Each reply must be at least 450 words. Each reply must
include a biblical integration and at least 2 peer-reviewed
source citations, in addition to the course textbook, in
current APA format.
Please reply to classmate #1The role of a pharmacy
Before one can dive into the role that a pharmacy plays in operations management, first
one must understand what the role of the pharmacy is and what it does. The pharmacy is a
“facility that exists to fill and dispense drugs and medications that are prescribed by physicians
or other caregivers” (Langabeer & Helton, 2016, p. 375), which is why the pharmacy is one of
the largest departments in a hospital (Langabeer & Helton, 2016). With this, it is important to
acknowledge the fact that the hospital’s pharmacy plays an active role in the management of
patient healthcare delivery (Langabeer & Helton, 2016). Additionally, the pharmacy helps to aid
in a “partnership role with physicians and other providers in evaluating the overall efficacy,
safety, and quality of medications on patient outcomes” (Langabeer & Helton, 2016, p.
376). Furthermore, hospital pharmacies are used to help focus on the practices and technologies
that are involved in managing and improving medication usage throughout the hospital
(Pederson, Schneider, & Scheckelhoff, 2012). Helping to show how pharmacies are essential to
the hospital and physicians by aiding in the health care outcomes of the patients and operational
strategies used by the health care providers (Langabeer & Helton, 2016).
The role that a pharmacy plays in operations management
The role that a pharmacy plays in operations management is that of selling goods
(Langabeer & Helton, 2016). Meaning that a pharmacy is an operational structure “whose costs
can represent 50% to 90% of the total expanses of the department” (Langabeer & Helton, 2016,
p. 376), because the pharmacy works by the labor and the costs of their products. The
pharmacy’s labor includes “filling, dispensing, and compounding orders and drugs” (Langabeer
& Helton, 2016, p. 376), while accounting for the costs of the products, or
medications. Additionally, pharmacies also provide services that include “ordering,
replenishing, storing, and providing controls over drugs” (Langabeer & Helton, 2016, p. 376),
which helps to aid in the services that are delivered to patients and customers. Furthermore, the
role of pharmacies in modern hospital pharmacy settings “play a key role in providing clinical
care as well as improving operational efficiencies” (Langabeer & Helton, 2016, 388), this can be
seen through the fact that hospital pharmacies are becoming more involved with identifying and
resolving problems that are related to medications and the effects that are caused by the
medications (Pedersen, Schneider, & Scheckelhoff, 2014). Through this, we must always
remember, “Truly He is my rock and my salvation; He is my fortress, I will not be shaken”
(Psalm 62:6, New International Version).
How modern day systems and technologies are streamlining pharmacy operations
Modern day systems and technologies that are streamlining pharmacy operations are
“robots, carousels, and other animations” (Lanagebeer & Helton, 2016, p. 388), which helps to
make pharmacies to be more efficient than any other department in the hospital. It is important
to note that modern day systems and technologies are aimed at bettering patient care (AlTabakha, Obaid, Fahelelbom, & Sadek, 2016). When it comes to understanding the modern day
systems and technologies, it is important to acknowledge the fact that doctors’ prescriptions are
not, necessarily, hand written anymore. Nowadays, prescriptions are entered directly into “a
computerized physician order entry (COPE) system” (Langabeer & Helton, 2016, p. 381). This
in turn allows for the physician to not only input prescriptions but also patient health information
(Langabeer & Helton, 2016). Once this information is entered, the system then sends out the
information to the appropriate care team member which allows them to “further promote patient
safety, and ensures that the right patient received the right medication” (Langabeer & Helton,
2016, p. 382), thus showing how modern day systems streamlining pharmacy operations
especially in the hospital setting. For modern day technologies, there are robots and carousels
that pick the medication off the shelves for the pharmacists (Langabeer & Helton, 2016). This
helps to reduce the risk of pharmacists picking the wrong medication or dosage (Langabeer &
Helton, 2016). Thus, showing how modern day technologies are streamlining pharmacy
Al-Tabakha, M. M., Obaid, D. E. E., Fahelelbom, K. M. S., & Sadek, B. (2016). The impact of
modern pharmacy curriculum on the student attitude towards weight loss product
advertisements: A case study. Journal of Young Pharmacists, 8(4), 456-462.
Pedersen, C. A., Schneider, P. J., & Scheckelhoff, D. J. (2012). ASHP national survey of
pharmacy practice in hospital settings: Dispensing and administration—2011. American
Journal of Health-System Pharmacy, 69(9), 768-785. doi:10.2146/ajhp110735
Pederson, C. A., Schneider, P. J., & Scheckelhoff, D. J. (2014). ASHP national survey of
pharmacy practice in hospital settings: Prescribing and transcribing—2013. American
Journal of Health-System Pharmacy, 71(11), 924-942. doi:10.2146/ajhp140032
Reply to classmate #2In healthcare, a pharmacy is often one of the largest and most profitable
departments in a hospital, which helps to evaluate the overall efficacy, safety, and
quality of medications in patient outcomes. It is a facility where the primary purpose of
the pharmacist is to fill and dispense drugs and medicine that are prescribed by
physicians or other caregivers (Langabeer & Helton, 2016, pp. 375-376). Therefore,
“pharmacies are “physical” supply chains, managing the physical flow of goods both
inbound and outbound.” Managing drug supplies requires pharmacists to have careful
control over stock-keeping units and item categories in the same way as materials
management departments manage general-purpose medical supplies (Langabeer &
Helton, 2016, p. 380).
Pharmaceutical companies are some of the leading players in supply chain
management. Their performance has a significant impact on healthcare supply chain
management efficiency. The top priority in all health systems is delivering medication as
a strategic product. Pharmaceutical supply chains have become more complicated
because it involves the life-saving interest of people and requires the participation of
different stakeholders such as pharmaceutical manufacturers, wholesalers, distributors,
customers, information service providers, and regulatory agencies. It is critical that
pharmacists are able to identify medication risks that can lead to sentinel events so that
they can be prevented. Every step in the pharmaceutical process is vital and needs to
be followed precisely (Kapoor, D., 2018). “Injuries due to medical care referred to as adverse
events (AEs) are important medical issues because they place an additional burden on the health care system
and are associated with symptoms ranging from slight illness to death” (Ohta, Y. et al., 2019). Studies have
shown that AEs happen at the rate of 11% in hospitalized patients and are either
preventable or
unpreventable. Many preventable AEs are associated with medical errors (MEs). “In
2000, the Institute of Medicine (IOM) estimated that MEs killed between 44,000 and
98,000 people every year in U.S. hospitals” (Ohta, Y. et al., 2019, pp. 251–256). There
has been considerable debate about the accuracy of the IOM’s report estimates. One
evidence-based study estimated 400,000 deaths per year. Regardless, any estimate
demands assertive actions on the part of legislators and all healthcare providers
(James, J. (2013).
Pharmacists currently use health information technology (HIT) in various
settings. For example, some pharmacists can document clinical information in
pharmacy management systems, while others have access to EHRs. There are many
programs and software that enhance workflow efficiency and healthcare services. “One
example is the development of clinical task queues within pharmacy management
systems. Pharmacists validating prescriptions can document drug therapy problems
identified during the normal workflow of the pharmacy and add these tasks to the clinical
queue. Most drug therapy problems are identified at this point in the process. The
queue can then be addressed by another pharmacist to minimize interruption in
Deuteronomy 25:15 says, “You must have accurate and honest weights and
measures, so that you may live long in the land the LORD your God is giving you”
(Biblehub.com, n.d.). I believe that this bible verse applies to the need to have accuracy
in pharmaceutical measurements so that people do not suffer from unexpected events
that result in death or serious physical or psychological injury.
Deuteronomy 25:15. (n.d.). Retrieved from https://biblehub.com/deuteronomy/25-15.htm
Galt, Kimberly, et al. (2019). “Health Information Technology Use and Patient Safety:
Study of Pharmacists in Nebraska.” Pharmacy, vol. 7, no. 1, 2019, p. 7.,
James, J. (2013). “A New, Evidence-Based Estimate of Patient Harms Associated with
Care.” Journal of Patient Safety, vol. 9, no. 3, pp. 122–128.,
Kapoor, D. (2018). “An Overview on Pharmaceutical Supply Chain: A Next Step towards
Good Manufacturing Practice.” Drug Designing & Intellectual Properties
International Journal, vol. 1, no. 2, 2018, doi:10.32474/ddipij.2018.01.000107.
Langabeer, J. R., & Helton, J. (2016). Health care operations management: A systems
perspective (2nd ed.). Burlington, MA: Jones & Bartlett Learning.
Ohta, Yoshinori, et al. (2019). “Epidemiology of Adverse Events and Medical Errors in
the Care of Cardiology Patients.” Journal of Patient Safety, vol. 15, no. 3, pp. 251–
256., doi:10.1097/pts.0000000000000291.
A Systems Perspective
James R. Langabeer II, MBA, PhD
Professor, Health Informatics, Management, and Emergency Medicine
The University of Texas Health Science Center
Houston, TX
Jeffrey Helton, PhD, CMA, CFE, FHFMA
Assistant Professor, Health Care Management
College of Professional Studies
Metropolitan State University of Denver
Denver, CO
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Library of Congress Cataloging-in-Publication Data
Langabeer, James R., 1969- , author.
Health care operations management : a systems perspective / James R. Langabeer, Jeffrey Helton.—
Second edition.
p. ; cm.
Includes bibliographical references and index.
ISBN 978-1-284-05006-6
I. Helton, Jeffrey, 1961-, author. II. Title.
[DNLM: 1. Hospital Administration—methods. 2. Efficiency, Organizational. WX 157.1]
Printed in the United States of America
19 18 17 16 15
10 9 8 7 6 5 4 3 2 1
About the Authors
Courtesy of James Langabeer II, PhD, MBA
James R. Langabeer II, PhD, MBA
Dr. James Langabeer is a professor of informatics, health care management,
and emergency medicine at the University of Texas School of Public Health
at Houston. He has spent most of his career focused on quality improvement
and information technology in hospitals and health care. His career has
involved hospital executive administration, information technology startups,
management consulting, and health care research and teaching. Dr.
Langabeer was the founding chief executive officer of Greater Houston
Healthconnect (the regional health information network serving Southeast
Texas) and helped move the organization from concept to reality. He was the
executive vice president of a technology and consulting firm based in Boston
that was widely touted as “best of class” in thought leadership on predictive
modeling and business intelligence. He has lived and/or worked extensively
in Boston, London, Paris, Rotterdam, and Tel Aviv, as well as Houston. He
has served on the faculties of the University of Texas, Boston University, and
Baylor College of Medicine.
Dr. Langabeer has served as principal investigator on many national
research projects. He has been funded by the American Heart Association,
the U.S. Centers for Disease Control, Health and Human Services, and many
other agencies and foundations. He has more than 85 publications that can be
found in some of the highest-rated management and clinical journals such as
the Journal of Emergency Medicine, American Heart Journal, Pediatrics,
Health Care Management Review, Quality Management in Health Care, and
Health Care Management Science.
Dr. Langabeer earned his PhD from the University of Lancaster in
England in management science, an EdD in leadership from the University of
Houston, and an MBA from Baylor University. He is also an Emergency
Medical Technician with Advanced Cardiac Life Support certifications, a
Certified Management Accountant, and a Fellow in the Healthcare
Information and Management Systems Society.
Courtesy of Jeffrey Helton
Jeffrey Helton, PhD, CMA, CFE, FHFMA
Dr. Jeffrey Helton is an assistant professor of health care management at
Metropolitan State University of Denver. He also holds an adjunct faculty
appointment in health care management at The George Washington
University and in health informatics at the University of Denver and health
informatics at the University of Texas School of Biomedical Informatics. The
majority of his career has been spent as chief financial officer for several
health care systems across the United States, where he led several
turnarounds of organizations previously in bankruptcy or receivership.
During his career as a financial executive, he identified several operational
challenges in hospitals and health plans that required development of staffing
standards, labor management processes, and internal financial controls to
restore financial stability to organizations. He has since supported other
health care organization turnarounds as a consultant, assisting in the analysis
of labor costs and development of labor control programs.
As a part of his consulting work, Dr. Helton has also served as chief
financial officer of the Disaster Housing Assistance Program on behalf of
families displaced from their homes as a result of Hurricanes Katrina and Ike.
As custodian for more than a quarter billion dollars in federal funds, he
became a Certified Fraud Examiner and provided fraud prevention assistance
to the agencies assisting victims of these natural disasters. He has also used
his background in fraud detection to assist several health care organizations
in developing fraud prevention and detection programs and has provided
material support to many health care fraud prosecutions, resulting in multiple
millions of dollars in recovered fraud losses.
Dr. Helton is a Fellow of the Healthcare Financial Management
Association, where he serves on its board of examiners. He also volunteers
his financial management expertise to the Association of University
Programs in Health Administration, where he serves on its finance committee
and as treasurer of the Health Care Management Division of the Academy of
Management and a member of the finance committee of the Colorado
Association of USA Track and Field. He is a Certified Fraud Examiner and a
member of the board of advisors for the Association of Certified Fraud
Examiners. Dr. Helton is also a Certified Management Accountant.
Dr. Helton earned his PhD in public health management from the
University of Texas School of Public Health, an MS in hospital and health
administration from the University of Alabama at Birmingham, and a BS in
business administration from Eastern Kentucky University. He is a journal
article reviewer for Healthcare Financial Management, Journal of
Healthcare Management, Social Science and Medicine, and Journal of Public
Health Management and Practice.
Table of Contents
List of Figures and Tables
New to the Second Edition
Chapter 1
Operations, Systems, and Financial Management
Health Care Operations and Systems
The Role of Health Care Operations Management
Key Functions of Health Care Operations
The Need for Operations Management
Goals of the Operations Manager
Competitive Advantage of Operations
Factors Driving Increased Health Care Costs
Learning from Other Industries
Principles of Management
The Scientific and Mathematical Schools of
Management Decision Making
Power and Decision Making in Health Care
The Role of Technology
Trends in Operations Management
Chapter Summary
Key Terms
Discussion Questions
Exercise Problems
Chapter 2
Health Care Marketplace
Hospitals Are Big Business
What Is a Hospital?
Teaching Hospitals
Hospital Business Operations
Hospital Policies and Regulations
Chapter Summary
Key Terms
Discussion Questions
Chapter 3
Health Care Finance for the Operations
How Hospitals Are Paid
From Retrospective to Prospective
Profit Margins
Income Statements
Income Statement Ratio Analysis
Balance Sheet
Working Capital
Other Financial Ratios
Cash Flow Statement
Audited Financial Statements
Debt in Health Care
Implications for Operations and Logistics
Chapter Summary
Key Terms
Discussion Questions
Exercise Problems
Quality and Productivity Management
Chapter 4
Quality Management
Choices for Operations Management: Tools and
Process Maps
Process Improvement Methodology
Improving Service Quality
Quality and Lean Processes
Six Sigma Versus Lean Comparison
Key Questions to Promote Dramatic Changes
Chapter Summary
Key Terms
Discussion Questions
Chapter 5
Operations Research Methods
Operations Research
Management Decision Making
A Brief History of Operations Research
Operations Research Applied to Health Care
Operations Research Applications
Forecasting Patient Demand and Volumes
Basic Principles of Forecasting
Capacity Analysis
Capacity Planning: Aligning Capacity with Demand
Minimizing Wait Times
Time and Motion Studies
Improving Flows with Tracking Systems
Bar Codes
Radio Frequency Identification
Chapter Summary
Key Terms
Discussion Questions
Exercise Problems
Chapter 6
Productivity and Performance Management
The Quest for Productivity
Measurement Issues
Single Versus Multiple Factors
Common Hospital-Wide Productivity Metrics
Improving Productivity
Principles of Productivity Management
Return on Investment: Capital Versus Labor
Staffing and Labor Scheduling Models
Basics of Labor Hour Management
Productivity and Performance Scorecard
Chapter Summary
Key Terms
Discussion Questions
Exercise Problems
Chapter 7
Operational Metrics in Health Care
Input Measures for Operating Metrics
Sources of Data for Operational Metrics
Output Measures
Common Operating Metrics
Other Operational Metrics
Using Operational Metrics
Chapter Summary
Key Terms
Discussion Questions
Chapter 8
Basics of Project Management
Defining Projects
Power, Influence, and Project Management
Project Success
Key Phases of Project Management
Change Management
Rapid Prototyping
Risks Involved in Project Management
Departments of Performance Improvement
Chapter Summary
Key Terms
Discussion Questions
Exercise Problems
Chapter 9
Operational Planning
Why Plan?
The Planning Process
Analyze Operations and Environment
Generate Strategic Alternatives
Breakeven Analysis
Implement, Measure, and Revise
Chapter Summary
Key Terms
Discussion Questions
Exercise Problems
Chapter 10
Return on Investment Analysis
Lack of Capital Investment Models in Health Care
The Politics of Capital Investment
Recommendations for Implementing a Capital
Investment Approach
Validating Return on Investment at Multiple Stages
Calculating Return on Investment
Time Value of Money
Calculating Multiple Cash Flows
Other Return on Investment Techniques
Chapter Summary
Key Terms
Discussion Questions
Exercise Problems
Chapter 11
Supply Chain Management
Supply Chain Management
Defining Supply Chains
Process Flows in Supply Chain
Components in the Chain
Business Processes in the Supply Chain
Supply Chain Strategy for Hospitals and Health Care
Patient (Customer) Demand Drives Supply Chains
Demand Chains
Principles of Supply Chain Management
Strategy and Logistics Capabilities
Efficient Versus Responsive Supply Chain
Management Strategy
Reverse Logistics
Supply Chain Information Systems
Evolution of Supply Chain Technology
Recommendations for Supply Chain Management
Supply Chain Collaboration
Sales and Operations Planning
Objectives of Sales and Operations Planning
The Basic Sales and Operations Planning Process
Collaborative Planning, Forecasting, and
Objectives of Collaborative Planning, Forecasting,
and Replenishment
Collaborative Planning, Forecasting, and
Replenishment Guidelines
Collaboration Performance Metrics
Chapter Summary
Key Terms
Discussion Questions
Chapter 12
Purchasing and Materials Management
Materials Management Organization
Culture of Materials Management
Revenue Generation in Materials Management
Optimizing Facility Layout and Design
Cost Minimization Models
Purchasing Internal Controls
Spend or Value Analysis
Group Purchasing Organizations
Trends in Hospital Purchasing
Resources for Materials Professionals
Customer Service in Materials Management
Laundry and Linen
Chapter Summary
Key Terms
Discussion Questions
Chapter 13
Inventory Management and Accounting
Inventory and Its Role in Health Care
The Costs of Supplies and Inventory
Differences Between Supply Expense and Inventory
Effect of Timing on Expenses
Important Facts About Inventory
Criteria for Inventory
Valuation Methods
Lower of Cost or Market
Periodic Versus Perpetual Systems
Accounting Entries for Supply and Inventory
Inventory Errors
Inventory Ratios
Other Inventory Calculations
Limitations of Inventory Ratios
Inventory Policies and Procedures
Inventory Planning
Inventory Audit
Inventory Management Expectations
Chapter Summary
Key Terms
Discussion Questions
Exercise Problems
Chapter 14

Forecasting and Supply Chain Management
Items and Attributes
Data Hierarchies
The Need for Standards
United Nations Standard Products and Services Code
Item Masters in the Enterprise Resource Planning
Enterprise Resource Planning Systems
The Item Life Cycle
Product Usage Patterns
Chapter Summary
Key Terms
Discussion Questions
Exercise Problems
Chapter 15
Operations Management in the Hospital
The Modern Pharmacy
The Pharmaceutical Supply Chain
Managing Items Using the National Drug Code
Process Workflow and Automation in the Pharmacy
Key Operations Management Trends for Pharmacies
Effect on Pharmacy Performance
Chapter Summary
Key Terms
Discussion Questions
Chapter 16
Operations Analysis and Benchmarking
Operations Analysis
Chapter Summary
Key Terms
Discussion Questions
Chapter 17
Best Practices for Health Care Operations
Best Practices for Successful Operations Managers
Achieving Success in Operations Management
Chapter Summary
Key Terms
Discussion Questions
Appendix A
Major Teaching Hospitals
Appendix B
Answers to Selected Chapter Exercise Problems
Glossary of Terms
List of Figures and Tables
P1-1 Operations Management in Health Care
Operations Management Counters the Extrinsic Pressures Deflating Health
Care Margins
1-2 Variability Creates Chaos and Inefficiency
1-3 The Operations Management Process
1-4 Controlling Exponential Price Increases in Health Care
1-5 Traditional Decision-Making Process
2-1 Hospital Breakdown by Ownership Type, 2012
2-2 Funding Sources for U.S. Hospitals, 2012
Hospital Industry Economics: Inpatient Supply Falling and Demand Rising
(Community Hospitals)
3-2 Average Hospital Profit Margins
4-1 Operations Management—Tools and Techniques
4-2 Example Process Maps
4-3 Flowchart Symbols
4-4 Process Improvement Methodology
4-5 Causes of Errors During Patient Check-In
4-6 Statistical Process Control Charts Manage Variability
4-7 Sigma Levels and DPMO
5-1 Time Line of Significant OR Events
5-2 Process De-Bottlenecking
5-3 Forecasting Volumes in Excel
5-4 Wait Time Simulation Models
5-5 Bar Code Symbology
5-6 Radio Frequency ID Tags
6-1 Trends and Benchmarks in Productivity Management
6-2 Operational Productivity and Performance Scorecard
8-1 Defining Project Success
8-2 Phases of Project Management
8-3 Scheduling Projects—Gantt Charts
8-4 Nodes in a Network
9-1 The Process of Crafting Operations Strategy
9-2 Analyzing Internal Operations Using Radar Diagrams
9-3 Breakeven Analysis
10-1 IT Portfolio Management
10-2 Multiple Points for ROI Analysis in Project Life Cycle
10-3 ROI Analysis Tool
11-1 Health Care Supply Chain
11-2 Cost Behaviors in Logistics
11-3 Evolution of SCM Systems
12-1 Materials Management Organizational Structure
12-2 Layout Impact Costs and Throughput
Cost Minimization Layout Model 2: Construct Node Diagrams and Assess
12-4 Cost Minimization Layout Model 3: Apply Minimization Formula and Simulate
12-5 Standard Purchasing Methodology
12-6 Supplier Evaluation Scorecard
12-7 Value/Spend Analysis
14-1 Stock-Keeping Unit Categories
14-2 The Scope of ERP Systems
14-3 Phases in an Item’s Life Cycle
14-4 Common Item Utilization Patterns
15-1 Pharmaceutical Goods Control Hierarchy
15-2 Pharmaceutical Value Chain
15-3 Manufacturers Winning the Value Battle
15-4 Pharmacy National Drug Codes
17-1 The Future of Health Care Operations Management
17-2 Visibility and Tracking in Health Care Control Centers
1-1 Key Functions and Issues in Health Care Operations Management
1-2 Teachings from Other Industries
1-3 Roles and Trends in Health Care Operations Management
3-1 Hospital Income Statement
3-2 Hospital Balance Sheet
3-3 Statement of Cash Flows
4-1 Sample Log for Six Sigma
4-2 Six Sigma Versus Lean
6-1 Single- and Multifactor Productivity Example
6-2 Full-Time Equivalent Employee Definitions by Time Period
6-3 Commonly Used Department Workload Units
7-1 Examples of Sources of Operational Data
7-2 Sample Income Statement and Summary Operating Statistics
8-1 Elements of a Business Case
11-1 The Largest Health Care Distributors
11-2 Health Care Organization SCM Strategy
11-3 JIT versus STS
12-1 Cost Minimization Layout Model 1
13-1 Example Purchase and Inventory Data for Hypothetical Hospital
13-2 Comparison of Expense Recorded and Ending Inventory Values
13-3 Inventory Accounting
13-4 Listing of Items in the Inventory at Hometown Hospital
13-5 Inventory Listing Sorted by Annual Usage
13-6 Assignment of ABC Classifications
14-1 Item Master Attributes
16-1 Example Operational Analysis Report Format
16-2 Example Trended Operational Analysis Format
16-3 Examples of External Benchmark Sources
16-4 Data Envelopment Analysis Benchmarking Example
16-5 Relative Efficiency Comparison from Data Envelopment Analysis
16-6 Input Targets Calculated Using Data Envelopment Analysis
New to the Second Edition
In recent years, there has been a heightened awareness of the effect that
efficient and successful management of the health care organization can
provide. New federal policies and new payer reimbursement models are just
two examples of how the industry is changing. The discipline of health care
operations management is key to the success of these changes and to
organizations in general. Operations management focuses on improving
clinical and administrative processes, streamlining costs, and ensuring highquality outcomes while optimizing available resources—all of these are
critical to organizations that are struggling to compete and survive in an era
of constrained reimbursements. The first edition of this book was widely
adopted by universities throughout the world, and due to demand and our
desire to make operations management current and relevant, it seemed an
appropriate time to introduce the second edition. This revision of the book
offers an expanded coverage of quality, financial, and systems management.
We would like to thank Jones & Bartlett Learning for their leadership in
publishing this second edition. We would also like to thank the thousands of
readers and dozens of professors who read the first edition and offered their
opinions and insights for revisions. We truly appreciate your help with and
continued support of this second edition.
The encouragement of friends and family helped us complete this book,
which was quite an undertaking! We would also like to acknowledge the
wonderful editorial assistance from Elizabeth Vogler, MA from the
University of Texas School of Biomedical Informatics. She was
tremendously helpful in organizing chapters and giving all of the material a
final read.
Many changes, improvements, and additions were made in response to
valuable comments by readers and users. First, there were several errors in
the text and these have all been fixed. Dr. Jeffrey Helton, a significant
researcher in health care finance and operations management, was added as a
coauthor to the text to provide greater coverage on certain topics. All chapters
were made current in terms of statistics and updated references and were
edited for the purpose of clarifying some material, correcting a few minor
errors, improving language and syntax, and generally updating material.
Some chapters were merged and combined, and a few new chapters were
created. In all, the second edition contains 17 chapters, which will allow the
academic reader to complete one chapter per week during the semester. The
more significant changes are encapsulated as follows:

Chapter 1, “Health Care Operations and Systems Management,” was
augmented greatly by the addition of sections on management decision
making. Because the ultimate purpose of operations management tools
and methods is to improve decision outcomes, we felt it was
appropriate to expand the discussion of decision making.
Chapter 2, “Health Care Marketplace,” provides greater detail on
current health policies and their effect on the health care environment.
There is a discussion of the Affordable Care Act and other relevant
federal policies.
Chapter 3, “Health Care Finance for the Operations Manager,” was
expanded and reworked to include new reimbursement models,
information on how payers reimburse provider organizations, and an
examination of how an organization is paid can effect operations
Chapter 4, “Quality Management,” provides significantly more detail
on Six Sigma and Lean methods, which have been continuously
increasing in adoption in recent years.
Chapters 5 and 6 were updated and augmented with additional theory
around operations research and practical examples.
Chapter 7, “Operational Metrics in Health Care Organizations,” is a
new chapter that details the key metrics in operations management.
These metrics include discussion of full-time equivalent, adjusted
patient days, and other productivity metrics. Additional details on
sources of labor data to enhance the accuracy of calculating labor
management metrics are also included.
• Chapters 8 through 10 were updated and information was consolidated.
• Chapters 11 through 15 represent the supply chain management areas.
These chapters were consolidated where needed and also revised and
improved. They include greater coverage of forecasting and supply
chain management systems.
• Chapter 16 blends a new component focused around operational
analysis and benchmarking and provides integrative examples for
operations management. Because analysis and comparison of units to
others has become so widespread, we felt it important to add sections
on how to make proper comparisons.
Although less than 5% of the American population currently works in a
health care system, the overwhelming majority of adults have been a patient
or a guest at a hospital, clinic, or physician’s office. Of those, while most
remember the quality and care given by nurses and physicians, many have
left the facility with an overwhelming feeling of disdain for the inefficient
and time-consuming business processes. Excessive wait times, lack of
coordination among different departments, duplicate entry of personal
information in multiple manual forms, unfriendly facilities, and general lack
of customer service are typical attributes assigned to health care
organizations. Although outcome data suggest that the quality of medical care
is improving for most types of illness, the attention to detail in day-to-day
operational management has not kept pace.
In a time when hospitals’ financial situations are increasingly being called
into question, hospitals are now starting to get serious about creating
operational efficiencies to become more competitive and financially viable.
Do hospitals and clinics exist to make profits? Some do; however, most do
not. Either way, if hospitals are to survive dismally poor health care
economics, escalating costs, and increasing competitive pressures, they must
apply sound business management. This will ensure that hospitals earn the
reasonable return on investment necessary to continue to invest in and
upgrade buildings, programs, and employees.
A very active debate continues at the national level, primarily focused on
health policy research. New programs and policies centered around the
concepts of “pay for performance,” quality and accreditation, flawed
government funding mechanisms, federal and state regulations, publication
and sharing of outcome data with the public, and other aspects of the U.S.
health care system continue to address structural issues that affect the quality
and costs of care in general. In addition, behavioral research into physician
judgment and mechanisms to encourage elimination of unnecessary tests and
treatments will likely change medical education in the future. All of these can
help improve the industry’s economics and market structure. But, for now,
hospitals and systems must continue to look internally at their own operations
and management to adapt and thrive in current conditions. Hospitals cannot
wait for policy to address the structural issues driving health care costs—they
must apply inspired management to improve organizational performance
Principles of operations management, whether they focus on productivity
or supply chain management, are common in other industries but have yet to
really catch on in health care. There has been a reluctance to admit the
applicability of business optimization techniques to the health care industry
in general. This, coupled with the lack of sophistication and management
education on the part of health care managers, limits the ability to fully
understand and utilize the concepts, methods, and techniques offered.
Up until about two decades ago, business managers in health care were
considered low-level “paper pushers.” Senior administrators at most hospitals
tended to be clinically trained and did not see as much value in managing
business issues as medical ones. Of course, at that time most hospitals were
reimbursed fully for all operational costs and capital costs, plus a small
margin. With guaranteed profits, there was not a big drive for efficiency and
productivity management. Times have changed.
However, most books on health care business management still focus
primarily on issues of either governance or finance—both of which are
important topics but alone are not comprehensive. Coverage of revenue cycle
issues such as reimbursement, patient billing, coding, and collections are well
addressed, as are basic accounting and financial reporting topics. Similarly,
governance issues such as improving physician relations are well
documented. Yet, as important as these topics are, it leaves most of business
operations fairly uncovered.
This text focuses on the practical application of operations management
techniques in health care organizations, including hospitals, clinics, multiplehospital systems, and other facilities in an integrated delivery network. For
clarity purposes, however, the term hospital is widely used in this book, and
it refers broadly to any large organizational entity—hospital is simply easier
to use as the unit of measure than integrated delivery network, health care
system, clinic, or the like. Hospitals remain the predominant hub of the health
care system, and they employ the majority of workers and resources, so they
make more lucid examples for most concepts illustrated here. The tools and
techniques used in this text, however, are just as relevant to other health care
This book concerns itself primarily with the topics that have not been
extensively treated in health care texts, which are the operational components
of health care. These include all areas that help hospitals improve
productivity, reduce cycle times, measure performance, analyze activities,
compare organizations to others, improve cost management, and generally
create business value by converting resources into services. Hospital
operations management concerns itself with a few key themes, all of which
will be covered in this text: productivity analysis, supply chain management,
business process and service design, quality management, inventory
management, technology and systems, operational planning and scheduling,
and performance improvement. All of these are traditional operations
research topics that, when applied to hospitals and health care organizations,
cover the majority of resource consumption.
This book was written to help practicing executives and administrators, as
well as students in undergraduate and graduate health care administration
programs, understand the importance of sound operational management by
using business strategy and logistics to create a competitive advantage for
their organization. It presupposes that there will be a growing need for
improved cost efficiencies and economics in the coming years, and this
mindset is required if hospitals are to survive competitive pressures. The
significance and role of business professionals in health care will continue to
evolve and improve over time, and therefore it is mandatory that the skills
and expertise of hospital business officers continue to improve.
The framework for this book uses a practical perspective of operations
management and attempts to set a path for hospitals to pursue a strategy of
operational excellence. Therefore, the problems this book addresses are those
that are integrated around operations and logistics management, as displayed
in Figure P1-1.
This book will help hospital and health care administrators to address
important operational and day-to-day issues in this rapidly evolving industry.
This book should be used as a reference guide for those working in hospital
administration, clinic management, performance improvement, and all other
areas of management and it serves three purposes:
Present concepts and techniques about improving daily operations
capabilities and capacity in health care.
Educate students and administrators on the value of clinic and
business operations, with a strong focus on analytical models for
decision making.
Help health care organizations improve their performance and
It is our hope that this book will stimulate significantly more research and
publication on mastering operations research in health care and using
advanced techniques to drive improved competitiveness into health care.
Operations, Systems, and Financial
Part I of this text provides the reader with a foundation of operations
management and explains its role in improving health care’s financial and
business condition. Health care activities and processes are complex. To
perform optimally, they must be managed as a system. Operations and
systems management requires knowledge of process improvement, quality,
finance, and many other business practices. As a service industry, financial
outcomes are driven primarily by labor and supply costs, so an understanding
of the income statement and the use of key ratios to manage these areas is
provided. Understanding the concepts of operations management, and its
relationship to financial margins, is also explored.
Chapter 1 offers an overview of the discipline of operations and systems
management and that of management in general. Goals of operations
management, from cost reduction to network optimization, are described, as
well as the key functions and roles performed by operations managers. This
chapter sets the stage for the rest of the text.
Chapter 2 provides an introduction to the health care marketplace.
Because health care organizations are businesses, they must generate
revenues and sustain themselves financially, as organizations do in other
industries. This chapter defines the hospital and health care organization and
discusses the nature of its goods and services. This chapter provides an
overview of some of the significant health policies that affect patient
operations, including the Affordable Care Act. The concept of health care
production, distinct from operations, is also explored.
Chapter 3 provides a structured introduction to health care finance for the
operations manager. An understanding of the drivers of improved financial
performance is essential to effective operations management. This chapter
addresses how hospitals earn revenue, and it defines the basic terms used in
health care finance. Of great importance, it explains the key external financial
statements that represent the financial condition of the organization, which
are used as data sources for a variety of operational analyses in this text.
FIGURE P1–1 Operations Management in Health Care
Health Care Operations and
Systems Management
1. Describe the need for improved decisions and management
2. Define health care operations management.
3. Describe the roles and responsibilities of health care operations
4. Examine the management decision-making process.
5. Understand the goals of operations management.
6. Describe the management discipline and where operations
management fits.
Health care operations management is a discipline that integrates scientific
principles of management to determine the most efficient and optimal
methods to support patient care delivery. Today, most hospital positions are
roles that involve the coordination and execution of operations. This chapter
provides the rationale for operations management and describes its evolving
role in helping hospitals become more competitive.
Health care operations is about management of interconnected processes, or
systems. A system is a set of connected parts that fit together to achieve a
purpose. Health care operations and systems management is the set of diverse
and interrelated activities that allow for diagnosis, treatment, payment, and
administrative management in health care facilities.
Most hospitals are nonprofit in nature. Nearly 80% of hospitals are
considered nonprofit and exist solely to serve the community in which they
operate, down from 85% a few years ago. As nonprofits, these organizations
are exempt from most federal and state taxation and are not expected to show
continuous positive growth rates or large profit margins, as most publicly
traded firms do. However, if a hospital or health care organization cannot
show some return on the capital or dollars invested, there will be negative
consequences. For example, failure to show reasonable margins will likely
cause the public bond market (which finances most health care growth today)
to assign subpar credit ratings; therefore, the bonds themselves will have poor
yields, making hospitals less than stellar investments for bondholders.
Most important, the term limited profit margins implies that there will be
fewer dollars to invest back into the business to ensure that buildings are
updated, equipment is replaced and technology is modern, and clinical
programs will continue to expand and be enhanced. Without these
investments, hospitals will likely be unable to attract the most qualified
physicians and administrators, which will continue the downward spiral.
While some hospitals and health care systems wait for changes in the public
health policy to save them, the more competitive and successful hospitals are
acting now to protect their margins.
In this era of continual pricing pressures affecting the top line of the
income statement, and with a large majority of all hospitals reporting
negative profit margins, it is essential that hospitals begin to look toward
more sophisticated business strategies to succeed. Differentiated marketing
programs and strategies, broader use of advertising, and more careful and
precise long-term planning about service lines are all strategies that must be
utilized (Rovin, 2001).
Equally as important, there must be a broader adoption of operations
management techniques into hospital business affairs. Monitoring and
maximizing labor productivity for all medical support and allied health
professionals is critical to maintaining salary expenses. Incorporating queuing
theory and scheduling optimization methods helps drive waste and cycle time
out of hospitals. Incorporating logistical and supply chain management
techniques helps reduce operational expenses, eliminate excess safety stocks,
and generally improve working capital management. Most important, using
technology to further automate and streamline all processes in hospital
operations can help reduce costs and maximize efficiencies.
Hospitals and other health care organizations cannot rely on extrinsic
factors (such as health policy, federal payer regulation changes, or shifts in
managed care market structures) to change their margin potential. Although
these are important issues, they are covered in other texts and will evolve
regardless of the managerial behavior that hospitals employ. However,
equally significant to these macro-level issues are the micro-economic and
organization factors that can be affected by operations and logistics
management. Operations management can help organizations today.
Think of health care profit margins as a balloon, where a variety of
extrinsic, or external, factors cause deflationary pressure from the outside. On
the inside is the set of decisions and management systems put in place to
combat these pressures and essentially inflate the balloon, or expand the
margin. In effect, operations management is the set of intrinsic, or internal,
processes and decisions that help address costs, process, technology, and
productivity. Strategic management, although equally important, is not a
focus of this text. Figure 1–1 shows conceptually the margin-expansion role
that operations management plays.
Health care is primarily a service sector, in that the industry provides
intangible or nonphysical “goods,” as opposed to physical objects that can be
seen or touched. Hospital services primarily deliver care through providers to
patients and therefore lack a manufacturing or assembling process. These
services are unique and somewhat differentiated from other hospitals,
knowledge based, and have high levels of customer interaction. Of course,
there is a physical good that accompanies the service, which is the focus of
supply chain management in hospitals that procures, replenishes, and stores
medical supplies and pharmaceuticals as well. In this regard, hospitals have a
mix of both tangible and intangible characteristics. All of these attributes
make health care operations management somewhat different from industries
that strictly produce and market physical goods or widgets.
FIGURE 1–1 Operations Management Counters the Extrinsic Pressures
Deflating Health Care Margins
Health care operations management can therefore be defined as the
quantitative management of the supporting business systems and processes
that transform resources (inputs) into health care services (outputs). Inputs
are defined as resources and assets such as labor and capital, including cash,
technology, personnel, space, equipment, and information. Outputs include
the actual production and delivery of health care services. Quantitative
management implies a heavy use of analytical and optimization tools, as well
as extensive use of process and quality improvement techniques to drive
improved results.
Health care operations management is a discipline of management that
integrates scientific or quantitative principles to determine the most efficient
and optimal methods to support patient care delivery. This field is relatively
new to health care, but it has existed in other industries for nearly 100 years.
The scope of health care operations management includes all functions
related to the management systems and business processes underlying clinical
care. This includes extensive focus on the following: workflow, physical
layout, capacity design, physical network optimization, staffing levels,
productivity management, supply chain and logistics management, quality
management, and process engineering. Table 1–1 summarizes these key
functions and illustrates some of the critical issues and questions that must be
addressed for the health care enterprise.
Health care operations management includes all of these business
functions and provides job opportunities for those with titles such as
administrator, scheduling manager, operations supervisor, vice president of
support services, quality manager, operations analyst, director of patient
transportation, procurement manager, management engineer, inventory
analyst, facilities manager, supply chain consultant, and so on. Nurses,
technicians, and other health providers also play a key role in managing
service operations. Operational management positions in hospitals will
continue to grow as the need for increased cost efficiency and accountability
Table 1–1
Key Functions and Issues in Health Care Operations
Management Objective or Issue to Consider
• Are there too many departments or people performing the same
• Do we have an end-to-end map of our major business processes?
• How many manual processes exist?
• Are there ways to reduce cycle time, steps, and choke points for
key processes?
• Can we improve speed and patient satisfaction?
• Are our facilities designed with the consideration of speed,
capacity, traffic flow, and operational efficiency?
• Are unit or floor layouts designed to eliminate redundancy (e.g.,
safety stock on all resources)?
design and
• How can we reduce bottlenecks to improve patient throughput for
each area?
• In which cases should we increase the use of technology to
improve labor productivity?
• Where should we position appropriate par locations, pharmacy
satellites, warehouses, and supplies to minimize resources and
• Do we strategically utilize vendors and their facilities?
• How can we design and position optimal locations for clinics or
resources to ensure lowest total costs?
levels and
• How much output can we expect from our staff?
• Have we maximized the use of automation and electronic
commerce to increase productivity?
• Have we implemented sophisticated analytical models to
optimize labor and resource scheduling?
Supply chain
• Have we built collaborative planning and forecasting logistics
processes to standardize items and reduce total costs?
• Should we operate just in time?
• Do we use automated, optimized replenishment of medical–
surgical supplies to increase turns and asset utilization?
• How much inventory of each item do we need?
• Do we use perpetual inventory systems to ensure stringent
internal controls and accurate financial reports?
• Do we use advanced tools for tracking projects?
• Are we measuring the right performance indicators to bring
visibility to trends and exceptions?
planning, and • Do we know how we compare to our key competitors?
• Have we identified the quality issues that affect our customer
satisfaction and efficacy goals, in addition to efficiency, costs,
and speed?
The Future of Emergency Care report series produced by the Institute of
Medicine of the National Academies describes the problems facing health
care today, especially the emergency care arena. The report outlines several
recommendations for solving the current crisis, and one key recommendation
notes, “Hospitals should reduce crowding by improving hospital efficiency
and patient flow, and using operational management methods and
information technologies” (Institute of Medicine, 2006, p. 2).
Others outside of the health care industry have also identified weaknesses
in how health care managers administer the processes and systems. IBM has
recognized that the service sector must focus more on applying management
science to improve processes and outcomes and is collaborating with
universities to implement what it calls services science. Irving WladawskyBerger, IBM’s Vice President for Technical Strategy and Innovation, was
quoted in The New York Times as saying,
All those processes [in a hospital] get done in a relatively ad hoc way.
If we want to apply information technology and engineering
discipline to improve the quality of the service to reduce errors and to
improve productivity, you need people who know how to design a
hospital system. (Holstein, 2006, p. 10)
Clearly, even those on the periphery of the health care system understand the
complexity and the lack of sophistication that currently exist in the industry.
Many other researchers and associations have called for operations
management to help drive improvements and efficiencies in the health care
system (Herzlingertt, 1999). The purpose of this text is to help students and
practitioners do just that.
The operations manager may hold any number of the job titles discussed
earlier, but generically the term operations manager will be used to describe
all such positions in this text. A clinic manager who ensures that processes
are in place so that patients efficiently move from registration to treatment
rooms to payment is an operations manager. An administrative director who
oversees financial operations is an operations manager. An operations
manager is any individual who directs and transforms processes to improve
the delivery of patient care. What else do operations managers do? They have
a variety of broad goals and functions in the hospital, including all of the
following: reduce costs, reduce variability and improve logistics flow,
improve productivity, improve quality of customer service, and continuously
improve business processes. These are outlined in more detail in the
following sections.
Reduce Costs
The primary role of operations managers is to take costs out of the health care
system. Finding waste, improving utilization, and generally stabilizing and
reducing the overall cost of delivering services are essential functions. A
hospital with appropriate tracking and management systems—that can isolate
all personnel, material, and other resources utilized for delivery of care—will
be much more likely to reduce costs because it understands the underlying
cost structure. Identifying costs and eliminating unnecessary waste and effort
is at the forefront of an operations manager’s priority list.
Reduce Variability and Improve Logistics Flow
Operations managers continuously look for the most efficient and optimal
paths for movement of resources, whether those resources are physical or
information flows. Similarly, there is a continuous focus on reducing
variability. Variability is the inconsistency or dispersion of inputs and
outputs. Variability threatens processes because it results in uncertainty, too
many or too few resources, and generally inconsistent results. If there are 10
patients typically seeking care in a specific clinic within a certain time period,
and then 20 appear the following period, it will be difficult to staff, control
waiting times, and manage patient flows.
Improving flow means seeking higher throughput or yields for the same
level of resource input. Throughput is the rate or velocity at which services
are performed or goods are delivered. If a hospital typically sees four patients
an hour and can increase throughput to six per hour, this is a 50%
improvement in logistical flow and throughput. Similarly, if patient volumes
double but a hospital maintains the same historical inventory levels of
pharmaceutical supplies, this represents significant improvement in material
flow, because assets have higher utilization and turns.
Staffing and resource consumption should be tied directly to patient
volumes and workload: If patient volumes increase, so too should resources.
Unfortunately, many health care facilities do not understand patient volumes
and the variability that exists from hour to hour and day to day. Managing
this variability allows an adjustment to staffing mix and scheduling to
accommodate the changes, without staffing at the peaks (which causes
excessive costs), staffing for the valleys or low points (which will cause long
lines periodically due to limited resources and therefore service quality
issues), or staffing for the average (which is the most common suboptimal
approach). Figure 1–2 shows how variability changes over time, which
necessitates both capacity and demand analyses.
Logistics is defined as the efficient coordination and control of the flow
of all operations, including patients, personnel, and other resources. The role
of operations managers is to facilitate improved logistics and throughput by
using streamlined process and facility designs to increase capacity, workflow,
and throughput.
Improve Productivity
Hospitals have a tendency to hire additional staff faster than in other
industries. This is partly driven by the highly structured organizations that are
common in health care and partly because of the historical lack of focus on
costs. In years past, hospitals were reimbursed by the government and other
payers on a “cost-plus” basis—meaning that whatever the cost to deliver,
hospitals would be fully reimbursed along with a small profit margin.
FIGURE 1–2 Variability Creates Chaos and Inefficiency
When pricing is guaranteed to cover costs, there is not a tendency to be
overly cost conscious. Even though the industry continues to move toward a
prospective payment system and managed care, the mentality and behavior of
many hospitals have been slow to adapt. Productivity is defined as the ratio
of outputs to inputs. Improving productivity implies a search for higher levels
of output from all employees and other assets. This is one of the most vital
roles of an operations manager.
Improve Quality of Customer Service
Health care cannot become so focused on cost and efficiency that quality
starts to diminish. Improved quality implies reduced medical errors and
improved patient safety, in addition to higher levels of patient satisfaction.
Maintenance and improvement of high quality and service levels, both from
patient care and other business services (such as the cafeteria or admissions),
are expected from an operations manager. Across all industries, higher-
quality services lead to the ability to secure higher prices, which drives
increased market shares and operating margins (Buzzell & Gale, 1987).
Ensuring that services continue to improve patient satisfaction levels
while simultaneously reducing response and waiting times are key
deliverables to providing higher-quality services. The cost–quality
continuum refers to a theoretical trade-off in which a focus on one side of
the equation leads to diminishing returns on the other. A focus on costs may
lead a hospital to reduce services provided, which may affect overall quality.
Operations professionals must balance both and help to make optimal
decisions on many fronts.
Continuously Improve Business Processes
In highly structured organizations, business processes tend to be unique to
each department and are not highly cross functional or integrated. The
operating room in one hospital may handle procurement of goods one way,
while the same hospital’s gynecology department handles it another. There is
typically no sharing of best practices internally, standardization of processes
that can lead to improved learning and economies of scale, and very little
multidepartment workflow automation. Each department in large hospitals
today operates as an independent business, which creates multiple efficiency
problems. The role of operations management is to find ways to carry out
business processes while improving process efficiency and effectiveness.
Figure 1–3 shows the operations management process of converting inputs
into outputs.
FIGURE 1–3 The Operations Management Process
Overall, if a hospital is successful at delivering on each of these goals
throughout the facility, it will deliver improved operational effectiveness.
Operations effectiveness is a measure of how well the organization is run. It
considers both the efficiency of resource inputs and usage and the
effectiveness of overall management in achieving desired goals and outcomes
(Kilmann & Kilmann, 1991). Operational excellence is a term often used to
describe a business strategy that focuses exclusively on maximizing
operational effectiveness.
A hospital that is operationally effective is heading toward increased
competitiveness. Competitiveness is management’s ability to respond to
environmental changes (such as changes in reimbursement practices) as well
as competitors’ actions (such as adding new facilities or expanding existing
service lines). If a hospital can achieve a competitive edge or advantage over
other hospitals—and sustain this position—it will have higher operating
margins and be able to continue improving, expanding, and surviving.
Operations management is critical to this outcome.
Competitiveness is often driven by innovation. Innovation is the
continuous search for a way to do new things or to do current things better.
Organizations innovate by using new technologies or finding ways to change
the playing field so that processes that once were considered essential are no
longer necessary. The electronics industry is an example in which firms
continuously innovate. A firm that was competitive based on analog
technology had its perspective of the world shaken up considerably when
digital technology was created, and the products that the firm once made
became completely irrelevant. In addition, continuous innovation often
results in hypercompetition, which ultimately is characterized by economics
wherein both prices and costs decline (D’Aveni, 1994). For example, when
digital video disc players were first introduced, prices were nearly $1,000.
Today, they can be purchased for as little as $30 in discount stores. The
prices of smartphones, tablets, televisions, laptops, and many other
electronics all follow the same pattern. In health care, innovation also helps to
improve competitiveness.
Imagine that rather than a health care organization’s annual budget increasing
between 5% and 15% (the range of industry average annual changes),
expenses could be maintained and even show signs of deflation, or negative
price/cost growth. This would be very beneficial to a hospital’s financial
condition if it could reduce costs and maintain similar pricing levels.
The historical argument justifying continuously growing health care
inflation rates typically focuses on five points:
1. Consumers are aging and living longer and are increasingly utilizing
a greater number of services than in prior years.
2. The costs of medical technology and equipment continue to rise, and
this represents a growing percentage of capital budgets for most
3. The labor costs of key resources (such as physicians and nurses) are
governed by market shortages for these positions, which have
increased steadily in the past few decades.
Prices of pharmaceuticals, which represent a sizable portion of
medical treatment plans, continue to escalate to cover high costs of
research and development, long U.S. Food and Drug Administration
approval cycles, and generally high industry margins for
Emphasis on strict managed care, which appeared to be the
predominant model a decade ago, is slowly shifting and diminishing
in practice.
The result has been a steadily increasing cost of care. For example, the
Bureau of Labor Statistics tracks inflation growth through its consumer price
index, a mathematical calculation of the average pricing changes over time,
using a market basket approach. The general consumer price index for all
items in years 1999 through 2005 showed an increase of less than 14% over 7
years, or around 2% per year (Bureau of Labor Statistics, 2014). Compare
that with the cost of medical care, which rose nearly 30% in that same time
period—almost double that of all the other goods tracked. Figure 1–4 shows
this growth over time.
FIGURE 1–4 Controlling Exponential Price Increases in Health Care
Data from U.S. Department of Labor, Bureau of Labor Statistics, 2014.
Overall spending for health care in the United States has risen steadily. In
1993, health care costs represented 13% of the national gross domestic
product; in 2006, this number increased to more than 16.5%; and today it is
nearly 18–19% of the gross domestic product. Economists project that this
will double again in the next decade (Heffler et al., 2005). While some
hospitals wait for the national debate to continue, it is important to first look
at the intrinsic factors in the organization that are driving excessive costs:
redundancy, inefficiency, bureaucracy, waste, paper, limited productivity,
lack of performance monitoring, poor deployment of information technology,
and generally unsophisticated levels of management.
Although health care is unique and has its own set of challenges, hospitals
can learn a great deal from other industries that have evolved faster due to
technology or process innovation, industry economics, more aggressive
competition, reduced barriers to entry and exit, or just better trained business
managers. For example, if managers looked at a hospital as being similar to
the retail industry, they could better understand how to lay out floors, design
configurations to achieve more efficient movement and handling, and use
analytical forecasts to drive all aspects of the business. There is a lot to learn
from the more operationally effective industries. The tools and techniques
that are most similar should be borrowed and applied to health care where
For example, in the airline industry, thousands of planes move through
the sky fairly seamlessly. Planes land every few seconds at major airports
throughout the world, and yet there are very few accidents (as a percentage of
total flights), very high levels of on-time rates (given numerous factors such
as weather and security), and very little lost baggage. Nearly 650 million
passengers boarded planes in 2013 in the United States alone (Bureau of
Transportation Statistics, 2014). Airlines have learned to operate using speed
and volume as an advantage. When an airplane lands, there is very little time
before it must be turned around and readied to take off to another destination.
This changeover process allows less than 30 minutes, on average, to
completely refuel, check maintenance and mechanical conditions, validate
aviation systems, restock food and supplies, change over personnel, and
unload and reload hundreds of passengers. Think of this changeover as it
relates to the process a hospital goes through when changing out beds after a
patient is discharged (i.e., admitting and bed management process). A lot can
be learned from how another industry approaches a somewhat similar
problem. Table 1–2 summarizes what operations managers in health care can
learn from other industries.
Table 1–2
Teaching from Other Industries
Building layout and configuration, customer flows, use of
forecasts and planning, electronic commerce
Scheduling, logistics, strategic pricing (yield management)
Efficiencies, economies of scale, extensive use of linear
programming and quantitative modeling
Technology innovation, product life-cycle management,
pricing strategy
Telecommunications Command and control center
Operations management is one discipline in the broader field of management.
According to most theorists, management concerns itself with four key
functions: planning, organizing, leading, and controlling. Planning involves
the establishment of goals and a strategy to achieve them. In health care,
planning can be strategic (such as deciding which geographic region to invest
in a new facility), or it can be operational (such as how many employees to
have on staff for each shift). Organizing includes making decisions about
which tasks will be done, where, when, and by whom. Organizing uses a
variety of tools, such as an organizational chart to manage people’s roles and
reporting relationships, process flowcharts for improving activities, and Gantt
charts for managing projects. Leading includes motivating employees,
building support for ideas, and generally getting things done through people.
Providing direction and clarification of expectations, as well as the role of
change management, or preparing the organization for changes to come, are
instrumental in providing leadership in hospital operations management.
Controlling includes all tasks to monitor and track progress toward goals,
ensure performance improvement, and make corrective changes in strategy
where necessary. The use of status reports, budgets, procedures, and a
multitude of other tracking tools is useful in helping enhance management
Managers wear many hats and play many roles. They may serve as a
figurehead, make decisions, reward employees, and handle conflicts and
solve problems. Managers help plan tasks, organize and direct them, and
continually adjust and control. Henry Mintzberg (1973), one of the earliest
researchers on management processes, described the nature of a manager’s
work as grouped around three key themes: informational, decisional, and
interpersonal. Informational refers to collecting, monitoring, and
disseminating information from the external and internal environments to
work teams. Decisional refers to making key decisions for the organization,
such as allocation of scarce resources, rewards and penalties for employees,
and negotiations with employees and others. Interpersonal includes training
and motivating employees, serving as a spokesperson, facilitating
communication exchanges among various groups, and serving as a liaison.
The study of management continues to evolve. It has moved through a
variety of schools of thought: from scientific management to process focused
to human behavior to decision or management sciences theory to social and
open systems (Certo & Certo, 2005). These schools of thought represent
different contexts or perspectives on which a manager’s role and tasks should
be based. For example, the systems theory schools emphasize that a manager
views the organization as a living organism, which is changing and adapting
and that operates by an integrated network of open processes. Behavioral
schools tend to view management from a psychological aspect, highlighting
the importance of understanding what motivates employees and how human
and cognitive factors influence work environments.
For purposes of operations management and looking for ways to improve
operational effectiveness, the school of thought that is most relevant is that of
scientific management.
Operations management seeks to apply quantitative and analytical techniques
to achieve the goals of reduced costs, higher quality, higher productivity,
improved processes, and improved logistical flows. The role of mathematics
started to drive concepts of industrial efficiency in what is now known as the
scientific management era, which began prior to the turn of the 20th century.
Scientific schools of thought historically focused on use of concepts such
as time and motion studies, which measured how long business processes
took, seeking ways to reduce the variability of the results and continuously
shrinking the times and associated costs. Early work by Frank and Lillian
Gilbreth helped drive a focus on continual improvements—finding ways to
do things faster and with fewer resources. In fact, the Gilbreths’ research has
had a profound effect on health care as well (Gilbreth & Carey, 1966). In the
early 1900s, they were credited as observing the productivity of surgeons and
found that the introduction of changes in both staffing and workflow could
significantly alter physician productivity. The introduction of a surgical nurse
—to help provide surgical instruments and supplies when needed in order to
free up the surgeon, thereby improving overall productivity—was one of the
key recommendations made. In addition, the Gilbreths recommended other
hospital improvements, such as a tray to hold common surgical instruments.
These are just two of the contributions made by scientific management to
health care.
Frederick Taylor, one of the original management researchers and the
“father of scientific management,” was often quoted as saying that scientific
management is a great “mental revolution” (Matteson & Ivancevich, 1996).
By this, he meant that a scientific approach encourages a different perspective
or outlook that can change management behaviors and results. This
revolution led to some key concepts, such as specialization, division of labor,
and mass production. The concept of specialization suggests that if people
repeatedly perform just one task, they will be able to perform that task faster
and with higher quality than others, because they have repeated exposure to
the process and have learned from their experiences. Specialization, in many
regards, is what leads hospitals to structure their organization around units
such as nursing or materials management. Continued specialization helps to
produce well-defined roles and tasks, concentrated work efforts, and higher
efficiencies. This is also known as division of labor. Mass production is the
creation of rapid production processes through the use of assembly-line
techniques. Mass production has been embraced by most other industries,
but, in many respects, it is not relevant in health care.
The scientific era has been shown to have several failings and issues,
which led to other schools of thought. The lack of focus on human behavior,
alignment of employee rewards with those of the organization, and
understanding the need for job rotations and expansion all are major issues
that well-rounded managers must consider. Thus, many of the analytical
concepts of scientific management remain vital to health care operations
management. First, scientific management suggests the need for a strong
understanding of processes, their costs and resource utilizations, constraints,
and cycle times. Second, scientific management encourages an initial focus
on understanding expected outcomes and subsequently designing
management systems and business processes around this operational strategy.
Third, the variability of processes has to be smoothed out and consistently
managed. Finally, scientific management shows that in many cases
quantitative approaches can help create mathematically optimal results for
common management decisions and problems. These four fundamental
concepts are the foundation of the operations management discipline.
Management decision making is a process in an organization in which
decisions are made (Yates, 2003) and reflects the major processes involved in
managing the work of organizations (Szilagyi & Wallace, 1990). Decisions
are the output of the process and are typically described as a choice between
two or more alternatives (Rowe, Boulgarides, & McGrath, 1984). Decisions
can also be described as an “action” taken as a result of a process. As Hoch
and Kunreuther (2001) stated, “The strength or weakness of managerial
decisions is the linchpin of the business enterprise” (p. 9).
Herbert Simon (1960), one of the first researchers on decision making in
organizations, described the decision-making process as having three steps:
1. Finding occasions to make a decision.
2. Finding possible courses of action.
3. Choosing among many options.
Browne (1993) described it similarly as that “which occurs at the highest
level of an organization” (p. 2). Schwenk (1988) described management or
strategic decisions as ill structured, nonroutine, important to the organization,
involving large resource commitments, and generally very complex. A
traditional management decision process, adapted from Browne, is shown in
Figure 1–5.
Decision-making theory has been defined by many perspectives:
sociology, psychology, economics, engineering, and business. Because
management decisions are made within organizations, organizational
theorists early on shaped the field by suggesting a rational approach where
decision makers make decisions in the best interests of the organization and
emphasize “information processing.” More recently, there has been a strong
emphasis on decision making as a behavioral process, as decisions are made
by individuals, where personality and judgment represent both a source of
bias and influence on decision processes.
Harrison (1987) described decisions as either “routine and
programmable” or “complex and unique.” If decisions are routine, then they
are procedural and can use computation and rational models for decision
support. This area is well suited for operations research methods. The latter is
more unstructured and relies more on judgment and general problem-solving
approaches. This method has typically been considered to emphasize
behavioral processes over quantitative ones, because they involve ambiguity,
conflict, negotiations, and bias created by the interaction of individuals and
Similarly, Allison (1971) outlined three perspectives on strategic decision
making: rational, organizational, and political.
Rational. Barnes (1984) was one of the earlier researchers in this
area, which defines decisions as the product of a “conscious choice.”
The rational, conscious choice emphasizes a “search and selection”
process that has limited alternatives, maximizes decision outcomes,
and adjusts for risks. Other researchers have outlined structured
methods for organizational decision makers to follow to reach
optimal or maximizing outcomes (see Christensen, Andrews, Bower,
Hammermesh, & Porter, 1982).
FIGURE 1–5 Traditional Decision-Making Process
Organizational. Henry Mintzberg (1978) is generally recognized as
one of the leading researchers on decision making from an
organizational theory perspective. This views decisions as the outputs
of organizational processes, not individual ones, and includes
adapting astrategy to the environment. The organizational approach
emphasizes satisficing. Satisficing is a process of making a less than
optimal decision, but one that can be supported and is acceptable
because it meets the minimal criteria (e.g., the decision is reached
quickly, is adequate, and/or is the result of consensus between
parties). Satisficing terminates the search for alternative processes
early. Ambiguity plays a critical part, as does the concept of
randomness, which leads to models of decision making that are less
than rational and that can be described as “organized anarchies” or
“garbage can” models (March & Olsen, 1979).
3. Political. From this perspective, decisions are the result of bargaining
among individuals attempting to achieve their own personal goals
(Abell, 1975). This includes social, nonprofit, educational, and other
organizations. Political models tend to redefine the decision
processes, structures, and goals on a continual basis, making
evaluation difficult. Behavioral concepts, such as the roles of
judgment, biases, emotions, and heuristics, are often a component of
this perspective. Bazerman (2005) is one of the prominent researchers
on individuals and behavior in decision-making processes.
From both the organizational and political perspectives, the concept of
bounded rationality has emerged. Bounded rationality suggests that humans
or individuals have only a limited, finite capacity to understand all of the
options available to them and process them in an evaluation mode (Simon,
1979). Bounded rationality can also be described as limits on a human’s
ability to process and interpret large volumes of data (Bazerman, 2005).
Theory suggests that while rational models think all alternatives are known,
they usually are not and there is no known probability or consequences of the
actions. In addition, goals are changing and the process is not always as
sequential as it would appear. The complexity of decision processes is also
often used to describe why rational models are not appropriate.
There are two components of bounded rationality: search and satisficing
(Simon, 1979). Search refers to how extensively a decision maker searches
for information to guide decision making (Tiwana, Wang, Keil, & Ahluwalia,
2007). Simon envisioned an “aspiration point” where managers determine
what is “good enough.” This process of terminating the search process
without incorporating more extensive information is called satisficing, as
discussed earlier. This can create biases and risks for managers.
The concept of trade-offs is related to satisficing (Simon, 1965). Tradeoffs represent a cognitive process of balancing the pros and cons of attributes
or decision criteria in an effort to accept less of something to get more of
something else (Luce, Payne, & Bettman, 2001).
Browne (1993) described four models or perspectives in decision theory:
normative, descriptive, analytical, and behavioral. Normative models, or
prescriptive models, describe what managers should be doing to produce
optimal outcomes. Browne suggested that normative models are the
contributions of scientific management. Simon (1965) argued that rational
models of management science are valuable contributions toward normative
decision-making theory. Descriptive models describe what actually occurs in
organizations, not what should occur. Analytical models, which are the
contribution of management science, involve risk and uncertainty in
quantification and in the role of modeling decisions and predicting outcomes.
Finally, behavioral models examine the roles of bias and cognition in
humans, as well as how information is processed and used.
As theory has established, decision making is not necessarily a rational
search and evaluation process, where alternatives are clearly defined,
evaluated, and then the best alternative is selected. Brunsson (1985) argued
that decision making is less about finding the right choice and more about
giving an impression of rationality in organizational processes. He also
described other more common irrational processes used by managers. In
decision sciences, decisions are sometimes categorized into one of two types:
routine or complex. Routine decisions have been described as
“programmable” and are sometimes associated with selection and evaluation
methods that can be mechanized or automated (Harrison, 1987). These
routine decisions are often supported by methods such as operations research.
The more complex the decisions are, the greater the use of intuition or
judgment in the process, and presumably the less likely that methods such as
operations research will be used. Discussion in strategic management
literature about the role of intuition versus analytics touches on this subject
but does not comprehensively address the role of quantitative methods using
the routine-complex dimension (Miller & Ireland, 2005).
In summary, organizational decision-making processes are complex and
appear to be variable in nature. In addition, the complexity of the decision
and the cognitive capacity of the decision makers both influence the form of
decision processes. As a result, some health care organizations may find a
quantitative component of operations management decision making more
useful or relevant, while others may value it to a lesser extent.
Decisions in health care do not follow the traditional, logical processes used
in industrial organizations. In other industries, where profit maximization and
shareholder wealth are the primary motives, decisions are usually driven by
goal alignment for both managers (those who run the business) and owners
(shareholders who invest in equity or debt and have a claim on the profits and
assets). Decision making tends to follow cost-benefit models and focus on
risk minimization, cash flows, and return on investment. Although disputes
and conflicts may arise because of incomplete or imperfect information (as
described in the agency theory of economics), these disputes can typically be
minimized by changing incentives, behaviors, and structural mechanisms.
In health care, however, there is incomplete alignment of goals between
different agents, or managers, in the organization because of three issues:
Goals are unclear. There are clinical goals, financial goals,
educational or academic goals, societal goals, community goals, and
so on. The ambiguity that exists in terms of priorities and focus
makes goals much less acute than in other industries.
Organizations are complex. In industrial organizations, the
organization is clearly focused on the key aspects of buying, making,
selling, and moving products to the marketplace. In health care,
reporting relationships often involve complex matrices and dualreporting structures. This is not the “command and control” structure,
focused on speed and efficiency of decision making, that might work
in other places.
3. Relationships are ambiguous. Many business units in health care are
interconnected, but they often behave as if they were not. Independent
departments and providers help create an environment that is less
team focused than in other industries, making relationships important
for purposes of mutual support as allies. There are also continuous
power struggles in the health care arena between different factions of
employees. This creates ambiguity in decision making.
Physicians are typically the most dominant players, given their clinical
expertise and control over the “production” of health care services, and they
have a very substantial role in most major organizational decisions (Young &
Saltman, 1985). Power conflicts with nurses and other providers are frequent
and have developed (for structural reasons) in the struggle for control over
patients, their care, and overall patient management processes (Coombs,
2004). As such, several formal power bases have emerged: business
managers, who increasingly are becoming more professional and
sophisticated; physician leadership, which historically dominates the power
pendulum; and nursing leadership, which may have the most intimate
knowledge of patients and their needs.
Those who control the “production” process in most industries tend to
have the most influence and can control decision making for many things. In
the production of health care (i.e., delivery of treatments and provision of
care) physicians are by far the dominant players, yet their role in most
operational management processes in most hospitals is waning as
professional business managers evolve.
Decision making in teaching hospitals and academic medical centers is
even more complicated due to the introduction of another dominant party:
academic faculty and researchers (Choi, Allison, & Munson, 1986). In the
largest hospitals, this complexity in decision making is complicated by large
business infrastructures, which may employ hundreds or thousands of
individuals in all types of support functions from admissions to patient
finance to facilities.
Three characteristics define this complexity of decision processes:
problematic preferences, unclear technology, and fluid participation (Cohen,
March, & Olsen, 1972). These characteristics, together with “streams” of
both problems and choices, can be combined in unclear decision processes in
a “garbage can,” where they can often address the wrong problems at the
wrong time. This garbage can tends to allow issues and solutions to resurface
in strange ways, which often results in a lack of clarity and focus.
With all of these dominant players and complexities, many hospitals have
become large bureaucracies. These bureaucracies make it difficult to make
important decisions, address financial and business issues, change behaviors
and business processes, and implement new technology.
Sophistication in operations and logistics management requires not only
understanding concepts and their application to health care, but also
understanding the persuasive and leadership characteristics necessary to
navigate the bureaucracy, influence dominant power groups, engage support
for ideas, and ultimately gain approval for and acceptance of changes. These
changes will come only if business executives achieve more dominant power
positions, which can evolve only as operations and logistics executives are
recognized for their contributions, specialized education, professional
expertise, and leadership skills. Collaboration within these multidisciplinary
organizations is just one way to retain more control in the decision-making
With its focus on improvements, operations management rests highly on the
use of technology and automation. Many new technologies—including
mobile devices, handhelds, scanning capabilities, asset tracking, database
management, health information exchanges, and electronic health records—
help managers improve their capture of data and transform it into improved
decisions. Decisions about capital investment in new information and
management systems are always at the forefront of the modern operations
manager’s mind. Technology should be considered whenever quality and
efficiency is low. Processes that are repetitive in nature and that can be
replaced by less expensive automation are also suitable for a technology
investment. Technology often serves one of three roles:
1. Automate manual processes.
2. Improve transaction processing capabilities.
3. Improve the quality of analysis, reports, and decisions.
Technology has the ability to substantially alter the economics of a
process. Processes that can be mechanized allow for faster production or
delivery, with less resource usage—two keys to improving operational
effectiveness. The decision to substitute capital, or technology, for labor—
especially in areas of business support services—is the only way to reduce
processing and transactional costs over the long run.
There are several trends that are being widely considered and adopted in
hospitals. These are depicted in Table 1–3, and the trends correspond to the
role or function of operations management most closely related to it.
Table 1–3
Roles and Trends in Health Care Operations Management
Primary Role of Operations
Evolving Trends
1. Reduce costs
Resource tracking systems
2. Reduce variability and
improve logistical flow
Integrated service delivery
Supply chain management
3. Improve productivity
Information technology; mobile devices; asset
and patient tracking systems
Return on investment
4. Provide higher-quality
Evidence-based health care
Six Sigma
5. Improve business processes
Outsourcing is the contracting of an outside firm to perform services that
were once handled internally. Outsourcing is common in many industries,
and in health care it has been used successfully for cafeteria operations,
bookstore management, investments, and even nursing and other clinical care
areas. Outsourcing is not a new concept, but it has a slow adoption rate in
health care, where decisions such as these are often difficult to make,
especially when they result in the dismissal of employees from hospital
payrolls. However, outsourcing, when used selectively to target the right
areas, can be beneficial from a cost perspective.
Outsourcing relies on the notion that a hospital should focus on its core
competencies—delivering clinical care—and not on some of the less missioncentric functions, such as housekeeping, materials management, finance, and
information technology. When analyzing pre- and postperformance
improvement, the evaluation of internally performed or selective outsourcing
costs must be undertaken to ensure that all options are explored and the most
operationally effective process remains.
Integrated service delivery is another trend that has developed over the
past few years. Many researchers have pointed to the excessive cost of care
as being driven by the medical community’s continued desire for
specialization and concentration on discrete diseases and treatments, rather
than integrative, comprehensive care (Porter & Teisberg, 2006). In response
to this, hospitals are looking for ways to push care toward more integrative
medicine, including higher sharing of information, resources, and
collaboration. The effect on operations management will include redesign of
business processes and changes in the number and frequency of logistics
Supply chain management is the integrated management of all products,
information, and financial flows in a network designed to pull products from
manufacturers to consumers. In health care, there has been widespread
adoption of improved sourcing and inventory techniques, designed to lower
overall supply expense ratios (which typically account for 25% to 50% of all
hospital costs). Significantly more detail about the use of supply chain and
logistics management will be covered elsewhere in the text.
Another trend in health care operations management is globalization. The
world is becoming smaller, and vendors from all around the globe are
competing for business in retail and other industries. Health care has only
recently felt the effects, but this trend will continue. When firms look for
outsourcing opportunities (e.g., in information technology), they are now able
to turn to vendors as far away as Ireland and India to help manage their
information technology operations infrastructure. Medical care that may once
have required on-site specialists is now only a television away, allowing
physicians to practice medicine without setting foot in the hospital. Vendors
for certain medical supplies, pharmaceuticals, and equipment are emerging
and starting to compete for business as potential suppliers, requiring hospital
managers to understand global logistics. As more and more hospital services
become automated, the location of the technology does not matter. This is the
true result of globalization, and it will require adjustments by hospital
Investments in a hospital’s information technology infrastructure are
common today. Electronic medical records, computerized physician order
entry, enterprise resource…
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