecting aggregated data, looking for patterns and statistics to help improve processes and creating information ultimately leading to new knowledge that helps improve efficiency and effectiveness in health care, and other goals of health and public health” (Balgrosky, 2015, p. 260). When we think of our individual health records and how complex those data are, consider having the ability to use millions of peoples’ data to analyze, predict, create policy, and recommend changes to improve population-based health care. Every year, public health

officials promote influenza vaccines to increase the “herd immunity.” That means if the majority of the population is immunized and protected from the disease, we are less likely to see epidemics or worse yet, pandemics such as the influenza pandemic of 1918 that killed 50 million people (DHHS, n.d.). Big data, in turn, relates to the massive data bases that are becoming available in health care, as well as in other industries, to which investigators can apply analytics for a multitude of purposes, including predicting and preventing pandemics.

Research and Policy: Big data and analytics enhance the capacity to conduct research and utilize research findings in making policy. For example, the Agency for Healthcare Research and Quality (AHRQ) anticipates the use of “big data analytics” to develop new research methodologies, to offer many new sources of data, “to incorporate new information flows into clinical workflows” (Dimitropoulos, 2014, p. 4), and to develop a research agenda assessing new topics and care models. In addition, numerous apps are being developed for smartphones to facilitate medical research data collection. “More than 75,000 people have enrolled in health studies that use specialized iPhone apps…to submit data daily by answering survey questions or using the iPhone’s built-in sensors to measure their symptoms” (Bailey, 2015, para. 5). These include, for example, an Asthma Health app, a Parkinson’s disease app, and others. These developments clearly open new, deep reservoirs of data for researchers and organizations.

As advances occur in information systems, a parallel and equally accelerated process has been and will continue to occur in medical devices and technology. Advanced genetics will become a predictive part of our health record, indicating potential treatments to avoid, or at least proactively manage the expression of later-onset inherited illnesses. A large number of clinical decisions can be made by a computer programmed to respond to an X-ray or lab result rather than a physician—involving the specialist only when a set of conditions is unknown to the knowledge base. Admittedly, some of these possibilities may seem straight out of science fiction and perhaps as silly as the idea that a telephone would not have to be plugged into the wall in our home or place of business might have been in 1985, or that you could talk to someone on that unplugged device and see them at the same time! The availability of health information, combined with its ability

to be mobile and shared, has the potential to transform the workplace of the future. The health care manager must be aware of and understand the impact of HIT to ensure that workers are productive, sensitive data is protected, and patients remain safe.

THE IMPACT OF INFORMATION TECHNOLOGY ON THE HEALTH CARE MANAGER More than ever before, the health care work environment requires comfort with and knowledge of information systems. This means managers need to have the competencies to effectively evaluate the experience of their staff in the use of required systems as well as their own ability to quickly adapt to new tools to manage their own workload. The nurse or medical coder who will not or cannot adapt to new tools will be unable to perform his or her job. Technology has also given rise to new types of employees, such as medical scribes who assist physicians with entry of data into EHRs (Gellert, Ramirez, & Webster, 2015). Health care managers will need to evaluate whether utilizing this type of employee would be beneficial for their organizations.

This increasing dependency on computers and mobile devices creates new workplace challenges when those technologies are not available or are not working optimally. Downtime and upgrades that add extra steps for the workforce will create new situations to be effectively managed. And while clinical care cannot stop merely because a system is down, the gap in information during that downtime must be filled so a break in the documented care of the patient is addressed. The health care manager of the future must be able to navigate technology used by his or her team and understand the barriers to be addressed to increase productivity and enhance job satisfaction. Take, for example, a manager’s commitment to ensure that health care employees are only accessing patient information on a need-to- know basis. Historically, this meant ensuring that charts were locked away when not used and not even accessible to those not physically in receipt of them. Today, with patient records online and able to be accessed by many

simultaneously, the ability to uphold this obligation requires monitoring audit files to ensure that electronic “straying” doesn’t happen, and if it does occur, it is addressed immediately. There is a human side of computing and IT: for every system created to ensure the security of health data and information, there is someone who can find a way around it and break into the system. New laws and policies regarding insurance and the confidentiality of patient information, such as the HIPAA, create new challenges for the use, maintenance, and sharing of privileged health information. For an industry that is steeped in the creation and use of paper documentation and medical records, it continues to be a difficult leap into the virtual world of EHRs. Textbox 8-5 provides an example of a breach of privacy and the consequences.


In August 2014, Dr. Rick Sacra, a physician from Boston, contracted Ebola while volunteering to provide aid and medical care during the Ebola outbreak in Liberia. He was brought back to the U.S. for treatment at Omaha’s Nebraska Medical Center in early September and subsequently recovered (Pollack, 2014). During a routine patient privacy audit, the hospital concluded that two employees had inappropriately accessed his medical records. The hospital released a statement which read, in part and was reported by a local television station:

“…we discovered that two med center employees inappropriately accessed the record of Ebola patient Dr. Rick Sacra. This is a violation of HIPAA regulations… Based on the results of the investigation conducted, two employees no longer work for the organization and other corrective action has been taken. In accordance with HIPAA regulations, Dr. Sacra was notified in person and in writing before his departure from the hospital.”

Source: WOWT NBC Omaha, 2014.

In cases like this, these individuals did not hold a job or perform a role in which they had any legitimate need to know the clinical information that they had accessed about Dr. Sacra. It is not clear what other action has been taken against these two individuals. As a HIPAA privacy rule violation, complaints are reported to the OCR in the DHHS, and under the new

security rules the risk assessment had to be undertaken. It is not yet clear, however, what action the OCR has or will take in this case. Additional action may be taken on the basis of their findings.

HIPAA privacy rules violations are considered misdemeanors, if there was no “evidence of malicious intent [and]…are punishable by a maximum fine of $50,000 and/or imprisonment for up to 1 year. But defendants who harbored ill will or used false pretense in obtaining or disclosing individually identifiable health information may face felony charges instead, which are punishable with a maximum fine of $100,000 and 5-year prison terms” (Seitz, 2010, p. 746).

As this demonstrates, easy access to medical records information often creates a situation where the curiosity of individuals clouds their judgment, resulting in very real punishments.

OPPORTUNITIES FOR RESEARCH ON HEALTH CARE PROFESSIONALS Technological advances in U.S. health care will continue to be spurred by the HITECH Act and consumer demands for increased transparency and transferability of data across the spectrum of care. In addition, big data, data mining, and analytics will become increasingly important in policy development, and planning, organizing, and evaluating delivery of care. Many of the resources used in writing this chapter also include extensive research holdings and data sets that are available to students and academic researchers. Herewith is a partial listing of these resources.

Agency for Healthcare Research and Quality Health Information Tools and Resources;

American Hospital Association; Centers for Medicare and Medicaid Electronic Health Records Incentive Programs;

ECRI Institute; and, U.S. Department of Health and Human Services Health Resources and Services Administration (HRSA) Health Information Technology.

You will have an abundance of information at your fingertips at any one of these websites.

CONCLUSION Health care information technology (HIT) is having an increasingly large impact on the health care industry and therefore on the health care manager. Health care costs in the U.S. have risen, while quality has not. This situation within the global economy is unsatisfactory to both the public and private sectors. In what has traditionally been seen as a high-touch industry, the promise of increased clinical quality and cost-effectiveness through the use of high tech health information systems has become a significant and urgent goal. As the adoption of clinical systems increases, so does the need for more sophisticated knowledge about them. Effectively operating in this new environment will require the successful manager to be comfortable with using and taking advantage of the benefits of the use of HIT and carefully manage its risks. Above all, the successful manager must always remember that the focus of HIT cannot be only about the gadgets and high tech toys, but on improving the health care of patients and populations served by the health care organization.

This chapter has provided the basics around the key health information systems used by health care managers and the significance of and challenges to adoption of the electronic health record (EHR). The future of HIT creates a vision of seamless movement of clinical information to wherever and whenever it is needed for patient care. While achieving this vision once seemed almost impossible, recent quality and cost concerns, as well as the impetus provided by the federal government and other influential bodies, suggest that it is essential and inevitable. This inevitability will require new skills of and offer new opportunities for health care managers.


1. Explain how the delivery of health care services can benefit from health information systems, and provide two examples.

2. What two pressures on the health care industry, the first in the 1990s and the second in the 2000s, conclude that electronic medical records are essential?

3. Jefferson Hospital has recently implemented computerized provider order entry (CPOE). What EMRAM stage are they in, and what projects might Jefferson undertake next to progress its EMR implementation?

4. Identify and describe the four primary barriers to health care information systems adoption.

5. As a health care manager, it is critical that your employees value and preserve the privacy of patient information. What measures might you put into place to encourage and monitor this?

6. What are the differences between EMRs and EHRs? What challenges have they presented for health care managers? And, what challenges does the future proffer?

7. What are the implications of the recent changes to HIPAA with regard to protecting PHI?

8. Using one of the data resources provided by your instructor, identify what stage of EMRAM U.S. hospitals are in for 2015 Q4. What suggestions for improvement can you make based on this information?

9. A large (100) physician cardiology group has decided it is time to move to a new EHR. As the practice manager, what key features should you be looking for and how will you integrate this into the practice? Keeping in mind the objections the physicians might throw at you during the monthly practice meeting, create a pitch to the managing partners for the system you think would work best for the practice. Assuming the partners approve, what is your plan to implement the new system? Provide timelines, deliverables, who is responsible for what step, as well as a staff training plan.

Cases in Chapter 18 that are related to this chapter include:

Building a Better MIS-Trap The “Easy” Software Upgrade at Delmar Ortho

Case study guides are available in the online Instructor’s Materials.

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Financing Health Care and Health Insurance

Nancy H. Shanks

LEARNING OBJECTIVES By the end of this chapter, the student will be able to:

Analyze health care spending, how it has grown, and whether it is expected to continue to grow;

Critique the concepts of health care financing and payment for health care;

Provide an overview of how health insurance works; Outline a brief history of how health insurance has evolved; Assess the terms and characteristics of health insurance; Compare and contrast the different types of private health insurance; Differentiate the types of social insurance; Evaluate data on health insurance coverage and lack thereof; Characterize the uninsured; Assess health care reform and changes to insurance resulting from it; Explain the implications of health care financing and health insurance for management; and

Investigate sources of research on finance and health insurance.


As health care managers, there are a number of concerns relating to the overall costs of health care, how it is financed, how health insurance works, and where the gaps in insurance are. It is critical for managers to understand these issues and learn how to better manage these areas.

National Health Spending Health care spending in the U.S. has grown over the last 50 years at what has been characterized as an alarming rate. While the increases have not returned to the double-digit levels that existed in the 1980s and early 1990s, the Centers for Medicare and Medicaid Services (CMS) are predicting the expansion in national health care spending will continue. “During 2009–11 per capita national health spending grew about 3 percent annually, compared to an average of 5.9 percent annually during the previous ten years” (Ryu, Gibson, McKellar, & Chernew, 2013, p. 835). The reduction in the rate of growth has been attributed to several factors, including a slowing of the economic recovery, private sector benefit changes that increased cost sharing by employees, and the “effects of sequestration” (Ryu et al., 2013; Sisko et al., 2014). Even with this slackening, health care expenditures in the U.S. were $2.9 trillion in 2013 (Hartman, Martin, Lassman, Catlin, & the National Health Expenditure Accounts Team, 2015). National Health Expenditures (NHE) for 2015 were projected to reach $3.2 trillion and to account for 17.6% of gross domestic product (GDP), or $9,983 per capita (Sisko et al., 2014).

Expenditures for health care were directed to a variety of services, as shown in Table 9-1. Five areas accounted for more than three-quarters of those expenditures in 2013. Hospital care accounted for 32.1%; physician and clinical services represented another 20.1%; other professional, dental, and personal care services costs were 6.5%; prescription drug costs made up 9.3%; and nursing home and home health care comprised 8.1% (CMS, 2014a).

In addition, CMS has also projected health care spending will reach $5.2 trillion and will account for 19.3% of GDP by 2023 (Sisko et al., 2014); this increase is projected “at an average rate of 5.8 percent per year” for 2014– 2024 (CMS, 2015b, para. 1). This will equate to an estimated $14,944 per capita by 2023. In sharp contrast, national health expenditures were $247.3 billion in 1980 and accounted for only 8.9% of GDP (Levit et al., 1997). Chernew, Hirth, and Cutler (2009) argue that the continued growth in health care spending crowds out other areas and limits the resources available for other non-health-related types of goods and services, and efforts are needed to slow the rate of health care spending. Whether the slowing of national health expenditures will continue is up for debate. In fact, Dranove, Garthwaite, and Ody (2014) state

the economic slowdown explained approximately 70 percent of the slowdown in health spending growth for the people in our sample. This suggests that the recent decline is not primarily the result of structural changes in the health sector or of components of the

Affordable Care Act, and that—absent other changes in the health care system—an economic recovery will result in increased health spending. (p. 1399)

The most recent data from the U.S. Census Bureau Quarterly Services Survey seem to indicate this has begun to happen, as “health spending was 7.3% higher in the first quarter of 2015 than in the first quarter of last year. Hospital spending increased 9.2%” (Altman, 2015d, para. 2). This was attributed to more people having coverage and utilizing more services.

Paying for Health Care Payments to cover these health care expenditures are derived from a variety of sources. These include individuals who pay out of pocket, private health insurance of a variety of types, other private funds, and public insurance programs. These categories are described below.

Out-of-pocket payments include payments by individuals who buy individual insurance policies, pay for services themselves, and/or pay for part of those services through copayments and/or deductibles.

Private health insurance includes payments made by individuals and/or their employers for health insurance premiums, which in turn cover the costs of payments made by various health plans, including indemnity plans, preferred provider organization plans (PPOs), point- of-service plans (POSs), health maintenance organizations (HMOs), and catastrophic plans, such as high-deductible health plans (HDHPs).

Public health insurance sources include funding from federal, state, and local government programs, including, among others, Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and the Military Health System.

Investment includes funding for research, as well as structures and equipment.

The breakdown of expenditures by these sources of funding for 2013 is shown in Figure 9-1. These data show the close to 50% of expenditures are derived from public sources.

INTRODUCTION TO HEALTH INSURANCE As with other types of insurance, the intent of health insurance is to provide protection should a covered individual experience a health event, adverse or otherwise, that requires treatment. Risk is the money that might be lost due to insuring people who utilize health care services. Insurance transfers the risk from one person to many people by pooling the risk across a large number of subscribers or members. When individuals purchase coverage, they join with others and pool their resources to protect against losses. In so doing, they pool the potential risk for losses that might be experienced and the cost of risk is shared among the many. This is called cost-sharing. The larger number of healthy people in the pool, the lower the risk. The greater number of sick people in the pool, the greater the risk. Thus, two key concepts in insurance are:

risk is transferred from the individual to the group, with cost sharing of any covered losses incurred by the group members.

FIGURE 9-1 National Health Expenditures by Source of Funds, 2013

CMS, 2014a.

Fifty years ago, health insurance coverage was typically purchased on an individual basis, much like car insurance. Individuals bought policies to protect themselves and their families against catastrophic illness. This was at a time when health care was not as expensive as it is today and individuals

paid for routine types of care out of pocket, thereby using health insurance to cover catastrophic expenditures and to protect against income loss. The latter, while technically a form of health insurance, is what we now think of as disability income insurance coverage.

During the second half of the 20th century, the demand for and use of health insurance changed in significant ways. Health insurance products have also changed in response to that demand. Of particular importance were the following:

Most health insurance coverage included a comprehensive set of health care benefits, most frequently including hospital stays and physician care, as well as other types of services and benefits;

Both the public and private sectors began to have expanded and increasingly important roles in the provision of health insurance coverage;

Group health insurance policies began to be offered as an employee benefit, with the purchasing of coverage being handled by companies and fewer people taking out individual insurance policies;

Mechanisms for reimbursing health care providers have expanded from solely paying on the basis of costs to reimbursing on a prepaid basis; and

The cost of health care began to rise.

BRIEF HISTORY OF HEALTH INSURANCE During the Great Depression of the 1930s, there were discussions about creating a national health insurance policy that would provide a system of universal health insurance coverage in the United States. While the proposal had some proponents, the American Medical Association (AMA) and others opposed the move. With the subsequent U.S. involvement in World War II, the funding required for such a system was not available. While there continued to be interest in national health insurance after the war, the concept of a universal health insurance mechanism eventually became synonymous with “socialized medicine” and all the negative associations with Communism during the cold war of the 1950s. The end result was a health

insurance system rooted in the private sector (Starr, 1982). Although the expansionist social policies of President Lyndon B.

Johnson’s Great Society in the 1960s are credited with development of the largest social health insurance programs this country has ever known, now known as Medicare and Medicaid, the seeds of these programs were actually sown by Congress during the Eisenhower administration in the 1950s. At a time when private health insurance coverage was increasingly being provided for workers by their employers, the elderly had virtually no such coverage and yet were the group in society with the largest health costs and often the most limited financial resources. The ultimate passage of the Kerr-Mills Act by Congress in 1960 provided for federal matching grants to the states for a new category of “medically indigent” individuals, but still did not cover elders other than those who had become poor. However, this piece of legislation played a pivotal role as the precursor to Medicaid.

It was actually President John F. Kennedy, backed by senior interest groups and supported by labor unions and nurses, who proposed the first Medicare bill to Congress in 1962 in keeping with his strong belief in the need for federal health care for the elderly. Although this measure was defeated by legislative opponents in the Senate, it did serve to raise public awareness and support and set the stage for President Johnson to utilize his considerable political popularity, legislative liaisons, and persuasiveness in small groups (such as the leadership of the AMA) to lead the charge for passage of the Medicare and Medicaid legislation in 1965.

Over time, these public programs have been expanded to bring more eligible individuals into coverage, have added types of benefits, and have changed in a variety of other ways. One such major expansion took place with the creation of the Children’s Health Insurance Program in 1997, which provides health insurance coverage to children in low-income families. The most recent, and some would argue the second most historic, change in health insurance occurred in March 2010 with the enactment of the Patient Protection and Affordable Care Act, commonly referred to as the Affordable Care Act, ACA or Obamacare. The primary intent of this health care reform legislation was to expand access to care by providing increased health insurance coverage and bringing the uninsured into coverage. This was to be achieved via an “individual mandate” that by 2014 required “most legal residents of the United States to obtain health insurance.” The law also mandated significant changes in health insurance

practices for both the public and private sectors (Iglehart, 2010a, 2010b). The ACA is described in greater depth later in the chapter.

The federal government also has an extensive program for providing health care to active-duty military personnel, veterans, and their dependents. The military medical system is one of the most advanced in the world and has come to serve as a model in many ways.

Private health care coverage has evolved significantly in the last 60 to 70 years, as well. Employers began to provide health insurance as an employee benefit, electing to offer the benefit in lieu of providing wage increases to employees. This was primarily the result of collective bargaining agreements, where unions negotiated increased benefits for workers and their families. Over time, private health insurance has evolved from being primarily conventional indemnity insurance to various types of prepaid and managed care plans. Today, a variety of different types of coverage are used in the industry.

CHARACTERISTICS OF HEALTH INSURANCE This section discusses some important aspects of health insurance, including how health care is financed, how costs are controlled, and the types of benefits offered.

Forms of Payment Two forms of payment provide the basis for all types of health insurance coverage. These are:

Fee-for-service—This approach was developed by Blue Cross Blue Shield plans and is based on the idea of an insured individual purchasing coverage of a set of benefits, utilizing individual medical services, and paying the health care provider for the services rendered. The provider is paid either by the insurer or out of pocket by the insured, who, in turn, is reimbursed by the insurer. Typically, the insured must meet deductibles and make copayments for their care.

Prepayment—In this approach, an insured individual pays a fixed,

prespecified amount in exchange for services. Routine types of care are typically covered in full, with small copayments for selected services (e.g., prescriptions).

Cost Sharing Most insurance policies require insured individuals to bear some of the cost of care out of pocket. Cost sharing may take different forms but may include some or all of the following:

Copayments—are costs that are borne by the insured individual at the time of service. For example, a prescription medication or a physician office visit may require a $15 or $20 copay. Copayments are used in both fee-for-service and prepaid plans.

Deductibles—are required levels of payments that the insured individual/family must meet before the insurer begins making its payments for care in a fee-for-service plan. Deductibles are regularly met at the beginning of each year and vary by policy type. They can range from relatively small amounts for traditional types of insurance to quite substantial amounts under high-deductible, catastrophic coverage plans.

Coinsurance—Under a fee-for-service policy, insured individuals pay a portion of the cost of their care, while the insurer is responsible for the remaining costs. For example, the insured’s coinsurance is often 20%, while the insurer pays 80%.

Policy Limitations Often the insurance policy has various types of limitations—some that limit payments by the policy holder and some that limit how much total coverage the insurer will provide.

Maximum out-of-pocket expenditure—This is an amount where the insured individual’s cost sharing is capped. After reaching this point, the insurer will pick up 100% of the tab.

Lifetime limit—This is the maximum amount that the policy will pay out over the lifetime of the insured individual. This type of limit usually

only comes into play when there are catastrophic types of illnesses requiring very costly care. For example, in various types of transplants or spinal cord injuries, the treatment costs can escalate to hundreds of thousands of dollars. The limit can be $1 million or higher.

Types of Benefits Different types of benefit packages can be purchased that offer varying types of coverage for individuals and families. These include:

Comprehensive policies—These policies provide benefits that typically include physician and other types of outpatient visits, inpatient hospitals stays, outpatient surgery, medical testing and ancillary services, medical equipment, therapies, and other types of services. Prescription drugs are sometimes covered, as are rehabilitation services, hospice, and mental health care. Despite the name “comprehensive,” most policies do not cover everything and thus have exclusions; in particular, most types of experimental treatments and long-term care are excluded.

Basic, major medical, or hospital-surgical policies—Referred to by several different names, the benefits provided by these policies are limited to types of illness that require hospitalization. Benefits include inpatient hospital stays, surgery, associated tests and treatments, related physician services, and other expenses incurred during an illness. There usually are limits on hospital stays and caps on expenditures.

Catastrophic coverage policies—Benefits under these policies are intended to cover extraordinary types of illness; policies typically carry very sizable deductibles ($15,000 or higher) and lifetime limits on coverage.

Disease-specific policies—In these policies, the benefits cover only the specific disease(s) covered (e.g., a cancer care policy).

Medigap policies—These policies provide supplemental coverage of certain benefits that are excluded from other types of policies (e.g., prescription drugs).

Long-term care insurance—Coverage under these policies typically includes various types of assistance for in-home care, assisted living,

skilled nursing, home, and other specialized care, such as in an Alzheimer’s unit.

Other Concerns Regarding Health Insurance There are a number of issues that are important when managers and/or individuals are making decisions about health care coverage. These include the following:

Access to vs. restrictions on care—This pertains to whether access to care is limited or controlled for the insured individual. Under some insurance policies, there is unlimited access, while under others, access is restricted by a gatekeeper.

Moral hazard—This concept refers to the idea that existence of insurance coverage provides an incentive for insured individuals to secure and use coverage. For example, a woman who knows she is going to become pregnant may be more likely to opt into coverage than a woman who is not expecting to have a need for this type of care.

Pre-existing conditions—These are medical conditions that make a person a risk to an insurer, as the pre-existing condition may result in high expenditures. In the past, those who have had these types of conditions (e.g., cancer) have found it difficult or impossible to obtain coverage.

Buy-downs—This is a situation that occurs with individual policies. “When insurers inform members of large premium hikes, they commonly suggest that the increase can be mitigated (or sometimes even eliminated) by switching to a lower-cost policy (which means a policy with higher deductibles and/or greater limits on benefits)” (Altman, 2010, para. 2).

Coordination of benefits (COB)—This is important when someone has two insurance plans: for example, a husband and wife both have coverage at work and have a family insurance plan. Each company seeks to ensure it pays only that which it is obligated to pay.

The remaining sections of this chapter explore the different types of insurance coverage in greater depth. The chapter includes a discussion of the numbers and demographics of specific segments of the population who do

and do not have health insurance coverage. Finally, the chapter concludes with a discussion of the implications for health care managers.

PRIVATE HEALTH INSURANCE COVERAGE Each type of private health insurance is described briefly below. Additionally, consideration is given to the pluses and minuses of the type of insurance with respect to access to care, choice of providers, and cost.

Conventional Indemnity Insurance Most indemnity insurance products are based on the fee-for-service model. When the insured individuals utilize health care services, they pay for those services and seek reimbursement from the insurer. Care is rendered by independent health care providers, without gatekeeping or other restrictions. Management of care only comes into play in elective admissions, which may require preauthorization. While this type of coverage used to be predominant in the health insurance industry, as shown in Table 9-2 later in this section, it now represents only a very small segment of the market. Additionally, Table 9-3 compares indemnity and other types of health plan coverages on a variety of characteristics which help to explain the loss of dominance of this type of coverage.

Managed Care Plans Unlike indemnity plans, these health plans seek to manage cost, quality, and access to health services through control mechanisms on both patients and providers. These delivery systems attempt to integrate both the financing and provision of health care into one organization. The primary types include HMOs, PPOs, and POS plans and are described further below.

Health Maintenance Organizations (HMOs) Individuals become members of the organization by paying a fixed prepayment amount. Once they become members, they are enrolled in the HMO. Enrollees are eligible to get care from the providers and facilities that

are aligned with the HMO. Services are used at no charge, although minor copays are often required for prescription medications. Administration is centralized, with providers typically being reimbursed under a capitated rate. This means that providers are paid a set amount no matter how much care they need to provide. As described by Kongstvedt (2007), various types of contracting arrangements exist with providers, which may take the form of:

Closed-Panel HMO—physicians practice only with the HMO, frequently in an HMO-owned health center;

Open-Panel HMO—physicians practice within and outside the HMO; Group Model HMO—the HMO contracts with a multispecialty group practice to care for its enrollees;

Staff Model HMO—groups of physicians are either salaried employees of the HMO or salaried employees of a professional group practice contracting exclusively with the HMO;

Independent Practice Association, or IPA Model—the HMO contracts with an association of physicians practicing independently in their own offices; and

Network Model HMO—the HMO contracts with several groups of physicians or with individual physicians or multispecialty medical clinics (physicians and hospitals) to provide a full range of medical services.

Preferred Provider Organizations (PPOs) These plans reflect a combination of indemnity insurance and managed care options. In PPOs, insured individuals purchase coverage on a fee-for-service basis, with deductibles, copays, and coinsurances to be met. Care is managed in the sense that insured individuals pay less if care is obtained from a network of preferred providers with which the insurer contracts for discounted rates. Preferred providers include physicians, hospitals, diagnostic facilities, and other service providers. If care is not provided by a preferred provider, the insured individual pays a higher undiscounted rate and must meet higher deductibles and coinsurances for these services.

Point-of-Service (POS) Plans

These plans provide some flexibility to the HMO model described above and are sometimes referred to as open-ended plans. Under a POS plan, an enrollee can use services that are out of plan, in exchange for deductibles and coinsurance payments. The plan tries to address some of the shortcomings of the pure HMO approach.

High-Deductible Health Plan with Savings Option (HDHP/SO) A form of consumer-driven health plan, these types of plans offer the enrollee catastrophic coverage for a relatively low premium that is coupled with a high deductible. The savings option is typically a Health Savings Account (HSA) or some other type of vehicle. HSAs serve as a way to bank pretax dollars with an employer up to a certain amount to be used for medical expenses. If the consumer does not spend the HSA account down, she loses the money at the end of the year. Among the many provisions of the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003, HSAs were mandated to “pair high-deductible plans that meet certain requirements with fully portable, employee-owned, tax- advantaged accounts” (Wilensky, 2006, p. 175). The underlying ideas behind HSAs are that consumers will become more educated users of health care, be more likely to utilize preventive and chronic care services, become more cognizant of the costs of care, be less likely to make poor decisions about using care that is not necessary or not appropriate, and be more prudent when using an account that is seen as containing “their own funds.”

In the mid-1990s, many people thought managed care was the solution to the rising health care cost problem. While initially there was tremendous growth in managed care, particularly in HMOs, that trend slowed in early part of the 21st century. Consumer perceptions indicated negative views of managed care plans, concerns about the restrictions imposed in the plans, and the quality of care provided.

Evidence and data suggest that PPOs have become the dominant form of coverage (Hurley, Strunk, & White, 2004). This represents a radical shift in choice of plan over time, as shown in Table 9-2. In 1988 the majority (73%) of covered workers were enrolled in conventional indemnity types of health insurance plans, 16% were in HMOs, 11% were in PPOs, and POS and

HDHO/SO plans weren’t even options. By 2014, 58% of workers enrolled in health plans opted for a PPO, while only 13% and 8% were in HMOs and POSs, respectively. The penetration of HDHP/SOs into the health insurance market increased from zero to 20% in less than 10 years. Less than 1% of workers were still covered by conventional indemnity health plans in 2014 (Kaiser Family Foundation and Health Research and Educational Trust, 2014).

The primary types of private health insurance coverage are compared across a number of important dimensions in Table 9-3. These include issues of access to care in general and to specialists, choice of providers, cost sharing, restrictions on utilization, administrative costs, paperwork, and several other dimensions. It is clear from reviewing this information that there are distinct tradeoffs between plans. For example, those that provide unlimited access tend to have difficulties controlling costs, but afford higher quality. Those that are able to manage and control costs do so by limiting access and utilization.

THE EVOLUTION OF SOCIAL INSURANCE As with private insurance, many changes have taken place in how individuals can access care via social insurance or federal entitlement programs. The changes in both areas are discussed below, along with key pieces of legislation that also relate to the private sector.

Major Legislation The social health insurance programs of Medicare and Medicaid have continued to evolve over the past 50 years. The following discussion will address some of the major pieces of legislation shaping this evolution.

Social Security Act of 1965 The 1965 Amendments to the Social Security Act of 1935 established the

two largest government-sponsored health insurance programs in the history of the U.S. Medicare, Title XVIII of the Act, entitled persons 65 and over to coverage of hospital care under Part A and physicians’ and other outpatient health services under Part B. Eligibility for Medicare benefits has since been extended to younger people with permanent disabilities, individuals with end-stage renal disease (ESRD), and persons under hospice care. Medicaid, Title XIX, set up a joint federal–state program entitling financially qualified indigent and low-income persons to basic medical care. This program, too, has undergone numerous iterations at both the state and federal levels as these governments have attempted to strike a balance between equity in coverage for certain services (mandated at the federal level) and states’ rights in controlling the use of public funds.

Employee Retirement and Income Security Act “The Employee Retirement Income Security Act of 1974 (ERISA) protects the interests of participants and beneficiaries in private-sector employee benefit plans…. An employee benefit plan may be either a pension plan (which provides retirement benefits) or a welfare benefit plan (which provides other kinds of employee benefits such as health and disability benefits” (Purcell & Staman, 2008, p. 1). This federal law allows private companies to provide health benefits to employees through their own self- funded health insurance plan. The plan must meet the legal requirements of ERISA but can be customized to include only the benefits the company defines. While the law has been periodically amended to require these plans to comply with other federal laws, such as the requirements of temporary coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA), the preexisting conditions provisions of the Health Insurance Portability and Accountability Act (HIPAA), the coverage requirements of the Mental Health Parity Act, and other specific coverage areas (Pozgar, 2007; Purcell & Staman, 2008), there are no requirements for these plans in terms of specific covered benefits. Additionally, since federal law preempts state law, companies that opt for this type of health plan have in almost all instances been exempted from the requirements of state health insurance mandates and laws.

TEFRA 1982 and OBRA 1989 In response to rapidly rising health care costs, Congress passed the Tax Equity and Fiscal Responsibility Act (TEFRA) in 1982, with particular emphasis on Medicare cost controls. Among its key provisions were the following:

a mandate for a prospective payment system (PPS) for hospital reimbursement, with payment rates established up front for conditions known as Diagnosis-Related Groups (DRGs);

the option of providing managed care plans to Medicare beneficiaries; and

the requirement that Medicare become the secondary payer when a beneficiary had other insurance.

Similar payment arrangements have been mandated for other types of providers, such as compensation for physician office services to Medicare beneficiaries using the Resource-Based Relative Value System (RBRVS), mandated as part of the Omnibus Budget Reconciliation Act (OBRA) of 1989 and implemented in 1992. Under RBRVS, payments are determined by the costs of resources needed to provide each service, including physician work, practice expenses, and professional liability insurance.

Balanced Budget Act of 1997 Despite reductions in reimbursements for hospital admissions and physician visits, Medicare expenditures continued to soar throughout the 1990s. Congress passed the Balanced Budget Act (BBA) of 1997 in an attempt to control costs for other health care services, mandating some 200 changes (primarily restrictive) to Medicare alone, as well as changes to Medicaid. Medicare PPSs were phased in and implemented in other health care settings beginning in 1998 as follows:

Skilled nursing facilities (SNFs), in 1998, with RUGs (Resource Utilization Groups);

Home health agencies (HHAs), in 2000, with HHRGs (Home Health Resource Groups);

Hospital outpatient department services, in 2002, with OPPS (Outpatient Prospective Payment System); and

Payment reductions and prospective payment arrangements for hospice care, rehabilitation hospitals, ambulance services, and durable medical equipment.

Other key provisions of the BBA, providing for cost controls in some areas and expansion of coverage in others, were:

the creation of Medicare Part C, originally known as Medicare+Choice and now referred to Medicare Advantage Plans, to move Medicare recipients into alternative forms of coverage, including HMOs and PPOs;

provisions relating to fraud and abuse; improvements in protecting program integrity; restrictions on public benefits for illegal immigrants; addition of Medicare prevention initiatives (such as mammography, prostate cancer, and colorectal screenings);

addition of rural initiatives; and establishment of the Children’s Health Insurance Program (CHIP) to provide increased access to health care coverage for low-income children; this became Title XXI of the Social Security Act.

Medicare Prescription Drug, Improvement, and Modernization Act of 2003 Known as the Prescription Drug Benefit, Medicare Part D, and/or MMA, this produced the largest additions and changes to Medicare and was projected to cost $395 billion in its first decade alone. Effective January 1, 2006, this controversial entitlement to prescription drugs instigated a flurry of activities by individual states to mitigate uncertainties in its implementation and to temporarily provide prescription coverage for millions of seniors still in the process of meeting eligibility requirements. Tax breaks, subsidies, and other incentives to pharmaceutical companies and private, managed care insurers, along with significant pressure on seniors to enroll in Medicare Advantage Plans or risk significant out-of-pocket costs,

were among the most contentious provisions of the drug benefit portion of this legislation.

With so much attention focused on the drug benefit, it has become easy for other provisions of this legislation to become lost in the discussion. Some of the more important ones include:

increased prevention benefits; an extra $25 billion boost to often severely underfunded rural hospitals; a requirement for higher fees to be collected from wealthier seniors; and the addition of a pretax health savings account for working people.

Patient Protection and Affordable Care Act of 2010 President Obama signed Public Law 111-148 on March 23, 2010. This law called for sweeping changes in health insurance, including both individual and employer mandates, creation of health insurance exchanges to allow choice in purchasing coverage, subsidies for small businesses, changes to Medicare, expansion of Medicaid to provide coverage for more children and low-income adults, expansion of CHIP to provide additional federal funding, cost-containment efforts for both Medicare and Medicaid, provisions for improving quality of care and performance, expansion of prevention and wellness programs, and elimination of cost sharing for screening and prevention services, to name some of the key provisions (Iglehart, 2010b; Kaiser Commission on Medicaid and the Uninsured, 2010a; Kaiser Family Foundation, 2010c). Lifetime limits on health insurance coverage were eliminated as of 2014 (Iglehart, 2010b). The new health care reform legislation created the Pre-Existing Condition Insurance Plan (PCIP) to allow access to coverage for individuals in this group (Kaiser Family Foundation, 2010c). A website was created by the federal government to provide details about the new law, to link people to the health insurance marketplace in order to enroll for coverage through either the federal or state health care exchanges, to provide ready access to policies and regulations, to make data readily available for researchers, and a host of other uses (see The Kaiser Family Foundation published a summary of the law (2010c). A timeline for implementation of the ACA is also available for 2010 through 2022 (Obamacare Facts, 2015c).
There have been numerous problems with the rollout of the health exchanges, use of the federal website for enrolling, and other logistical issues, but these have for the most part been resolved. There have also been a large number of legal challenges to the ACA relating to whether the federal government has the authority to mandate health insurance coverage; taxing of health benefits; required coverage of certain benefits; and the impacts on businesses (particularly small businesses), the states, insurers, and health care providers (Abelson, 2010; Helms, 2009; Kaiser Commission on Medicaid and the Uninsured, 2010c; Luo, 2010; Miller, 2010; Sack, 2010; Schwartz, 2010). Several have been heard by the U.S. Supreme Court. The first case upheld most of the provisions of ACA, but did prohibit the federal government from cutting funding to states if they did not expand their Medicaid programs (Cauchi, 2015). The second case focused on benefit coverage and found that “closely held corporations cannot be required to provide contraception coverage under Obamacare if they had religious objections” (National Constitution Center Staff, 2015). The most recent challenge, known as King v. Burwell and heard by the Court in March 2015, questions the constitutionality of the verbiage in the ACA with regard to providing tax subsidies to individuals through the health care exchanges (Cauchi, 2015; National Constitution Center Staff, 2015).

These types of challenges to the health care reform legislation may continue, in part because there continues to be dissension about the value and provisions of the law. For example, a Kaiser Family Foundation Health Tracking Poll found that only 19% of people polled felt that the ACA has been beneficial for them or the families, while 22% indicated that it has hurt them and the remaining 56% saw no direct impact (Altman, 2015b), but the Foundation’s March Health Tracking Poll also showed that Americans were almost evenly divided on whether they favor the ACA or oppose it (41% vs. 43%, respectively) (Altman, 2015a). There also continue to be misunderstandings about the law. For example, many individuals who change their status as a result of a “qualifying life event” may be eligible to apply for coverage outside the yearly “open enrollment periods” (Hartman, Espinoza, Fried, & Sonier, 2015). This suggests the need for better communication about the ACA.

Finally, it is also important to recognize who has benefited from the ACA. “The data shows that the law has done something rather unusual in the American economy of this century: It has pushed back against inequality,

essentially redistributing income—in the form of health insurance or insurance subsidies—to many of the groups that have fared poorly over the last few decades” (Quealy & Sanger-Katz, 2014, para. 2). While that is true, the bottom line is that it will be many years before we know the true costs, long-term benefits and overall results of this legislative action.

Medicare Access and CHIP Reauthorization Act of 2015 This legislation, sometimes referred to as MACRA or the Medicare “Doc Fix” bill, included several important provisions. The first changed the formula for reimbursing physicians and prevented reductions in physician payments that were scheduled to take place in April 2015. The intent was to forestall physicians from not accepting Medicare patients and thereby increasing access for them. Another set of provisions reauthorized the Children’s Health Insurance Program. Finally, several provisions authorized spending cuts to Medicare for supplemental Medigap plans and requiring “higher premiums for seniors who make more than $133,500…. starting in 2018” (Cubanski & Neuman, 2015; Obamacare Facts, 2015a, para. 7).


Medicare As discussed previously, this federal program provides access to health care for the elderly over 65 years of age, for permanently disabled younger adults, and for those suffering from end-stage renal disease (ESRD). End-of-life “palliative” care (or comfort care) is also provided for terminally ill enrollees in their last six months of life. The primary benefits of this program, as delineated by the CMS (2015a) and Kaiser Family Foundation (2010b), can best be summarized through description of its four “parts”:

Part A—Hospital Insurance (HI), allowing 90 days of inpatient hospital coverage per benefit period (with a 60-day lifetime inpatient hospital reserve), inpatient skilled nursing facility (SNF) coverage of up

to 100 days per episode (with a 90-day lifetime SNF reserve), currently prequalified home health care services, and hospice care for the terminally ill.

Part B—Supplemental Medical Insurance (SMI), providing coverage for visits to physicians, outpatient treatments, and preventive services, including flu and hepatitis B vaccines, mammography, and Pap smears.

Part C—Medicare Advantage Plans (MAs), allowing beneficiaries to enroll in a variety of capitated health insurance plans, which are required to provide the same types of services covered under traditional Medicare plans and may offer the option of additional benefits such as prescription drugs.

Part D—The Prescription Drug Benefit, with drug coverage being available through Prescription Drug Plans (PDPs), Medicare Advantage Drug Plans (MA PDs), or other Medicare-approved prescription plans.

Administered federally by the CMS, Medicare has been financed through three primary means. The first has been through assessments to employers and employees, contributing 2.9% of payroll (1.45% each), “along with an additional 0.9 percent paid by higher-income taxpayers (wages above $200,000/individual and $250,000/couple” (Cubanski et al., 2015, p. 2). This funding is dedicated entirely to paying Part A benefits. The second means of financing has involved increased cost sharing by beneficiaries, including premiums (financing 25% of all Part B benefits and 25.5% of Part D benefits, with wealthier beneficiaries again paying higher percentages, “ranging from 35 percent to 80 percent” (Cubanski et al., 2015, p. 32), deductibles, coinsurance, and balance billing. The third and largest financing source has increasingly been derived from allocations from general revenues (i.e., federal tax revenues). Total Medicare revenues from all sources were estimated at $575.8 billion in 2013 (Cubanski et al., 2015). Figure 9-2 summarizes the relative percentages from major Medicare revenue sources.

Public policy circles have become increasingly concerned about the growth in Medicare program enrollment and the concomitant rise in expenditures. According to CMS data, 19.1 million individuals were enrolled in Medicare at its inception in 1966; this number grew to 55 million in 2015 (Cubanski et al., 2015). With the influx of the huge Baby Boom generation (born between 1946 and 1964) that began to turn 65 in 2011, enrollment is projected to swell “to 93 million, while the ratio of workers per beneficiary is

expected to decline from 3.2 to 2.3” by 2050 (Cubanski et al., 2015, p. 34), resulting in significantly fewer revenues being derived from payroll taxes. Medicare’s share of the U.S. economy is also expected to increase from 3.5% (as a percentage of the GDP) in 2013 to 5.3% in 2035 “and will increase gradually thereafter to about 6.9 percent of GDP by 2088” (Social Security and Medicare Boards of Trustees, 2014, p. 5).

FIGURE 9-2 Estimated Medicare Revenues, 2013

Data from: Kaiser Family Foundation based on data from 2014 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.

Another issue of concern surrounding Medicare expenditures is the distribution by percentages of dollars allocated to various sectors of the health care arena. Figure 9-3 summarizes this distribution. These numbers are partially indicative of the aging of the population, with increased life expectancy. Research has shown that health care services are used by those 65 and older at a much higher rate than other age groups, particularly by those who are very old. Yet these factors do not tell the entire story. Why else have Medicare expenditures grown so dramatically? The following are among the most frequent and significant factors:

a shift from treatment of acute illnesses to more chronic care as society ages and lives longer, with more substantial outlays of money to treat

the latter; tremendous growth in hospital expenditures; initial lack of cost-conscious Medicare reimbursement, using retrospective fee-for-service (payments based on charges) methods;

huge growth in pharmaceutical costs and in technological innovations in the medical field;

increased payments under Part C plans; the need for higher payments to rural health providers; rising medical malpractice premiums related to increasing litigation; and as shown in a recent study, “two-thirds of traditional Medicare beneficiaries older than 65 have multiple chronic conditions, according to a USA Today analysis of county-level Medicare data. More than 4 million—about 15%—have at least six long-term ailments. Those sickest seniors account for more than 41% of the $324 billion spent on traditional Medicare” (Hoyer, 2015, para. 5).

FIGURE 9-3 Distribution of Medicare Expenditures, 2014

Adapted from: Kaiser Family Foundation based on data from 2014 Annual Report of the Boards of

Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, p. 29 (Figure 24). Retrieved from key-facts-about-the-medicare-program-and-the-people-it-covers

During the early 1990s, federal policy makers were already alarmed by the dramatic rise in health care expenditures, particularly concerning Medicare. In fact, during the first Clinton administration in the early 1990s, there was a push toward legislation providing for a national health care system. Efforts to slow the rate of growth were mandated. The 2010 health care reform legislation included provisions for this, including changes to Medicare Advantage, reducing payments to hospitals for patient readmissions, changing premiums for Parts B and D, promoting preventive care, and working to reduce fraud (Kaiser Family Foundation, 2010c). Additionally, Medicare is currently testing new delivery mechanisms mandated by the ACA that are designed to reduce costs and improve quality, including creating Accountable Care Organizations (ACOs), bundling payments, and creating Medical Homes, as well as developing a “value-based purchasing program” for reimbursing hospitals. These reforms are discussed further in Chapter 10.

Medicaid Medicaid, the second largest provider of socialized health insurance in the United States, provides health care coverage to the medically indigent (those below certain poverty-level determinations) and is jointly funded by state and federal governments. Mandatory services required by the federal government include: “physician, midwife and certified nurse practitioner services; inpatient and outpatient hospital services; laboratory and x-ray services; family planning services and supplies; rural health clinic/federally qualified health center services; nursing facility and home health care for adults over 21; and Early Periodic Screening, Diagnostic, and Treatment (EPSDT) services for children under age 21” (Center on Budget and Policy Priorities, 2013, para. 15). Beyond this, each state has authority in administering Medicaid programs, including the amount and scope of services and differences in eligibility requirements.

There is huge variation in the types of benefits provided by various states. For example, some states provide a wide array of dental benefits to beneficiaries. Others provide mental health benefits and/or drug and alcohol
treatment. Similarly, there are significant variations in coverage of the poor. Some “bare bones” Medicaid programs cover only individuals mandated by the federal government, while other states cover individuals with higher incomes. These differences, as well as differences in ages of individuals covered, result in wide gaps in Medicaid coverage from state to state.

Despite the considerable discretion given to the states in terms of eligibility requirements in relation to income, the following categories of medically indigent and low-income individuals must be included in state Medicaid programs:

The medically indigent, historically linked to two federal assistance programs: Temporary Aid to Needy Families (TANF), which replaced Aid to Families with Dependent Children (AFDC) in 1996, and Supplemental Security Income (SSI);

Low-income pregnant women, children, and infants, as mandated through the Omnibus Budget Reconciliation Act (OBRA) of 1986; and

Children whose parents have income too high for Medicaid but too low for private insurance, through CHIP.

The primary problems caused by allowing such liberal state discretion have been the huge inequities in the numbers and percentages of residents being served and the types of benefits being received. Part of these discrepancies may be related to the differences in how Medicaid is financed. The federal government finances 50% to 77% of Medicaid costs in any given state, depending on the state’s poverty status (i.e., the number of individuals living below the federal poverty level). This leaves state contributions ranging from 23% to 50%, with the poorer states contributing the lowest percentages. Many “richer” states, often feeling the pinch of reduced state coffers related to factors other than income, feel it is unfair that they must shoulder 50% of the health insurance burden of their poorest members and thus often contribute a smaller proportion of their General Fund to the provision of Medicaid services.

The changes from the ACA have had a tremendous impact on Medicaid, as a result of the provisions calling on states to expand their coverage of the uninsured. “Specifically, the ACA expanded Medicaid eligibility to nearly all non-elderly adults with income at or below 138% of the federal poverty level —about $16,245 for an individual in 2015… [and] provided for 100% federal

funding of the expansion through 2016, declining gradually to 90% in 2020 and future years” (Paradise, 2015, p. 1). This provision of the law was, however, challenged by several states and the U.S. Supreme Court ruled in 2012 that expansion would be optional for the states. The result is again significant variation in how the expansion has been handled. As of May 26, 2015, 30 states and DC had expanded their Medicaid programs, 3 states were considering it, and the remaining 18 states (mainly in the South and Midwest) were not adopting the provision (Kaiser Commission on Medicaid and the Uninsured, 2015). The states that do expand are also required to comply with the minimum coverage requirements of the law, thus bringing greater uniformity to benefits across the states (Mahan & Traver, 2013).

Between October 2013 and October 2014, Medicaid added 8.7 million people to the Program (Pear, 2014), bringing the total enrollment to approximately 70 million. These changes have brought many uninsured Americans into health care coverage. The groups covered by Medicaid have remained relatively stable and include low-income individuals (including the elderly), families, and children, as well as the disabled. What has changed radically over time, however, is the dollars consumed by these different groups. For example, the aged, blind, and disabled represented 24.0% of Medicaid beneficiaries, but accounted for 65.0% of Medicaid spending in 2012 (Truffer, Klemm, Wolfe, Rennie, & Shuff, 2013, p. 16). This radical difference can be seen graphically in Figure 9-4. This difference is likely to be accentuated with the influx of new enrollees who are mostly children and adults in low income families who use fewer resources, while the elder and disabled enrollees continue to be responsible for the majority of spending.

As with Medicare expenses, Medicaid expenditures have grown dramatically over the past couple of decades. In 1966, at the inception of Medicaid, there were only 10 million recipients of Medicaid, with total spending at only $1.7 billion (in 1966 dollars). While expenditures reached $431.9 billion in FY 2012, the rate of increase had slowed to some extent. In fact, “total Medicaid expenditures increased by 0.8 percent in 2012, which is the second-lowest rate of growth in the program’s history, as States acted to limit the rate of growth of expenditures while the States’ share of costs increased” (Truffer et al., 2013, p. iii). That said, the Office of the Actuary of CMS has estimated that “over the next 10 years, expenditures are projected to increase at an average annual rate of 7.1 percent and to reach $853.6 billion by 2022” (Truffer et al., 2013, p. iv). Thus, the slowdown appears to

be temporary as “Medicaid spending grew 6.1% to $449.4 billion in 2013, or 15 percent of total NHE” (CMS, 2014b, para. 1).

FIGURE 9-4 Estimated Medicaid Enrollment and Expenditures by Enrollment Group, as Share of Total, Fiscal Year 2012

CMS, 2013, Acturial Report on the Financial Outlook for Medicaid (Truffer, Klemm, Wolfe, Rennie, & Shuff, 2013, p. 16).

Medicaid is thus one of the primary funders of health care in the country. This includes the following:

accounting for “35% of safety-net hospitals’ revenues”; providing “40% of health center revenues”; paying for “one-quarter of all behavioral health care spending nationally”;

financing “nearly half of all births in the U.S.”; and

covering “half the national bill for long-term services and supports needed by people with disabilities and the elderly” (Paradise, Lyons, & Rowland, 2015, p. 19).

As previously asked regarding Medicare expenditures, why have Medicaid expenditures grown so dramatically? The following are illustrative of the most significant reasons given for growth in spending and numbers of Medicaid recipients:

Changes in Medicaid policies, particularly expansion of eligibility requirements.

Expansion of types of services provided, including dental care, rehabilitation, preventive services, mental health care, and drug and alcohol treatment, in more generous states.

Downturns in the economy and rising unemployment rates that have resulted in increasing numbers of the poor and uninsured since 2001. For example, the 2008 recession led to one of the largest single-year enrollment increases since the program’s inception between June 2008 and June 2009; 3.3 million people were added to the Medicaid rolls, an increase of 5.4% (Kaiser Commission on Medicaid and the Uninsured, 2010b, 2010c).

The unexpected significant increases in Medicaid expenditures as a result of higher payment rates to providers and more spending on those who “deserve” public support, including the aged, blind, disabled, and children.

There is an increasing number of elderly and disabled individuals who enter long-term care institutions as private pay and “spend down” their assets to become eligible for Medicaid.

As the federal government has been attempting to control escalating Medicare costs, the CMS and individual states alike have been active in implementing cost controls. At the federal level, one of the most important measures enacted was the provision in the Balanced Budget Act of 1997 allowing states to enroll Medicaid recipients in managed care health plans. “As of 2015, 38 states and DC have risk-contracting programs, and more than half of all Medicaid beneficiaries nationally are enrolled in comprehensive managed care plans, many on a mandatory basis” (Paradise et

al., 2015, p. 16). Additionally, the Deficit Reduction Act of 2005 attempted to reduce expenditures even more dramatically by calling for net Medicaid “reductions of $4.8 billion over the next five years and $26.1 billion over the next 10 years” (Kaiser Commission on Medicaid and the Uninsured, 2006, p. 1). The Medicaid Integrity Program resulted from this and created new efforts to reduce Medicaid fraud and abuse (CMS, 2009; Wachino, 2007). Efforts to offset the 2009/2010 increases in spending benefitted from a temporary increase in the federal Medicaid match that was authorized as part of the American Recovery and Reinvestment Act (ARRA) (Kaiser Family Foundation, 2010a). One aim of the new health care reform legislation is to reduce costs. Thus, Medicaid is experimenting with ACOs, increasing efforts to help elderly enrollees remain in their homes under the home and community-based services programs, and undertaking other efforts to ensure access to quality care while undertaking payment reforms (Paradise, 2015). The growth in Medicaid spending has exacerbated state budgets deficits, led to cuts in other state programs, and resulted in other cost-containment efforts (Kaiser Commission on Medicaid and the Uninsured, 2010b; National Governors Association, 2010). The concerns of the states continue and are apparent with the changes brought about by the ACA. That said, the compact between the federal government and the states to provide care to low income Americans is clearly being fulfilled by the Medicaid Program.

The Children’s Health Insurance Program Originally called the State Children’s Health Insurance Program, CHIP provides health care coverage for children in low-income families that do not qualify for Medicaid. CHIP, thus, picks up covering uninsured children where Medicaid leaves off, by covering children in families with slightly higher incomes with respect to the federal poverty level. Like Medicaid, CHIP is a joint federal/state programs, where states have the option of running the program as part of Medicaid, as a separate program, or as a combination of the two. Funding for CHIP also comes from both federal and state governments, but applies a matching rate that is 15% higher than Medicaid. The ACA increased the federal match, so that “beginning October 1, 2015 the already enhanced CHIP federal matching rate will increase by 23 percentage points, bringing the average federal match rate for CHIP to 93%…[and continuing it] until September 30, 2019” (CMS, n.d.,

para. 3). Given the relationship to Medicaid, children often move back and forth between the two programs. As of FY 2013, 8.1 million children were enrolled in CHIP (Kaiser Family Foundation, 2014).

Insuring Veterans, Active and Retired Military Personnel, and Their Families The Military Health System covers federal health benefits for veterans, military personnel, and their family members under the Department of Defense’s (DOD) medical facilities and TRICARE plan, the medical facilities of the Department of Veterans Affairs (VA) and the VA’s Civilian Health and Medical Program (CHAMPVA), and other specialized programs (TRICARE, 2007, 2008, 2010a, 2010b). While everyone who served in the military is a veteran, only those who served for an extended period (normally 20 years) are retired. Health benefits described in this section are federal benefits or entitlements—technically, not insurance.

TRICARE and DOD TRICARE is not an abbreviation; it is the title of the military health program. It covers active duty military personnel, retired military personnel, and their family members. DOD’s medical facilities are considered part of TRICARE. “The Veterans Health Administration (VHA) is home to the United States’ largest integrated health care system consisting of 150 medical centers, nearly 1,400 community-based outpatient clinics, community living centers, Vet Centers and Domicillaries. Together, these health care facilities and more than 53,000 independent licensed health care practitioners who work within them provide comprehensive care to more than 8.3 million Veterans each year” (VHA, n.d.). DOD has also contracted with various companies to provide health care in the private sector both in the U.S. and overseas.

TRICARE offers three separate programs: an HMO, a PPO, and a fee- for-service option. All active duty members are automatically enrolled at no cost in the HMO option called TRICARE Prime. Other categories must enroll. Retirees and their families pay an annual enrollment fee; active duty families do not. All enrollees (except active duty) have copays for office visits, prescription medication, diagnostic tests, and hospitalization. Most

preventive services are free. Individuals who do not elect to enroll in TRICARE Prime pay an annual deductible and copays. Those who use the PPO (called TRICARE Extra) have a 15% or 20% copay; the former percentage applies to active duty family members, the latter to retirees. Those who use the fee-for-service option (called TRICARE Standard) are subject to higher copays of 20% and 25% for those same respective groups. Other special programs, including TRICARE Reserve Select and TRICARE Retired Reserve, provide coverage for reservists; TRICARE Young Adult allows unmarried children under age 26 to retain coverage; TRICARE for Life is for military retirees who are eligible for Medicare; and the Extended Care Health Option (ECHO) provides additional services “that are not covered by TRICARE, such as assistive services, equipment, in-home respite care services and special education for qualifying mental and physical conditions” (Jansen, 2014, p. 14). DOD offers all participants a mail-order pharmacy program. Dental services for active duty members are free; for others, there is an insurance plan where enrollees pay a monthly premium for covered services. There is no long-term care coverage under TRICARE.

The U.S. Army, Navy, and Air Force operate military medical facilities around the world and afloat. DOD (as opposed to the three military services organizations) manages the contracted arrangements, except in the limited case where contracts are issued by a medical facility—these are managed by the medical facility. Medical personnel from each of the three services provide staff to the DOD organizations that oversee the contracted arrangements.

Problems with TRICARE primarily focus on:

the limited network of providers in rural areas; providing rehabilitative care to soldiers injured in 21st-century wars; in particular, treating veterans with traumatic brain injuries (TBIs) and mental health problems, e.g., post-traumatic stress disorder (PTSD);

providing care to National Guard and Reserve personnel who alternate from active duty to inactive duty; and

ensuring there are sufficient providers to meet the needs of the 9.2 million beneficiaries (Auerbach, Weeks, & Brantley, 2013; Office of the Secretary of Defense, n.d.).

These problems are normally addressed within DOD and the services, but veterans’ organizations and Congress take an active role in helping to ensure that beneficiaries receive access to quality services at a reasonable cost.

Veterans Affairs Operated through the Veterans Health Administration (VHA), the VA manages the nation’s largest health care delivery system with “152 medical centers, 800 community-based outpatient clinics, and 126 nursing homes, staffed by doctors and nurses who are VHA employees” (Auerbach et al., 2013, p. 1). Every VA medical center is affiliated with a national medical school. Unlike the DOD, the VA does not differentiate between veterans who retired from the military and those who did not. Virtually all veterans are eligible for care in the VA, although those receiving less than honorable discharges or who left the service before serving 180 days may have limited or no benefits. The VHA operates its medical facilities in 22 regions called Veteran Integrated Service Networks (VISN). VISN directors are responsible for providing or arranging care for enrolled veterans, as well as some who are not enrolled. Individuals who enroll are placed in one of eight categories based on disability or service, as shown in Table 9-4. The VHA also purchases care from private providers when the VA does not have the needed service. Veterans who are in categories 1 through 4 are provided virtually all their medical needs by the VA. Those in categories 5 through 8 are provided care primarily for conditions that the veteran incurred while in the military—called service-connected conditions.

Family members of selected veterans are provided care through the VA’s special health benefits programs. If the veteran is not retired from the military and the military determines the veteran is permanently and totally disabled or has died from a condition related to military service, family members are eligible for the CHAMPVA program. CHAMPVA is a fee-for- service program patterned after the TRICARE fee-for-service option with an annual deductible and a 25% copay. Unlike TRICARE, CHAMPVA is operated completely by the VA and not through contractors. If a veteran is a Vietnam veteran or served in Korea between 1967 and 1971 near the Demilitarized Zone (DMZ) and his or her child has spina bifida, the VA provides 100% coverage of medical care and supplies for these children

under the Spina Bifida Healthcare Program (U.S. Department of Veterans Affairs, Health Administration Center, 2009). For women Vietnam veterans who have children with certain birth defects, the VA provides 100% coverage for the related condition under the Children of Women Vietnam Veterans Healthcare Program. Both programs were established because of veterans’ exposure to Agent Orange, a defoliant used extensively in Vietnam and near the DMZ in Korea.

Problems with VA health programs are addressed through typical patient advocate activities. As with the DOD, veteran organizations and Congress play very active roles in the oversight of the VA’s health system. The VA has problems providing services in rural areas, much like the DOD. Also, the large number of Guard and Reserve members serving in Operation Iraqi Freedom and Operation Enduring Freedom, who continually change status from active to inactive, sometimes have problems with continuity of care issues, mental health, and treatment of other injuries resulting from service.

Financing for DOD and VA Health Programs To obtain funds for their programs, the DOD and VA submit budgets to the Office of Management and Budget (OMB). The OMB validates the requests and includes them in the President’s request to Congress, which appropriates funds for the operation of the health systems. The President’s Budget for FY 2015 for the VA was $163.9 billion. Of that total, $56.0 billion was earmarked for VA health care, with an additional 4.7% increase

in advance for the following year, bringing that advance appropriation for 2016 to $58.7 billion (U.S. Department of Veterans Affairs, 2015).

Operational Issues The VA leads the nation in providing quality care to veterans. Researchers, including the Congressional Budget Office (2007), tout the quality provided by the VA, with one pointing out that “at least in terms of process quality… the VHA has improved substantially and now seems to be outperforming the rest of U.S. health care” (Oliver, 2007, pp. 11–12). The VA is also noted for being an early adopter of electronic health records, as well as dealing with crises. When New Orleans was devastated by hurricanes in late 2005, not one veteran’s medical record was lost.

While positive, there have been several recent scandals confronting the VA. In particular, the VA Hospital in Phoenix came under fire in 2014 for manipulating wait lists, thereby delaying treatment for many veterans, some of whom subsequently died (Philipps, 2015), and has subsequently been criticized for its slow response in addressing these problems (Shear & Phillipps, 2015). There have also been significant delays and huge cost overruns with the construction of the new VA medical center in Aurora, Colorado, which requires $830 million in additional funding to complete the $1.73 billion project (Armbrister, 2015). Congress and the VA are currently trying to resolve the funding issue.

Despite these problems, Krumholz (2014) cautioned about how the VA is judged and that focus should be on the following three positives; (1) “that the VA healthcare system has consistently out-performed the non- VA/private sector in quality of care and patient safety,” (2) “that the VA health care system has been a model for accountability,” and (3) that the VA has typically adopted “a more contemporary and effective approach…to understand the problem, embrace the opportunity to improve, and strengthen the systems” (paras. 2, 3, 6). He concludes his article by saying incidents such as those in Phoenix should be used as opportunities for problem solving that will result in system and quality improvements. To this end, the VHA developed its “Blueprint for Excellence” in fall 2014, which delineates its vision for the future and its plan for addressing the following themes of “improving performance, promoting a positive culture of service, advancing healthcare innovation for Veterans and the country, and

increasing operational effectiveness and accountability,” as well as the strategies for achieving them (VHA, 2014, p. 4).

In sum, the Military Health System plays a large and critical role in providing care to veterans, active duty military personnel, and their families. It is, thus, a huge contributor to public sector health care coverage.

STATISTICS ON HEALTH INSURANCE COVERAGE AND COSTS As a part of the U.S. Census Bureau’s Current Population Survey, health insurance coverage data are collected on an annual basis. The most recent data from 2012 indicated that 84.6% of the population had some type of coverage (U.S. Census Bureau, 2013). The data presented in Figure 9-5 show the breakdown of health insurance by type of coverage for those who were insured in 2012.

These data reflect only modest changes from previous years. The individuals covered by some form of insurance increased by 3.0 million between 2011 and 2012. Coverage of individuals increased slightly or remained the same in all categories (U.S. Census Bureau, 2013). Earlier changes were directly linked to the recession and job loss (Bernstein, 2009; Truffer et al., 2010), while more recent changes have resulted from the ACA.

At the outset of this chapter, there was a brief discussion of the increases in the expenditures for health care. While government programs are funded primarily from taxes, payments to the Social Security Trust Fund, and cost sharing by recipients, private health insurance must be financed by employers and employees. “It appears that public programs control per capita spending somewhat more effectively than private coverage does. That may be just the opposite of what many would presume in a country where the private market is generally expected to outperform the public sector” (Altman, 2015e, para. 4).

FIGURE 9-5 Health Insurance Coverage, 2012

U.S. Census, 2013.

The costs of premiums for different types of private health insurance, presented in Table 9-5, show the variation in the contributions toward premiums paid by employees and employers. Data are provided for individual policy holders, as well as for those opting for family coverage. These data also only reflect premiums and thus do not include deductibles, coinsurance, and/or copayments.

Premiums for family coverage increased 69% between 2004 and 2014. The split between employer and worker contributions was 65% for the former and 81% for the latter, which suggests companies are continuing to require greater cost sharing on the part of employees. While these increases seem substantial, they are slower than had been anticipated at the start of the period and are not huge on an annual basis. They also support the fact that the ACA has not had a major impact on employer-sponsored plans (Claxton et al., 2014). That said,

the relatively quiet period in 2014 may give way to bigger changes in 2015 as the employer shared-responsibility provision in the ACA take effect for large employers. This provision requires firms with more than 100 full time equivalent employees (FTEs) in 2015 and more than 50 FTEs in 2016 to provide coverage to their full-time workers or possibly pay a penalty if workers seek subsidized coverage in health care exchanges…. We expect some employers to revise eligibility and contributions for benefits in response to the new provisions. (Kaiser

Family Foundation and the Health Research and Educational Trust, 2014, p. 7–8)

As an example showing this may have already begun, Japsen (2014) reported findings from the Mercer annual national survey of employer- sponsored health plans that in an effort to reduce employer expenses, increase employee cost sharing, and provide more consumer direction to health plan selection, employers are increasingly offering high deductible health plans. That said, despite many people purchasing these high deductible plans, Altman (2015f) reported that “they aren’t all that happy about [them]” (para. 1). While changes to private health insurance coverage will no doubt continue, the early evidence of the impact of the ACA are that “it has had no impact on employer coverage” (Blavin, Shartzer, Long, & Holahan, 2015, p. 170). That may change in the future, as the ACA provision known as the ‘Cadillac Tax’ is slated to begin taxing high cost, employer-sponsored health plans in 2018 (Troy, 2015). Efforts may, however, be undertaken to amend this and other provisions of the law.


There were 44.8 million people without insurance coverage in the U.S. in 2008, which represented 14.9% of the population. That number had increased 7.1% to 48.0 million or 15.4% of the 2012 population. Over the 14-year period 1999 to 2012, the percentage of uninsured increased 27% (U.S. Census Bureau, 2013).

A breakdown of the data, as shown in Figure 9-6, indicates differences in those who are uninsured by racial group. For example, while Blacks made up 14.0% of the population in 2012, they accounted for 16.9% of the uninsured, and while Hispanics comprised only 17.1% of the population, 32.4% of the uninsured were from this ethnic group. These disparities are a function of many things, among them differences in employment, eligibility for public programs, and income.

FIGURE 9-6 Distribution of Uninsured by Race, 2012

U.S. Census, 2013.

Additionally, when these numbers are broken down by age, the distribution shows that those without insurance coverage spanned all age groups in 2012. Figure 9-7 indicates that, while only a small number of those 65 and over were uninsured (as would be expected due to Medicare coverage), all other age groups included several million uninsured individuals, with more than four-fifths being adults. The majority of the uninsured were individuals under 35 years of age, but the largest single group was the 11.4 million people ages 25 to 34.

FIGURE 9-7 Distribution of the Uninsured by Age, 2012

U.S. Census, 2013.

Research about other characteristics of the uninsured also helps us to understand who this population includes (Abel, 1998; Rowland, Lyons, Salganicoff, & Long, 1994). The following are some of the key characteristics of these individuals.

Approximately 25% were in families where income was below the poverty level.

Most were individuals from families with incomes above the poverty level, but many had incomes below 300% of the poverty level.

More than four-fifths were workers or dependents of workers who were employed in industries that do not typically provide health insurance coverage.

The percentages of individuals without health insurance coverage vary across the states. More people in states in the South and the West tend be uninsured than those living in the Midwest and East.

Those who are uninsured have been shown to use the health care delivery system in different ways. Without coverage and/or ability to pay, studies have shown that the uninsured: • do not typically have a primary care physician; • delay seeking care until they are sicker; and

• utilize hospital emergency departments, the most expensive entry point to the health care system, to access the system and receive health care.

The cost of insurance and job loss are also major contributors to being uninsured.

These characteristics of the uninsured continue to hold true for those who continue to be uninsured (Kaiser Commission on Medicaid and the Uninsured, 2014).

The ACA and the Uninsured The ACA has had a significant impact on the number of uninsured. “National plan selection data show that as of the end of the second Open Enrollment period, nearly 11.7 million Americans selected or were automatically reenrolled into a 2015 health insurance plan through the Health Insurance Marketplaces” (U.S. Department of Health and Human Services, 2015, p. 4). While not all of these individuals were uninsured, Obamacare Facts (2015b) reported that 12.9% of Americans were still uninsured as of January 2015. According to Gallup, which conducted the poll, “this is down slightly from 13.4% in the third quarter of 2014 and down significantly from 17.1% a year ago” (Levy, 2015, para. 1). These numbers are mirrored by other polls conducted by the Urban Institute, the RAND Corporation, the Commonwealth Fund, and the Centers for Disease Control and Prevention (CDC); the consensus is the number of uninsured had decreased by 25% by 2014 (Sanger-Katz, 2014),

Several states (including Rhode Island, Oregon, West Virginia, Washington, Kentucky, Colorado, and Arkansas), all of which opted to expand their Medicaid programs, saw the largest decreases in the percentages of their population who were uninsured (Obamacare Facts, 2015b). The largest drop was in West Virginia, where the uninsured rate dropped from 17.34% of the population before the ACA to 6.59% afterwards; this represents a 62% change. Thus, the inclusion of the Medicaid expansion provisions has had a major impact on the uninsured rates (Sanger-Katz, 2014).

Additionally, the provision of the ACA that allows young adults, under age 26, to remain on their parents’ health insurance policies has been

instrumental in reducing the number of uninsured among those aged 19–25 (McMorrow, Kenney, Long, & Anderson, 2015). Research has also shown a reduction in the use of hospital emergency departments by this age group “of 2.7 ED visits per 1,000,” when compared to those in the 26–31 year age group (Hernandez-Boussard, Burns, Wang, Baker, & Goldstein, 2014).

These data clearly support the fact that significant inroads have been made toward achieving the ACA goal of reducing the number of the uninsured. That said, however, as pointed out by Sanger-Katz (2014) “about 30 million people are expected to remain uninsured even after several years, according to the Congressional Budget Office” (para. 12).

Research has shown that several other problems persist. For example, Mitts and Fish-Parcham (2015) reported that despite having coverage, 25.2% of adults still have trouble paying for care, have gone without care, and are unable to make copays and or meet deductibles. This finding was also noted by Goodnough, Abelson, and Hartocollis (2014), who reported that high deductibles and copays restrict the use of coverage and that the Affordable Care Act is not necessarily “affordable.” Altman (2015c) has pointed out that deductibles are a particular problem for many families with low or moderate incomes. This may be the result of the fact that deductibles have grown much more rapidly than wages. Between 2006 and 2014 wages increased 23%, as compared to deductibles, which increased 108% (Altman, 2015g).

Another concern is that many states have not opted into Medicaid expansion, resulting in a major coverage gap in 21 states as of April 2015 (Buettgens, Holahan, & Recht, 2015). It was estimated “nearly four million poor uninsured adults fall into the ‘coverage gap’ that results from state decisions,” and thus are not eligible for other public coverage programs, do not get health benefits at work, and cannot afford to buy coverage outright (Garfield, Damico, Stephens, & Rouhani, 2015, p. 2). Pear (2014) reported almost 50% of these “coverage gap” adults are residents of just three states— Texas, Georgia, and Florida—with the majority being Black or Latino and younger adults.

Providing health care to the uninsured continues to fall primarily to hospitals, where much of it becomes uncompensated care. There are still some funds available to assist hospitals through the federal government’s disproportionate-share program that provides some funding for providing

large amounts of uncompensated care. Although the ACA called for funding reductions for the program, these will not be imposed until 2018 (Snyder & Rudowitz, 2015). There are also state and local programs that help to support these hospitals. The cost of care provided to the uninsured is borne by the taxpayers, as well as by insured patients, with those costs being passed along in the form of higher taxation and higher health insurance costs.

Great strides in addressing the problem of the uninsured have been made, but we still have a long way to go in resolving the problem. The long-term impact is at this point not known with respect to whether access to and outcomes of care have been achieved, whether the uninsured have been able to maintain coverage when premiums come due, and whether the cost of care will moderate or grow.

OPPORTUNITIES FOR RESEARCH ON EMERGING ISSUES This chapter has discussed some of the research on financing and cost issues and health care management being conducted. While our nation continues to move toward insuring those previously un- or under-insured citizens, consumers, providers, payers, and other stakeholders press for evidence of improved access, reduced costs, and improved quality of health care. Opportunities for in-depth research on these emerging issues exist in a variety of venues, including your health care organization. Many of the resources we used in writing this chapter also include extensive research holdings and data bases available to citizens, students, and academic researchers. Herewith is a partial listing of these resources.

Agency for Healthcare Research and Quality; Centers for Medicare and Medicaid Services; Centers for Disease Control and Prevention (CDC); Hospital Research and Educational Trust (HRET); Inter-university Consortium for Political and Social Research (ICPSR); Institute for Healthcare Improvement (IHI); Kaiser Family Foundation;

National Center for Health Statistics (NCHS); Pew Charitable Trusts: Health; Robert Wood Johnson Foundation; Social Security Administration; U.S. Census Bureau; and U.S. Department of Veterans Affairs.

CONCLUSION The changes that will occur over the next five years as health care reform continues to be implemented will bring new and different challenges for health care managers. While much will change, much will remain the same. There will still be two primary ways that health insurance issues will affect health care managers. The first relates to managing the health insurance benefit for employees and their dependents. In this regard, managers need to understand the options available to them in selecting plans that meet the needs of their employees, as well as the needs of the company. For small businesses, new opportunities to provide coverage to workers will be in the offing. The affordability of providing health benefits to employees will continue to be an increasingly difficult proposition for organizations, both large and small. Managers will be called upon to try to reduce the costs of coverage, to select cost-effective health plans, to understand the pros and cons of different types of coverage, to encourage employees to manage their care better, and to take steps to have employees bear more of the cost of coverage.

The second way that health insurance will be important for managers is related to patients—their insurance coverage and how they receive reimbursement from their insurers. Managing the patient health insurance function well will be critical to the financial success and viability of the organization. Issues relating to coding, billing, and other aspects of financing are discussed further in Chapter 10.


1. Compare and contrast fee-for-service and prepaid health plans.

2. What types of cost sharing in health insurance are most effective? Provide a rationale for your response.

3. What are the pros and cons of the different types of health insurance benefit packages that someone might purchase?

4. Why have conventional indemnity policies been supplanted by other forms on health insurance coverage?

5. What is the best type of health insurance? Justify your answer.

6. Compare and contrast Medicare and Medicaid in terms of eligibility, benefit packages, access to care, and other key dimensions.

7. How does CHIP add to coverage provided under the Medicaid Program?

8. What issues and concerns have arisen relating to Medicare Part D? How can they be resolved?

9. Discuss the different types of health care coverage/health insurance that are provided to military personnel and their dependents.

10. What factors make it difficult to provide health care coverage for everyone in the U.S.?

11. How has the Affordable Care Act brought more people into coverage? Is this trend likely to continue? Explain why or why not?

Cases in Chapter 18 that are related to this chapter include:

United Physician Group Piecework My Parents Are Turning 65 and Need Help Signing Up for Medicare

Newby Health Systems Needs Health Insurance

Case study guides are available in the online Instructor’s Materials.

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Managing Costs and Revenues Kevin D. Zeiler

LEARNING OBJECTIVES By the end of this chapter, the student will be able to:

Evaluate the importance, purpose, and major objectives of financial management in health care organizations;

Compare and contrast tax status implications of for-profit versus not- for-profit health care entities;

Assess the primary methods of reimbursement to providers; Apply methods for classifying and controlling costs; Evaluate determinants and initial processes considered by health care managers in setting charges/prices for products and services;

Appraise the purposes, primary sources, and major problems associated with managing working capital;

Analyze some of the important issues and major processes involved in managing accounts receivable in health care organizations;

Examine the importance, basic tenets, and commonly accepted methods for managing materials and inventory;

Analyze the major characteristics and types of budgets utilized by health care managers;

Critique the basic tenets of health care billing and coding principles; and Discuss special research issues related to managing costs and revenues.

INTRODUCTION The purpose of this chapter is to give a general overview of the various components of financial management within health care organizations, providing examples and applications. Students in health care management and administration frequently become apprehensive about dealing with the financial management aspects of the field. However, it cannot be emphasized enough that an understanding of finance is critical to any student who desires to better understand the business function. The entry-level management position will, at the very least, require an understanding and grasp of the basic concepts of accounting and finance principles, budgets, billing and coding, and forecasting goals and techniques. Each section of this chapter will provide an overview that will help with future studies and lay the groundwork for continued research and application.

WHAT IS FINANCIAL MANAGEMENT AND WHY IS IT IMPORTANT? Health care financial management is the process of providing oversight for the health care organization’s day-to-day financial operations as well as planning the organization’s long-range financial direction. Put simply, it involves working to increase the revenues and decrease the costs of the organization. This involves making organizational forecasts, while taking into consideration numerous external environmental variables such as the economy, insurance company policy changes, legislative rules and regulations, and so on. These can have profound impacts on the financial forecast. Ultimately, it is the goal of the finance department to put the organization in the best position possible.

Finally, in the dawn of health care reform, all students, health providers, and financial personnel must understand that financial management will be an ever-changing field that will continually be affected by outside influences. According to a recent poll concerning health care reform, “[n]early three- quarters of health care executives say health care reform will have a negative financial impact on their facilities” (Ledue, 2010, p. 1). This statement does

not mean reform is going to ruin the industry; instead, it means that the savvy financial manager will need to stay on top of industry changes in order to maintain the financial health of the organization.

Most health care organizations attempt to meet their economic goals by charging their finance departments with both accounting and finance tasks. These functions help to establish the groundwork for reaching the aforementioned goals.

Accounting consists of two types: 1. Managerial accounting, in which financial data are provided

concurrently or prospectively to internal users (managers, executives, and the organization’s governing board); and

2. Financial accounting, in which data are provided retrospectively to external users (stockholders, lenders, insurers, government, and suppliers).

Finance generally includes: 1. Borrowing and investing funds; and 2. Analyzing accounting information to evaluate past decisions and make

sound decisions that will affect the future of the organization.

While Nowicki (2004) emphasizes financial management’s primary purpose as being “to provide both accounting and finance information that assists healthcare managers in accomplishing the organization’s purposes” (p. 4), Berger (2002) takes this description of purpose one step further by noting that “a primary role of financial management [is] helping to analyze the financial implications of the data across the healthcare organization’s setting” (p. 7). The latter implies the importance of involving managers at all levels of the organization in financial analysis and decision-making. For example, the manager in the radiology unit of a hospital should be directly involved in looking at both the revenues, i.e., the amount of money generated by procedures (X-rays, ultrasound procedures, CT scans, etc.) performed in the department and the expenses incurred (i.e., money that is spent) in running the department, in addition to being involved in hiring personnel, managing appropriate staffing ratios, making decisions involving the replacement or purchase of equipment, and so on.

TAX STATUS OF HEALTH CARE ORGANIZATIONS In order to fully comprehend the financial needs and constraints of any given health care organization, it is important to first determine the tax status of that organization. Although health care organizations are primarily categorized as either for-profit or not-for-profit, Berger (2002) discusses three major types: one for-profit and two not-for-profit. For the student’s clearer understanding, they have been arranged somewhat differently below, and additional comments have been included:

For-profit, investor-owned health care organizations: These organizations are owned by investors or others who have an interest in making a profit from the services that are provided. These are normally viewed as the for-profit organizations that are required to pay taxes as a cost of doing business. Traditionally, this has included most physician practices and skilled nursing facilities.

Not-for-profit health care organizations: Historically, these organizations have taken care of the poor, needy, and indigent residents of communities and thus have been granted tax-exempt status. They include the following two groups: 1. Business-oriented (private) organizations, which are characterized as

private enterprises with no ownership interests, that are self- sustaining from fees charged for goods and services, are exempt from income taxes and may receive tax-deductible contributions from those who support their mission, and must provide a certain amount of charity care or community service. Based on their relationships with religiously affiliated organizations, it is not surprising that this group has included an overwhelming majority of hospitals.

2. Government-owned organizations and public corporations, which are influenced by political interests but are exempt from taxation and have the ability to issue directly (rather than through a state or municipal authority) debt that pays interest exempt from federal taxation. Included in this group are government-owned hospitals (especially research and training institutions or those serving the

medically indigent) and public health clinics.

In addition, there are significant differences in financial management goals based on tax status, which can be summarized as follows:

Financial goals in for-profit organizations: According to Berman, Weeks, and Kukla (1986), “management must administer the assets of the enterprise in order to obtain the greatest wealth for the owner” (p. 4). That is, the goal is to maximize earnings and profits while minimizing risk to the organization.

Financial goals in not-for-profit organizations: According to Berger (2002), while these entities must still “produce the best possible bottom line. . . they simply need to do so in the context of providing optimal patient care in the most efficient manner” (p. 6). However, both Berger and Nowicki (2004) emphasize that nonprofit health care providers still place somewhat greater emphasis on community services and other social goals.

Table 10-1 delineates the primary differences between for-profit and not- for-profit health care organizations.

FINANCIAL GOVERNANCE AND RESPONSIBILITY STRUCTURE The organizational structures of these health care organizations may also be affected by their tax status, although the largest differences are probably seen in the structures of their governing bodies, or boards of directors or trustees. While similar types of professionals (or “volunteers,” in the case of not-for- profit boards) are specifically charged with financial accountability and stewardship, in smaller organizations one individual may perform several of the separate functions. Knowing the organizational structure of the financial components of the organization will allow all managers to access the appropriate individual(s) in order to make judicious financial decisions for their departments or divisions. In order of responsibility:

The Governing Body, or Board of Directors: As described by the American Hospital Association (1990) and reiterated by Nowicki (2004), in its “fiduciary” role (persons in a position of trust), the board is ultimately “responsible for the proper development, utilization, and maintenance of all resources in the healthcare organization” (p. 30). In for-profit organizations, board members may be paid, but board members serve strictly as volunteers in not-for-profit organizations.

The chief executive officer (CEO) is hired and delegated authority by the board and serves as chief administrator of the operations of the entire organization. The CEO’s fiscal performance is monitored through the board’s Finance Committee.

The chief operating officer (COO), often the senior vice president, is responsible for the day-to-day operations of the organization.

The chief financial officer (CFO), who may also serve as a vice president, is responsible for the entire financial management function of the organization. The CFO is in charge of two primary financial branches, involving (1) the accounting function and (2) management of financial assets. The CFO directly supervises two officers (and occasionally one other) directly in charge of these functions. In some organizations, the COO and the CFO may be the same person.

The controller (also called the comptroller) is the chief accounting officer responsible for the accounting and reporting functions, including financial record keeping. He or she oversees such departments and activities as patient accounts, accounts payable, accounts receivable, cost analysis, budgets, tax status, the generation of financial reports, and sometimes internal auditing.

The treasurer is charged with the stewardship of the organization’s financial assets, including cash management, commercial bank relations, investment portfolios, management of pensions or endowment funds, capital expenditures, management of working capital, and long-term debt obligations.

The internal auditor is often a separate staff position from the CFO in large health care organizations and is responsible for ensuring that the accounting, bookkeeping, and reporting processes are performed in accordance with generally accepted accounting principles (GAAP), the nationally accepted rules that determine how financial information is recorded and reported. GAAP includes, among other things, the overarching ideas of conservatism, consistency, and matching of revenues and costs. The internal auditor protects the organization’s assets from fraud, error, and loss.

The chief information officer (CIO), present in many large health care organizations, is the corporate officer responsible for all information and data processing systems, including medical records, data processing, medical information systems, and admitting. The CIO reports either to the CFO or directly to the CEO.

The independent auditor, generally a large accounting firm, is retained by the health care organization to ensure that all financial reports sent to external entities are accurate as to format, content, and scope in presenting the organization’s true financial position.

All managers in a health care organization are financial managers to the extent that they consider asset selection, charges, financing, reimbursement, and/or department budgets. This shared responsibility at all levels of the organization serves to maximize efficiency and accountability.

MANAGING REIMBURSEMENTS FROM THIRD-PARTY PAYERS One of the major objectives of financial management involves facilitating and managing third-party reimbursements, which is vital to generating revenues for the daily operations, growth, and competitiveness of the health care organization. This section will discuss both the methods of payment to providers by managed care organizations (MCOs) and other private insurers and reimbursements to providers from public entities such as Medicare and Medicaid.

What Are the Primary Methods of Payment Used by Private Health Plans for Reimbursing Providers? Private health care plans use a variety of methods for reimbursing the providers servicing the plan’s enrollees. Some are utilized more frequently than others for payments to different provider groups. They are classified according to the amount of financial risk assumed by health care organizations and whether reimbursements are determined after or before health care services are delivered.

Retrospective Reimbursement Under retrospective reimbursement, the amount of reimbursement is determined after the delivery of services, providing little financial risk to providers in most cases. It can involve the following methods:

Charges, most commonly called fee-for-service: Health care providers are paid close to or at 100% of their submitted prices or rates for care provided. Because there is virtually no financial risk to providers, these are no longer common. Where full charges persist are with private-pay patients and uninsured individuals, who do not have insurance companies to negotiate discounted rates on their behalf.

Charges minus a discount or percentage of charges: Health care organizations offer discounted charges to third parties in return for

large numbers of patients. This is the second most common form of reimbursement to hospitals.

Cost plus a percentage for growth: Health care institutions receive the cost for care provided, plus a small percentage to develop new services and products.

Cost: The organization is reimbursed for the projected cost, expressed as a percentage of charges. While this method provides the smallest amount of reimbursement to providers, there is little risk unless full costs (direct costs of providing care plus indirect costs or overhead for running the organization) are not recognized.

Reimbursement modified on the basis of performance: The provider is reimbursed based on quality measures, patient satisfaction measures, and so on. Obviously, this method poses more risk for providers.

Prospective Reimbursement This method of reimbursement to providers is established before the services are provided to patients. These are the primary methods utilized by managed care organizations (MCOs):

Per diem, in which a defined dollar amount per day for care is provided. This is the most common method of reimbursement to hospitals. It presents risks and incentives. It tends to be bad for acute- only patients, for whom greater costs are incurred earlier in care without the opportunity to make up differences later, when less intense services may be needed.

Per diagnosis, in which a defined dollar amount is paid per diagnosis. It provides risks and incentives. Most common are those similar to the rates utilized by the Centers for Medicare & Medicaid Services (CMS) for Medicare reimbursements, including Diagnosis-Related Groups (DRGs) for hospitals, Resource Utilization Groups (RUGs) for nursing homes, and Home Health Resource Groups (HHRGs) for home health care. Additional rates have more recently been determined for outpatient and inpatient rehabilitation hospital services. In virtually all cases, fewer patient treatments or visits, and/or shorter hospital stays, are now being provided for any given diagnosis.

Accountable Care Organizations (ACOs): The model of the ACO is based on the idea that groups of providers come together and take responsibility for delivering care to a defined patient population (Colla, Lewis, Shortell, & Fisher, 2014). This approach uses a primary care physician (PCP) to orchestrate the care delivered. The ACO is encouraged to deliver efficient and appropriate care and to keep patients healthy. The approach relies heavily on information technology, so that providers have access to medical records, particularly test results, which is intended to prevent duplication. If those goals are achieved and costs are reduced, the ACO is eligible to share in the savings with Medicare. ACOs differ from HMOs in that the PCP doesn’t act as a gatekeeper and patients have the choice of going out of network to receive care (Gold, 2014).

Bundled Payments: This model is based on the idea of providing a single payment for a specific episode of care or a specific procedure. Instead of paying multiple providers to perform their specific tasks in, for example, a surgery such as a knee replacement, a single payment is made. Under this model, “a group of providers receives a fixed payment that covers the average cost of a bundle of services” (Ridgely, de Vries, Bozic, & Hussey, 2014, p. 1345). CMS has developed four models of payment under its Bundled Payments for Care Improvement Initiative, which is being used to test different methods of reimbursement (retrospective and prospective), as well as different types of bundling (CMS, 2013). The models are being phased in at different times “to assess whether the models being tested result in improved patient care and lower costs to Medicare” (CMS, 2014, para. 4). The Advisory Board Company (2014) reported that many provider groups have signed up to participate in this program as of summer 2014, but a report on an early demonstration in California indicated that problems existed with the program and that few contracts were signed to continue after the initial phase of the demonstration; specific concerns were with “a number of barriers, such as administrative burden, state regulatory uncertainty, and disagreements about bundle definition and assumption of risk” (Ridgely et al., 2014, p. 1345).

Fee schedule by Current Procedural Terminology (CPT) code, or procedure code, which is the most common method for reimbursement of specialty physicians. In general, the more complex

and time-consuming the procedure, the higher the rate of reimbursement.

Capitation is an agreement under which a health care provider is paid a fixed amount per enrollee per month by a health plan in exchange for a contractually specified set of medical services in the future. Negotiated capitated payments are based on perceptions of expenses for a population. Thus, capitation shifts the risk of coverage from the insurer to the provider of care, providing the most financial risk but also the most opportunity. It is the most common reimbursement method for primary care physicians in MCOs, providing penalties and withholdings for too much care and bonuses as an incentive for ordering lower levels of care.

Medical Home: This model also focuses on connecting patients to primary care, linking them to all types of services, and developing a system that encourages and assures quality of care. The concept of the medical home, which is also referred to as the patient-centered medical home (PCMH), is not new, as it was initially devised in 1967 to provide care to children with special needs (Health Resources and Services Administration [HRSA], n.d.). What is new is that it has been adapted for coordinating the care of adults and other children. The Affordable Care Act “contains various provisions that support implementation of the medical home model including new payment policies, Medicaid demonstrations, and the creation of Accountable Care Organizations— which are similar to medical homes, on a larger scale” (National Conference of State Legislatures, 2012, para. 7).

The medical home model is based on the following seven principles as adopted by the American Academy of Family Physicians, the American College of Physicians, and the American Osteopathic Association:

1. Personal physician: patients are linked to a primary care physician (PCP).

2. Physician directed medical practice: a team of care givers works with the PCP to provide and be responsible for care; this includes nurses, social workers, nutritionists, etc.

3. Whole person orientation: the PCP and the team take a holistic approach to the patient and assume responsibility for all types of care

across the person’s entire life, including primary care, behavioral health, chronic care, etc.

4. Care is coordinated and/or integrated: all types of providers within the health care system and community can become involved in the provision of care in order to assure that appropriate care is provided.

5. Quality and safety are hallmarks of the medical home: providers and patients work collaboratively to assure quality and good outcomes.

6. Enhanced access to care: practices make access more accessible through offering expanded hours and improved communication with patients.

7. Payment: payment includes coverage of the management of care, specific provider visits, inpatient procedures and stays, as well as the sharing of any savings derived from the management of care (HRSA, n.d.; National Conference of State Legislatures, 2012).

A recent survey of 172 patient-centered medical home initiatives found extensive expansion in the number between 2009 and 2013. The study also found that private insurers, Medicaid, and Medicare participated; used different types of payment reform incentives, such as FFS, pay for performance bonuses, per member per month (PMPM) payments, and various combinations of these; covered almost 21 million people; and concluded that the “model is likely to continue to both become more common and to play an important role in delivery system reform” (Edwards, Bitton, Hong, & Landon, 2014, p. 1823).

The third-party reimbursement system in the health care arena has become so complex, many health care providers (including hospitals and large physician practices) have been forced to hire employees specializing in different contract types within their insurance/finance departments to negotiate the labyrinth of rules and regulations. Accuracy is critical in today’s health care industry, where improper coding or billing or untimely filing can lead to missed opportunity—or charges of fraud. Thus, reimbursement is a form of risk for the organization. Simply put, think about the risk as the way in which reimbursement affects profits and how it is uncertain (Gapenski, 2009). Remember, finance is forecasting, so you can see how a complex reimbursement system can and will affect an organization financially if billing is not done correctly.

What Are the Primary Methods of Payment Used for Reimbursing Providers by Medicare and Medicaid? The largest government-sponsored health care programs in the U.S. are Medicare and Medicaid, as discussed in Chapter 9. Different methods are used to provide reimbursement to various providers of care by these programs, as discussed further below. The current regulations regarding reimbursement to providers in these programs are, however, reflective of various cost-containment efforts. It is also worth mentioning that health reform has also affected Medicare and Medicaid by creating the Center for Medicare and Medicaid Innovation (CMI), which was established to test innovative payment and service delivery models (Shafrin, 2010). As you enter the field or continue to study health care finance, keep in mind that reimbursement will continue to change and adapt to the numerous factors listed earlier in this chapter. Cost-containment issues will continue to arise and will continue to force financial managers to adapt and change to this volatile environment.

Reimbursement to Hospitals and Contractual Allowances Due to rapidly rising health care expenditures based on an initial retrospective, charge-based reimbursement system to providers, Congress passed the Tax Equity and Fiscal Responsibility Act (TEFRA) in 1982, with particular emphasis on Medicare cost controls. Included among its provisions was a mandate to hospitals for a prospective payment system (PPS) with reimbursement rates established up-front for certain conditions, the option of providing managed care plans to Medicare beneficiaries, and the requirement that Medicare become the secondary payer when a beneficiary has other insurance.

Like most third-party payers for hospital services, CMS substantially reduces reimbursement to hospitals (from original hospital charges to beneficiaries) based on a system of contractual allowances. As defined by McLean (2003), a contractual allowance is the “difference between the charge for a bed-day in the adult medicine unit and the amount that the hospital has agreed to accept from the patient’s insurance carrier” (p. 53).

In the case of Medicare-eligible patients, CMS reimburses a fixed amount per admission and per diagnosis, based on the patient’s Diagnosis-Related Group, or DRG. For example, a patient being admitted for heart bypass surgery would receive a higher reimbursement rate than a patient admitted for observation after a fall in which he or she suffered a fractured humerus (arm bone). Berger (2002) asserts that the International Classification of Diseases, ninth edition (ICD-9 codes) was “the most important element” in creating the DRG for reimbursement of an inpatient stay (p. 127). Furthermore, the Omnibus Budget Reconciliation Act of 1990 later folded capital costs into DRG rates as well, with hospitals risking significant reimbursement losses if their buildings and equipment are not properly utilized (Nowicki, 2004).

On the other hand, the Medicaid reimbursement rate to hospitals for any given service varies from state to state, but in all cases includes a substantial contractual allowance. Individual states implement cost controls for Medicaid payments, using either DRGs (like Medicare) or case mix to set reimbursement rates. Case mix, also referred to as patient mix, is usually related to the mix of patients served by an organization based on the severity of illnesses. An example of differences in this type of reimbursement would be a nursing unit primarily serving patients on ventilators that would be reimbursed at a substantially higher rate than a nursing unit serving patients with orthopedic problems, due to the greater expenses incurred by the former. In all cases, providers must accept reimbursement as payment in full and follow designated efficiency and quality standards.

Reimbursement to Physicians A Resource-Based Relative Value System (RBRVS) was implemented in 1992 for reimbursement for physician office services rendered to Medicare beneficiaries. This system pays a prospective flat fee for physician visits and is based on the Healthcare Common Procedure Coding System (HCPCS) codes used by outpatient health care providers and medical suppliers to code their professional services and supplies. Current Procedural Terminology (CPT) (American Medical Association, 2010) is the generally accepted coding methodology utilized. An example of this system is the higher reimbursement rate afforded to a physician for an extended initial patient visit to fully assess a patient’s medical condition, versus the lower

reimbursement provided for a brief follow-up visit to assess how well a prescribed medication was working.

However, recent legislation (April 2015) passed through both houses and will set up a new way to pay physicians. The current plan will allow physicians to see pay increases over the next five years until a new, merit based program is approved (Carey, 2015). Therefore, the reimbursement formula from that 1990’s mentioned above, will become a thing of the past.

Because Medicare serves over 54 million Americans, it was important to pass such legislation so the program can continue into the future (Cornwell & Humer, 2015). Furthermore, the new system will be focused on, “quality, value and accountability” (Carey, 2015). Similarly, state Medicaid programs have implemented cost controls for reimbursement to physicians, initially through fee schedules, but with many states more recently requiring beneficiaries to enroll in capitated managed care plans. As defined by Gapenski (2003), capitation is “a flat periodic payment per enrollee to a healthcare provider; it is the sole reimbursement for providing defined services to a defined population. . . . Generally, capitation payments are expressed as some dollar amount per member per month (PMPM)” (p. 576).

Medicare Reimbursements to Other Providers Despite reductions in reimbursements for hospital admissions and physician visits, Medicare expenditures continued to soar throughout the 1990s. Congress passed the Balanced Budget Act of 1997 in an attempt to control costs for other health care services. Prospective payment systems were implemented in other settings beginning in 1998, as follows:

Skilled nursing facilities (SNFs), in 1998, with RUGs (Resource Utilization Groups);

Home health agencies (HHAs), in 2000, with HHRGs (Home Health Resource Groups); and

Outpatient hospitals and clinics, in 2002, with OPPS (Outpatient Prospective Payment System).

How Are Providers Reimbursed by Private Pay Patients and Individuals with No Health Insurance?

As discussed above, those individuals who are not covered by any type of health plan, whether private or public, are often billed for full charges (generally well above costs) by the health care organization delivering the care. This is largely due to the inability of the individual to negotiate a discounted rate for his or her care that is usually afforded patients covered by group health plans. This phenomenon has had the consequence of substantially increasing the number of personal bankruptcies related to medical bills. As revealed in a frequently-cited article in the journal Health Affairs, approximately half of the 1.458 million personal bankruptcies filed in 2001 were related to medical bills caused by injury and illness (Himmelstein, Warren, Thorne, & Woolhandler, 2005). A more recent study found little change in these findings, stating that in 2013, “1.7M Americans live in households that will declare bankruptcy due to their inability to pay their medical bills” (LaMontagne, 2015, para. 3). As a direct result, there have been increases in the amount of uncompen-sated, or unreimbursed, care.

Not-covered or uncompensated care is a measure of total hospital care provided without payment from the patient or an insurer. This accounted for between 5.8% and 6.1% of hospital total expenses between 2007 and 2013 (American Hospital Association, 2015). The two major types include:

Bad debt, in which the health care organization bills for services but receives no payment. These operating expenses are based on charges, not costs, and are written off by the organization. This term is usually used with for-profit organizations.

Charity care, in which the not-for-profit organization provides care to a patient who it knows will be unable to pay. Level of charity care (based on either costs or charges) must be documented in footnotes to the financial statements; otherwise, the organization’s tax status can be questioned.

Although uncompensated care may be written off as bad debt or charity care by the health care organization, and although it is even required to a certain extent with a not-for-profit organization to maintain its 501(c)(3) status, it is important for managers to recognize that providing too much of this type of care could serve to financially cripple the organization, both in terms of difficulty in maintaining current operations and inability to maximize investment opportunities. Some for-profit organizations question

the tax status of not-for-profit organizations and their ability to write off debt as “charity care.” They also decry the use of the term “bad debt,” because it implies that the manager who extended the credit used poor judgment. This is a controversial topic and one that bears watching.

CODING IN HEALTH CARE After a patient receives any type of health care service, a bill is generated. Typically, after an encounter with a physician, ambulatory surgery center, or other provider, diagnosis and procedure codes are assigned to the bill. Codes also represent symptoms and medications in order to process a claim properly. The bill is then submitted to the payer, often a health insurance company, in order to receive payment for services rendered. This interaction is known as the billing cycle or revenue cycle and can take several days to several months to complete.

The diagnosis codes and procedure codes assist the insurance company in determining the medical necessity of the services and whether the services are covered and should be paid. Usually, a medical coder abstracts information from documentation in the patient’s medical record, assigns the appropriate codes, and creates the claim to be paid by the commercial insurance company or government agency such as the CMS (American Association of Professional Coders [AAPC], 2015).

Since the late 1800s, an international system of classification for diseases and other health problems has been used to record vital records such as death certificates (World Health Organization [WHO], 2015). Since 1948, WHO has assumed responsibility for managing and publishing this International Classification of Diseases (ICD) (WHO, 2015). This is the standard tool for categorizing diseases and health problems for clinical and epidemiological purposes such as mortality statistics as well as for reimbursement decisions around the world. It is updated every ten years. ICD-10 is the 10th revision of the classification system and increases the number of codes from more than 17,000 to 69,000 different codes (Centers for Disease Control and Prevention[CDC], 2015). The latest compliance date for ICD-10 has been set as October 1, 2015, according to a regulation published by the DHHS on August 4, 2014 (AMA, 2015b). The CMS

announced in July 2015 that it will make several changes during the first year of ICD-10 implementation to prevent Medicare claims denials and other penalties, thus making in the changeover less disruptive for physician practices (Stack, 2015).

In 1966, the AMA created the Common Procedural Terminology (CPT) set, which it updates every year (AMA, 2015a). CPTs describe medical procedures and other services. In the 1970s, the federal government released the Healthcare Common Procedure Coding System (HCPCS), pronounced as “hick picks,” which is based on the AMA’s CPT codes for Medicare payment. This coding is necessary for Medicare, Medicaid, and other health insurance programs (AMA, 2015a). Currently, HCPCS has two levels of coding: Level 1 is the CPT code and Level 2 is alphanumeric and includes non-physician services like ambulances, devices, and supplies.

Until the 1980s, claims were submitted using paper forms when electronic submission of bills began. Now, Medicare bills must be sent electronically, and payment is transmitted to providers electronically, as well. Over the years, coding has become more sophisticated and covers more services and specialties such as dental care and skilled nursing facilities. Because of the complexity of this, medical billing and coding specialists must pass examinations to become certified and may even specialize in areas such as outpatient coding or interventional radiology coding (AAPC, 2015). Auditing and compliance are essential aspects of the billing and coding process to ensure quick and accurate claims submission, faster reimbursement, fewer denials, and better-managed practices. Here are some examples. Question: What is the ICD-10 code for acute appendicitis?

Answer: K35.2 is a billable ICD-10-CM code that can be used.

Question: What is the ICD-10 code for leprosy?

Answer: A30.9 is the billable ICD-10 code.

Question: What is the HCPCS code for 15 minutes of medical nutrition therapy initial assessment and intervention?

Answer: The CPT code is 97802. This code can only be used once a year.

Question: What is the CPT code for hepatitis A vaccination?

Answer: The CPT code is 90632 for monovalent Hepatitis A vaccine for adults (ICD 10 Data, 2015).

Any manager in health care needs to understand the importance of billing and coding classification systems in receiving payment based on accurate and prompt claim submission. Meticulous processing of records related to office visits, planned surgery, or outpatient procedures will ensure compliance with insurance requirements and federal regulations.

In summary, almost every medical condition, procedure, service, and supply can be identified by a numeric code, primarily because Medicare and other third-party payers require numeric coding on claim forms. Accurate coding is the key to prompt reimbursement for services. Knowing the difference between a diagnosis code of 280 (iron deficiency anemia) and 820 (a fracture of the neck of the femur) will help protect a practice from fraud and abuse investigations, as well as help ensure getting paid appropriately and in a timely manner.

CONTROLLING COSTS AND COST ACCOUNTING Historically, health care organizations, especially hospitals, have been provided strong financial incentives to maximize reimbursements rather than control costs. However, as can be seen in the preceding discussion, there has been a major movement during much of the past two decades to decrease the levels of reimbursement to providers in almost all sectors of the industry. It has thus become increasingly important for health care organizations to understand how to estimate and manage their costs. This changing environment has also resulted in separation of “cost accounting systems from financial accounting systems” and movement “from traditional allocation- based cost systems to activity-based cost systems” (Zelman, McCue, Millikan, & Glick, 2003, p. 15).

While Nowicki (2004) describes its purpose as providing managers with cost information for such reasons as “setting charges and profitability analysis” (p. 145), it is important to note that cost accounting ultimately leads to decision making. This might include enhancing departments that

are making money, eliminating services that are losing money, and carefully managing loss leaders (i.e., procedures provided cheaply or below cost to attract customers to the organization). Cost accounting also provides methods for classifying and allocating costs, as well as more precisely determining product costs, all of which will be described briefly in this section.

Classifying Costs Although there are a number of ways in which costs may be classified, the purpose of Table 10-2 is to illustrate a sampling of the most frequently utilized methods. The importance of such systems is merely to provide a point of departure for controlling costs.

While many authors provide a concise summary of the major methods of classifying costs, such as those shown in Table 10-2 (Nowicki, 2004; Zelman et al., 2003), they do not show how these classifications are often combined by managerial accountants to demonstrate the complexity of cost analysis within health care organizations. For example, concerning salaries and wages in hospitals, the salaries of radiology department managers are both direct and fixed, the wages of on-call nurses are direct but variable, and the salaries of the CEO and CFO are fixed but indirect.

Allocating Costs Cost allocation involves the determination of the total cost of producing a specified health care service through assigning costs into revenue-producing departments and then further allocating the costs down to the unit-of- service or procedure level based either on departmental revenue or volume. The purpose of this methodology is:

To ensure that patients are paying [theoretically] “for only the costs of the services and products they received” (Nowicki, 2004, p. 147); and

“To separate costs at the unit-of-service level to allow managers to: • Measure the effects of change in intensity and case mix; • Identify those costs that can be converted from fixed to variable; and • Identify inefficient functions and demonstrate the nature of the

problem, such as price, volume, or practice” (Berger, 2002, p. 216).

Although a number of methods have been identified for cost-allocation purposes, in each case the process ends when all of the organization’s costs (including those generated in non-revenue-producing departments, such as housekeeping and medical records) are allocated to the cost centers of revenue-producing departments (radiology, pediatrics, and so forth). These methods have been widely used for pricing and reimbursement purposes in the past but are beginning to be replaced by more accurate methods of determining product costs.

Determining Product Costs A number of methods for determining product costs (e.g., home health visits or patient days) have been posed, each of which crosses department lines of responsibility. However, one method, activity-based costing (the ABC method), has enjoyed increasing popularity in health care

organizations because of its greater accuracy. This change in methodology is also due to the fact that cost allocations are no longer made on the basis of cost center characteristics (e.g., number of office visits or percentage of square feet) but rather on the basis of cost drivers, or “the activities that go on in preparation for and during a unit of service” (McLean, 1997, p. 142). As explained by Zelman et al. (2003), “ABC is based on the paradigm that activities consume resources and products consume activities. Therefore, if activities or processes are controlled, then costs will be controlled” (p. 426).

Break-Even Analysis The ultimate goal of managing costs is minimally to break even and not run a deficit. Break-even analysis is the method of determining at what level of volume the production of a good or service will equal the revenues created. It is used by health care managers for the purpose of determining profit or loss. The break-even point is the volume of production in units and sale of goods or services where total costs equal total revenue. As noted by Nowicki (2004), “After the break-even point has been reached and fixed costs have been covered, each subsequent unit produced contributes to profit” (p. 159). McLean (2003), however, emphasizes that the break-even quantity (e.g., total number of visits) does not necessarily need to be reached for a health care organization to decide to keep a specified service. He states, “If [a] unit covers its direct costs (fixed and variable) and makes any contribution to overhead, it is worth keeping, even in the long run,” since the organization would incur overhead expenses even without the unit (McLean, 2003, p. 142). In the long run, “if the unit cannot meet its own (direct) total costs, it should be eliminated unless some outside entity or another revenue center is to subsidize it” (McLean, 2003, p. 142).

SETTING CHARGES Only after costs have been determined can health care organizations go about the business of setting rates or charges for their services and products. While the earlier section on “Managing Reimbursements from Third-Party Payers” describes a number of methods used by third-party payers and health care organizations to negotiate payments for services, a more

complete picture of what is involved when setting charges should be taken into consideration by any provider.

A first step in this discussion might be to differentiate the meanings of charges versus actual prices set by the organization. The Robert Wood Johnson Foundation defines charges as the “amount of money a provider would charge absent discounts” (Painter, Chernew, & Dunn, 2012, p. 9). In other words, charges do not reflect costs and are often published simply for reporting purposes. They do not reflect what the consumer will pay or the true value of the services.

Prices in health care, on the other hand, involve opportunity costs, what consumers or third-party payers give up in order to acquire medical goods or services, including:

Money actually spent. The perceived value of: • These goods or services; • Time sacrificed in acquiring these services; and • Other opportunities forgone (purchases, activities).

In other words, charges posted by the organization do not necessarily translate into actual prices paid for services.

Other Determinants of Setting Charges and Prices Although not claiming to be all-inclusive, the following factors are provided to make sure that the health care manager gives due consideration to each when involved in setting prices for services or products.

State and federal laws and regulations; The Joint Commission and other accrediting body regulations; Antitrust and other fair-pricing laws; and Profit-oriented pricing, including profit maximization, satisfactory profits, or breakeven strategies.

Setting charges or rates remains a highly complex activity within any health care organization due to the need to consider a huge number of

variables, both internal and external to the organization. While individual health care managers may be involved in providing substantial input into this process, larger organizations employ experts dedicated to this task in order to sustain revenue maximization and competitiveness in the health care market.

MANAGING WORKING CAPITAL “Working capital refers both to current assets,” that is, inventory, cash on hand, accounts receivable, and other such items that can be converted to cash in less than one year, “and to current liabilities,” meaning “those liabilities that will be paid within the current accounting period” (McLean, 2003, p. 288). Virtually all experts, however, define net working capital as “current assets minus current liabilities,” a concept that seems to remind us that health care organizations are never without accumulation of debt.

What Are the Purposes of Working Capital Management? There are two sets of purposes in managing working capital. The end result of the first set of purposes is to increase revenues and reduce expenses in order to:

Serve as the “catalyst” to make capital assets (buildings and equipment) productive by wisely managing such current assets as labor and inventory.

Control the volume of resources committed to current assets. McLean (2003) states that “financing working capital by the least costly means available can allow one’s organization to deliver the same amount of care at lower cost, or can allow an organization with a limited budget to deliver a greater amount of care” (p. 288).

Conserve cash by cutting the organization’s financing costs in order to take advantage of short-term investments.

Manage cash flow, that is, the amount of inflows and outflows, and the cash conversion cycle, which is the process (measured in days) through

which initial cash is converted into the inventory, labor, and supplies needed in health care operations that in turn generate accounts receivable and that finally are collected in the form of cash revenues.

Manage the liquidity of an organization, that is, “how quickly assets can be converted into cash” (Zelman et al., 2003, p. 488).

The second set of purposes involves enhancing “goodwill” toward the organization by:

Paying vendors and employees on time; and Demonstrating to lenders that the organization is “creditworthy” by showing it has sufficient resources to repay loans or at least pay interest on short-term funds.

Why Is Working Capital Management in Health Care Environments Problematic? Managing working capital tends to be more problematic with health care organizations because, with the exception of patient copays, which are miniscule in the big picture of the organization’s finances, health care organizations generate very little immediate cash. This is largely due to the huge preponderance of third-party payers and the substantial delays in payment. Also, even if paid by private parties, the large costs incurred for most medical services result in payment after the billing cycle, by credit card, or in negotiated installments.

Another area of concern for many health care financial managers is how best to make decisions in managing working capital when faced with such a wide array of options. Even new and inexperienced managers might take heart by heeding the advice of Sachdeva and Gitman (1981), who offer a simple decision rule when faced with alternative choices between possible means of managing current assets and liabilities: “Undertake changes in working capital management practices that add value to the organization” (p. 45).


Accounts receivable (AR) have been defined as a “current asset, created in the course of doing business, consisting of revenues recognized, but not yet collected as cash” (McLean, 2003, p. 352). Zelman et al. (2003) estimate that AR comprise “approximately 75 percent of a healthcare provider’s current assets” (p. 175). Also called patient accounts in many health care organizations, accounts receivable provide no interest for the provider unless they have been converted into interest-bearing loans to allow patients to pay out their debts for services over time. Therefore, management of AR becomes exceedingly important in order to collect revenues generated to ensure cash flow for management of the operations of the organization. It is essential to note that the ultimate collection of AR becomes less likely as the amount of time since services were rendered increases. More and more providers are becoming aggressive about collecting these revenues, sometimes resorting to telephone scripts more typical of collection agencies to obtain payments.

Major Steps in Accounts Receivable Management Managing accounts receivable involves collaboration and cooperation among almost all departments of a health care organization, although some departments are more directly involved than others. Table 10-3 provides examples of involvement in a typical hospital setting.

Some additional thoughts and clarification are warranted concerning the “overriding importance” of managing accounts receivable in all departments:

Documentation capture emphasizes the importance of the quality of the written or electronic record of patient care by all health care professionals.

Ultimately, interdependence among departments affects the reduction in the AR collection period. For example, accurate documentation supports the coding, and the timeliness of the coding greatly affects the ability of the billing department to send out a timely bill. Cooperation among managers is essential.

AR outcomes are often measured by first determining a baseline of the progress to be measured and then monitoring the outcomes periodically by looking at the organization’s balance sheet and income statements. This process is often referred to as “benchmarking,” in which the current year’s results can be measured against prior results to see whether things are getting better or worse.

MANAGING MATERIALS AND INVENTORY Formerly referred to as inventory management and more recently designated as supply chain management, materials management refers to the process of managing the clinical and non-clinical goods and inventory purchased and used by the personnel of a health care organization in order to perform their duties.

Why Is Materials Management Important? There are at least three reasons why materials management is so important to the health care organization. The first involves delivery of appropriate patient care, for which the organization must have the right kind and right amount of supplies, delivered in the right time frame. Stock-outs (not having enough of a product) are considered totally unacceptable in health care organizations, as they may result in unnecessary deaths or poor outcomes. A second reason involves cost control. Inventory, a non- productive asset, loses value over time, increasing the costs to the health care facility. If items spend too much time in inventory, they may become contaminated, lost, stolen (referred to as “shrinkage”), or expired.

Furthermore, cash tied up in excessive inventory cannot be used for assets that produce income. The third reason involves improvement of the organization’s profitability. Skillful materials management can improve the organization’s bottom line through such techniques as reducing utilization of overused supplies, obtaining best pricing for supplies and equipment through negotiation, and standardizing the organization’s supplies to provide purchasing discounts (Berger, 2002).

What Are the Basic Tenets of Materials Management? It is also important to adopt the most appropriate method for stocking inventory. This includes keeping a safety stock level of inventory, below which the health care facility will not allow units on hand to fall. It further involves understanding and adopting one of the commonly accepted methods for valuing inventory:

FIFO, or “first-in, first-out,” in which the first item put in inventory is the first taken out; it produces an inventory of newer items and thus values the cost of inventory at the price paid for the newest items;

LIFO, or “last-in, first-out,” in which the last item put in inventory is the first taken out; it produces an inventory of older items and thus values the cost of inventory at the price paid for the oldest items;

Weighted average, in which the average cost of inventory items is multiplied by the number of units in inventory; and

Specific identification, in which the actual cost of each item is included. This tends to be used with high-cost (and relatively few) items.

Finally, adopting the most appropriate method for stocking inventory includes application of either the JIT or ABC inventory methods in terms of when to order or deliver products to the health care facility:

Just-in-time (JIT): With this technique, products are literally delivered to the organization “just in time” for use. This method is preferred by Berger (2002) in order to decrease the “chance for obsolescence and shrinkage (theft)” (p. 306) and to reduce holding costs associated with warehousing items in the health care facility.

ABC inventory method: With activity-based costing (ABC), each supply item is categorized as belonging to one of three groups. Group A includes very expensive items that must be monitored closely, such as certain expensive drugs. Group B consists of intermediate-cost items, where order and inventory quantities change “as interest rates and unit prices vary.” Group C, the largest group, consists of items that represent little cost but are important to the day-to-day operations of the health care organization (e.g., bandages, tissues, pain relievers). Zelman et al. (2003) and Nowicki (2004) describe the ABC method in detail, providing examples of how it is applied.

While it may be the ultimate responsibility of the materials manager to ensure that all goods needed by both the clinical and non-clinical users in a health care facility are available when required and in the most cost-efficient manner, every manager in the organization must be held accountable for timely ordering and judicious use of materials. Physicians and other users of high-cost equipment and supplies should also be educated about the procedures involved in the ordering and stocking process. Table 10-4 provides examples of the most commonly used inventory management techniques.

MANAGING BUDGETS One of the most critical functions for managers in health care organizations is management of the departmental or division budget. While the facility’s Finance Department is generally involved in working with the manager in developing both operational and capital budgets for the department, it is the responsibility of each manager to ensure that expenditures (for items such as labor, equipment, and supplies) and revenues (if the department supplies services or products for patients/consumers) are monitored carefully on an ongoing basis.

Sorting Out the Definitions and Distinguishing Characteristics of Budgeting Budgeting means different things to different people, even in health care organizations, and it does not help that not all authors or organizations utilize the same terms in discussing their budgeting processes. The purpose of the current section is to try to sort out some common budgeting terms that are used in the financial management departments of health care entities.

Budgeting is, quite simply, the process of converting the goals and objectives of the organization’s operating plan into financial terms: expenses, revenues, and cash flow projections. The budget, then, is a financial plan for turning these objectives into programs for earning revenues and expending

funds. Listed below are characteristics of budgeting important to health care managers.

The budget should be a dynamic working document, to be utilized on an ongoing basis by every manager in the organization.

Managers must have access to a budget manual and last year’s data regarding volumes, revenues, expenses, and cash flows on a monthly basis to provide guidance for their departments’ budgeting process.

Budgets provide a tool for ex post facto evaluation of managers concerning their performance in efficiently running their departments and for assessing how well the organization as a whole has met its financial performance goals.

The budget period is the time frame for which a budget is prepared, often one fiscal year (McLean, 2003).

The budget calendar is a planning tool used to design and maintain all of the organization’s projects falling under the budget, with separate calendars being prepared for the operating and capital budgets (Berger, 2002). Included in this calendar are the budget activities, time-frame expectations, the parties responsible, and follow-up meeting times.

What Are the Specific Types of Budgets? The operating budget generally refers to the annual budget that follows the strategic financial and operating plan. Berger (2002) describes 24 steps in preparing the operating budget, including five distinct “segments”: strategic planning, administrative, communications, operational planning, and budgeting segments. He further asserts that these steps “involve managers in every facet of operations. In addition, a critical set of stakeholders who must be accessed, solicited, and appeased are the physicians linked to the organization, either in an employment capacity or in an affiliate relationship” (pp. 145–148).

Cash budget is a term sometimes used interchangeably with “operating budget,” but it is specifically distinguished from the latter by some authors and organizations. Prepared by the finance department staff, this budget is described by Berger (2002) as “the necessary step that allows the organization to determine how to optimize the value of the cash being

generated by its operations” (p. 235). McLean (1997) more specifically defines a cash budget as “a forecast of cash inflows, cash outflows, and net lending or borrowing needs for the months ahead” (p. 355). This 52-week budget attempts to forecast the receipts (most often from third-party payers) and disbursements (expenses) of the organization. These budgets comprise the following:

An expense budget, which is a prediction of the total expenses that the organization will incur, typically includes such items as labor, supplies, and acuity levels (case mix) and is included on the left-hand side (the debit side) of accounting entries. Remember, an expense is an outflow or an asset that has been used up, and a cost is the resources necessary to provide the service or product you are producing.

A revenue budget, shown on the right-hand (credit) side of accounting entries, includes data on forecasted utilization of specific services within the organization and third-party payer mix.

Three other terms generally associated with cash budgets are:

Cash outflows, which include such expenses as mortgage payments or rents, salaries and wages, benefits, utilities, supplies, and interest paid out;

Cash inflows, which include cash payments up front, 30-day and 60- day collections, government appropriations, donations, and any interest earned each month; and

Ending cash, which comprises both the cash balance at the end of the month and the following month’s beginning cash level. The following formula is used to determine this amount: Ending cash = Beginning cash + Cash inflows – Cash outflows.

There are two other types of budgets with which health care managers should become familiar. The term statistics budget is given to the initial statistics delineated in the operating plan that forecasts service utilization (by service type, acuity level or case mix, and payer mix), resource use, and policy data (employment data, occupancy rates, staffing ratios, etc.). The capital budget refers to the plan for expenditures for new facilities and equipment (often referred to as fixed assets). The following discussion will focus on the


The Importance of Capital Budgeting Capital budgeting may be defined as the process of selecting long-term assets, whose useful life is greater than one year, according to financial decision rules. The capital budget determines funding amounts, what capital equipment will be acquired, what buildings will be built or renovated, depreciation expenses, and the estimated useful life to be assigned to each asset. Berger (2002) states that its main purpose “is to identify the specific capital items to be acquired. The problem in almost all healthcare organizations is which capital projects should be funded” in light of scarce resources (p. 157). McLean (2003) further asserts that “[t]he basic question that any capital budgeting system must ask is, ‘Does this asset or project, in a time value sense, at least pay for itself? If not (if it requires a subsidy), is there a subsidy forthcoming?’ If the answer is yes, then the project is worth doing” (p. 189).

The following are types of items typically included in such budgets:

Land acquisition, including land to be used for expansion of service offerings;

Physical plant or facility construction, expansion, acquisition, renovation, or leasing, possibly including medical office space for physician practices;

Routine capital equipment, including items used in clinical areas (radiology, lab, surgery, rehab, and nursing departments);

Information technology infrastructure or upgrades for financial systems, medical records, and clinical use; and

Recruitment and acquisition of staff physicians (more recently included), either through purchasing existing physician practices or establishing new practices by employing physicians.

While the capital budgeting process often involves substantial outlays of time by managers at different levels of the organization, it is important to consider some essential steps that are frequently followed. Determination of the capital budget often begins with a wish list of various items requested by staff, physicians, or any other individuals who must obtain or use equipment

within the department. It is important to note that engaging physician leaders in this process cannot be overemphasized, because they ultimately make the majority of diagnostic and clinical decisions regarding patient care in health care organizations.

Department managers must then complete and submit designated capital budget requests to the Finance Department. Once all requests have been submitted, the finance staff reviews them for consistency and completeness. Reviewers of the technical aspects of the capital requests make sure each contains all of the data required. This group often includes accounting staff, information systems management, materials management, and facilities management. Designated evaluators assess the merits of the requests, how each compares to all other project requests on a criteria basis, and whether each adheres to strategic plan criteria. Administrative approval and approval by the governing body completes the process.

While there are a number of methods utilized to make capital budgeting decisions, most health care organizations establish criteria-based decision rules. These range from a simple accept/reject decision, which merely addresses “whether or not to acquire an asset or initiate a project,” to capital rationing, in which a fixed dollar amount is placed on annual capital spending by governing bodies and those with the highest profitability index are selected (McLean, 2003, pp. 193–195). However, as a “safety valve” in the decision process, some organizations have found that it is necessary to include a mechanism that allows some needed capital acquisitions “to be purchased no matter what,” that is, despite not being able to meet formal evaluation criteria. Berger (2002) calls this non-criteria-based capital budgeting.

OPPORTUNITIES FOR RESEARCH ON MANAGING COSTS AND REVENUES Opportunities for in-depth research on managing costs and revenues exist in a variety of venues, including your own health care organization. Many of the resources used in writing this chapter also include extensive research holdings and data sets which are available to students and academic researchers to utilize. Herewith is a partial listing of some resources.

Agency for Healthcare Research and Quality; American College of Healthcare Executives; Centers for Medicare and Medicaid Services, particularly the reimbursement and fee schedules;

Healthcare Financial Management Association; Health Services Research Information Central (HSRIC); Internal Revenue Service, particularly areas on charity, non-profits, and tax exemptions; and

Social Security Administration.

CONCLUSION Managing costs and revenues in the health care arena is a complex and often technical process that involves understanding of the interrelatedness of the processes involved, the interplay of many departments and managers within the organization, and the importance of influences external to the organization. This chapter has addressed the importance and objectives of financial management and the impacts of tax status and organizational structure and has taken a cursory look at how effective management of a variety of organizational support functions contribute to maximizing revenues and controlling costs. More specifically, the chapter has provided the health care administration student with a non-financial career path a basic understanding of managing costs, reimbursements from third-party payers and other sources, budgeting, capital acquisition, working capital, accounts receivable, setting charges and prices, and managing materials and inventory. Managers at all levels of the organization are often involved in addressing these functions.

What this chapter did not address more specifically were investment decisions, short-term versus long-term financing, managing endowments, financial ratios, or financial statement preparation and analysis. This is largely due to the fact that these functions are most often handled by professionals within the Finance Department of the health care organization, who in turn provide managers with pertinent related information on an as- needed basis. However, for health care managers more directly involved in financial management as a major part of their jobs, it is imperative that they

avail themselves of this and other detailed financial management information to help ensure the financial viability of their organizations.

All managers employed within the health care arena must continue to monitor the changes taking place in health care and, more precisely, with health care reform. The key to understanding health care finance is to take the concepts one step at a time until you are able to build them into one cohesive unit of understanding. Furthermore, getting involved and applying what you have learned in the classroom and through the textbook is an excellent way to hone your financial skills. Never pass up the opportunity to put your financial skills to work in a real-world setting, as this is how you will learn to apply the principles discussed in this chapter.


1. Define health care finance and provide several examples of how it affects managers at all levels within the organization.

2. Compare and contrast the different inventory management techniques and discuss how each technique might play a role within different health care organizations.

3. How are health services paid for? Provide a definition for the term “third-party payer,” discuss the different payers currently operating in the market, and assess the importance of each.

4. Define and give examples (other than from the table in the text) of fixed, variable, and semivariable costs, along with examples of ways to control the costs in your examples.

5. Explain why budgets are important to all organizations. Expand this discussion by illustrating how different types of budgets are used.

6. How is working capital important to the health care organization of today? Why is it different in health care as opposed to other industries?

7. Discuss the various ways in which health care reform has affected and may affect the financial delivery of health care today and into the


8. How do medical billing and coding specialists keep up-to-date with changes in ICD and CPT?

9. Why is it so important to have accurate medical billing and coding?

Cases in Chapter 18 related to this chapter include:

Piecework Problems with the Pre-Admission Call Center Medical Center: Let’s All Just Get Along I Want to Be a Medical Coder Managing Costs and Revenues at Feel Better Pharmacy

Case study guides are available in the online Instructor’s Materials.

REFERENCES Advisory Board Company. (2014, August 1). Thousands of providers join

Medicare’s bundled pay program. Retrieved from medicare-bundled-pay-program-what-it-means

American Association of Professional Coders (AAPC). (2015). Certified Professional Coder. Retrieved from

American Hospital Association (AHA). (1990). Role and functions of the hospital governing board. Chicago, IL: Author.

American Hospital Association (AHA). (2015, January). Uncompensated hospital care cost fact sheet. Retrieved from

American Medical Association (AMA). (2010). Current procedural terminology (CPT). Retrieved from resources/solutions-managing-your-practice/coding-billing-
insurance/cpt.shtml American Medical Association (AMA) (2015a). History timeline. Retrieved


American Medical Association (AMA). (2015b). ICD-10 code set to replace ICD-9. Retrieved from resources/solutions-managing-your-practice/coding-billing- insurance/hipaahealth-insurance-portability-accountability- act/transaction-code-set-standards/

Berger, S. (2002). Fundamentals of health care financial management: A practical guide to fiscal issues and activities (2nd ed.). San Francisco, CA: Jossey- Bass.

Berman, H. J., Weeks, L. E., & Kukla, S. F. (1986). The financial management of hospitals (6th ed.). Chicago, IL: Health Administration Press.

Carey, M. A. (2015). Congress just passed a Medicare doc fix. Kaiser Health News. Retrieved from fix-congress/

Centers for Disease Control and Prevention (CDC). (2015, October 1). International Classification of Diseases, (ICD-10-CM/PCS) transition —background. Retrieved from

Centers for Medicare & Medicaid Services (CMS). (2013). Bundled Payments for Care Improvement (BPCI) Initiative: General information. Retrieved from

Centers for Medicare and Medicaid Services (CMS). (2014, January 1). Fact sheets: Bundled Payments for Care Improvement Initiative fact sheet. Retrieved from sheets/2014-Fact-sheets-items/2014-01-30-2.html

Colla, C. H., Lewis, V. A., Shortell, S. M., & Fisher, E. S. (2014). First national survey of ACOs finds that physicians are playing strong leadership and ownership roles. Health Affairs, 33(6), 964–971.

Cornwell, S., & Humer, C. (2015). U.S. House okays bipartisan bill to fix Medicare doctor payments. Reuters. Retrieved from idUSKBN0MM27B20150326

Edwards, S. T., Bitton, A., Hong, J., & Landon, B. E. (2014). Patient- centered medical home initiatives expanded in 2009-13: Providers, patients and payment incentives increased. Health Affairs, 33(10), 1823– 1831.

Gapenski, L. C. (2003). Understanding healthcare financial management (4th ed.). Chicago, IL: Health Administration Press.

Gapenski, L. C. (2009). Fundamentals of health care finance. Chicago, IL: Health Administration Press.

Gold, J. (2014, April 16). FAQ on ACOs: Accountable care organizations, explained. Kaiser Health News. Retrieved from accountable-care-organization-faq.aspx

Health Resources and Services Administration (HRSA). (n.d.). What is a medical home? Why is it important? Retrieved from

Himmelstein, D. U., Warren, E., Thorne, D., & Woolhandler, S. (2005, February). Market watch: Illness and injury as contributors to bankruptcy. Health Affairs, 10(W5), 63–73, Web exclusive.

ICD10DATA.COM (2015). ICD-10 CM Codes. Retrieved from

LaMontagne, C. (2015, April 28). NerdWallet Health finds medical bankruptcy accounts for majority of personal bankruptcies. NerdWallet Health. Retrieved from bankruptcy/

Ledue, C. (2010, April 23). Healthcare executives believe reform will negatively affect facilities. Healthcare Finance News. Retrieved from believe-reform-will-negatively-affect-facilities

McLean, R. A. (1997). Financial management in health care organizations. Clifton Park, NY: Thomson Delmar Learning.

McLean, R. A. (2003). Financial management in health care organizations (2nd ed.). Clifton Park, NY: Thomson Delmar Learning.
National Conference of State Legislatures. (2012, September). The medical home model of care. Retrived from care.aspx

Nowicki, M. (2004). The financial management of hospitals and healthcare organizations (3rd ed.). Chicago, IL: Health Administration Press.

Painter, M. W., Chernew, M. E., & Dunn, D. (2012). Counting change: Measuring health care prices, costs and spending. Robert Wood Johnson Foundation. Retrieved from assets/2012/03/counting-change

Ridgely, S. M., de Vries, D., Bozic, K. J., & Hussey, P. S. (2014). Bundled payment fails to gain a foothold in California: The experience of the IHA bundled payment demonstration. Health Affairs, 33(8), 1345–1352.

Sachdeva, K. S., & Gitman, L. J. (1981). Accounts receivable decisions in a capital budgeting framework. Financial Management, 10(4), 45–49.

Shafrin, J. (2010, June 30). Center for Medicare and Medicaid Innovation. Healthcare Economist. Retrieved from http://healthcare- innovation/

Stack, S. J. (2015, July 6). CMS to make ICD-10 transition less disruptive for physicians. AMA Wire. Retrieved from http://www.ama- physicians

World Health Organization (WHO). (2015). International Classification of Diseases (ICD) information sheet. Retrieved from

Zelman, W. N., McCue, M. J., Millikan, A. R., & Glick, N. D. (2003). Financial management of health care organizations: An introduction to fundamental tools, concepts and applications (2nd ed.). Malden, MA: Blackwell.

Managing Health Care Professionals Sharon B. Buchbinder and Dale Buchbinder

LEARNING OBJECTIVES By the end of this chapter, the student will be able to:

Distinguish among the education, training, and credentialing of physicians, nurses, nurse aides, midlevel practitioners, and allied health professionals;

Deconstruct factors affecting the supply of and demand for health care professionals;

Analyze reasons for health care professional turnover and costs of turnover;

Propose strategies for increasing retention and preventing turnover of health care professionals;

Create a plan to prevent conflict of interest in a health care setting; Examine issues associated with the management of the work life of physicians, nurses, nurses’ aides, midlevel practitioners, and allied health professionals; and

Investigate sources of data for health workforce issues.

INTRODUCTION Health care organizations employ a wide array of clinical, administrative, and support professionals to deliver services to their patients. The Bureau of Labor Statistics (BLS) indicated that there were close to 16 million jobs in

hospitals, offices of health practitioners, nursing and residential care facilities, home health care services, and outpatient settings (Torpey, 2014).

The largest employment setting in health care is hospitals and the largest category of health care workers is registered nurses, with 2.7 million jobs, 61% of which are in hospitals (BLS, 2014h). According to the BLS, there were 691,400 physicians and surgeons who held jobs in 2012 (BLS, 2014e). Increasingly, physicians are choosing to practice in large groups or to be employed by hospitals, rather than in solo or small practices. In 2013, Jackson Healthcare re-conducted a survey of physicians and found 26% were employed by hospitals, an increase of 6% over the previous year. Ownership stakes in practices, solo practices, and independent contractor statuses all declined in the same period (Vaidya, 2013). Employment offers physicians a safe haven in a volatile health care environment. Under the umbrella of a hospital or other large health care organization, they have better work hours, benefits, and time off, which they could not always afford in small or solo practice. It is expected the proportion of employed physicians will continue to grow in the coming decade. In 2012, physician assistants held 86,700 jobs, over 55% of which were in ambulatory health care services, including physician practices, about 20% were in hospitals, and the rest in nursing care facilities and government settings (BLS, 2014f). Allied health professionals constitute a broad array of 28 health science professions, including, but not limited to, anesthesiologist assistants, medical assistants, respiratory therapists, and surgical technologists (Commission on Accreditation of Allied Health Education Programs, 2015).

These statistics mean that, as a health care manager, in many instances you will be working with a mix of people with either more or less education than you have. It also means you will not have the clinical competencies that these health care providers have—an intimidating scenario, to say the least. Instead of clinical expertise, however, you will bring a background that enables you to enhance the environment in which these highly specialized personnel deliver health care services. You will be the person responsible for making sure nurses, doctors, and other health care professionals have the resources to provide safe and effective patient care. Your role will be to provide and monitor the infrastructure and processes to make the health care organization responsive to the needs of the patients and the employees. The more you understand clinical health care professionals, the better prepared you will be to do your job as a health care manager. The purpose of this

chapter is to provide you with an overview of who your future colleagues are, how they were trained, and ways to manage the quality of their work environment.

PHYSICIANS Physicians begin their preparation for medical school as undergraduates in premedical programs. Premedical students can obtain a degree in any subject; however, the Association of American Medical Colleges (AAMC) (2015) indicates that the expectation is that they will graduate with a strong foundation in mathematics, biology, chemistry, and physics. Entry into medical school is competitive; applicants must have high grade point averages and high scores on the Medical College Admission Test (MCAT).

There are some shorter, combined Bachelor of Science/Medical Doctor (BS/MD) programs; however, the majority of medical school graduates will have 8 years of post–high school education before they go through the National Residency Matching Program (NRMP), a matching process whereby medical students interview and rank their choices for graduate medical education (GME), also known as residencies, and the residency training programs do the same (NRMP, 2015). Once matched with a residency training program, physicians are prepared in specialty areas of medicine. Depending on the specialty, the length of the residency training program can be as short as 3 years (for family practice) or as long as 10 years (for cardio-thoracic surgery or neurosurgery). According to the Accreditation Council for Graduate Medical Education (ACGME), “When physicians graduate from a residency program, they are eligible to take their board certification examinations and begin practicing independently. Residency training programs are sponsored by teaching hospitals, academic medical centers, health care systems and other institutions” (ACGME, 2015, para. 4–5). Due to recent GME legislation working on the physician shortage, there will be a gradual increase of residency training positions over the coming years with a priority on primary care physician residency spots (AMA Wire, 2015a). Some authors have begun to question the need for lengthy training programs, given the presence of shorter pre-medical programs, competency based education, the looming shortage of physicians, and levels of debt incurred by medical students (Duvivier, Stull, &

Brockman, 2012; Emanuel & Fuchs, 2012). Regardless of the specialty, length of physician training programs, or number of trainees, depending on the type of health care organization where you are employed, you may be working with residents-in-training and medical students, as well as physicians who have been in independent practice for decades.

In addition to having a long time before they can practice independently, residents work extensive hours as part of their training programs. At one time, it was not uncommon for residents to be on call continuously for 48 hours, because ceilings on hours of work for residents varied by residency training program. However, that all changed due to the death of Libby Zion, an 18-year-old college student, who was seen at the Cornell Medical Center in 1984 and allegedly died due to resident overwork (AMA, Medical Student Section, n.d.). Although the hospital and resident were exonerated in court, the battle over resident work hours had begun. New York was the first state to institute limits on resident work hours in 1987. Over the past two decades, various specialty societies, medical associations, and legislators fought over the definition of “reasonable” work hours for physicians in training. The battle has continued, and new rules have been updated from those published in 2003. Per these new rules, hospitals and residency training program directors will be required to limit resident work hours to no more than “80 hours per week, averaged over a four-week period, inclusive of in-house call activities and all moonlighting” (i.e., side jobs in addition to the 80 hours per week) (ACGME, 2014, p. 4). First-year residents (PGY-1) are not permitted to moonlight (ACGME, 2011).

“Sponsoring institutions and programs must ensure and monitor effective, structured hand-over processes to facilitate both continuity of care and patient safety” (ACGME, 2014, p. 13). This mandate means when the resident goes home, the next person taking care of the patient must be briefed to ensure that the patient care team has all relevant information. Despite the restrictions on work hours, residents are not permitted to walk out the door without communicating this important patient care information. At times, this means a delicate balancing act to ensure compliance with all standards, which also emphasize the need for interpersonal and communication skills, professionalism, systems-based practice as components in a culture of safety and patient-centric care.

When the work-hour rules first went into effect, physicians who trained under the “work until you drop” mentality protested that professionalism

would decline and residents would miss out on learning opportunities associated with continuity of the care from patient admission to discharge. Surgeons, in particular, protested, fearing walk-outs in the middle of long cases, a reflection of a time-clock-punching and a shift-work mentality. Ethnographic research conducted among medical and surgical residents in two hospitals did not find evidence for those fears. Over the course of three months, Szymczak, Brooks, Volpp, and Bosk (2010) followed residents, observed behaviors, and conducted in-depth face to face interviews. These researchers found that rather than leave at a critical juncture, the residents were, on occasion, more inclined to stay—off the clock. Interviews elucidated thoughtful, analytical rationales for the non-compliant behaviors, as well as a respect for the work-hour rules. Residents were mindful of the implications of their behaviors and the implications of non-compliance and were conflicted about under-reporting their hours, i.e., lying about their time on duty. These work-hour rules and patient handoff protocols underscore the fact that residents are in the hospital for education, not to provide service to the hospital, a major departure from the way graduate medical education was conducted a few decades ago. More time is needed to see if the pendulum will swing back to longer duty-hours in light of actual behaviors.

The implications of limits on resident work hours are multifold. While residency training program directors are responsible for monitoring resident work hours, they must be in compliance with the health care institution’s policies as well. You may be responsible for ensuring compliance by collecting work-hour data for your managers. Health care managers are obligated to ensure adequate coverage of the hospital with physicians. Resident work-hour restrictions may mean that you need to employ more physicians or midlevel practitioners—physician assistants and nurse practitioners. And your organization may need to hire ancillary staff and allied health professionals, such as intravenous therapists and surgical assistants, to do tasks previously covered by resident physicians.

Most physicians are eligible to obtain a license to practice medicine after one year of postgraduate training. Licensure, granted by the state, is required for physicians, nurses, and others to practice and demonstrates competency to perform a scope of practice (National Council of State Boards of Nursing [NCSBN], 2015a). Limited licensure is granted for PGY- 1s in hospital practice under supervision. State Boards of Physician Quality

Assurance (BPQA) establish the requirements for medical licenses. These requirements are lengthy and strenuous. For example, the state of Maryland requires the following (Annotated Code of Maryland, 2015):

Good moral character; Minimum age of 18 years; A fee; Documentation of education and training; and Passing scores on one of the following examinations: • All parts of the National Board of Medical Examiners’ examinations, and/or a score of 75 or better on a FLEX exam, or a passing score on the National Board of Osteopathic Examiners, or a combination of scores and exams; or

• State Board examination; • All steps of the U.S. Medical Licensing Examination (USMLE).

Candidates must demonstrate oral and written English-language competency and supply the following:

A chronological list of activities beginning with the date of completion of medical school, accounting for all periods of time;

Any disciplinary actions taken by licensing boards, denying application or renewal;

Any investigations, charges, arrests, pleas of guilty or nolo contendere, convictions, or receipts of probation before judgment;

Information pertaining to any physical, mental, or emotional condition that impairs the physician’s ability to practice medicine;

Copies of any malpractice suits or settlements, or records of any arrests, disciplinary actions, judgments, final orders, or cases of driving while intoxicated or under the influence of a chemical substance or medication; and

Results of all medical licensure, certification, and recertification examinations and the dates when taken.

In addition to the above requirements, many states also mandate Continuing Medical Education (CME) in such topics as domestic violence,

child abuse, drug abuse, and quality assurance, to name but a few. A new commission is working to help streamline the process for those physicians seeking licensure in multiple states. The eligible physician designates her “principle state of licensure and selects other states in which she desires licensing” (AMA Wire, 2015b, para 3). At the time of this writing, seven states were participating in this compact. It is anticipated that with the rise of telemedicine, more states will join the Federation of State Medical Boards, Inc. (FSMB)–initiated agreement.

Physicians must also undergo criminal background checks (CBCs) in all but a few states. As of 2014:

“45 state medical boards conduct criminal background checks as a condition of initial licensure;

39 state medical boards require fingerprints as a condition of initial licensure;

43 state medical boards have access to the Federal Bureau of Investigation database; and

The Minnesota Board of Medical Practice will conduct criminal background checks and require fingerprinting (including access to the FBI National Crime Information Center [NCIC]) by January 1, 2018” (FSMB, 2014, p. 1).

The reasons for increasing numbers of medical boards requiring CBCs are numerous and include, but are not limited to, increasing societal concerns about alcohol and drug abusers, sexual predators, and child and elder abusers. If a CBC contains information about convictions, the state licensure board will examine the application on a case-by-case basis. The reviewers will be looking for level and frequency of the criminal behavior, basing their decision on that, along with other materials submitted by the applicant, such as proof of alcohol and drug rehabilitation.

In addition to obtaining a license, physicians may voluntarily submit documentation of their education, training, and practice to an American Board of Medical Specialists (ABMS) member board for review (ABMS, 2015). Upon approval of the medical specialty board (i.e., successful completion of an approved residency training program), the physician is then allowed to sit for examination. Successful completion of the examination(s) allows the physician to be granted certification, and she is

designated as board certified in that specialty (e.g., a board-certified pediatrician or a board-certified general internist). Certificates are time- limited; physicians must demonstrate continued competency and retake the exam every 6 to 10 years, depending on the specialty. The purpose of American Board of Medical Specialties Maintenance of Certification (ABMS MOC) is to ensure that physicians remain up-to-date in their specialties (ABMS, 2015). Board certification is a form of credentialing a physician’s competency in a specific area. For staff privileges and hiring purposes, most hospitals, HMOs, and other health care organizations require a physician to be board certified or board eligible (i.e., preparing to sit for the exams) because board certification is used as a proxy for determining the quality of health professionals’ services. This assumption of quality is based on research that more education and training leads to a higher quality of service (Donabedian, 2005; Tamblyn et al., 1998). Lipner, Hess, and Phillips (2013) conducted a meta-analysis of the perceptions of the value of ABMS MOC on stakeholders. The authors found patients and health care organizations valued MOC and participation across the boards was high, perhaps due in large part to hospitals requiring it for privileging. However, not all physicians were not convinced re-certification was useful. The same literature review found the association between physician board certification and quality of care to be positive, but “modest in effect sizes and are not unequivocal” (Lipner et al., 2013, p. S20). Since the ABMS MOC is still a relatively new requirement, it remains to be seen if the impact on quality of care will grow over time.

Most states require that physicians complete a certain number of continuing medical education (CME) credits to maintain state licensure and to demonstrate continued competency. Additionally, hospitals may require CME credits for their physicians to remain credentialed to see patients (National Institutes of Health [NIH], 2015). Seven organizations, the ABMS, the American Hospital Association (AHA), the AMA, the Association of American Medical Colleges (AAMC), the Association for Hospital Medical Education (AHME), the Council of Medical Specialty Societies (CMSS), and the FSMB, are members of the Accreditation Council for Continuing Medical Education (ACCME) (ACCME, 2015b). The ACCME establishes criteria for determining which educational providers are quality CME providers and gives its seal of approval only to those organizations meeting their standards. The ACCME also works to

ensure “uniformity in accreditation” of educational offerings to maintain the quality of continuing physician education and now requires educational providers to reapply for maintenance of recognition (ACCME, 2015a).

Physician credentialing is the process of verifying information a physician supplies on an application for staff privileges at a hospital, HMO, or other health care organization. Most health care organizations have established protocols, and as a health care manager, you will be required to follow that protocol. Physicians are tracked by the AMA from the day they graduate from medical school until the day they die. Information about every physician in the U.S. is in the AMA Physician Masterfile, which has been in existence for more than 100 years. Originally created on paper index cards to establish biographic records on physicians, “the Masterfile…serves as a primary resource for professional medical organizations, universities and medical schools, research institutions, governmental agencies, and other health-related groups” (AMA, 2015b, para. 5). Physician credentialing is a time-consuming, labor-intensive, costly process that must be repeated every two years. When physicians apply for privileges at a hospital, they must specify what they want by specialty and, within the surgical specialties, by procedure. For example, a general surgeon who wants to do laparoscopic cholecystectomies (i.e., removal of the gall bladder through a very small incision, using an instrument like a tiny telescope) would apply for both general surgery privileges and for that specific procedure. Using extensive documentation, the surgeon must demonstrate competency for those privileges.

Normally, physician credentialing criteria are established by the department where the physician would be affiliated. Core privileges cover a multitude of activities that a physician is allowed to do in a health care services organization. Using family practice (FP) as an example, the Department of Family Practice in a hospital would establish the criteria for privileges. Core privileges for a FP might include: admission, evaluation, diagnosis, treatment and management of infants and children, adolescents, and adults for most illnesses, disorders, and injuries (American Academy of Family Practice [AAFP], 2015b). Specific privileges would be those activities outside the core privileges and would require documentation of required additional training and expertise in a procedure. In this example, if the FP also wanted to be allowed to deliver babies at a hospital, that FP would be required to provide documentation of that training and might be

subject to observation or proctorship to ensure he or she had the requisite competencies (AAFP, 2015a). If there are two departments with physicians who do the same thing (e.g., Obstetrics and Gynecology and Family Practice), each department is responsible for its own criteria. The Medical Staff Office would enforce, but not establish, the criteria. A hospital must conduct diligent research on physicians before granting privileges, or it can be held liable in a court of law for allowing an incompetent physician on its staff, should there be a bad outcome. The same is true for HMOs, ambulatory care centers, and other health care delivery organizations. In Taylor v. Intuitive, lawyers for the estate of Fred Taylor alleged Intuitive, the company that created the daVinci robotic surgery system, failed to provide adequate training for the surgeon, which led to major complications and the death of the patient. Intuitive argued it had no responsibility for assessing the surgeon’s competency in using the technology. The jury agreed with the defense, underscoring the importance the hospital’s legal liabilities associated with negligent credentialing and privileging (Pradarelli, Campbell, & Dimick, 2015).

It is preferable to obtain primary, meaning firsthand, verification and documentation by contacting each place of education, training, and employment individually by phone and obtain original documents, such as transcripts with raised seals. Verification can include, but is not limited to, the following elements (Government Accountability Office [GAO], 2010):

Name, address(es), and telephone numbers; Birthdate and place of birth; Medical school; Residency training program and other graduate education, including fellowships;

State licensure details, including date of issue and expiration; Specialty and subspecialty, including board certification and eligibility; Continuing medical education; Educational and employment references; Drug Enforcement Agency (DEA) registration status; and Licensure, Medicare/Medicaid, and other state or federal sanctions.

The importance of primary verification of these elements has been

underscored by an audit of the credentials of physicians employed by six Veterans’ Affairs Medical Centers (VAMCs) (GAO, 2010). The auditors “looked for evidence of omissions by physician applicants related to medical licenses, malpractice, and at five of six VAMCs visited, gaps in background greater than 30 days” (GAO, 2010, p. 42). They found that of 180 physician files they reviewed, 29 lacked proper verification of state licensure and 21 physicians failed to disclose malpractice information (GAO, 2010).

An entire industry of companies who conduct physician credentialing for a wide array of requirements now exists for physicians and health care organizations. Regardless of who completes the work, it still must be reviewed and approved by the organization where the physician will be practicing. As a health care manager, you may find yourself working in the physician relations and credentialing department of a hospital, HMO, or other health care delivery organization, and you may be responsible for determining whether the credentials offered by a physician are legitimate. Physician credentialing requires excellent interpersonal skills, organizational skills, persistence, an eye for details, and the ability to identify inconsistencies in data.

Since physicians are tracked from the moment they graduate from medical school, the first thing to verify is that there are no gaps in their resumes. Physicians rarely take time off “to find themselves.” If there is a significant gap between educational or employment placements (e.g., nothing on the resume for four years between a residency training program and an evening-shift job working at a clinic with a poor reputation), you need to question what has transpired in this individual’s life. Physicians are human, and they can have events in their lives such as mental illness, addiction, or imprisonment. Since you will be responsible for safe, effective patient care, you must be mindful about who is providing that care. The first clue will be in the credentials, especially in the chronology of life events.

Occasionally, you will come across an individual who claims to be a physician but is not. In this Internet and computer age, physician imposters can obtain fraudulent credentials from medical schools in other countries, or even in the U.S. Physician imposters are rare, but potentially dangerous, individuals. There is no substitute for personal interaction with the institution where someone claims to have been educated or employed. This is where an eye for details and inconsistencies and interpersonal skills come into play. You will be required to handle telephone inquiries with the utmost

tact to ensure that you obtain verification. If no one at an institution knows the individual, or if the medical school has “burned down, leaving no records,” alarm bells should be ringing in your head, and you should notify your manager immediately there may be a problem with the application.

A comprehensive review of a physician’s credentials involves making electronic queries to the National Practitioner Data Bank (NPDB), aka “the Data Bank.” At one time, physicians who were disciplined or lost their license in one state could simply move to another state and get a license there. Other than person-to-person contacts, there were few ways to track “bad docs” who moved across state borders. The NPDB was created to have a system whereby state licensing boards, hospitals, professional societies, and other health care entities could identify, discipline, and report those who engage in unprofessional behavior. “The National Practitioner Data Bank (NPDB) is an electronic information repository created by Congress. It contains information on medical malpractice payments and certain adverse actions related to health care practitioners, entities, providers, and suppliers. Federal law specifies the types of actions reported to the NPDB, who submits the reports, and who queries to obtain copies of the reports” (National Practitioner Data Bank, 2015, para. 1). One of the main criticisms of the NPDB is that a physician can be reported for having been sued, but the outcome of the lawsuit, even when dismissed, is not reported, and the lawsuit remains on the physician’s record. In an era of increasingly litigious consumers of health care, this is not a minor complaint. Physicians may dispute the report, but it can take much time and effort, much like trying to get a correction on a credit report. Hence, the information in the Data Bank should be used along with other data to look for patterns of deviation from professional behaviors.

When credentialing physicians, it is critical to have other physicians review the application to ensure that experts who understand the nuances of the data contained in an application render the final judgment as to whether to approve or disapprove privileges. Using the example of a surgeon applying for general surgical privileges at a hospital, after the physician credentialing department receives a physician’s application for privileges and conducts due diligence in verifying each and every claim on the application, the materials are submitted to a surgical credentialing committee. Unless the hospital is very small, each department will have its own credentialing committee. In this case, if the department of surgery’s credentialing

committee approves the application, it then recommends that the documents be forwarded to a medical executive committee, which is a subcommittee of the hospital board of directors. The subcommittee then makes a recommendation to the board, which then approves or disapproves the application. Under certain circumstances, temporary credentials can be granted. Usually, however, the time from submission of the application to final approval can take three to six months. If there are problems with the application or missing documents, the process can take even longer.

Some hospital systems are now instituting system-wide credentialing processes to ensure standardization across multiple settings. Regardless of protocol or process, physician credentialing is one of the most important jobs in any health care delivery setting. By approving a physician’s privileges, the health care organization indicates that it believes that this physician will provide safe, effective patient care. It is not a responsibility to be taken lightly. The lives of patients and the financial survival of the health care organization depend on how well this process has been done.

International Medical Graduates International Medical Graduates (IMGs), formerly referred to as Foreign Medical Graduates (FMGs), can be U.S. citizens who attend school abroad or foreign-born nationals who come to the U.S. seeking educational and professional opportunities and filling voids in health care services delivery for the U.S. population. IMGs represent 25% of the total physician population in the U.S. physician workforce, or approximately 245,005 physicians (Traverso & McMahon, 2012). In 2009, the top country sending foreign-born physicians to the U.S. was India (AMA, 2015a).

Researchers have repeatedly demonstrated that IMGs are more likely to go where U.S. medical graduates (USMGs) prefer not to go (i.e., inner-city and rural areas) and to serve populations increasingly at risk of medical abandonment (Hagopian, Thompson, Kaltenbach, & Hart, 2003; Hallock, Seeling, & Norcini, 2003; Mick & Lee, 1999a, 1999b; Mick, Lee, & Wodchis, 2000; Polsky, Kletke, Wozniak, & Escarce, 2002; Thompson, Hagopian, Fordyce, & Hart, 2009). In 2008, nearly 60% of the IMGs in the U.S. were in primary care (internal medicine, pediatrics, family medicine) or specialized in psychiatry, anesthesiology, obstetrics/gynecology, general surgery, or cardiovascular disease (Smart, 2010). More than three-quarters of

the IMGs in practice were in direct patient care. At one time, the quality of care provided by non-USMGs was a major concern. Over the past decades, however, a formidable system of checks and balances has been implemented, and foreign-trained and foreign-born medical graduates (FBMGs) are now required to pass rigorous English-language and written and clinical skills assessment examinations prior to being allowed to apply for GME, that is, residency training positions (Whelan, Gary, Kostis, Boutlet, & Hallock, 2000). This arrangement has improved the quality of the IMG applicant pool that continues to fill graduate medical education positions still left unfilled by USMGs (Cooper & Aiken, 2001; McMahon, 2004). Additionally, a study examining quality of care provided by IMGs in Pennsylvania found the quality of care provided to be as good as or better than that given by graduates from U.S. medical schools (Norcini et al., 2010).

We are now facing a shortage of physicians across all specialties. This shortage of physicians is a result, in part, from the aging of the Baby Boomer population, physician retirements, changing ethnic and racial demographics, increased access to care with the implementation of the Affordable Care Act (ACA), increased utilization of services, advances in health care technology, a hostile malpractice environment, and medical school graduates (both female and male) who desire reasonable work hours (Bureau of Health Professions, 2003; Cooper, 2002, 2003). While some experts argue over the exact numbers of physicians in the workforce and whether to use the American Medical Association Masterfile or the U.S. Census Bureau Current Population Survey for workforce projections, they agree that the physician workforce will be younger and work fewer hours per week regardless of gender (Steiger, Auerbach, & Buerhaus, 2009, 2010).

In response to the predicted workforce shortage, U.S. medical schools have increased enrollments and new medical schools have opened their doors. This upsurge in production of U.S. trained physicians is predicted to bump international medical graduates, both foreign and U.S. born, out of graduate medical education programs. An increase in supply in U.S. medical graduates creates new questions about of the diversity of residents in training and their ability to provide culturally responsive care as well as the education and training of international medical graduates whose home countries have relied on them to return home to provide high quality care (Traverso & McMahon, 2012). As residency training programs begin to reduce acceptances of IMGs, the question still remains: who will provide medical

care to an aging U.S. population? Even with attempts to ramp up the physician workforce, there is a

pipeline effect. Students admitted to medical school in 2010 will not be prepared to provide primary care until 2017, at the earliest. Despite increases in residency training positions, longer specialty training means longer wait times for the population needing to be served and greater mortality rates. The American College of Physicians (2008) estimated “the addition of one primary care physician per 10,000 population in the U.S. resulted in 3.5 fewer people dying each year” (p. 7). In the meantime, with the increase of chronic disease, longer lifespans, and re-merging epidemics, health care managers will struggle with recruitment, retention, and optimal utilization of physicians, whether USMG or IMG. According to the BLS (2014e), employment of physicians will increase by 18% over the next decade due to expansion of the health care industry. Some of the issues you will be most likely to encounter with IMGs will surround the physician credentialing process and the J-Visa, which provides legal entry to the U.S. for training purposes. Physicians who graduate from foreign medical schools will have to provide, in some instances, additional documentation and verification that the information they have provided is true and correct. The Educational Commission for Foreign Medical Graduates (ECFMG) offers online credential verification services that can ease some of the burden but not all of the responsibility or liability in the granting of privileges (ECFMG, 2011).

In summary, physicians are critical to the provision of safe, effective patient care. Ensuring the quality of the physicians practicing in an organization is one of the roles of the health care manager. To fulfill this responsibility, you will need to know all the steps in the education, training, and credentialing of physicians. It will take attention to detail, organizational skills, and excellent interpersonal skills to do it well.

Employed Physicians and Turnover At one time, the majority of physicians in the U.S. were self-employed, solo practitioners, or in partnership with one or two other physicians. Recent data suggest that the old images of the independent physician practitioner need to be updated to reflect the growing numbers of physicians who are now employed by organizations such as hospitals and large single- or

multispecialty group practices (Isaacs, Jellinek, & Ray, 2009). One recruiter reported that in some communities, as many as 90% of the physicians may be employees (Butcher, 2008). In 2008, about one-third of all physicians, male and female, between the ages of 45 and 54 were full-time hospital employees (Smart, 2010). A 2013 survey of 3,456 physicians found the number of employed physicians was up by 6% from the previous year and the number of solo practitioners was down by the same proportion (Vaidya, 2013). Continued robust growth in physician hospital employment reflects the desire of these organizations to improve their bottom lines by becoming accountable care organizations (ACOs), i.e., health care providers that focus on continuity and quality of care of a given population. Medicare rewards ACOs with shares of savings from reduced health care utilization. This increased demand for hospitalists and other employed physicians arrives at the same time newer generations of medical school graduates are expecting a balanced work–family life.

Combined with the consolidation of physicians’ practices and enrollment growth in managed care organizations, these trends will continue to accelerate. However, employment goes hand in hand with turnover (i.e., the proportion of job exits or quits from a facility in a year). Buchbinder, Wilson, Melick, and Powe (2001), using data from a nationally representative sample, studied a cohort of 533 post-resident, non-federal, employed PCPs who were younger than 45 years of age, had been in practice between two and nine years, and had participated in national surveys in 1987 and 1991. They combined data from this sample with a national study of physician compensation and productivity and physician recruiters to estimate recruitment and replacement costs associated with turnover. The authors found that by the 1991 survey, slightly more than half (n = 279, or 55%) of all PCPs in this cohort had left the practice in which they had been employed in 1987; 20% (n = 100) had left two employers in that same five- year period. Estimates of recruitment and replacement costs for individual PCPs for the three specialties were $236,383 for family practice (FP), $245,128 for internal medicine (IM), and $264,645 for pediatrics (Peds). Turnover costs for all PCPs in the cohort by specialty were $24.5 million for FP, $22.3 million for IM, and $22.2 million for Peds. They concluded turnover was an important phenomenon among the PCPs in this cohort and that PCP turnover has major fiscal implications for PCP employers. Loss of PCPs causes health care organizations to lose resources that could otherwise

be devoted to patient care, as well as potentially sidelining their goal to becoming an ACO.

A physician retention study conducted by Cejka Search and American Medical Group Association (AMGA) reported physician turnover remained at about the same level from the previous year, however, primary care physician turnover increased by 9% and specialist physician turnover increased by 6% in 2013 (Cejka Search & AMGA, 2013). Retirements escalated, with 18% of physicians in the survey indicating that reason for leaving employment. Women and new physicians appeared to be more vulnerable to turnover, in general. Women were more likely to leave practices with 3 to 50 physicians. Both genders were equally likely to turnover in practices with over 500 physicians. The vast majority of the groups surveyed indicated they “offered flexible schedules, less than a full- time schedule, and extended time off” (Cejka Search & AMGA, 2013, p. 18). Most medical groups indicated they plan to hire more physicians, as well as advanced practice clinicians, or APCs, such as physician assistants and nurse practitioners. The majority of the groups plan to focus on ensuring their physicians “are working at their maximum efficiency with our APCs” (Cejka Search & AMGA, 2013, p. 11). These are clearly management issues related to physician recruitment, retention, turnover, and utilization.

Employee turnover has been clearly linked to job dissatisfaction and job burnout. Job satisfaction is the “pleasurable or positive emotional state resulting from the appraisal of one’s job or job experiences” (Locke, 1983, p. 1300). Job burnout is “a prolonged response to chronic emotional and interpersonal stressors on the job” (Maslach, 2003, p. 189). In the past, most solutions to job burnout involved removing the affected individual from the job. However, it is the organization that is the primary cause of job burnout (due to heavy workload, poor relations with coworkers, etc.) and job dissatisfaction. Therefore, it is the health care manager’s role to address these issues. Health care managers employed in these kinds of settings must be alert to signs of physician job dissatisfaction and burn-out, the harbingers of turnover (Dunn, Arnetz, Christensen, & Homer, 2007). “Achieving a patient-centered and professionally satisfying culture and closing the quality chasm in cost-effective ways depend on accountable organizational arrangements, strong primary care, and effective team performance” (Mechanic, 2010, p. 556). As a health care manager in a hospital or physician owned medical group practice, you will be expected to work with the

physicians to help create a positive practice environment and to provide recommendations for interventions to improve retention.

Employed Physicians and Conflict of Interest There has long been a requirement for researchers to disclose funding sources for biomedical research because of concerns that the outcomes of the research could be biased in favor of the company that has, in essence, paid for the research. The NIH and the majority of biomedical journals require investigators to disclose any financial relationships that might exist between the researcher and the funding entity (Drazen et al., 2010; NIH, 2014). Related to these concerns have been growing fears about the influence of gifts and other financial incentives on physicians’ prescribing practices and purchasing behaviors. Some states, such as Massachusetts, Minnesota, and Vermont, enacted laws earlier than others to prohibit pharmaceutical or medical device companies from giving more than $100 in gifts to a physician (Ross et al., 2007). These laws and Open Payments, aka, the Sunshine Act, have led to a more transparency in health care as well as greater urgency for organizations to create their own conflict of interest policies for physicians employed by health care organizations.

Open Payments, aka, the Sunshine Act, which was created as part of the Affordable Care Act, requires medical device manufacturers and group purchasing organizations (GPOs) (entities that work with multiple health care organization to buy in large volumes to decrease costs) to report any payments and “transfers of value” to physicians’ or teaching hospitals, as well as any ownership of investment interest physicians or immediate family members have in a company. This information must be reported annually. These “transfers of value” can be as small as $7.77 for coffee and donuts. Records of these gifts are maintained on the Centers for Medicare and Medicaid Services (CMS) website and are open to anyone with access to the Internet, hence, the name “Open Payments” (CMS, 2015; Dreger, 2013). It is imperative that physicians periodically check this website to ensure the accuracy of these reports. If there is a discrepancy, physicians and hospitals have the right to appeal. Physicians who do not want to give even the appearance of impropriety are now telling sales representatives to desist in bringing food. Office staff who looked forward to free lunches from sales representatives are sometimes resentful of this loss in “benefits.” As

managers in physician offices and teaching hospitals, it will be up to you to be vigilant about ensuring your employer’s integrity by deterring these gifting behaviors.

Conflict of interest is a term used to describe when an individual can be influenced by money or other considerations to act in a way that is contrary to the good of the organization for whom he or she works or the patient for whom he or she should be advocating in their best interests. In most health care organizations, conflict of interest disclosures are required for all employees who make purchasing decisions—including physicians and administrators—and include a series of questions to which the individual must respond no or, if yes, must explain. These questions include but are not limited to the topics of:

Personal gifts; Meals, invitations, and entertainment; Attendance at industry-sponsored (and third-party industry sponsored) conferences, education sales, or promotional events;

Industry-sponsored scholarships and other education support for trainees;

Speaking, consulting arrangements, and advisory services with industry; Fiduciary, management, or other financial interests with industry; Detailing, tying, switching, or ordering; Conflicts of commitment; Site or facility access by industry representatives; Publications/ghost-writing/ghost-authoring; and Free drug/product samples.

There must be full disclosure if a conflict exists, and the individual must remove himself or herself from the decision-making role. The individual must certify his or her responses to all of the above questions are complete and accurate to the best of their knowledge and, if anything changes, they must update their disclosure document. Conflict of interest documents must be updated annually (Medstar Health, 2015).

Your job as a health care manager will be to ensure that first and foremost you complete the same type of document you expect physicians to complete.

Even the appearance of any potential conflict of interest should be avoided. Your reputation and the reputation of the health care organization where you are employed depend on ethical behaviors of all employees.

REGISTERED NURSES At one time, all nurses were trained in hospital-based programs and received diplomas upon graduation. Before 1917, nursing was essentially an apprenticeship, without a set curriculum, which then morphed into hospital- based diploma schools that produced their own nursing workforce. The hospital-based diploma nursing school is part of a passing era; in 2011, they represented only 10% of the nursing programs in the U.S. (American Association of Colleges of Nursing [AACN], 2011). Currently, the majority of nursing education is provided in degree-based settings. Over half the nursing workforce holds baccalaureate, four-year degrees; many of these RNs began with associate degrees and returned to school to earn a bachelor’s of science in nursing (BSN) to improve their opportunities for career advancement (Health Resources and Services Administration [HRSA], 2013). “Between 2007 and 2011, nursing master’s and doctoral graduates increased by 67 percent” (HRSA, 2013, p. ix). This increase in advanced degree nurses means increased production capabilities of undergraduate nurses. Indeed, the overall numbers of RNs has increased; however, due to aging, nurses continue to retire faster than they can be replaced in the workforce.

Nurses with BSNs can continue their education and enter a wide array of graduate educational programs including, but not limited to, post- baccalaureate certificates; masters of science in nursing (MSN) degrees for community health nursing and nurse education; advanced practice degrees (nurse practitioner, clinical nurse specialist, nurse midwife, nurse anesthetist); and doctoral degrees, such as the nursing doctorate (ND), doctorate in nursing science (DNS), or a doctor of philosophy (PhD).

The undergraduate nursing school curriculum (BSN) is rigorous and demands a good understanding of the biological sciences. At Stevenson University, for example, students are eligible to continue to the third year of the program only after completing a specific sequence of courses and

maintaining a 3.0 or B average overall GPA and in all science courses (Stevenson University, 2015).

The current shortage of nursing faculty means fewer slots for nursing students—there are fewer faculty to teach (AACN, 2014b). “In the 2014– 2015 academic year, 265,954 completed applications were received for entry-level baccalaureate nursing programs (a 1.9% decrease from 2013) with 170,109 meeting admission criteria and 119,428 applications accepted. This translates into an acceptance rate of 44.9%” (AACN, 2014a, para. 12). Due to a crisis-level national nursing shortage and demands for workers, state legislators are pressuring universities and colleges to increase the number of graduates from nursing programs. However, unlike other undergraduate degrees, nursing students must learn clinical skills and be carefully supervised in health care organizations by master’s or doctorally prepared nursing faculty. The nursing faculty clinical supervisor is only allowed to have a specific number of student nurses. Exceeding that number could endanger the lives of patients and the faculty member’s nursing license.

As nursing students progress through their program of study, meeting state requirements for licensure and passing the National Council Licensure Examination (NCLEX) is uppermost in everyone’s mind. A student must pass the NCLEX to become a licensed registered nurse (RN) in the U.S., and nursing programs’ pass rates on the NCLEX are used as a proxy for the quality of their educational curriculum. With the current nursing shortage, many graduating nurses have a job offer in hand before graduating— contingent upon obtaining state licensure and passing the NCLEX (NCSBN, 2015b).

As of 2012, 40 boards of nursing out of 55 required CBCs for nurse applicants for licen-sure (Council of State Governments [CSG], 2012). The CSG has called for fingerprinting to be added to the CBC requirements for nurses based on evidence that RNs with criminal backgrounds do not always self-disclose and go undetected without fingerprinting (CSG, 2013). Again, the reasons are multifold and include but are not limited to increasing societal concerns about alcohol and drug abusers, sexual predators, and child and elder abusers. If a criminal background check contains information about convictions, the licensure board will examine the application on a case-by-case basis. As noted previously, the reviewers will be looking for level and frequency of the criminal behavior, basing their decision on that,

along with other materials submitted by the applicant, such as proof of alcohol and drug rehabilitation and a monitoring program utilizing random drug testing reported to the state board of nursing.

After graduation, RNs, unlike physicians, do not have postgraduate programs that last from 3 to 10 years. In the past, new RNs have been hired to work in hospitals or other health care organizations, given a brief orientation, then placed on a nursing unit and left to sink or swim. This Darwinian approach to nurse staffing led, in part, to massive turnover. Although the vast majority of nurses are female (only 9% are male), women now have career choices other than nursing, teaching, or homemaking; older nurses continue to retire faster than new ones come into the field (HRSA, 2013; Steiger, Auerbach, & Buerhaus, 2000). Nursing turnover costs have been estimated to be 1.3 times the salary of a departing nurse, or an average of $65,000 per lost nurse (Department for Professional Employees AFL- CIO, 2010; Jones & Gates, 2007). Multiply that by the number of nurses who quit their jobs, and the costs can be in the millions of dollars for health care organizations. Health care managers cannot afford to ignore the loss of nurses from the workforce.

Any strategy that improves the retention of nursing staff saves the organization the costs of using agency or traveler nurses, replacing lost nurses and training new ones, as well as the loss of productivity from burdening the remaining staff. A survey conducted among 67 new nurses from 13 hospital departments indicated that new graduates were concerned about communicating with physicians and were afraid of “causing accidental harm to patients.” Additionally, this group identified a desire for “comprehensive orientation, continuing education and mentoring” (Boswell, Lowry, & Wilhoit, 2004, p. 76). Nurse residency programs (NRPs) were created in response to low satisfaction levels and high turnover rates among new graduates. The University HealthSystem Consortium (UHC)/AACN Residency Program has 92 practice sites in 30 states that offer the year-long post-baccalaureate residency. As of this writing, more than 26,000 nurses have completed the program. Satisfaction, as reflected by a 95.6% retention rate versus previous turnover rates of 30%, serves as a strong indicator of the success of this program (AACN, 2015). While much work has been done to develop a model with a strong curriculum and excellent outcomes, thus far the participants are only in academic health centers and large health systems. NRPs need to be replicated beyond these elite and well-endowed settings to

community hospitals where much of the health care is provided in the U.S. A difficult transition into practice isn’t the only reason that nurses leave

health care organizations. Nurses quit jobs where they feel overworked, underpaid, and disrespected by their coworkers and managers. Using national focus groups, on behalf of the Robert Wood Johnson Foundation, Kimball and O’Neil (2002) found RNs are concerned about being unable to physically continue to do the work, increases in their daily workloads, and the lack of ancillary staff to support them. These groups also indicated they were confused about health care financial issues, felt powerless to change things in their work environments, and thought their nurse managers were overextended and unable to help them. The respondents gave a list of suggestions to improve the retention of nurses, including:

Decreasing workloads; Providing support staff; Empowering nurse managers; Increasing salaries; Encouraging physicians to treat nurses as colleagues; Improving the orientation process; and Providing paid continuing education (Kimball & O’Neil, 2002, p. 46).

Overwork of nurses and high patient-to-nurse ratios lead to patient mortality, nurse burnout, and job dissatisfaction (Aiken, Clarke, Sloane, Sochalski, & Silber, 2002). Aiken et al.’s (2002) benchmark article reported “that the difference from 4 to 6 and from 4 to 8 patients per nurse would be accompanied by 14% and 31% increases in mortality, respectively” (p. 1991). The Joint Commission (2002) report called a high patient-to-nurse ratio “a prescription for danger” and indicated that “staffing levels have been a factor in 24% of 1,608 sentinel events (unanticipated events that result in death, injury, or permanent loss or function)” (p. 6). In addition, Aiken and her colleagues reported that more nurse education and training led to higher quality of service and lower patient mortality (Aiken, Clarke, Cheung, Sloane, & Silber, 2003). A recent longitudinal survey of predictors of turnover among newly licensed RNs found Magnet Hospital Status was not related to turnover, but on the job injuries were directly predictive. This means implementing policies to prevent strains and sprains can reduce

nursing turnover (Brewer, Kovner, Greene, Tukov-Shuser, & Djukic, 2012). In light of these data, it makes financial sense to employ more RNs per patient, to protect them from on the job injury and to hire RNs with a baccalaureate level or higher. Given the nursing shortage, the health care manager’s next best choice would be to hire RNs with an associate degree, provide tuition assistance, and create incentives for them to return to school for their BSN.

Conflict and Communication: Creating a Culture of Safety Encouraging physicians to treat nurses as colleagues has always been a challenge. Recommendations for collaborative practice between physicians and nurses have been in place for decades, going back to nursing shortages in the 1980s and the National Commission on Nursing’s 1983 Summary Report and Recommendations, calling for nurse-physician joint practice (National Commission on Nursing, 1983). One of the problems in this dyad has been the gap between physician and nursing education. In previous years, when diploma schools dominated nursing education, physicians had at least 20 more years of formal education than the RNs they worked with. In that era, when a physician walked into a room, a nurse would stand as a sign of respect—and give him her chair. Nurses now have formal educational programs in degree-granting settings, and the educational gap between the two health care professional groups is diminishing. Women have also “come of age” since the women’s rights movement in the 1970s, and nurses are no longer the doctor’s handmaidens. They, too, are health care professionals.

Teamwork is essential to a culture of safety. Physician resistance to acknowledging nurses as professionals and colleagues leads to poor teamwork and interpersonal conflict and can result in poor patient outcomes. One study found that physicians and nurses differed widely in their opinions about teamwork in an ICU setting. Almost three-quarters of the physicians reported high levels of teamwork with nurses, but less than half of the nurses felt the same way (Sexton, Thomas, & Helmreich, 2000). Despite demonstrated need and effectiveness of interdisciplinary teamwork, formal educational training in this important skill for physicians and nurses is rare (Baker, Salas, King, Battles, & Barach, 2005; Buchbinder et al., 2005).

A poll conducted in 2004 by the American College of Physician Executives (ACPE) revealed that about one-quarter of the physician executive respondents were seeing problem physician behaviors almost weekly (Weber, 2004). Approximately 36% of the respondents reported conflicts between physicians and staff members (including nurses), and 25% reported that physicians refused to embrace teamwork.

It is no longer an option for physicians or nurses to refuse to play well with other health care professionals. The operating room and the ICU are two units that must rely on team-work to accomplish life-saving procedures. An orthopedic surgery symposium emphasized the need to address problem physicians’ behavior immediately and warned that avoidance of confrontations enables toxic personalities to continue to create hostile workplaces (Porucznik, 2012). Teamwork in the ICU is critical, yet despite studies that document associations between positive caregiver interactions and positive patient outcomes, an extensive review of the literature failed to determine a one best approach to improving teamwork (Dietz et al., 2014). No doubt this inability to have a one-size-fits-all approach is due, in part, to the wide variety of tasks and teams, not to mention organizational settings. Other authors have reported that combining the Agency for Healthcare Research and Quality (AHRQ) training program, TeamSTEPPS, with specialty team protocols improves role delineation and communication among team members, leading to better patient outcomes (Gupta, Sexton, Milne, & Frush, 2015; Tibbs & Moss 2014). Regardless of how the team arrives at improved performance, it must include respectful communication and behaviors from all team members.

Intimidating and disruptive behaviors include “overt actions such as verbal outbursts and physical threats as well as passive activities such as refusing to perform assigned tasks or quietly exhibiting uncooperative attitudes during routine activities” (The Joint Commission, 2008, p. 1). Disruptive behaviors, whether from physicians or nurses, are unacceptable and counterproductive to a patient-centric culture of safety. Disruptive behavior is considered a sentinel event, i.e., “a Patient Safety Event that reaches a patient and results in any of the following: death; permanent harm; severe temporary harm and intervention required to sustain life” (The Joint Commission, 2014, para. 2).

People who behave like schoolyard bullies in health care organizations must be dealt with through counseling sessions, disciplinary actions, or

terminations. Trust and good communication are central to excellence in health care delivery.

Communication between physicians, nurses, and other health care professionals is critical to a culture of safety. The Joint Commission established new standards to address communication and published a book for clinicians and health care managers with strategies to improve communication between staff members, patients, and teams (The Joint Commission, 2009). In this book, as well as in peer-reviewed articles, physicians and nurses are tasked to focus on patient-centered care and patient safety (Levinson, Lesser, & Epstein, 2010; Nadzman, 2009). However, nurses and physicians rarely receive education on effective communication in their professional programs. While it is hoped that medical and nursing school curricula will respond to the need for this important skill, those courses are not in place at this time. For this reason, it may become your duty as a health care manager to ensure that resources such as educational seminars and teamwork training are in place to support a culture of safety at your health care organization.

Organizational climate is critical to promoting job satisfaction and retention of nursing staff. Laschinger and Finegan (2005) found that nurses who perceived that they had access to opportunity, experienced honest relationships and open communication with peers and managers, and trusted their managers were more likely to be retained and to have higher job satisfaction. The American Association of Colleges of Nursing (AACN, 2002) published a white paper titled Hallmarks of the Professional Nursing Practice Environment. The attributes of hospitals with work environments that support professional nursing practice were reviewed and the questions a new graduate should ask were listed. They are: Does your potential employer:

Manifest a philosophy of clinical care, emphasizing quality, safety, interdisciplinary collaboration, continuity of care, and professional accountability?

Recognize the contributions of nurses’ knowledge and expertise to clinical care quality and patient outcomes?

Promote executive-level nursing leadership? Empower nurses’ participation in clinical decision making and

organization of clinical care systems? Maintain clinical advancement programs based on education, certification, and advanced preparation?

Demonstrate professional development support for nurses? Create collaborative relationships among members of the health care provider team?

Utilize technological advances in clinical care and information systems?

The AACN also recommends that applicants inquire about RN staff education, vacancy, tenure, and turnover rates; patient and employee satisfaction scores; and the percentage of registry/traveler nurses used. The questions posed by the AACN challenge health care organizations to rise to higher standards and to reach for American Nurses Credentialing Center Magnet Recognition Program status (ANCC, 2014a). Unless these questions are answered in the affirmative, nursing turnover will continue to be one of the largest human and financial costs that the health care manager will be forced to control.

Like physicians who sit for board certification examinations, RNs can take ANCC’s or other nursing specialty organizations’ (e.g., the Wound, Ostomy, and Continence Nurses’ Society; the American Association of Critical Care Nurses, etc.) examinations to demonstrate additional competence in a specialty, after they have earned a baccalaureate or higher degree and practiced for a specific number of hours in a specialty area. Thus, nurses can be certified in a large number and variety of specialty areas. Nurses who are credentialed in specialty areas must demonstrate continuing competency by fulfilling requirements for certification renewal via one or several of the following mechanisms: continuing education hours, academic courses, presentations and lectures, publications and research, or preceptorships.

In many states, nurses are required to obtain nursing continuing education units (CEUs) to renew and maintain their nursing licenses. The ANCC Commission on Accreditation, the credentialing unit of the American Nurses Association (ANA), reviews and approves providers of nursing CEUs (ANCC, 2015).

There are literally hundreds of providers of nursing CEUs and multiple ways to obtain nursing CEUs, including but not limited to online courses;

magazine or journal articles; workshops and conferences; audiotapes, CDs, and DVDs; and the previously noted academic courses, presentations and lectures, publications and research, or preceptorships. Nurses can even attend other health care providers’ workshops that have been approved for awarding nursing CEUs. There is no dearth of opportunities for nurses to obtain continuing education. It is the responsibility of the RN to maintain his or her license. Your role as health care manager will be to ensure that resources (i.e., money and time) are available for nurses to participate in these educational opportunities.

Foreign Educated Nurses The nursing shortage, caused by a confluence of the aging of the U.S. nursing workforce, declining enrollments in nursing schools, higher average age of new graduates from nursing school, and organizational retention and turnover difficulties, would have been difficult enough for health care managers on its own. However, we have what some people call “the perfect storm” in health care because the nursing shortage is now combined with demographic forces and market forces, such as aging Baby Boomers, increasing racial and ethnic diversity, increased demand for health care services, increasing longevity of U.S. citizens, new treatments for chronic diseases that used to kill people (like asthma, diabetes, hypertension), and educated and demanding health care consumers (AACN, 2014b; HRSA, 2013).

Since U.S. health care organizations are experiencing a crisis in the nursing workforce and cannot survive without nurses to deliver care, it is not surprising that foreign-educated nurses are coming to the U.S. to fill gaps in nursing services. However, the annual number of internationally educated NCLEX passers has declined from nearly 23,000 in 2007 to only 6,100 in 2011 (HRSA, 2013). In 2010, the majority of internationally trained nurses who took the NCLEX came from the Philippines, trailed by South Korea, India, Canada, and Nigeria (NCSBN, 2010). According to the Commission on Graduates of Foreign Nursing Schools (CGFNS) (2015) for nurses educated outside the U.S., all U.S. State Boards of Nursing require credentials evaluation, certification, or verification as a first-step in the application process. The CGFNS International Certification Program provides a credentials review, a qualifying exam of nursing knowledge, and

an English-language proficiency examination. The CGFNS International Certification Program is required for licensure by a number of State Boards of nursing licensure and can be utilized for federal Visa screening requirements for immigration. The CGFNS Certification Program removes a major burden from an employer. However, as a health care manager, your job may require you to ensure that foreign-educated nurses are who they say they are, have fulfilled all the requirements of the State Board of Nursing, and are legally allowed to work in the U.S. (McFarlane, 2013).

Due to the stringent requirements the U.S. has for RN licensure, concerns about the U.S. depleting other nations of their nursing workforce are not based on hard data (Aiken, Buchan, Sochalski, Nichols, & Powell, 2004). However, these types of misperceptions can influence coworker relationships and may contribute to conflicts between U.S.-educated and foreign-educated nurses and between physicians and foreign-educated nurses. Different cultures bring varying expectations to the work setting. These expectations may well be at odds with those of their coworkers. Excellent interpersonal skills, conflict management, cultural proficiency, and sensitivity to diversity issues are critical for you to be able to be an effective health care manager for these employees.

LICENSED PRACTICAL NURSES/LICENSED VOCATIONAL NURSES In 2012, there were about 738,400 Licensed Practical Nurses (LPNs) or Licensed Vocational Nurses (LVNs) working under the supervision of physicians and nurses in the U.S. According to the BLS (2014c), they were employed in nursing homes and extended care facilities, hospitals, physicians’ offices, and private homes. Most work full time. After graduation from high school, LPNs are trained in one-year, state-approved programs. Most are trained in technical or vocational schools, although some high schools offer it as part of their curriculum. In order to be employed as an LPN, students must graduate from a state-approved program, then pass the LPN licensing exam, the NCLEX-PN (BLS, 2014c). LPNs are trained to do basic nursing functions such as checking vital signs, observing patients, and assisting patients with activities of daily living (ADLs), such as

bathing, dressing, feeding, and toileting. With additional training, where state laws allow, they can also administer medications. LPNs are the backbone of the long-term care (LTC) sector of the health care industry, providing around-the-clock care and supervision of certified nurse’s assistants (CNAs) in nursing homes and convalescent centers. Many LPNs go on to earn their RN, and in some states, LPNs can take challenge examinations to earn their RN licensure. LPNs are an important part of the health care team and should be included in the health care manager’s tuition assistance plan to encourage key personnel to return to school for additional education.

NURSING ASSISTANTS AND ORDERLIES In 2012, there were over 1.5 million nursing assistants and orderlies employed in nursing and residential care facilities and in hospitals (BLS, 2014d). Nursing aides, nursing assistants, certified nursing assistants (CNAs), orderlies, and other unlicensed patient attendants work under the supervision of physicians and nurses. They answer call bells, assist patients with toileting, change beds, serve meals, and assist patients with ADLs. Regardless of employment setting, aides are frontline personnel. Since nursing aides held the most jobs, at 1.5 million, and were employed most often by nursing care facilities, that will be the focus of the remainder of this section.

Nurse’s aides have made the news in negative ways in recent years. In the past, CNAs were not required to have CBCs, and elder abusers, sexual predators, and thieves saw the elderly population as easy prey. Now the majority of states and employers require CBCs. However, a clean CBC doesn’t guarantee that the person hasn’t abused or won’t abuse a patient. Therefore, it is incumbent upon the health care organization to have policies about neglect and abuse prevention in place, and the health care manager must enforce them. Some nursing homes have installed “granny-cams,” video surveillance systems to keep an eye on caregiver behavior and to document misbehavior. When working with vulnerable populations, the health care manager must be in a state of constant vigilance for neglect and abuse.

CNAs are often trained on the job in 75 hours of mandatory training and are required to pass a competency examination. CNAs provide direct care to patients over long periods of time and are often the most overlooked group of workers in terms of pay, benefits, and opportunities for advancement. Seavey (2004) conducted a literature review and found that estimates of turnover from LTC facilities ranged from 40% to 166%, with indirect and direct costs per lost worker ranging from $951 to $6,368. She estimated a minimum direct cost of $2,500 per lost worker. Ribas, Dill, and Cohen (2012) utilized longitudinal data collected between 1996 and 2003 and found 73% of the sample working in occupations other than nurse’s aide over time. Over half those who left nurse aide work moved into higher paying occupations; however, when they excluded those who became RNs from the sample the number dropped to 35% (p. 2189). The researchers pointed to lack of clear career paths and lack of career ladders for these workers, resulting in lower wages.

It’s a vicious cycle: poor quality of work life begets turnover, which begets poor quality of work life, which begets more turnover. And it’s not just the CNAs and other aides who are affected. Once the CNAs are gone, the LPNs will go, then the RNs will be stressed, become emotionally burned out, and leave (Kennedy, 2005). Then who will provide the care? The job of the health care manager is to improve retention to slow down or stop turnover by addressing the quality of work life. The place to start is with a comparable market wage analysis. Are the workers being paid the same as or better than workers with comparable jobs at other comparable facilities? Nursing home administrators have confided that CNAs will leave one facility to go to another one for a pay raise of 25 cents per hour. Is the pay fair? Does the facility pay tuition assistance for CNAs? What kind of benefits package is being offered? Are there career paths and ladders presented to the CNAs to encourage them to move up?

After looking at these basic items, the health care manager then needs to assess the work environment, including employee job burnout and satisfaction, preferably using an outside organization so workers can respond freely without fear of retribution. While not an exhaustive list, some of the items to be included in a work life analysis include worker perceptions of:

Job autonomy, variety, and significance; Fairness of pay and benefits;

Opportunities for promotion and advancement; Relationships with supervisors; Relationships with coworkers; Level of job burnout; and Overall job satisfaction.

All health care workers, not just nurses, want to be treated as colleagues and with respect. If you conduct a survey of the organizational climate—as seen by the workers—you must be prepared to respond and intervene. If you do nothing, you will lose employees’ trust, and the revolving door of turnover will continue.

HOME HEALTH AIDES In 2012, there were 875,100 home health aides employed in the U.S. (BLS, 2014b). Hospitals continue to discharge patients quicker and sicker, which means more and more health care that used to be provided strictly in hospital settings is now given at home (Landers, 2010). In addition, due to the demographic tsunami of aging Baby Boomers who wish to age in place (i.e., at home) and due to the increasing longevity of individuals with chronic diseases and disability, this area of employment is expected to grow dramatically over the next decade. Many of the same issues associated with nursing aides will come along with this dramatic employment surge in home health aides. Since these individuals go to people’s homes to provide their services, all of the concerns noted above related to the need for CBCs, prevention of abuse of vulnerable populations, and turnover apply here as well. In addition,

home health aides who work for agencies that receive reimbursement from Medicare or Medicaid must get a minimum level of training and pass a competency evaluation or receive state certification. Training includes learning about personal hygiene, reading and recording vital signs, infection control, and basic nutrition. Aides may take a competency exam to become certified without taking any training. These are the minimum requirements by law; additional requirements for certification vary by state. (BLS, 2014b, para 3)

Many hospitals and health care organizations have branched out into home health care services. While you may think you will be employed by a

hospital and work only on inpatient services, the reality is you may very well become a manager for these outpatient, in-home services. It will be your responsibility to ensure that the people who are hired for these jobs are trustworthy and competent.

MIDLEVEL PRACTITIONERS Midlevel practitioners include advanced practice nurses (APNs), such as nurse practitioners (NPs), clinical nurse specialists (CNS), nurse anesthetists, and nurse midwives, as well as physician assistants (PAs). “Between 2001– 2011, the number of NP graduates grew from 7,261 to 12,273, a growth of approximately 69 percent” (HRSA, 2013, p. 50). According to Bureau of Labor Statistics, PAs held about 86,700 jobs in 2012 (BLS, 2014f). These health care professionals are called midlevel practitioners because they work midway between the level of an RN and that of an MD. Midlevel practitioners serve in a variety of settings, including hospital emergency rooms or departments, community health clinics, physician offices, and health maintenance organizations. They may also cover hospital floors for physicians. Midlevel practitioners are usually less expensive than physicians, often replacing MDs at a 2:1 ratio. Although APNs were resisted by many state medical societies early in the 1970s, over time physicians realized that APNs could increase their productivity and ease their workload. Midlevel practitioners are much sought after by health care organizations because they can provide many of the same services as physicians at a lower cost.

Advanced Practice Nurses There are many organizations and accrediting bodies that certify advanced practice nurses (APNs). The following discussion is not intended to be an exhaustive listing of the specialty certifications that are available. Rather, it is meant to be illustrative of the variety of roles that APNs can assume. In addition to the educational preparation noted below, all APNs must demonstrate continuing competency by obtaining CEUs. APN certification must be renewed every five years, either by documenting evidence of practice or by retaking the examination. Below are some examples of APNs.

Nurse practitioners (NPs) are prepared, according to the American

Association of Nurse Practitioners (AANP), in either an NP MSN, a post- master’s certificate, or a doctoral program (AANP, 2010). To become certified in Adult, Family, and Adult-Gerontology Primary Care by the AANP’s Certification Program (AANPCP), candidates must provide documentation that they are graduates of an accredited college or university’s master’s or post-master’s level adult, gerontologic, and family nurse practitioner program (AANPCP, 2015, p. 9) They must also take a competency-based exam. “The certification program is recognized by all State Boards of Nursing, the Centers for Medicare and Medicaid Services (CMS), the Veterans Administration, private managed care organizations, institutions, and health care agencies for credentialing purposes” (AANPCP, 2015, p. 6). This means they can bill for services rendered, as can the organization that employs them. NPs can also become certified in areas of care that include but are not limited to acute, adult psychiatric/mental health, advanced diabetes management, family psychiatric/mental health, medical-surgical, school, and pediatric. They must pass a certification exam and maintain their competency through continuing nursing education and recertification exams (AANPCP, 2015). To respond to changes in the field, some examinations are retired (the Gerontologic NP) or being retired (the Adult NP). Qualified NPs can elect to apply for conversion to the Adult- Gerontology Primary Care Nurse Practitioner (AANPCP, 2015, p. 9). On May 12, 2015, Maryland became the 21st state to enact the full practice law, which enables nurse practitioners to evaluate patients, diagnose, order and interpret diagnostic tests, initiate and manage treatments, including prescribing medications, under the exclusive licensure authority of the state board of nursing (AANP, 2015). In light of the physician shortage, it is anticipated more states will follow suit and enact full practice laws for NPs.

Clinical nurse specialists (CNSs) have in-depth education in the clinical specialty area at a master’s or doctoral degree level. To be certified as a CNS, the RN must have all of the same educational qualifications as an NP, but in their area of focus, plus a minimum number of hours of supervised clinical practice as specified by each specialty area. Areas of certification include:

ACNS-BC (Adult CNS – Board Certified); GCNS-BC (Gerontological CNS – Board Certified); HHCNS-BC (Home Health CNS – Board Certified);

PCNS-BC (Pediatric CNS – Board Certified); and PMHCNS-BC (Psychiatric Mental Health CNS – Board Certified)— used for both Child/Adolescent and Adult (ANCC, 2015, para 3).

They, too, must pass a certification exam and maintain their competency through continuing nursing education and recertification exams (ANCC, 2015).

Certified registered nurse anesthetists (CRNAs) are APNs who specialize in providing anesthesia. Between 2001 and 2011, their numbers grew from 1,159 graduates to 2,447 graduates (HRSA, 2013). According to the American Association of Nurse Anesthetists (AANA), nurses have been providing anesthesia care since the U.S. Civil War (AANA, 2015). They work in cooperation with anesthesiologists, surgeons, dentists, and other health care professionals. Education and experience required to become a Certified Registered Nurse Anesthetist (CRNA) include:

A Bachelor’s of Science in Nursing (BSN) or other appropriate baccalaureate degree.

A current license as a registered nurse. At least one year’s experience in an acute care nursing setting. Graduation from an accredited graduate school of nurse anesthesia. These educational programs range from 24–36 months, depending upon university requirements, and offer a master’s degree.

All programs include clinical training in university-based or large community hospitals.

Pass a national certification examination following graduation.

It takes a minimum of seven calendar years of education and experience to prepare a CRNA. The average student nurse anesthetist completes almost 2,500 clinical hours and administers about 850 anesthetics (AANA, 2015, para 1–3). “As of Nov. 1, 2014, there were 114 accredited nurse anesthesia programs in the U.S. utilizing more than 2,500 active clinical sites; 32 nurse anesthesia programs are approved to award doctoral degrees for entry into practice” (AANA, 2015, para 6).

A review of six years of data from the Centers for Medicare & Medicaid Services (CMS) found no adverse outcomes in states where nurse

anesthetists were allowed to practice solo, that is, without the supervision of a physician (Dulisse & Cromwell, 2010). Other researchers made a strong case for the cost-effectiveness of nurse anesthetists as well as the quality of care provided (Hogan, Seifert, Moore, & Simonson, 2010; Mackey, Hogan, Seifert, Moore, & Simonson, 2010). Nurse anesthetists and anesthesiologists have similar postgraduate training; these data provide evidence that the positive health outcomes for patients of solo nurse anesthetists are similar to those of physicians and cost-effective.

Certified nurse midwives (CNMs) are licensed as independent practitioners in all 50 states, the District of Columbia, American Samoa, Guam, and Puerto Rico. CNMs provide prenatal care and deliver babies. They are defined as primary care providers under federal law (American College of Nurse-Midwives [ACNM], 2014). More than 80% of all nurse midwives have master’s degrees; another 4.8% have doctoral degrees. Nurse midwives were introduced to the U.S. in 1925 with the Frontier Nursing Service (FNS), founded by Mary Breckenridge (FNS, 2015). As of 2010, all CNM applicants were required to have graduate degrees and to graduate from a nurse-midwifery education program accredited by the ACNM and pass a national certification examination (ACNM, 2014).

Physician Assistants According to the BLS (2014f), in 2012 there were 86,700 employed PAs in the U.S. PAs were created in the 1960s in response to a primary care physician shortage in the U.S. Vietnam veteran medical corpsmen were selected for a “fast-track” training program and trained to assist physicians wherever they practiced (American Academy of Physician Assistants [AAPA], 2015b). Once a male-dominated profession, now over two-thirds (67%) are female. In 2015, there were 196 accredited PA educational programs that must confer graduate degrees (Accreditation Review Commission on Education for the Physician Assistant, Inc., 2015). Only graduates of accredited PA programs are eligible to take the Physician Assistant National Certifying Examination (PANCE). PAs must demonstrate competency and be recertified every 10 years and must earn 100 CME hours every two years (National Commission on Certification of Physician Assistants, 2015). PAs are certified to practice with a team of physicians and can prescribe medication in every state in the U.S., the District of Columbia, and most

U.S. territories. A physician assistant’s responsibilities depend on state laws, practice setting, their experience, and the physician’s scope of practice (AAPA, 2015a, 2015c). PAs practice in every conceivable setting, although the major employers of PAs are hospitals, followed by single- and multi- specialty physician group practices (AAPA, 2013). PAs are versatile and valuable members of the health care team and are highly sought after by hospitals, physician practices, and other employers.

ALLIED HEALTH PROFESSIONALS The term allied health professionals refers to more than 2,000 programs in 28 health science occupations (Commission on Accreditation of Allied Health Education Programs [CAAHEP], 2015). A full list of allied health occupations is provided at the CAAHEP website, Each has its own body of knowledge, program requirements, and competency expectations. Allied health professionals assist physicians and nurses in providing comprehensive care to patients in a variety of settings. Many of the occupations, such as anesthesiologist assistant and surgical assistant, have grown from the unmet demand for help in the highly specialized operating room environment. Other occupations, such as perfusionist and electroneurodiagnostic technician, have grown out of the technological boom and the need for people to operate highly specific equipment. Radiologic technologists and technicians (often shortened to “rad techs”) assist radiographers in imaging technologies, which are changing with dizzying speed. The rate of accreditation of licensed rad techs is not keeping up with the speed of change in technology, and shortages are predicted for this high-demand field (BLS, 2014g).

Laboratories that analyze clinical specimens with increasingly sophisticated technologies need to be staffed with qualified personnel. The National Accrediting Agency for Clinical Laboratory Sciences (NAACLS) is responsible for maintaining the quality of programs in the clinical laboratory sciences. “Accredited programs include Clinical Laboratory Scientist/Medical Technologist, Clinical Laboratory Technician/Medical Laboratory Technician, Cytogenetic Technologist, Diagnostic Molecular Scientist, Histologic Technician, Histotechnologist, and Pathologists’ Assistant” (NAACLS, 2015). The BLS (2014a) indicates that job growth will
be brisk in the coming years for clinical laboratory technologists and technicians and that the majority of this growth will occur in hospitals; however, other settings will need these workers as well.

Respiratory Therapists (RTs) This section will address one allied health occupation in greater detail: respiratory therapists (RTs). In 2012, RTs held about 119,300 jobs, with most employed by hospitals (BLS, 2014i). RTs evaluate, treat, and care for patients with respiratory disorders, such as asthma, emphysema, pneumonia, and heart disease. An associate’s degree is required for entry into the field to become a certified respiratory therapist (CRT). Additional education is required for advanced practice and eligibility for the registered respiratory therapist (RRT) designation. RTs are certified by the National Board for Respiratory Care (NBRC), and registration is available only to graduates of accredited programs in respiratory care of the Commission on Accreditation for Respiratory Care (CoARC; NBRC, 2015). All states except Alaska, as well as the District of Columbia and Puerto Rico, require RTs to obtain a license (AARC, 2010; BLS, 2014i). In addition, most employers require cardiopulmonary resuscitation (CPR) certification because RTs are usually members of hospital rapid response teams.

Shortages exist in almost all the allied health occupations, but respiratory therapy continues to be particularly affected. With a vacancy rate of 9% that translates to a national shortage of 12,000 respiratory therapists, recruitment and retention are critical matters (Brady & Keene, 2008). The authors, who are respiratory therapists, paint a disturbing picture of work life for these health care professionals. Understaffed and overwhelmed, the demands of a high patient load can be tipped into disaster when a code is called and all the other less critical patients have to wait—with anxious and angry family members who don’t understand why their loved one’s treatment is delayed. Brady and Keene (2008) recommend strategies to retain RTs, beginning with appreciating the important work they are doing. They also recommended approaches to assess and assign workload more evenly and expressed concerns that overwork and short staffing compromises patient care. Since recruitment and retention are under the domain of the health care manager, you will be expected to come up with creative approaches to address this ongoing dilemma.

OPPORTUNITIES FOR RESEARCH ON HEALTH CARE PROFESSIONALS Staffing shortages across all health care professions will continue to be an issue, along with recruitment, retention, job satisfaction, burnout, and turnover. Maintenance of currency and the relevance of an up-to-date health care workforce will always be an evergreen topic for researchers and health care managers alike. Many of the resources used in writing this chapter also include extensive research holdings and data sets that are available to students and academic researchers. Herewith is a partial listing of these resources.

Agency for Healthcare Research and Quality TeamSTEPPS®: Strategies and Tools to Enhance Performance and Patient Safety;

Bureau of Labor Statistics (BLS) Occupational Outlook Handbook Healthcare;

Centers for Disease Control and Prevention (CDC) Collaboration Primer;

Foundation for the Advancement of International Medical Education and Research;

Hospital Consumer Assessment of Healthcare Providers and Systems; Hospital Research and Educational Trust (HRET); Inter-university Consortium for Political and Social Research (ICPSR); Open Payments; The Robert Wood Johnson Foundation; and U.S. Department of Health and Human Services Health Resources and Services Administration (HRSA) Coordinating Center for Interprofessional Education and Collaborative Practice (CC-IPECP).

You will have an abundance of information at your fingertips at any one of these websites.


This chapter has described the education, training, and credentialing of physicians, nurses, nurses’ aides, midlevel practitioners, and allied health professionals and has given an overview of the supply of and demand for health care professionals. In addition, some of the reasons for health care professional turnover and costs of turnover have been discussed, along with some strategies for increasing retention and preventing turnover. Conflict of interest as it relates to employed physicians has been addressed, and issues related to the management of the work life of physicians, nurses, nurses’ aides, midlevel practitioners, and allied health professionals have been interwoven through all of these topics. These are issues that can and should be addressed by you, the health care manager, with respect for each and every health care professional. The challenges await you; there will be no shortage of problems for you to solve.


1. Delineate the steps in attaining state licensure for physicians.

2. Describe the steps in attaining state licensure for nurses.

3. Compare and contrast licensure and credentialing.

4. Distinguish between core privileges and specific privileges in physician credentialing.

5. Why is physician credentialing one of the most important jobs in a hospital?

6. What is the National Practitioner Data Bank, and why was it created?

7. What is an international medical graduate, and what populations have they traditionally been most likely to serve?

8. Why might we begin to see fewer foreign-educated nurses in the U.S.?

9. Why might we begin to see fewer foreign-educated physicians in the U.S.?

10. Define the following terms: “job burnout,” “job satisfaction,” “retention,” and “turnover.” Why are they of importance in managing health care professionals? What can health care managers do to minimize physician burnout?

11. What is the “Sunshine Law,” how does it relate to conflict of interest, and why is it important among employed physicians?

12. What is the relationship among nursing education, nursing burnout, job dissatisfaction, and patient mortality? What can health care managers do to minimize nursing burnout?

13. What are the attributes of hospitals that support professional nursing practice?

14. Distinguish among the following: advanced practice registered nurse, certified registered nurse, and physician assistant.

15. Distinguish among licensed practical nurses, certified nurses’ assistants, and home health aides. What are some of the health care manager’s challenges with these groups?

16. Who are allied health professionals? What are some health care management issues in working with them?

Cases in Chapter 18 that are related to this chapter include:

United Physician Group Death by Measles Full Moon or Bad Planning The Brawler I Love you. . .Forever Managing Health Care Professionals—Mini-Case Studies Such a Nice Young Man The New Toy at City Medical Center

Case study guides are available in the online Instructor’s Materials.

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The Strategic Management of Human Resources

Jon M. Thompson

LEARNING OBJECTIVES By the end of this chapter, the student will be able to:

Delineate why human resources management includes strategic and administrative actions;

Assess current environmental forces influencing human resources management;

Analyze the key role of employees as drivers of organizational performance;

Summarize major federal legislation affecting human resources management;

Contrast human resources functions that address employee workforce planning/recruitment and employee retention;

Differentiate between the key responsibilities of human resources management staff and line management staff in recruitment and retention;

Classify methods of compensating employees; Compare methods of evaluating employees; Discuss examples of human resource management issues in health care settings; and

Identify current research areas in human resources management.

INTRODUCTION The management of human resources is one of the most important and challenging responsibilities within health services organizations. Health services organizations need to be high-performing organizations, and human resources are considered the most important factor in creating such organizations (Pfeffer, 1998). A high-performing health services organization provides high-quality services and excellent customer service, is efficient, has high productivity and reliability, and is financially sound.

Human resources management involves both administrative and strategic elements. From a strategic perspective, health services organizations compete for labor. They desire an adequate labor supply and the proper mix of quality and committed health care professionals to provide needed services. The strategic perspective acknowledges that organizational performance is contingent on individual human performance. Health services organizations need to view their human resources as a strategic asset that helps create competitive advantage (Becker, Huselid, & Ulrich, 2001). Additionally, organizations must have the capability to understand their current and future manpower needs and develop and implement a clear-cut strategy to meet those needs to achieve the organizational business strategy. Administratively, there are a number of specific functions and action steps that need to be carried out in support of managing the human resources of the health services organization to ensure high levels of performance.

Fundamentally, human resources management addresses the need to ensure that qualified and motivated personnel are available to staff the business units operated by the health services organization (Hernandez, Fottler, & Joiner, 1998). Human resources management encompasses a variety of functions and tasks related to recruiting, retaining, and developing staff in the health services organization. These staff include administrative staff who carry out nonclinical administrative functions such as patient accounting, quality management, and community relations; clinical staff who provide diagnostic, treatment, and rehabilitation services to patients; and support staff who assist in the delivery of clinical, administrative, and other facility services. The human resources activities that support administrative and clinical staff are carried out by dedicated human resources personnel who work in human resources or personnel departments, and are also carried

out by line managers who have primary responsibility for directing staff and teams and who are charged with hiring, supervising, evaluating, developing, and, when necessary, terminating staff.

Management of human resources is complex, and human resources actions address a variety of issues and situations. Consider the following examples of human resources management in various health services organizations:

A large physician practice is in need of hiring someone to head up its information management area. The practice has grown from seven to 23 physicians in the past five years, and the practice administrator has realized the clinical and financial records’ needs of the practice have outpaced current administrative expertise. The administrator wants to define the job by analyzing job duties and then recruiting personnel to fill the position.

A large system-affiliated hospital desires to train patient care technicians to assist in direct clinical care of patients. The hospital has experienced a shortage of RNs in the past three years and has found that a multidisciplinary team approach using patient care technicians will help the organization meet patient and manpower needs. The Vice President of Patient Care desires to know the best way to train these teams.

An assisted living facility is developing a new position for a marketing specialist, who will be tasked with marketing the facility in an effort to increase its census. The facility administrator desires to conduct a job analysis to determine the specific responsibilities of the marketing specialist’s job.

An ambulatory care clinic plans to add new diagnostic imaging equipment in order to compete for more patients in its service area. The purchase of this equipment raises several questions for the organization, including: What are the specific human resources needed to staff the new technology, and are they available? How will the addition of new technology and services affect the operating budget and the achievement of the business strategy of the clinic?

Each of these scenarios provides a good illustration of the diverse nature of human resources activities from both strategic and administrative perspectives and suggests how these activities contribute to the effective

performance of the organization. This chapter provides an overview of the specific activities that take place

strategically and administratively to manage the human resources of the health services organization. First, environmental forces affecting the management of human resources in health services organizations will be reviewed. Second, the importance of employees as drivers of organizational performance will be addressed. Key functions within human resources management will then be identified and discussed. Finally, conclusions regarding management of human resources in health services organizations will be presented.

ENVIRONMENTAL FORCES AFFECTING HUMAN RESOURCES MANAGEMENT There are several key environmental forces that affect the availability and performance of human resources within health services organizations (HSOs) (see Table 12-1). The environment for HSOs is the external space beyond the organization that includes other organizations and influences that affect the organization.

First, declining reimbursements from government payers and other third parties have reduced the revenues coming to HSOs. In efforts to contain their expenses, the Medicare and Medicaid programs, private insurance, and managed care organizations have reduced their payments on behalf of covered beneficiaries. Declining reimbursements for health services organizations have left HSOs with fewer resources to recruit, compensate, and develop their workforces. Because other organizations in local and regional markets are also competing for the same labor, this has made recruitment and retention of staff more difficult for many HSOs.

Second, the low supply of health care workers—particularly highly specialized clinical personnel—has made recruitment of needed health care personnel very challenging (Fottler, Ford, & Heaton, 2002). Many areas of the country have experienced shortages of nursing, diagnostic, and treatment personnel, a phenomenon that has left many HSOs understaffed, requiring remaining staff to work longer hours per week (Shanahan, 1993). This has also contributed to lower levels of staff satisfaction and higher rates of turnover in certain staff positions, which has in turn increased human resources costs to the HSOs (Izzo & Withers, 2002; Shanahan, 1993). In addition, recruiting staff members who are highly specialized and who are in short supply tends to raise human resources costs as HSOs have to pay these staff members’ higher wages and provide other incentives to appeal to these potential workers (Shanahan, 1993).

Third, competition among health services organizations has increased dramatically in the past 20 years due to an increase in supply of traditional HSOs, such as hospitals and nursing homes, as well as the influence of newly emerging HSOs, such as retirement communities, assisted living facilities, and ambulatory care programs. HSOs have engaged in service competition and, to a lesser degree, price competition in trying to outperform their rivals. Competition in services and competition for labor has contributed to increased demands on human resources management.

Fourth, the population’s needs for health and medical care have increased in the past two decades and will continue to grow during the next 25 years as the population ages and Baby Boomers approach retirement and qualify for Medicare. Older adults require more health services, and therefore, HSOs

will require more health care workers to care for the increasing volumes of patients served at their facilities. This is further complicated by the fact that much of the current health care workforce is nearing retirement age themselves (Burt, 2005). Thus, in the future, health services organizations will be faced with declining workforces due to retirements, on the one hand, and expanded demands from the population on the other hand. Projections of the future number of health care workers show significant opportunities for employment (see Table 12-2). However, this puts HSOs in a difficult situation: additional workers are needed to care for the increased patient workload, while the supply of workers in many categories continues to be low. This creates additional challenges for recruiting as well as retaining HSO staff.

Finally, increasing regulation and scrutiny of health services organizations by external organizations have increased pressures for high-quality and high- performing organizations. While licensing and accrediting organizations monitor HSO conformance to standards, they also make these performance indicators available to the public, legislators, and other stakeholders. In addition, reimbursement organizations and government payers, like Medicare and Medicaid, are increasing requirements on HSOs for accountability and performance by mandating reports on quality, morbidity, and mortality, as well as efficiency and costs. For HSOs, this means that human resources management must help the HSO become a high- performing, high-quality organization that can demonstrate quality processes and outcomes to these external stakeholders. Human resources can help accomplish this by hiring staff that are high quality, retaining those that are high quality, and reinforcing the culture of a high-performing organization.

In addition to the noted external factors, internal factors also affect human resources management. Increasingly, senior management of HSOs view human resources in terms of its contribution to the success of the HSO and look to human resources indicators in their assessment of overall organizational performance (Becker et al., 2001; Galford, 1998; Griffith, 2000; Pieper, 2005). As they do with other departments and services, HSO senior management wants to see a return on their investment in human resources functions and a contribution to the bottom line (Becker et al., 2001). Although a support function to the core focus of delivery of patient care services, human resources activities are evaluated in terms of the contribution to recruitment, training, and development for staff, as well as employee satisfaction and retention. Therefore, human resources strategies and programs to address recruitment and retention needs are being developed and assessed, not in terms of whether they look good or because other organizations are doing them, but rather because they contribute to the organization’s mission and goals for the creation of a high-performing, high-quality organization.

UNDERSTANDING EMPLOYEES AS DRIVERS OF ORGANIZATIONAL PERFORMANCE The core services provided by HSOs—patient care services—are highly dependent on the capabilities and expertise of the organization’s employees. It has been said that successful business strategy is directly connected to

having committed, high-performance employees (Ginter, Swayne, & Duncan, 2002). HSOs are only as good as their employees. Why is this so for health services organizations?

There are three primary reasons why this is the case. First, HSOs are service organizations, unlike traditional businesses or manufacturing firms that make and distribute a specific product. Being a service organization means providing a service that is needed and/or desired by a consumer who decides to take advantage of what the HSO has to offer. Providing services involves doing things to help others, and HSOs require employees who have a desire to help others—a “service orientation” (Fottler et al., 2002). Second, HSOs are highly specialized service organizations that provide a range of specific services that include inpatient, outpatient, surgical, rehabilitation, diagnostic, therapeutic, and wellness services. To provide these specialized services, health care workers need to carry out many highly specialized tasks, and they need to have the proper knowledge, training, and experience to do those tasks well. Finally, because of the variety of services provided in HSOs and the fact that specialized staff provide only specific “pieces” of the overall service experience, health care workers from different departments and units must work together to provide a comprehensive service that meets all the needs of each patient (Liberman & Rotarius, 2000). Staff must work together as teams to ensure that all required services are provided and that the total needs of the patient or health care client are met. Therefore, teamwork is necessary for the HSO to provide the high-quality, coordinated, and comprehensive services that are required for it to be a high-performing organization.

In essence, all HSO employees need to work together to ensure the best service possible, centered on the patient’s needs. Managers, therefore, must be able to hire good people with the proper knowledge, skills, and attitudes and provide them the resources and support necessary to do their jobs effectively and efficiently.

KEY FUNCTIONS OF HUMAN RESOURCES MANAGEMENT In this section, the major functions within human resources management

will be reviewed. The primary areas of human resources management activity include job analysis; workforce planning; establishing position descriptions; recruitment, selection, and hiring of employees; orienting new employees; managing employee relations and engagement; providing training and development; managing compensation and benefits; assessing performance; offering leadership development programs; providing employee assistance services; and offering employee suggestion programs. Typically, these key functions can be collapsed into two major domains called workforce planning/recruitment and employee retention (see Table 12-3). In the discussion that follows, the reader should note that activities in these two domains are typically carried out by human resources staff professionals who are under the supervision of a vice president, director, or manager of human resources. In some HSOs, this office may be called “personnel,” but most health services organizations—particularly large HSOs—now have a department or office of human resources that reflects both a strategic and administrative focus.

The human resources department or office develops and maintains all employee policies and procedures that reflect hiring, evaluating, promoting, disciplining, and terminating employees. In addition, policies and procedures related to assessing employee satisfaction, giving employee awards, compensating employees, and providing benefits are also developed and

managed by the human resources staff. Furthermore, all employee records are maintained in the human resources office and in the human resources information system.

It should be noted that many federal and state laws affect human resources management in HSOs. There is a lengthy history of federal legislation that has been enacted to protect the rights of individual employees and to ensure nondiscrimination in the hiring, disciplining, promoting, compensating, and terminating of employees on the basis of age, sex, religion, color, national origin, or disability. Many states have also enacted specific laws that protect employees. Other employment issues such as sexual harassment, whistleblowing (identifying wrongdoing), and workplace harassment are also addressed under federal and state law and offer employees protection. The legal environment for HSOs related to human resources management is constantly changing, and employers must carry out their activities with full knowledge of applicable laws and emerging rulings from court cases. Table 12-4 provides a summary of key federal legislation affecting human resources management in HSOs.

WORKFORCE PLANNING/RECRUITMENT Human resources functions carried out within the workforce planning/recruitment domain are directed to analyzing jobs needed within the HSO; identifying current and future staffing needs; establishing position descriptions; recruiting, selecting, negotiating, and hiring employees; and orienting new employees.

Job Analysis One of the fundamental tasks of human resources is to conduct an analysis of all jobs or positions that are a part of the HSO. Every position in the HSO— whether administrative, support, or clinical—needs to be justified in terms of its specific responsibilities and day-to-day activities. Job analysis involves identifying those unique responsibilities, duties, and activities specific to every position in the HSO. This is necessary to clarify individual responsibilities but is also critical to avoid duplication of tasks and responsibilities across positions. The outcome of job analysis is to clearly

state the responsibilities, duties, and tasks of every position within the HSO.

Human resources experts have suggested that HSOs should focus on

those positions that contribute most directly to the completion of the organization’s business objectives (Huselid, Beatty, & Becker, 2005). This is important because filling these critical positions with the best personnel —“A” players—will then increase the organization’s ability to perform.

Workforce Planning For every position established for the HSO, there needs to be an estimate of the number of staff members needed to carry out those responsibilities at the present time, as well as projections of the number of staff members needed at some future target date. For example, how many RNs does our hospital currently need for all the various services that we currently offer, and how many will we need in five years? This is a very complex decision process, and it must be based on consideration of many factors. For example, consider a hospital. Will the hospital be downsizing or eliminating any services in the next five years? Will the facility be adding any new services that are not presently offered? How will changes in regulations, the addition of new technology, or the addition of nursing assistants affect the need for RNs in the future, across all services of the hospital?

Identifying current numbers of staff is based on volume statistics that reflect the current performance of the HSO. The need for clinical staff is based typically on patient care statistics, such as the number of patients admitted, number of outpatient visits, or the number of patients receiving a specific service. In some cases, need will be determined by licensure standards that govern the minimum number of staff for certain services. For non–patient care areas, including such support functions as medical records, information technology, and financial services, the number of staff needed is contingent on the current volume of records and patient accounts that must be processed. Each support person in these areas can handle a minimum number of accounts or records per day, which becomes the basis for estimating current need. This is called a ratio method of determining needs. The managers in various units calculate these estimates and forward them to human resources for the development of aggregate estimates of staffing needs for the total facility.

Projections of staffing needs for a future target date are based on a similar method. Projections of future service volumes are made and associated staffing requirements are projected as well to serve that anticipated volume.

Again, line managers usually develop these projections. Future volumes are typically determined through a consensus-based strategic planning process where there is agreement on future service volumes. In this process, consideration is also made for retiring staff, transfers, and service changes (such as eliminations or expansions of beds and services) to arrive at the needed number of staff to recruit or to acquire on a temporary basis from outside staffing firms. Once the projected staffing needs are identified for the total facility, strategies and timeframes are established for recruiting. Projections of staffing needs are revisited every year as annual performance is assessed to see if projections remain accurate.

Accuracy of projections has important implications for preparing budgets and evaluating financial performance of the HSO. For example, future staffing levels may be unrealistic if forecast revenues don’t match projected expenses. Therefore, planned positions may remain unfilled and flexible staffing arrangements used as necessary. In addition, if demand shifts occur, some services may not realize projected patient volumes, and cutbacks in staffing arrangements may be necessary. Conversely, if there is an influenza or other contagious disease epidemic, the facility may find itself seriously short staffed. In conclusion, projections of future staffing requirements are just that—projections that may or may not hold up given the uncertain and dynamic nature of the health services environment. Many factors affect these projections, and a thorough and periodic assessment is needed to ensure that projections are realistic and revised as appropriate.

Establishing Job Descriptions Position descriptions or job descriptions are required for every position within the HSO. Job descriptions are necessary to define the required knowledge, skills, responsibilities, training, experience, certification or licensure, and line of reporting for a specific job within the HSO. Such descriptions are important to both the organization and employee. The position description elaborates on the findings from the job analysis and provides a means by which the organization clarifies each position in terms of expectations, locus within the organizational structure, and how it contributes to the organization’s overall performance. For the employee, the position description clarifies expectations and duties and allows prospective employees a means to evaluate the “fit” between a position and their own

individual knowledge, skills, and experience. Position descriptions are developed through joint efforts of line managers

and human resources staff. Line managers specify job requirements; human resources staff keep job descriptions in a consistent format and ensure accuracy of the positions as they are included in the HSO’s Human Resources Information System. An example of a position description for a hospital is shown in Figure 12-1.

FIGURE 12-1 Position Description

Reprinted with permission from Bon Secours St. Francis Medical Center, Midlothian, Virginia.

Recruitment, Selection, Negotiation, and Hiring of New Employees

A key principle of human resources recruitment is making ensuring HSO positions are filled with competent and highly skilled personnel. Once recruitment needs are made known by line managers, it is the responsibility of human resources to follow the appropriate procedures to fill those positions. In some cases, existing employees will have an interest in a new position for which they are qualified, and internal candidates will be considered. Human resources recruitment personnel use a standard process for external recruiting. These steps include advertising, screening applicants, determining those to be interviewed, conducting interviews, selecting the candidate, negotiating, and hiring. Activities for both human resources staff and line managers related to recruitment are identified in Table 12-5.

Advertising Different modes of advertising are used to target candidates and generate interest. These sources include local newspapers and electronic media including radio and television, organizational websites, and Internet job search engines, for example, and The human resources department uses standards for communication that address the position, required degrees, training and/or certification, experience, functional line of reporting, and general expectations of the position. Applicants submit information in response to the advertising and submit their credentials electronically to be reviewed and evaluated by human resources staff. Sometimes candidates are referred personally to the hiring manager or to the human resources staff. These candidates are informed that they need to make formal application through the organization’s online job application system.

The use of social media and website employment sites such as and offer health services organizations innovative, non- traditional ways to advertise job openings and to identify candidates based on candidate posting and submission of resumes (Sarringhaus, 2011). While health care organizations have been slow to adopt the use of innovative communications found in social media, more organizations are adding social media sites and reaching out to their employees, patients, and potential employees (Hawn, 2009).

Candidates are recruited also through private recruitment or headhunter firms, and these may include firms that engage in general staff recruiting or firms that specialize in health services organization staff by recruiting nurses, technicians, financial analysts, or office personnel. Arrangements with recruiters usually involve paying a percentage of the first-year salary to the recruiter if the candidate referred by the recruitment firm is selected for the position. This method of recruiting will result in costs that exceed the normal expected costs of filling position vacancies. However, this technique may be a necessary option when recruiting for highly specialized positions where the candidate pool is limited.

Another frequently used option in recruiting is to work with educational programs that prepare specialized health personnel, such as nurses, physical therapists, and diagnostic technicians (Shanahan, 1993). Sending announcements of positions to these educational programs, attending recruitment open houses, and developing important referral relationships with faculty and staff of these programs is helpful in building interest and identifying candidates. Other sources include placing ads in targeted professional journals that are read by health care professionals, disseminating recruitment materials to health care workers identified through association membership listings, and attending regional or annual meetings of professionals where human resources representatives can meet with interested candidates. A final option to identify interested candidates is for human resources staff to attend health care recruitment or job fairs held locally or regionally, or for the HSO to hold its own.

Some observers have suggested that HSOs use a pre-employment assessment by the candidate of the fit between their credentials and the job (Liberman & Rotarius, 2000). This is recommended to ensure that only appropriate, well-qualified applicants apply.

Interviewing, Selection, Negotiation, and Hiring Most applications for positions in HSOs are handled online through the organization’s employment website, and tracking is also handled online. Human resources staff complete the preliminary review and analysis of candidates based on their applications, check candidate references, and identify past employers’ satisfaction with the candidates. As a result, human resources staff narrow down the pool to those candidates that provide the best fit for the position based on training, experience, and other factors such as motivation and attitude. These applicants are then discussed with the line manager to select those to be interviewed. The candidates are invited to come to the organization and interview and spend some time with management, staff, and others. From the HSO’s perspective, this is important for two reasons. It enables the HSO to assess firsthand the candidates and verify their knowledge and skills; also, it enables the assessment of the candidates’ fit and compatibility with the organization and staff with whom they would be working. From the candidate’s perspective, an interview is important to get a close look at the organization and staff and

to assess their fit and interest in the position and the organization. Depending on the position, human resources staff may participate in

candidate interviews, and line managers will definitely participate in interviews with candidates. Structured interviews with clearly defined questions are thought to be best for assessing candidates (Foster & Godkin, 1998). Increasingly, peer interviews and behavioral-based interview questioning are used to assess candidates (Studer, 2003). Behavioral-based questioning focuses on the candidate’s response to questions that yield insight into actions taken in particular situations (e.g., “Tell me a time when a project could not be completed and how you resolved the problem,” or “Describe a situation in the past where you have experienced conflict with co-workers or a supervisor, and how you resolved the conflict”). Responses to behavioral-based questions yield important clues about the candidates’ attitudes and behaviors in past situations, their experiences in dealing with complex and difficult situations, and how they respond to questions under pressure.

Subsequent to the interviews, the staff who have interviewed candidates meet to review the candidates, determine how the candidates match with position requirements, and rank order candidates. Once the staff agree on the applicant they would like to hire, an offer is extended.

An offer of employment is made in writing, and the offer letter must specify the position for which the offer is made, start date, associated salary/compensation and benefits, and any other key information regarding the offer. Offers of employment are typically contingent on a successful background check. Although an offer has been extended, the recruitment process is not complete. Depending on the position, there may be a period of negotiation over salary, benefits, start time, flexible scheduling, and other issues. Once agreement is reached, the position is assumed filled, and the candidate responds with a formal letter of acceptance agreeing to the position and conditions of acceptance. Background checks, physical examinations, drug tests, and proof of immunizations are frequently required. In addition, human resources reviews social media (e.g., Facebook, LinkedIn, and Twitter) as part of a background check to look for evidence of behaviors, published statements, and or pictures that may yield more information about a candidate and their “fit” for the open position.

Completion of hiring paperwork is necessary at the time that the person

starts the job. This typically includes issuance of an identification badge and keys. It should be noted that if agreement is not reached with the first-choice candidate, then the offer would be extended to the next best candidate, and then the next, until agreement with a suitable candidate is reached.

Orientation One of the key requirements of a new staff member is to attend an orientation program coordinated by human resources. This program is important for several reasons. An orientation program informs the new employee of policies, procedures, and requirements, and it offers an opportunity for the new employee to ask questions and clarify understanding about the organization. The Employee Staff Manual is provided to each new employee. During orientation, various policies and procedures are highlighted, including expectations for the work day, proper attire and behavior, employee assessment, disciplinary actions and grievances, probationary period, and opportunities for training and development. The organization’s values, mission, vision, and goals are reviewed, as are strategic and long-range plans. Standards of behavior and codes of conduct are reviewed. Standards of behavior and codes of conduct specify attitudes and behaviors that each employee will exhibit in carrying out their position. These behaviors include such actions as providing excellent customer service and using resources in a cost-effective manner. Specific employee benefits are identified and reviewed, and employees are informed about options concerning benefits and associated costs. Safety and security policies and practices are reviewed, and in large HSOs, such as hospitals and nursing homes, special codes are revealed so that employees know when and how to respond to emergency situations such as fires, patient medical emergencies, patient problems, intruders, and chemical and environmental emergencies. With the passage of the Health Insurance Portability and Accountability Act (HIPAA) in 1996, training in the requirements of this law regarding confidentiality of health information has been incorporated into many HSO’s employee orientation sessions. Training in compliance with Medicare rules and regulations, along with the dissemination of Whistleblower Protection Act of 1989 information, is also becoming a part of new employee orientation in many HSOs.

Orientation is usually held once a month to coincide with the start date

for new employees. Part-time, full-time, and short-term temporary employees are typically required to attend orientation. New employees have an opportunity to meet the senior management team, who typically provide an overview of their respective management domains during orientation. This helps new staff gain an understanding of their respective roles in the HSO. Subsequent to the formal orientation session, most HSOs now require new employees to complete a required number of online and in-person courses related to the organization and other pertinent topics, such as sexual harassment, communications, customer service, and teamwork. Employees are tested on their knowledge after completing the training and must show competency as a part of their employment.

EMPLOYEE RETENTION Employee retention functions include all of those key activities that address care, support, and development of employees to facilitate their long-term commitment to the organization. The key functions under employee retention include employee relations and engagement, training and development, managing compensation and benefits, providing employee assistance programs, assessing performance, managing labor relations, providing leadership development programs, and offering employee suggestion programs.

Employee Relations and Engagement The purpose of employee relations and engagement efforts coordinated by the human resources staff is to identify and address the needs of employees so that they will be satisfied, perform at a high level, and remain with the organization. Increasingly, human resources staff use predictive analytics to identify employee needs, factors driving employee satisfaction, and factors that lead to employee retention (Davenport, Harris, & Shapiro, 2010). It has been shown through empirical study that satisfied workers provide better service and care (Angermeier, Dunford, Boss, & Boss, 2009). As a result, HSOs have increased their efforts recently to address staff concerns, improve the work environment, and redesign jobs and administrative structures to provide for personal learning and professional growth (Becker et al., 2001;

Osterman, 1995). Initiatives to increase participative management, through greater employee decision making about aspects of their work and sharing of organizational metrics about performance with employees, have been shown to increase employee satisfaction and engagement and lessen the likelihood of leaving the organization (Angermeier et al., 2009). Also, there have been major efforts at implementing recognition and reward programs, such as employee of the month, staff appreciation events, and greatest improvement by department or unit in balanced scorecard measures. In addition, organization-wide events are used to celebrate renewed accreditation or noteworthy achievements such as Magnet status by the American Nurses Credentialing Center, and top performance as recognized by such groups as Truven Health Analytics and HealthGrades.

The human resources department works with managers to determine appropriate employee relations activities, and typically, cross-functional committees are established to spearhead these efforts. Employee engagement and satisfaction surveys are commonly used to assess satisfaction and to help human resources staff and individual managers identify operational areas in need of improvement. Sometimes HSOs contract with consulting firms to survey employees in an anonymous fashion, usually once a year; to collect employee perceptions and suggestions; and to assess progress on addressing prior issues. Improvements in communications and teamwork, in addition to common areas of concern, such as compensation and benefits, are issues that are frequently identified through engagement surveys.

Another common tactic for HSOs to gauge employee perceptions and satisfaction is through manager walk-arounds, town hall meetings, employee neighborhood meetings, daily huddles, and employee focus groups. These efforts can be used in addition to engagement surveys, and those organizations that practice high-involvement employee relations will use these additional techniques with regularity. These methods allow for greater clarity of employee issues and concerns through dialogue with a manager. Follow-up responses to employees by managers are critical to closing the loop on concerns and suggestions. Moreover, observation of work units and meeting with employees through rounding creates a connection between management and employees that signals managerial interest in employees and a greater sense on the part of management as to employee daily job tasks and challenges (Studer, 2003). Observations are recorded on logs or diaries

and are used to identify needed improvements. Sometimes, employees may feel constrained in their input and discussion with managers—particularly their own manager—as they may view their input as complaining. However, in most HSOs where there is a positive relationship between management and staff, and where input and exchange is a key part of the organizational culture, employees will feel open to expressing their concerns. In addition, some senior administrators now use blogs and intranet postings to inform staff about decisions and solicit input on key issues.

Training and Development Training and development of the workforce are extremely important human resources functions for several reasons. First, the organization’s need for specific knowledge and skills is always changing because of the rapid changes being experienced by HSOs. For example, HSOs frequently add new medical technologies that require different technical skills of employees. Another example of additional skills needed is in the information technology area, where new computer information systems, electronic medical records, databases, and integrated patient and financial data systems are being acquired to generate, store, and retrieve patient-level and organizational information. Second, training is necessary to provide for continuing education of some staff. For clinical staff who require continuing education as part of their licensure and/or certification, HSOs may coordinate the provision of hands-on training that is provided either on-site or at remote locations. Some clinical training and training for nonclinical staff can be provided online through the organization’s intranet or a third party’s website. While it is clear not all training and development needs of staff can be met due to resource limitations, the human resources staff determines priorities for annual training and education efforts and implements and manages those programs. Human resources staff typically accomplish this through organization-wide needs assessments or through identification of specific training needs that are made known to human resources staff by managers. Typically, the cost of training and development programs is provided for in the human resources budget; in some cases, other departments or services within the HSOs may cover the cost of training that is coordinated by human resources. In most cases, the costs of training can be reduced if the training is provided online.

The goal of any training or development effort is to provide value for the organization by returning benefits, such as increased productivity, greater effectiveness, higher quality, greater coordination of care, and enhanced patient or customer service. Therefore, training and development programs are evaluated by human resources for cost-effectiveness to ensure training is effective in terms of return on investment and methods of training are appropriate (Phillips, 1996). Training programs cover a range of topics, including technical training on equipment and software programs, customer service training, and training to improve interpersonal communications and leadership skills, among others. Training and development of teams within HSOs are also increasingly common, as HSO staff work frequently in teams to coordinate the delivery of care. The effectiveness of team leaders has been shown to influence team learning, development, and performance (Edmonson, Bohmer, & Pisano, 2004).

Managing Compensation and Benefits The following sections describe the management of employee compensation and benefits in health care organizations and how it can contribute to a high- performing organization.

Compensation The human resources department has the specific responsibility of managing the pay or base compensation and benefits associated with all positions held within the HSO. This is no easy task, as specific pay ranges and benefits must be established for each position, which in the hospital industry includes more than 300 distinct jobs or major job classifications (Metzger, 2004). The management of compensation begins with a clear definition of the HSO’s compensation philosophy, which reflects the organization’s mission, values, and strategy regarding human resources, as well as consideration of internal (e.g., equity) and external (e.g., competitive) factors (Gering & Conner, 2002; Joiner, Jones, & Dye, 1998).

Determining compensation refers to the establishing of a specific financial value for a job. Compensation for each position is set based on the consideration of a number of factors, including the specialized knowledge and skills associated with the position, the experience required for the

position, the relative availability of skilled individuals to fill the position, and average wages that are specific to the local labor market. This is called job pricing (Joiner et al., 1998). Some positions are hourly rated (i.e., nonexempt and eligible for overtime pay), where a compensation rate per hour of work is established (e.g., for maintenance staff and floor nurses). Some positions are salaried (i.e., exempt and not paid overtime), where an annual salary is paid the employee (e.g., nurse managers and other managerial staff). In short, compensation is set to account for the special skills and experiences required of employees and to enable the organization to be competitive in the market in securing and retaining needed employees. Pay ranges will vary by type of position, but within a position class there must be equity. However, HSOs typically account for differences in training, experience, and special considerations of the job (working weekends or evenings) by allowing for pay/shift differentials. Also, some jobs are subject to significant external market pricing, because the skill set is unique and the market is national or international.

The typical large HSO, such as a hospital or hospital system, has a separate, designated staff to handle the administration of compensation on the one hand and benefits on the other. Human resources staff responsible for compensation keep records of wages and salaries, compensation adjustments, and the basis for compensation adjustments in individual employee personnel files and in the Human Resources Information System. Every few years, human resources administers a compensation or salary survey for positions within the HSO for benchmarking their current compensation to local and regional markets. This comparative market analysis of wages is then used to adjust salary ranges for positions as appropriate to remain competitive.

Job pricing is used to establish equitable pay scales by position within HSOs, but reward systems beyond base pay are frequently considered of greater importance to employees (Joiner et al., 1998). In addition to base compensation tied to expectations for a specific job, many HSOs have embraced incentive compensation. While compensation plans focus on individual performance and allocating rewards such as raises to high performers based on individual performance, incentive plans are designed to improve organizational performance (Gibson, 1995). In an incentive or pay- for-performance plan, the purpose of the plan is to stimulate employees to higher levels of achievement and performance that benefit the organization.

Meaningful measures such as profits (return on investments), productivity, attendance, safety, quality, and customer satisfaction are a few examples of financial and nonfinancial organization-wide performance indicators that can be used in developing incentive plans. The incentive plan would work in the following way. The organization would set target goals for performance in a specific time period. At the end of that time period, the organization would collect and review relevant information to measure the status of performance. If the measurement of performance on specific indicators met the target goals, the organization would then reward employees for the “organization-wide” performance. These programs are also known as bonus, gainsharing, or goal-sharing programs, and payouts (revenues derived from savings, increased productivity or volumes, increased customer retention, and quality) would be shared with employees as a bonus for their contributions to high performance within the HSO (Gomez-Mejia, Welbourne, & Wiseman, 2000).

Incentive compensation plans have long been thought to be associated with higher levels of organizational performance (Bonner & Sprinkle, 2002). The theory behind this approach is that use of incentives such as compensation bonuses positively affects motivation, which leads to higher performance (Gibson, 1995). Many health services organizations have begun to follow the lead of businesses and industries that pioneered these programs, but published literature addressing the impact of incentive compensation on organizational performance in health care is limited (Griffith & White, 2002). There is evidence to show that more HSOs are using incentive programs for executives that are tied to organizational performance (Healthcare Financial Management Association, 2001). However, other research in the business literature has shown the relationship between incentive pay and performance may not hold up.

Beer and Katz (2003) found in their survey of senior executives from many firms that bonuses have little to no positive effect on performance and their real function may be to attract and retain executives. They looked at firms that had implemented executive bonus compensation systems and assessed relationships to performance and found the only key explanatory factor was that the incentive system promoted teamwork. Similarly, Luthans and Stajkovic (1999) found in their analysis of research on pay-for- performance that social recognition and administrative feedback to employees on performance were just as influential as pay-for-performance in

achieving higher levels of performance in a manufacturing setting. Moreover, Beer and Cannon (2004) found many senior managers view incentive compensation programs with concern and question whether the benefits outweigh the costs. However, none of the studies cited above were specific to health services organizations.

Benefits The human resources staff is responsible for managing benefits provided to employees working in an HSO. A benefit is defined as any type of compensation provided in a form other than salary or direct wages, that is paid for totally or in part by an employer (Jenks & Zevnik, 1993). As benefits extended to workers, in general, have increased over the past two decades, the number and type of benefits made available to HSO employees have increased as well (Griffith & White, 2002; Runy, 2003). However, the HSO is faced with a dilemma. On the one hand, HSOs are under pressure to manage costs, and employee benefits have been a high-cost item for HSOs, which directly affects the HSO’s cost management strategy, financial status, and competitive position. On the other hand, benefits as a portion of total compensation have increased in importance, as more and more employees indicate that benefits are important in their choice of an employer (Runy, 2003).

Benefits may differ by level within the organization, as management may receive one set of benefits to offset the higher level of skill needed to complete the job, versus lower-level employees who may receive fewer benefits due to a lower level of skills required for the job. The availability of benefits, as well as the percentage of employee cost sharing, varies widely by HSO. Typical benefits offered by HSOs include the following:

Sick leave. A certain number of days per year are allocated for the employee being unable to be on the job due to illness or injury.

Vacation. A certain number of vacation days are allocated to employees for them to use as free time. In many HSOs, this is combined under a paid-time-off (PTO) plan with sick leave days and holidays.

Holidays. Designated national holidays are given to employees with pay as part of their benefits.

Bereavement leave. Paid leave of a specified duration is provided to

employees due to a death of a family member or significant other. Health insurance. Medical, behavioral health, and prescription drug coverage for the employee and optional coverage for dependents are typically made available. Depending on the type of health insurance plan offered to employees (and there may be one or more plans offered by the HSO), the total plan cost for the employee may be shared by the employer and employee. HSOs, like other organizations, have turned to managed care plans as a way to reduce health benefits expense for the HSO. Typical health insurance plans offered include a Preferred Provider Organization (PPO), a Health Maintenance Organization (HMO), and/or a High Deductible Health Plan (HDHP). Typical plan features include greater cost-sharing and out-of-pocket expenses for employees, along with the trend of increased access to out-of-network and specialty care. In addition, much of the coverage by health insurers today focuses on the management of certain chronic clinical conditions, such as cardiovascular problems and diabetes. These disease management programs are offered in an attempt to help the employee or dependent manage their conditions to promote better quality of life and reduce cost.

Life insurance. Coverage is provided that will help offset the loss of earnings for a limited time and to cover burial and other expenses related to the death of an employee. The employee is typically provided a base amount of life insurance with an option to increase coverage for an additional cost.

Flexible health benefits. Flexible or “cafeteria” benefits are increasing in popularity as they are offered to employees as options. Flexible benefits most often include health insurance, dental insurance, vision coverage, and other health benefits (such as disability insurance and long-term care insurance) and provide the employee with a choice of benefits for specific costs. Flexible benefits offer advantages to the employee in that the employee can tailor benefits to meet individual needs at varying costs (Joiner et al., 1998). For the HSO, overall benefit costs can be reduced under flexible benefit plans due to the fact that the employer is no longer paying for a specific base package of benefits for all employees (Joiner et al., 1998).

Retirement benefits. Many HSOs have retirement plans in place where

employees are granted a certain percentage of their compensation over and above their compensation that is put into a retirement fund. This fund can be a pension fund that is set up specific to the HSO or, more likely, a 401(k) or 403(b) plan where employees can manage their retirement dollars in mutual fund investments (Jenks & Zevnik, 1993). Many HSOs also have included the option in the retirement plan of offering to “match” employees’ contributions to the plan with employer-paid funds up to a maximum amount. Retirement funds can only be accessed at the age of retirement, or fund withdrawals are subject to penalties.

Flexible spending accounts. These are also called reimbursement accounts and are offered by the HSO to help the employee and their dependents by allowing pre-tax dollars to be placed in a health care or dependent care account. These accounts are then used to reimburse for out-of- pocket costs incurred by the employee and dependents that are not covered under other benefits or for the care of a child or dependent, disabled parent (Jenks & Zevnik, 1993).

Other benefits. Several other categories of benefits are also made available to HSO employees, although the degree to which they are offered and the scope of coverage will vary considerably. These benefits may include discounted personal health benefits (complementary and alternative health care, yoga, Pilates, weight control and health classes, wellness/fitness center memberships, health education programs, personal health risk appraisals, and fitness coaches and food coaches); transportation (use of a van pool); educational reimbursement (tuition assistance for employee’s or dependent’s college, parenting classes); employee incentives (profit sharing, stock options, sign-on bonuses, relocation/moving assistance); service and event discounts, such as free or discounted financial planning services and corporate discounts on movie tickets, events, and merchandise; flexible work scheduling, part- time work, job-sharing, and telecommuting; child care assistance and on-site child care; back-up child care assistance; elder care assistance; concierge services for information and referral on a variety of personal services; and savings programs (matched savings plans), among many others (Jenks & Zevnik, 1993; Halzack, 2014). Flexible scheduling, part-time work, telecommuting, job sharing, childcare assistance, and elder care assistance are examples of what many employee-focused

organizations offer employees in terms of work–life balance benefits. These benefits are viewed as a means to strengthen the commitment to the organization, reduce turnover, increase satisfaction, and provide flexibility in order to meet personal needs of employees (Osterman, 1995). Part-time work and telecommuting through a “virtual office” have increased in HSOs for some staff, and offer several benefits for the individual and the HSO, which include lower absenteeism, increased morale, greater schedule flexibility, creation of a wider talent pool, perception of fewer distractions, and perceived higher productivity (Corwin, Lawrence, & Frost, 2001; Hill, Miller, Weiner, & Colihan, 1998; Kurland & Bailey, 1999). However, challenges resulting from this workplace practice include social and professional isolation, where employees believe that interactions with others and promotional opportunities are limited (Cooper & Kurland, 2002). Managerial resistance to part-time workers and telecommuters, as well as unsupportive cultures, have also been identified as key barriers mitigating use of flexible work arrangements (Corwin et al., 2001; Kossek, Barber, & Winters, 1999). Perceived inequity among employees in terms of job structure and oversight may be another dilemma for management that results from adoption of this policy. Certainly, not all direct-care HSO employees could even consider telecommuting, due to their skills needed where the patient or client is located. For some HSO employees—such as information technology, business development and marketing, and finance—such flexible scheduling options may work well. In general, offering of these benefits is linked to several advantages, including lower turnover, higher satisfaction, and greater financial performance (Huselid, 1995; Konrad & Mangel, 2000; Perry-Smith & Blum, 2000),

Occupational safety and health. The human resources department contributes to the organization’s efforts to maintain a safe and healthy work environment. Responsibilities are carried out in several ways to address this concern. First, workers’ compensation coverage is required for organizations under state law, in order to protect workers who may get sick due to the job or become injured or incapacitated due to working conditions. This coverage is separate from any health insurance provided. Second, the HSO monitors federal and state regulations for occupational safety, monitors risk in the organization,

and works to eliminate safety risks. Sometimes these human resources staff activities are conducted in conjunction with the risk management activities within the HSO.

Employee Assistance Programs Employee assistance programs (EAPs) are HSO-sponsored programs that are made available to employees, and in many cases their dependents, to assist with personal or family problems that also affect the employee’s job performance (Howard & Szczerbacki, 1998). Such problems include stress and mental health problems; parenting issues; family dysfunction and divorce; alcohol and substance abuse problems; financial problems; legal issues; physical and emotional abuse; poor work relationships; and adjustment issues stemming from a death in the family, loss of a job, or severe illness. In addition, the patient care services provided in an HSO are often challenging and stressful, and providing care to individuals who are sick, injured, and in some cases dying or near death is very trying and stress inducing for employees (Blair, 1985). This may lead to feelings of helplessness, guilt, or grief that negatively affect attendance and threaten the employee’s focus, effectiveness, and productivity. Second victim programs to address clinicians’ guilt and trauma associated with medical errors have also grown out of the quality management and patient safety movement (Wu, 2000). Workplace stress may also be exacerbated by personal and family stress outside the HSO. As a result, HSOs have recognized the value of EAPs to help employees in their times of need by making available counseling, stress reduction programs, health education programs, and other interventions based on need to lessen the impact of these problems. A problem-free, happy employee is an employee who is more likely to be focused and productive on the job. This results in positive performance for the individual employee as well as the HSO. The cost of services to the employee will vary depending on how the EAP is structured; some of the needed EAP services may be covered under other current employee benefits. EAP services can be offered on-site at the HSO or offered at remote locations under contract with other providers, which facilitates greater confidentiality for users. Employees are also afforded protection from harassment and job loss due to use of the EAP.

In summary, the benefit package has become more important to

employees in recent years as employees balance tradeoffs between compensation and an appropriate array of benefits that are important to the employee and his/her dependents. For example, many employees with young families may be more interested in a broad range of benefits, such as those discussed above, rather than the highest salary possible. Such benefits help employees meet their own unique needs and become a significant factor in employee recruitment and retention. In the end, benefits may be one of the most critical factors in making the HSO competitive in attracting and retaining staff.

Assessing Employee Performance The human resources department is charged with developing and maintaining a system for measuring employee performance for all employees of the HSO. The central theme of this chapter is that organizational performance is paramount and that individual employee performance in an HSO is highly contributory to organization-wide performance. Therefore, assessing individual employee performance is critical to understanding and achieving high levels of organizational performance.

Under human resources department leadership, a performance appraisal system is established for the HSO. Performance appraisal means assessing the job performance of an individual employee. In order for the HSO to know how individuals are performing and to develop a plan and program for employees to improve performance, an annual performance assessment is required. The assessment form includes several criteria that are determined to be important for the HSO in evaluating performance. These criteria may include measures of work productivity, quality, and quantity as specified in the position description and include technical skill assessment as well as other criteria that address the employee’s motivation, attitude, and interpersonal skills in carrying out their respective work. Human resources, in conjunction with senior management of the HSO, will determine what specific criteria are included in the performance appraisal. Increasingly, managers use the results of computer monitoring systems to conclude how much work time is lost due to employee engagement in non-work activity (Buchbinder, 2015). Performance appraisals also include an assessment of the degree to which an individual’s annual goals and objectives have been achieved as spelled out in the yearly management plan. See Figure 12-2 for

an example of a performance appraisal used by Bon Secours St. Francis Hospital.

Kirkpatrick (2006) argues that a performance appraisal system must be part of the organization’s efforts for continuously improving performance. Performance assessment is conducted by line managers for their subordinates on an annual basis, at the time of the employee’s anniversary date or, more commonly, at a standard time to coincide with the budget development process for the upcoming year. Using the agreed-upon form, the manager will complete an assessment of each subordinate’s performance for the assessment period. The manager then will sit down with the employee and review the appraisal and discuss areas of favorable performance, as well as areas of improvement opportunity. This will also give the subordinate an opportunity to express any concerns and/or seek clarification as to the basis for the evaluation ratings. Many managers also ask subordinates to complete a self-evaluation for the performance period under review, using the same criteria, for discussion at the meeting. It should be noted that good managers communicate with their subordinates about employee performance regularly throughout the year, with an interest in monitoring, correcting, and improving performance on an ongoing basis.

At the designated annual performance appraisal meeting between a manager and a subordinate, a meaningful exchange can be carried out in order to frankly discuss performance, identify opportunities for improving performance, and develop a specific plan for achieving higher levels of performance. A two-way discussion of these matters is the most fruitful for both parties, as the employee will understand the manager’s concern and interest in the employee and the sincere desire for improving performance. In addition, the employee can express likes and dislikes about the job, which the manager needs to know (Butler & Waldroop, 2005). However, it is essential that clarity be provided in communicating performance, as perceived by the supervisor, so that there is no confusion as to the intent of the evaluation (Timmreck, 1998). A key outcome of the performance evaluation is the setting of performance improvement goals, actions to achieve the improvements, and priorities for action (Kirkpatrick, 2006). In addition to an annual performance appraisal, the HSO may require some or all employees to be reviewed for satisfactory performance at the end of their first 90 days of employment (often referred to as the probationary period) and at other times as specifically requested by a manager or if conditions

warrant. Performance appraisals are helpful to management and employees in the

following ways (Longest, Rakich, & Darr, 2000):

The manager can compare absolute as well as relative performance of staff;

Together, the manager and employee can determine a plan for improving performance if such improvement is needed;

Together, the manager and employee can determine what additional training and development activities are needed to boost employee performance;

The manager can use the findings to clarify employee desires to move up to higher-level positions and/or expand responsibilities;

The manager can document performance in those cases where termination or reassignment is necessary;

The manager can determine adjustments to compensation based on performance; and

The manager can determine promotional or other advancement opportunities for the employee.

In addition to the traditional method of assessing performance described above, many HSOs are now employing 360-degree performance appraisal systems. While this method also includes a manager–subordinate evaluation, it provides for multisource feedback on employee performance from a number of other stakeholders—including peers, the employee’s subordinates, and internal and external customers, if applicable. Feedback is aggregated and communicated to the employee through a neutral third party such as a human resources staff member. The advantages to using the 360- degree evaluation are reduction of fear of repercussion from evaluative comments and a greater range of feedback from a larger number of observers of the employee/manager (Garman, Tyler, & Darnall, 2004). However, there are some disadvantages as well. These include the higher cost of administration of a 360-degree evaluation, compared to a traditional evaluation, and the lack of an instrument suitable for health services managers (Garman et al., 2004). In addition, peer feedback included in 360- degreee evaluation may also be biased or inaccurately given, due to

difficulties in determining an individual’s contribution to the unit or service or fear of providing negative feedback to a colleague (Peiperl, 2005).

FIGURE 12-2 Performance Evaluation

Reprinted with permission from Bon Secours St. Francis Medical Center, Midlothian, Virginia.

One of the most challenging outcomes of the performance appraisal process is the need to terminate an employee. Although the goal of human resources management is to retain high-performing staff, not all employees will be retained. There are many reasons why an employee can be discharged, but in every case, the primary reason must relate to performance deficiency. Terminating an employee is not easy and is uncomfortable at times for managers who have the authority to discharge an employee. However, failure to act decisively will jeopardize the HSO’s performance and will certainly reflect negatively on the manager’s ability as a leader (Hoffman, 2005). In situations where an employee is not likely to be retained, it is essential that the manager not wait until the appraisal to assess the employee’s performance. In fact, ongoing monitoring of performance, efforts to correct performance problems, and documentation of the steps taken in any corrective processes are all typically required prior to discharge. This process should be done by the line manager in close consultation with the human resources manager. The HSO policies and procedures must be adhered to carefully to prevent subsequent allegations of wrongful discharge and potentially avert a lawsuit against the HSO and/or the line manager.

Managing Labor Relations Labor relations is a general term that addresses the relationships between staff (labor) and management within HSOs. Labor relations is associated with collective bargaining where a union, if certified (i.e., voted in by the workers), represents the interests of employees who become members of that union. Nationally, about 20% of HSOs have at least one union represented in their organizations (Longest et al., 2000). In the period 1980–1994, there were 4,224 certification elections held in health services organizations: 31% of these were in hospitals, 40% in nursing homes, and 29% were in other health care facilities (Scott & Lowery, 1994). Union elections in health services organizations vary by type of health care setting, but overall about 60% of elections result in a union being approved (Deshpande, 2002). Unions have a higher-than-average win rate in hospitals, and hospitals have been the focus of increased union organizing efforts in recent years (Deshpande, 2003). In 2009, union membership in health care was about 14% of the health care workforce (Malvey, 2010). However, this represents an increase of 270,000 unionized health care workers since 2000, with much

of the growth occurring in registered nurse and other non-physician occupations (Malvey, 2010).

Why do unions get involved in HSOs? As seen in manufacturing, the fundamental reason for unionization in health care is that employees are dissatisfied with some aspects of the work and/or the work environment and feel that management is insensitive to their needs. Unions often step in where management has failed to do its job and become the “voice” of the employees. If staff are strongly dissatisfied with various aspects of the HSO, view senior management as poor communicators, and/or perceive that management is insensitive to staff issues, they may believe that a union is the only way to have their voices heard and needs met. If elected to represent employees in an HSO, a union is then authorized to engage in collective bargaining with management of the HSO regarding wages, working conditions, promotion policies, and many other aspects of work (Longest et al., 2000).

The National Labor Relations Act of 1935, as amended, enables union organizing and collective bargaining in health services organizations. The Act also created the National Labor Relations Board (NLRB), which recognizes several bargaining units for health care employees, including nurses, physicians, other professional employees, and nonprofessional employees, among others. The NLRB has the authority to oversee and certify the results of union elections. There are many rules and regulations that must be followed in unionization activity, and there are certain restrictions placed on management as well as staff that govern what can and cannot happen regarding union discussions, organizing, and elections.

The presence of a union creates significant challenges for management of an HSO. From management’s perspective, unions create an unnecessary third party in decisions that affect the employment relationship and work of the HSO’s staff, which raises potential for conflict. Union requirements may restrict the administrator’s ability to use the number and type of staff in desired ways, and compensation negotiated by the union may reduce management’s ability to directly control staffing expenses. Labor unions can also limit an HSO’s discretionary authority to make changes in the workplace and in workplace practices (Holley, Jennings, & Wolters, 2001). Also, some research has shown that productivity may be negatively affected after unionization (Holley et al., 2001).

Beyond general impact on administration, unionization has been shown to significantly affect the human resources function in HSOs. Deshpande (2002) found in a study of hospital unionization activity that the presence of unions resulted in higher numbers of employees who were screened, a higher number of employee training programs, a greater number of job classifications, greater use of employee performance appraisal methods, and lower productivity, as reported by CEOs of hospitals.

Various strategies have been discussed with respect to the administrative stance vis-à-vis unions (Deshpande, 2003). To reduce the possibility of union discussions and union organizing, administrators are encouraged to keep communication open and fluid, provide competitive salaries and benefits, establish grievance policies and procedures, and ensure staff participation and involvement in decision making as much as possible. In all respects, administrators and human resources staff should continuously assess staff satisfaction and needs, as well as opportunities for staff and management to work together for the betterment of the organization and larger community. There are many challenging issues that affect HSOs, including lowered reimbursements from managed care and government payers, cost reduction practices, and lower staffing ratios. These can lead to employee dissatisfaction, and management needs to be cognizant of the negative impact of some of their decisions on staff motivation, satisfaction, and commitment.

If one or more unions are certified to represent employees in an HSO, then much of the time and effort of the human resources staff will be spent in addressing unionization issues. These include negotiating (bargaining) aspects of the union contract, ensuring that specific aspects of the contract are met, communicating with union representatives, and being the focal party in carrying out all union discussion and negotiation under the auspices of federal labor law (Longest et al., 2000).

Leadership Development It is widely accepted that health services managers must practice effective leadership in order for their staffs, and thus their organizations, to perform at the highest possible level. Leadership and leadership practices are increasingly addressed in the current health care literature, and leadership is seen as one of the key competencies of health services managers. Because of

the complexity and rapid change within the environment of HSOs and within HSOs themselves, managers need to engage in learning consistently to upgrade their knowledge and skills so that they can be effective leaders (Squazzo, 2009; Sukin, 2009).

Many HSOs have followed the lead of business and industry and are now embracing the concept of leadership development for their managers. Recent data show that about one-half of hospitals and health systems have a leadership development program for mid-level managers and senior executives (Kim & Thompson, 2012; McAlearney, 2010). Leadership development includes both formal and informal efforts. The formal efforts include completion of courses with satisfactory scores on assessment, usually on an annual basis, which are required to advance to higher levels of management within the HSO or to keep knowledge and skills current. Formal efforts may also include structured mentoring, 360-degree feedback, and coaching (Thompson & Kim, 2013). Some HSOs separate leadership development for existing managers, executive managers, and aspiring managers. Courses and self-study may be completed online through organizational staff Web portals or through seminars with trainers who are either HSO staff or contracted consultants. Required training may include topics that are priorities of the HSO, such as customer service or process improvement, or it may reflect special topics of executing leadership, such as organizational change, effective communications, and building effective teams. Many times, leadership development training is tied to a personal development plan for a manager, or conversely, for an aspiring manager. Informal methods are where the HSO has its executive and mid-level managers work unofficially with selected staff through mentoring, advising, and coaching. This also may include job enlargement based on successful job performance, where the staff member may be assigned additional work tasks or tasks that reflect cross-discipline work where that staff member can gain different perspectives and gain visibility throughout the organization.

Leadership development efforts in HSOs, as noted in Chapter 1, are also employed to provide for succession planning for senior/executive and mid- level managers. Because many senior executives are nearing retirement, and given the high demand for health care managers across all sectors of the industry due to keen competition for leadership talent, organizations have decided to groom from within. Providing for succession to positions by filling from within offers several advantages. These include seamless

continuation of organizational leadership, proven fit with the organizational culture, commitment to the organization, and prior demonstration of effective working relationships across disciplines.

Leadership development initiatives also serve as a recruitment tool for bringing highly qualified candidates to the organization in both clinical and nonclinical roles. For example, clinical staff who have an interest in management may find that the organization that provides extensive leadership development and career track options is better than those that do not. Accordingly, leadership development can serve as a differentiator for HSOs. This has been a strategy of businesses for many years, where individuals with bachelor’s and master’s degrees can begin their careers with an organization that will provide opportunities for leadership development and advancement.

Employee Suggestion Programs Employee suggestion programs (ESPs) are increasingly being considered by HSOs in an effort to encourage creativity on the part of employees and to identify needed improvements in processes and outcomes. Employee suggestion programs have been in existence for quite some time (Carrier, 1998), but the primary locus has been in manufacturing and other business enterprises as opposed to HSOs.

An ESP works simplistically by soliciting employee suggestions for change and acknowledging and rewarding those suggestions that offer the most potential to meet organizational goals and implementing those suggestions. These programs usually are formally structured, widely communicated throughout the organization, and managed by human resources staff. Current ESPs have gone far beyond the old suggestion box model and include elements of electronic submission and Web-based applications, as well as formal recognition and reward (Fairbank, Spangler, & Williams, 2003).

ESPs are part of an overall effort by HSOs to stimulate innovation and creativity by generating ideas that will help the HSO. The underlying rationale for the program is that employees of HSOs, as key providers of its services and activities, are in the best position to know what can be improved and may have good ideas as to how such improvements can be made. ESPs are built on the premise that innovation in organizations can be understood

from a problem-solving approach (Fairbank et al., 2003). Goals of ESPs can include organizational improvements, such as reducing costs, improving methods and procedures, improving productivity, improving equipment, and cutting waste, as well as increasing job satisfaction and organizational commitment on the part of employees (Carrier, 1998). This second goal of ESPs is very important and should not be overlooked by the human resources staff. Part of the overall satisfaction in working in an HSO is the belief that management understands and appreciates its employees and is interested in their input. ESPs are not, however, without their limitations. Drawbacks to the program include difficulties in designing a program, effectively administering it, and sustaining the program over several years (Kim, 2005).

RESEARCH IN HUMAN RESOURCES MANAGEMENT Many administrators and researchers consider effective human resource management to be the single most important factor affecting organizational performance. Because of the importance of human resource management to the success of the health services organization, there are many areas of research in human resources. Three lines of important research have emerged recently and the results are informing human resources management policies and practices. The first is understanding the nature of high-performance work systems in health care organizations. McAlearney et al. (2013) and Garman et al. (2011) have investigated the work practices of successful health care organization and identified best practices that can lead to high levels of organizational performance. These practices have been identified at both the organization-wide (macro-level) and the sub- organizational level (micro-level). These researchers found that best practices reflect four areas: staff engagement, staff acquisition and development, staff frontline empowerment, and leadership alignment and development. Practices specific to each are as follows:

Staff engagement: information sharing, employee involvement in decision-making, and performance-driven regard and recognition;

Staff acquisition and development: rigorous recruiting, selective hiring using assessments of cultural fit and behavioral standards, staff training, and career development using mentoring and leadership development;

Frontline employee empowerment: employment security through redeployment, use of teams, and decentralized decision-making; and

Leadership alignment and development: leadership training, succession planning, and performance-contingent rewards.

Similar to this research, Griffith (2015) and Griffith and White (2005) have examined characteristics associated with high-performing organizations that have met the Baldrige criteria for health care quality excellence. Griffith and White (2005) found human resources practices such as recognition of employee contributions, strategies to promote retention of employees, and continuous training of staff are emphasized in these high-performing organizations. Griffith (2015) found Baldrige winners as high-reliability organizations with a workforce that is more effective than the norm, and that training of staff in quality performance improvement and offering of rewards in conjunction with accomplishment of quality goals is critical to high performance.

The second line of research has examined the role of strategic human resources management in organizational strategic planning and its role in ensuring organizational success. This area of research ties closely to the view of human resources management as a strategic initiative that seeks to enhance organizational performance. Recent research examined the extent to which human resources management strategies were included in organizational strategic planning, the association between the involvement of senior human resources professionals in strategic planning, and the use of innovative human resources practices in hospitals (Platonova and Hernandez, 2013). They found significant associations between human resources management strategy inclusion in the strategic planning process and senior human resources professionals’ involvement in organizational strategic planning as reflected in three innovative human resources activities: finding talent in advance for key job openings, stressing organizational culture and values in the selection process, and basing individual or team compensation on goal-oriented results (Platonova & Hernandez, 2013). In addition, the researchers found innovative human resources practices were underused in some hospitals, but those hospitals that emphasized effective

human resources management were more likely to use some of the innovative human resources approaches.

A third area of emerging human resources management research is the area of predictive analytics or human resources analytics. Using large internal datasets that include information on employee skills, capabilities, and business performance, firms can identify needs and better manage their human resources. Davenport, Harris, and Shapiro (2010) state that human resources analytics can help the organization in various ways, including predicting performance based on employee engagement, understanding why employees choose to stay or leave, and developing models based on key statistics to boost retention rates. The analysis of employee data can also aid in planning for staff vacancies and succession planning, developing effective staffing models based on anticipated business volume, and assessing current employees and identifying issues that may impact turnover and promotion. In addition, the field of human resources analytics can provide meaningful information on measures of actual employee engagement, such as the amount of work occurring outside of normal working hours, the percentage of time participating in ad hoc meetings and initiatives, and the percent of a manager’s time spent with work teams (Fuller, 2014). This allows HSOs to measure actual engagement rather than employee perceptions of engagement, and can be used to modify manager practices to increase employee engagement. However, human resource analytics must be based on quality data and must be actionable for effective use by managers and leaders (Collins, 2013). Also, large HSOs can use third-party databases, typically made available by consultants, and compare employment patterns and organizational characteristics to regional or national benchmarks. They can also use this information to help in recruitment of staff that have greater opportunity to “fit” and remain with the organization.

Finally, given the importance of value-based purchasing programs being implemented by government and insurers that pay hospitals and physicians on the basis of quality and patient satisfaction, it is critical for additional research to be conducted on employee engagement and how employee satisfaction and engagement are related to patient satisfaction. Prior research has found that satisfied employees are associated with higher levels of patient satisfaction, but specific understanding of the actions that organizations are taking to increase employee satisfaction and engagement is needed. See Chapter 11 for specific organizations that conduct research on health care

professionals and their human resource issues.

CONCLUSION The management of human resources is an important function within HSOs because the performance of HSOs is tied directly to the motivation, commitment, knowledge, and skills of clinical, administrative, and support staff. Human resources actions of HSOs are undertaken for both strategic and administrative purposes. A variety of activities are included within the human resources area, and these activities typically fall within the domains of workforce planning/recruitment and employee retention. While human resources serves as a support function for line managers within HSOs, line managers and staff managers carry out human resources management roles as well, because they are involved in hiring, supervising, evaluating, promoting, and terminating staff. Therefore, human resources staff and other managers work closely to ensure that HSOs perform well. The contribution of the human resources management function is increasingly being evaluated by senior management, similar to other organizational functions, to determine the net contribution of human resources staff to organizational success. It is likely that management of human resources will increase in importance in the future, as HSOs face heightened external and internal pressures to recruit and retain committed and high-performing staff.


1. Contrast strategic and administrative actions within human resources management.

2. For each human resources scenario described in the introduction to the chapter, identify the steps you would take to address the specific human resources issue being faced. From your perspective, which is the most challenging issue, and why?

3. Two key domains of human resources management are workforce planning/recruitment and employee retention. Describe several human

resources functions that fall under each and describe their importance to human resources management.

4. Identify and describe some environmental forces that affect human resources functions in health services organizations.

5. Contrast “employee assistance programs” and “employee suggestion programs.”

6. Why do HSOs offer incentive compensation programs? How do these programs differ from base compensation programs?

7. Describe the importance of employee relations and engagement efforts by HSOs, and give some examples of these activities.

Cases in Chapter 18 that are related to this chapter include:

Metro Renal The Condescending Dental Hygienist The Brawler I Love You…Forever Such a Nice Young Man The Magic Is Gone Sustaining an Academic Food Science and Nutrition Center Through Management Improvement

Emotional Intelligence in Labor and Delivery Communication of Patient Information During Transitions in Care Multidrug-Resistant Organism (MDRO) in a Transitional Care Unit Recruitment Challenge for the Middle Manager

Case study guides are available in the online Instructor’s Materials.


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Teamwork Sharon B. Buchbinder

Jon M. Thompson

LEARNING OBJECTIVES By the end of this chapter, the student will be able to:

Distinguish between a face to face team, a virtual team, a task force, and a committee;

Compare and contrast disciplinary, interdisciplinary, and cross- functional teams;

Discuss the challenges associated with teamwork in health care organizations;

Compare and contrast the benefits and costs of face to face and virtual teamwork;

Summarize research findings on the importance of effective teamwork in health care;

Analyze differences between tame and wicked problems; Assess ways to fit into a team and to select team members; Apply current thinking on emotions to teamwork scenarios; Critique strategies for managing communication and conflict on a team; Create a personal development plan for becoming an effective team member; and

Investigate sources of research on teamwork.

INTRODUCTION Unless you’ve lived alone your entire life, by the time you obtain your first job in the health care arena, you will have been on a team. Family teams organize chores, vacations, and household projects. In school, students are assigned tasks—almost from the sandbox—that require small group work and cooperation. Extra-curricular activities—Girl Scouts, Boy Scouts, Junior Achievement, Habitat for Humanity—all require young people to work in cooperative groups. And let us not forget the soccer moms and dads, who chauffeur their offspring from preschool through high school to participate in sports teams. So why does the thought of teamwork assignments make entire classes of health care management students cringe? Despite years of teamwork experiences, few students in any discipline are actually educated and trained in the “how-to” of working in teams. Yet in health care management, from the day you enter the door of your first job, your role will include being part of a team. Teamwork requires leadership, strategic thinking, diverse groups of people with different perspectives and disciplines, excellent organizational and interpersonal skills, and a good sense of humor. The purpose of this chapter is to help you understand the formation and operation of teams, the benefits and costs of teams, and tools to navigate the sometimes tricky waters of teamwork.

WHAT IS A TEAM? Most simply, a team is a group of people working together to achieve a common goal (Grumbach & Bodenheimer, 2004). Teams typically include individuals with complementary skills who are committed to a common approach for which they hold themselves mutually accountable (Katzenbach & Smith, 2005). The formation and operation of teams are central to the effective functioning of health care organizations. In health care organizations, teams can be composed of one or more disciplines, for example, the nursing team, the physician leader team, the management team, or the quality improvement team. In Chapter 1, you learned about the internal structure of health care organizations. For example, a senior Vice President has several directors who report to him, which constitutes a

management team. Likewise, the administrator or CEO and all Vice Presidents that report to her comprise an executive team.

One of the distinguishing characteristics of health care organizations is that the professional staff needs to work closely and collaboratively to meet patient needs. In other words, the tasks of individual employees affect, and are dependent upon, the work of others. This is known as task interdependency. Because the health care needs of patients cut across an organization’s different disciplines or functions, it is important that interdisciplinary clinical teams be set up to ensure the delivery of safe, effective, and timely care. Clinical teams can be classified according to a number of factors, including client or patient population, disease type, or care delivery setting (e.g., inpatient or outpatient) (Blackmore & Persaud, 2012). In addition, teams can be organized to address a short-term, quality assurance problem, such as “Why did Mrs. Jones fall out of bed?” or long- term problems, such as preventing harm to all patients in all aspects of care (Ball, 2005) (see Textbox 13-1). Moreover, cross-functional teams (CFTs) are common in health care organizations to address specific organizational needs, such as service excellence, environmental sustainability and green initiatives, and clinical services marketing (Thompson, 2010). Cross- functional teams also help health care organizations carry out performance improvement activities and focus the organization on service enhancements (Studer, 2003). These CFTs include representatives from clinical and nonclinical areas of the organization. Health care organizations are considered high-reliability organizations, with hazardous environments where the consequences of errors are high (Baker, Day, & Salas, 2012). It is widely believed that the use of clinical and cross-functional teams will become more critical in the future as health care organizations become more complex and the demands for effective patient management increase (Jain, Thompson, Chaudry, McKenzie, & Schwartz, 2008) (see Textbox 13-2).


Pierce County, Washington, located just south of Seattle, is the second

most populous county in Washington State. The county is made up of urban areas in and around the city of Tacoma as well as less-populated towns. Pierce County also has the highest county-wide readmission rate within the state for hospital patients discharged to skilled nursing facilities (SNFs). In 2011, the average Washington State readmission rate for Medicare fee-for-service patients discharged to SNFs was 19.0 percent. In Pierce County, this rate was 20.6 percent.

In early 2011, MultiCare Health System created an interdisciplinary team focused on improving care transitions and reducing readmissions from SNFs. The team, originally involving three area SNFs, evolved to over ten participating SNFs by the end of the year. Health care systems in Pierce County have a long history of working together to improve the health of county residents. As such, in January 2012, MultiCare Health System, one of the four hospital systems in the county, invited key stakeholders from Pierce County and several neighboring counties to propose a partnership for improving care transitions and reducing readmissions for their shared patients. What developed out of these early discussions was a series of active work teams focusing on populations at risk for readmissions.

The Pierce County STAAR & Beyond Team quickly gained traction with its efforts focused on SNF patients. The team comprises two groups—a Case Management/SNF Working Group and a Provider Working Group. The Case Management/SNF Working Group includes administrators and directors of nursing from SNFs across the county (12 organizations and 32 individual facilities), as well as care managers from the four area health systems. This group is convened monthly and facilitated by the Medical Director of Care Management at MultiCare Health System. The Provider Working Group, also facilitated by the Medical Director of Care Management, includes physicians from the four health systems, primary care physicians, area SNFs, and hospital emergency departments.

During the STAAR & Beyond Team meetings, participants share data, identify opportunities for improvement, identify and agree upon best practice standards, and report out on PDSA cycles (tests of change) underway. These meetings serve as a forum for collaboration and shared learning focused on accelerating the progress of all. Operational practice changes made included:

1. Ensure SNF Staff Are Ready and Capable to Care for the Resident 2. Reconcile the Treatment Plan and Proactively Plan for Condition

Changes 3. Engage the Resident and Their Family Caregivers in a Partnership

to Create an Overall Plan of Care

The results were significant. Pierce County’s STAAR and Beyond Team decreased their aggregate 30-day readmission rate for Medicare patients discharged to SNFs by about 13 percent—from a baseline of 21.1 (Q4 2009 to Q3 2012) to a median rate of 18.3 in the most recent four quarters (Q4 2009 to Q3 2012).

Pierce County SNFs are also working to improve the care conferences that occur with residents and their family caregivers upon admission to the facility. SNFs are conducting tests to improve the timing and reliability of care conferences and ensure important topics, such as advance care directives and palliative care needs, are discussed and implemented.

Herndon L, Bones C, Bradke P, Rutherford P. How-to Guide: Improving Transitions from the Hospital to Skilled Nursing Facilities to Reduce Avoidable Rehospitalizations. Cambridge, MA: Institute for Healthcare Improvement; June 2013. Available at

Task forces require teamwork, but don’t have the life of a committee. A blue-ribbon task force may be commissioned for several years by a professional association or institute to examine issues in health care services delivery, such as medical errors and patient safety (Institute of Medicine [IOM], 2001). These groups focus on a specific agenda, have a limited term of tenure, and disband when a report or book is issued. At the intra- organizational level, a quality assurance committee comprised of individuals from many departments may have people appointed to three-year terms. At the end of that time, a person whose term has expired steps down, but the committee and the work of the committee lives on. Committees such as these usually have a person for whom this area is their full-time job, but representatives of multiple disciplines and areas of the organization are required to examine problems and to implement organizational policy decisions.

It is known that critically ill patients are medically complex and may benefit from a multidisciplinary approach to care. More than 4 million intensive care unit (ICU) admissions occur annually in the U.S. These patients are often at high risk of death: mortality for critical illness syndromes such as acute lung injury and sepsis ranges from 25% to 50%, and 20% of Americans die while receiving intensive care services. One approach to lowering ICU mortality is to optimize the organization of ICU services. For example, a large body of literature indicates that the presence of trained intensivist physicians is associated with improved survival, leading many policy makers to call for expansion of the intensivist-led model of critical care. A potential complement to intensivist staffing is a multidisciplinary care model in which physicians, nurses, respiratory therapists, clinical pharmacists, and other staff members provide critical care as a team. A multidisciplinary approach acknowledges the complexities of modern critical care and the important role of communication between health care providers in delivering comprehensive care.

Researchers conducted a study to determine the effect of multidisciplinary care teams completing daily rounds and 30-day mortality. The researchers conducted a population-based retrospective cohort study of medical patients admitted to Pennsylvania acute care hospitals (N = 169) from July 1, 2004, to June 30, 2006, linking a statewide hospital organizational survey to hospital discharge data. Multivariate logistic regression was used to determine the independent relationship between daily multidisciplinary rounds and 30-day mortality.

A total of 112 hospitals and 107,324 patients were included in the final analysis. Results indicate that overall 30-day mortality was 18.3%. After adjusting for patient and hospital characteristics, multidisciplinary care was associated with significant reductions in the odds of death (odds ratio [OR], 0.84; 95% confidence interval [CI], 0.76–0.93 [P = .001]). When stratifying by intensivist physician staffing, the lowest odds of death were in intensive care units (ICUs) with high-intensity physician

staffing and multidisciplinary care teams (OR, 0.78; 95% CI, 0.68–0.89 [P 100,000 E. coli. Orders for antibiotic therapy were obtained and the medication was initiated. The culture report also indicated in the comment section that the specimen was positive for extended spectrum beta-lactamase (ESBL), a multidrug resistant organism. The nurse failed to note the comment and no contact or isolation precautions were implemented.

The physician assistant (PA-C) reviewed and signed off on the report on Saturday morning and also overlooked the comment. Roger, with his fresh surgical incision, remained in the room coming into close contact with Joe, his bedding, and his personal items, all contaminated with ESBL. Staff continued to care for Joe utilizing standard precautions, but no additional

personal protective equipment (PPE) beyond gloves. On Monday morning, the Infection Preventionist noted the results during routine surveillance. Contact precautions were implemented and Joe was moved to a private room.

Roger’s day of discharge finally arrived. Roger’s girlfriend, Donna, came to take him home. Donna was a frequent visitor during Roger’s hospitalization, and was extremely supportive. She has even applied for Family Medical Leave (FMLA) in order to function as his primary caregiver during his convalescence. Unbeknownst to the staff, Donna and Roger have also been taking advantage of the privacy and alone time since Joe was moved into isolation, and they have resumed intimate behaviors.

While they wait for the nurse to come in and review Roger’s discharge instructions, Donna excuses herself to use the bathroom three times. Upon their return home, the frequency continues, along with occasional bladder spasms and burning with urination. Roger encourages Donna to see her primary care physician, where she is diagnosed with a urinary tract infection and started on antibiotics. Three days later, Donna receives a call from her physician informing her that her urine culture has come back positive for ESBL.


1. What are the facts of this case?

2. Review the quality improvement tools and select the appropriate one to analyze this problem.

3. What are the top three management issues in this case?

4. What are the legal and ethical obligations a health care organization has to its patients and families and how do they apply to this case?

5. Who should be held responsible for addressing these problems?

6. Is the health care facility responsible for Roger’s infection? If no, why not? If yes, what obligations does the facility have to Roger?

7. Is the health care facility responsible for Donna’s infection? If no, why not? If yes, what obligations does the facility have to Donna?

Are We Culturally Aware or Not?—Case for Chapters 14 and 5

Nancy K. Sayre

A growing, profitable internal medicine practice of 10 physicians, 2 physician assistants, a physical therapist, and a massage therapist is located in a city of 150,000 people. The clinical personnel are mostly from the majority group in the area and consider themselves open-minded, altruistic, and culturally aware. The administrative support staff is representative of the makeup of the patient population—mostly minority groups in the local community. The patient population is growing and becoming more diverse from those newly arrived in the city. The practice is currently facing several challenges.


1. The practice manager wants to have the local hospital expert on cultural competency come talk to the staff. The administrative support staff does not feel that they need training. How should the practice manager proceed?

2. The practice needs to hire a new administrative assistant to work with the front desk staff. The practice wishes to hire someone from the local minority community rather than an equally qualified individual from another state. How should the practice manager proceed? Justify the rationale for this recommendation.

3. With the recent growth, the practice is considering relocating its office

to another, larger office facility. Several options are being discussed. Should they relocate to a more affluent area of the city that is less diverse? Or should they stay in the same neighborhood, even if it is less profitable? What are the pros and cons of staying in this neighborhood versus moving to another area? If the rent is higher in the more diverse area, is that enough to justify not moving there? Or is diversity responsiveness a “cost of doing business?” How should the practice manager proceed?

4. The practice wants to maintain its good standing in the community. What initiatives could it undertake to remain connected to its local patient population?

5. The practice manager wants to complete a strategic plan as a guiding framework for the organization for the next five years. From whom should she get input to help shape this plan? Should cultural competency initiatives be included in this plan?

Patients “Like” Social Media—Case for Chapters 6 and 5

Nancy K. Sayre

A long-term care facility (50 beds) in the Midwestern U.S. has just been acquired by a larger acute care hospital/health care system in the nearby city because they want to offer services across the continuum of care. Last year, they also acquired a provider of hospice services (25 beds). The hospital has relied mainly on television advertising and a strong web presence (landing pages, banner ads), whereas the two smaller organizations used word-of- mouth, physician referrals, networking, and print materials to recruit new patients. Marketers know that social media is changing the way consumers and health organizations interact. The strategic plan indicates that priorities for the new combined health system include enhancing patient safety and

the patient experience, expanding into the growing senior market, competing on outcomes, minimizing the total cost of care, expanding geographic reach, extending partnerships with employers, and maintaining or improving the margin of 5.28%. As the newly appointed director of marketing for this combined new health system, you believe there are multiple points of discussion for your team regarding a marketing strategy using social media.


1. What information is needed to create a marketing strategy?