The Balanced Scorecard for Hospital Performance and Productivity ABSTRACT The purpose of this paper is to provide an overview of the usefulness of the Balanced Scorecard in improving a hospital’s management and delivery of health care at reduced cost without loss of quality. This paper describes an approach to designing and implementing a balanced scorecard system for measuring performance and productivity in a hospital setting. Specific measures of performance criteria are suggested as well as interpreted. Guidelines for measuring productivity are also suggested and interpreted. How these measures may be used by a hospital to improve its administration of health care while reducing costs and maintaining quality are described. This paper is a useful resource for hospital managers looking to improve their performance and productivity. The balanced scorecard is a management tool that is widely used in the manufacturing industry. This paper fulfills a need by healthcare providers to obtain information on implementing a balanced scorecard system that specifically addresses issues unique to hospitals. This paper also addresses how to measure productivity within a balanced scorecard system. Keywords:Hospital Performance, Balanced Scorecard, Hospital Productivity 1. INTRODUCTION Performance measurement and productivity in health care are important issues to individuals and at a national level. Medical costs continue to rise and consume an increasing proportion of GNP worldwide. Cost pressures are producing dramatic changes in the health care environment. The government continues to search for ways to control spiraling costs, principally through caps on reimbursement rates, and at the same time the public seeks coverage for more services. Competition among health care providers is intense as alternative delivery systems grow and compete with public health facilities forcing all health care organizations to lower their costs, downsize, or close facilities (Gumbus et al. 2003). Increasingly health care providers are cutting services to, or refusing to treat, Medicare and Medicaid patients because of inadequate reimbursement rates. One result of cost pressures faced by individuals, employers, insurance companies, and the government is to shift health care provider performance priorities in several areas. Previously, a primary objective of health care provider organizations was to attract more patients (a revenue focused strategy). Now, they are concerned with reducing costs to meet patient demand. In the past, hospitals wanted simply to attract leading doctors trained in the latest procedures and technologies (a high-cost strategy). Now, the emphasis is on improved service quality to meet the demands of payers and regulators. Historically, hospitals wished to bill more care to more patients (another revenue enhancing strategy). Now, they seek to balance cost versus patient outcomes resulting in shorter stays, less expensive treatments, and fewer tests. Traditionally, hospitals allowed doctors free reign in treatment plans, which increased demand for hospital services (and costs). Now, hospitals seek to attract patients from managed-care plans and balance the goal of maintaining physician loyalty with limits (i. e. , lower costs) on the use of the latest, and more expensive, medical technologies. Finally, hospitals encouraged only limited innovation in delivery of core services and administration. Now, high rates of innovation in both areas are necessary to achieve cost effective and efficient health care. Key to achieving cost controls in health care is adopting new approaches to performance and performance measurement (Adler et al. 2003). Hospitals have been slow to develop and implement formal performance and productivity measurement systems (Voelker et al. 2001). The primary problems that have inhibited hospitals from making greater progress in this area are culture, organization, and managerial practices that are inconsistent with competitive business, including operating practices that are not cost driven. Some specific reasons why hospitals have not been active in this area include the following: many hospital boards are composed of members lacking experience in competitive environments, lack of employee participation, particularly among doctors, and because many individuals regard hospital services as intangible and impossible to measure. Medical staff relations and quality of care are important attributes of hospital performance that can be difficult to measure, interpret, and compare with other health care organizations (Zelman et al. 2003). The balanced scorecard (BSC) is fundamentally a customized performance measurement system that looks beyond traditional financial measures and is based on organization strategy. This paper discusses fundamental concepts in developing performance metrics, provides an overview of issues in developing balanced scorecard measures, and gives numerous illustrations of performance measures. As shown later, the BSC is an active area of research within the medical community. However, previous research does not report on the fundamental linkages between hospital inputs, outputs, and the creation of performance metrics. In addition, these articles provide few specific examples of balanced scorecard measures and illustrations of how the balanced scorecard translates action into improved performance. 2. PERFORMANCE MEASUREMENT AND THE BALANCED SCORECARD IN HEALTHCARE Emphasis on financial measures of performance in response to cost pressures may be a dangerous impediment to creating future economic value (Weber 2001). Hospitals can benefit by using a balanced scorecard (BSC) to measure performance and productivity. The BSC consists of an integrated set of performance measures that are derived from the hospital’s management strategy. The BSC is designed to translate management’s strategy into performance measures that employees can understand and implement. Using a balanced scorecard can provide a hospital with the following benefits: * It aligns the hospital around a more patient-focused strategy, * It facilitates, monitors, and assesses the implementation of the overall strategy, * It provides a communication and collaboration mechanism, It assigns accountability for performance at all levels of the hospital, and * It provides continual feedback on the strategy and promotes adjustments to changing market and regulatory factors. The BSC was originally developed by Kaplan and Norton (1992; 1993) from the notion that reliance on financial measures of performance alone is insufficient for managing complex organizations, especially as those organizations become more customer focused and want to benefit from their knowledge-based human capital. The BSC has evolved into a strategic management system that uses a framework and core principles to translate an organization’s mission and strategy into a comprehensive set of performance measures (Kaplan 1996). Kaplan and Norton suggest measuring an organization’s performance around four perspectives: (1) financial, (2) customer, (3) internal processes, and (4) learning and growth. This framework provides a balance between short- and long-term objectives, financial and non-financial measures, and external and internal performance indicators. The scorecard also balances the results the organization wants to achieve (typically the financial and customer perspectives) with the drivers of those results (typically the internal processes and the learning and growth perspectives) (Inamdar and Kaplan 2002). Zelman et al. (2003) establish the relevance of the balanced scorecard to health care, but with modifications to recognize unique characteristics of the industry and organizational characteristics. Numerous articles exist concerning the balanced scorecard and healthcare. One area of research on this topic is concerned with the internal process of developing the balanced scorecard in a generic sense (see Voelker et al. 2001; Pink et al. 2001; Inamdar and Kaplan 2002; Sioncke 2005). Another group is concerned with developing measures at specific organizations or within defined patient populations (see Kershaw and Kershaw 2001; Gumbus et al. 2002; Gumbus et al. 2003; Sugarman and Watkins 2004; Woodward et al. 2004; Wells and Weiner 2005). Fundamentally, measuring performance gives health care providers more control over their services. Performance measures are designed to answer the following questions; * Are the service objectives appropriate? * Are the services meeting their objectives? * Are the services meeting the desired standards in terms of quality, effectiveness, access, and efficiency? Measures are based on inputs (e. g. , staff, services, supplies, equipment, facilities), outputs (services rendered, e. g. , acute and elective services, professional advice, training), and outcomes (results of inputs and outputs, e. g. , health status, disability, continuing care). Examples of hospital services, outputs, and outcomes are shown in Table I. Efficiency measures are ratios of inputs to outputs and it relates to achievement of specific objectives. The effectiveness of a department is a measure of how well the outcomes are achieving desired outcomes. The cost effectiveness of a service is the resources required to achieve the outcome, for example the total cost of achieving mobility and/or pain relief. Table I: Examples of Hospital Services, Outputs, and Outcomes Service Output Outcome Obstetrics Live birth Healthy child and mother Pathology Diagnostic test results Correct diagnosis, effective treatment Engineering Preventive maintenance Decreased machine downtime, reduced operating costs Financial services Financial reports Effective financial management Faced with increasing cost pressures, extensive government regulation, high expectations by the public, and increasing criticism health service providers must be able to not only do many things well but communicate their achievements in a clear and concise manner. Hospitals can benefit by applying the BSC approach to answer the following questions about performance: * Has financial performance improved? * Do patients recognize that we are delivering more value? * Have we improved key services and processes so that we can deliver more value to patients? * Are we maintaining our ability to learn and improve? . ESTABLISHING AND INTERPRETING PERFORMANCE CRITERIA There are some simple principles to follow when using a BSC approach to establishing performance indices and monitoring performance in hospitals. First, major health goals for the hospital must be established. Second, these goals will serve as a roadmap for service managers of major segments of the organization to establish related goals and supporting objectives. Third, a series of indicator measures should be developed to assess service delivery and effectiveness, operational performance, and the organization’s response to the environment. All measures of performance/productivity are interpreted in light of the hospital’s goals. Table II provides a high-level view of indicator measures, how they should link with hospital goals, objectives, and environmental concerns. Indicators are consistent with the perspectives outlined for application of the balanced scorecard, i. e. , they may be financial, patient focused, operational, and/or learning/growth oriented. Table II: Role of Indicator Measures in a Hospital Relate To Monitored By Timescale Service Goals Departmental Probably Effectiveness managers annually Indicators Service Objectives Departmental/ Monthly or Delivery cost center weekly Indicators managers Operational/ Detailed Cost center Monthly Organizational objectives/ managers Indicators action plans Environmental Assumptions, Corporate and Ad hoc, but Indicators goals, and departmental preferably objectives managers annually Following are brief descriptions and examples of performance measures for a public hospital using the perspectives of the BSC. 3. 1. FINANCIAL PERSPECTIVE The financial perspective garners the greatest amount of attention when cost control is paramount. However, it is difficult for most hospital managers to follow direct costs through to the general ledger and then relate them to the activities they manage. Health care organizations need to be able to accumulate this information in a concise and understandable way. Categories of financial measures might include financial health, capital, human resources, and efficiency. Financial Health. Measures such as the percent by which revenues exceed expenses, return on assets, liquidity measures (e. g. , current ratio, working capital ratio) will certainly be used. Capital. In an era of ever expensive medical technology, the percentage of total expenses accounted for by capital equipment is important to monitor. Human Resources. The costs of direct care staff are another important, and rising, health care cost component. Nurses, for example, are in short supply and hospitals regularly bid up the costs for their services. Measures such as “nursing care hours as a percentage of total inpatient/outpatient nursing hours” indicate the percentage of all inpatient/outpatient nursing hours for staff who are available to carry out the activities that contribute directly to care of in/outpatients. Efficiency. A measure of unit cost performance is the percent by which planned cost per weighted case differs from actual. Hospitals should monitor the cost of administrative services as a percentage of total expenses. Day in inventory is a useful measure of the efficiency of inventory usage. 3. 2. CUSTOMER PERSPECTIVE Patient service must include developing a positive perception of care delivery and an ability by the organization to quickly correct patient service problems (Kershaw and Kershaw 2001; Gumbus et al. 2003). Several categories of customer/patient measures may be important. These include measures of patient satisfaction, patient involvement, and waiting time. Patient satisfaction. The number of complaints provides an indication of satisfaction. The results should be interpreted in light of the number of patient advocates, how well their presence is publicized, and if a centralized complaints system exists. The pattern of complaints should be monitored. Patient surveys should be conducted. Patient involvement. Indicators for patient involvement in treatment choices includes the number of sources from which treatment information is available, the proportion of treatment services for which protocols exist, and the proportion of consumers offered treatment choices. Monitoring of consumer involvement in the broader decision making process is difficult, with a possible measure being the number of consumers on service development groups. Waiting lists. Waiting lists for services should be monitored separately. If the notional days required to clear either of these waiting lists is high, the percent change in patients on the list should be examined. In addition, the average length of time that patients have to wait for specialists should be surveyed because this may impact on the demand for public hospital services. 3. 3. INTERNAL PROCESSES PERSPECTIVE Hospitals need to identify the internal processes (service development, service delivery, service evaluation) that have the greatest impact on what patients (customers) value. Excellence in these areas is determined by measures that capture time to market, delivery time, cost, and process quality (Kershaw and Kershaw 2001). Ultimately, balanced scorecard measures such as patient satisfaction (from surveys), retention, and safety, establishment of minimally invasive surgery programs, accreditation, and patient referral rates will determine the outcome of internal process initiatives. Patient flow (timely discharge of patients) suggests another important area to measure. Following are some areas of concern for internal processes that may lead to well-functioning processes. Staffing. The ratio of staff to the area population and the staff workload should be monitored in aggregate and for specific work groups such as medical practitioners and nurses. An indication of the hospital’s commitment to equal employment opportunity (EEO) could be gauged by examining the workforce by ethnicity and gender mix. Efficiency. If the average cost per inpatient or outpatient case by treatment is high, then the key determinants of cost, namely average length-of-stay and staff costs should be examined. Staff costs should be analyzed to identify whether costs are high because of the base cost of staff, the workload per staff member, or because of high overtime costs. Additionally, “utilization rates” such as occupancy rates, throughput rates, and outpatient clinic time utilized should be examined in assessing how efficiently services are provided. Facility utilization. The overall proportion of specialized treatment facilities or equipment time allocated to a medical service should be monitored as well as this time in relation to specialty treatment beds and patient population in the hospital. It is also important to analyze how facilities or equipment time is used. Equity of access. The balance between use of inpatient, outpatient, and community services should be monitored as well as the balance between provision of services in the public and private facilities. Other factors affecting access that should be monitored include staffing levels, average travel time, and the availability of facilities to accommodate families. Activity rates should be monitored in aggregate and by age, sex, ethnicity, and domicile. Mortality rates. Overall mortality rates for procedures should be examined and related back to the morbidity rates included in equity of access. 3. 4. Learning and Growth Perspective Measures from the learning and growth perspective attempt to identify the skills and tools needed to improve important internal processes. Key areas of concern include the skill levels of employees, availability of training, and employee satisfaction. Patient loads and training hours per caregiver are important BSC measures. Other concerns and measures in this area include. 4. CONTINUING PROFESSIONAL EDUCATION, TRAINING, AND EMPLOYEE SATISFACTION. Most medical practitioners are subject to continuing professional education requirements. Measures that encourage employees to remain current in their fields and enhance their credentials should be part of a balanced scorecard system. In addition, learning and growth measures should be present to encourage innovation in delivering medical services. Examples of measures include budgets and expenditures to support cutting edge procedures, number of experimental treatments attempted, and the number of test projects funded to improve service delivery. A service department must establish its own performance standards. It is not particularly helpful to monitor the activity levels, incident rates, etc. if there is no standard or budget for comparison. For example, expected throughput for surgical services should be specified on a month-by-month basis, and a standard should be set for post-operative infection rates (it may be appropriate to set a target level together with an acceptable or minimum standard). The deviation from these standards is the key management information that should be monitored. Comparative information should be used carefully. In addition to measuring the difference in actual performance from planned, it is often useful to compare current performance with historical and similar departments in other organizations. When comparing performance with outside departments or standards, differences in objectives and standards, measurement practices, information systems, environmental factors, and resource constraints should be considered. Careful study and comparisons of other organizations’ criteria and standards should be undertaken (e. . , admission rates, length of stay, environmental standards). Despite these difficulties, there are many examples where careful use of simple comparative information has helped improve the quality and productivity of service delivery. 5. PRODUCTIVITY: A PARTICULARLY USEFUL TYPE OF OPERATIONAL AND ORGANIZATIONAL MEASURE Increasingly, techniques borrowed from production organizations are being utilized to measure productivity and performance and to balance staff resources for greater flexibility in meeting patient demand. Productivity measures are very useful in hospitals if they are constructed with a clear purpose in mind and have the support of employees. Productivity measures are used for two purposes. First, they report information not previously known by asking the questions; * Is an activity on schedule? * What is the cost of an activity or service? * How productive is a department? Second, they are used to control activities that need to be monitored or limited in some fashion. To be successful, productivity measures must affect employee behavior through a change in the relationship between performance nd rewards and generate commitment by employees to productivity improvement. Hospital department staffs are being asked to do more with less. Where hospital departments historically staffed according to peak loads, they now staff to meet the average load. This demands much greater flexibility in staffing, the greatest productivity challenge to hospitals because of the tremendous fluctuations in demand for hospital services. However, staffing flexibility impacts on service quality in periods when staffing is low and service demand is high. As a result, efforts to improve productivity need to be balanced with quality of care, effectiveness, and social equity. Productivity is easier to measure than these other factors so there is a tendency to focus on productivity measures to the detriment of other important factors in health care, although improvements in productivity may help improve throughput, accessibility to services, and quality of services. A few simple guidelines are useful for building and sustaining a good productivity measurement system. The measures should be developed participatively. A participative approach lessens resistance to measurement and has motivational benefits. The measures should reflect where the hospital wants to be. If the strategic direction changes, then so should the measures. Productivity is a long-term process. Patience is required concerning expected results. Regarding the specific measures used, choose a mix of individual and group performance measures. Clearly, the performance of a hospital depends on a combination of individual and team efforts. Clinical employees often view their work as a set of technical activities that they perform independently. They fail to connect their work to that of individuals and departments preceding and following them. Develop measures that consider the customer’s point of view. Frequently productivity measures neglect to consider that a hospital exits to satisfy patient needs. Develop a family of measures for each department that encompasses productivity, performance, quality, and other relevant measures. Rarely does a single measure adequately describe performance. Broad indices such as nursing hours paid per admission are unlikely to be helpful in identifying the factors behind the performance index or helping managers decide what action needs to be taken. Specific measures may be developed by analyzing the chain of factors between the initial decision to treat a patient and the actual expenses incurred. By looking at each link in the chain, it is possible to identify the factors that generate nursing costs. It is also possible to consider the interrelationship between these measures. For example, a relatively high index for admissions/population may be linked with low average patient activity. 6. COMMUNICATING PERFORMANCE INFORMATION Performance should be communicated to three groups; * Staff * Management * External groups contributing to your objectives. Health managers can only change service delivery through changing the behavior of their staff employees. Therefore, it is necessary to communicate performance information that is credible and meaningful to those personnel. A brief outline of a process for constructing performance measures, feeding back the information, and facilitating staff involvement in performance and productivity improvement may include; * Identifying the key issues relating to both quality and productivity, * Developing a few selected indicators that are useful for that particular work setting, * Establishing the monitoring system and baseline standards/targets, * Facilitating employee involvement in interpreting information, solving problems, and changing behavior, and * Rewarding performance. This degree of participation may not be appropriate to all units but it is imperative that this process start “top-down” to demonstrate management’s commitment and ensure consistency in application. Regardless of the degree of staff participation, the performance indices must be credible, the performance information must be communicated simply and frequently, and the information must be used for action to identify and solve problems, encourage improvements, and reward good behavior. Traditionally, management reporting has been on the basis of inputs, primarily deviations from budget (e. g. , bed and staff numbers), outputs and activity levels (e. g. , numbers of admissions, operations, tests conducted, inspections, etc. ), and progress in implementing plans. Communication with external groups requires information that is simple and credible. The objective of the communication should be very clear. If behavioral change is desired, then the communication will need to be reinforced with discussions and develop mutually acceptable action plans. . LEVELS OF MONITORING AND REPORTING Individuals throughout the organization will be interested in different performance levels of throughput. For example, the manager of surgical services for a multi-location facility might be concerned with total throughput in each surgical specialty (broken into acute and elective), quality as measured by post-operative morbidity, cost as measured by variance from budget, and accessibility as measured by average waiting time. The manager of surgical services at one location might be concerned with far greater detail. Finally, the manager of operating rooms might monitor; * availability of time for elective work (against an agreed upon standard), * availability of workers for acute work (against an agreed upon standard), * quality as measured by anesthetic related complications, * costs broken down into nursing, senior medical, junior medical, technical, etc. , * staff costs associated with scheduled and unscheduled sessions, * costs of OR and anesthetic supplies, * average cost per hour, and * unproductive time due to non-availability of staff. The managers of the surgical departments might also monitor a number of factors relating to their own specialties such as quality as measured by surgical related complications, use of allocated time, unproductive time due to non-availability of surgeons, delays in access to operating rooms for acute operations, and surgeon productivity. 8. CONCLUSION Concern by hospital management for performance and productivity measurement has grown in proportion to cutbacks in government funding for health services, pressure from businesses and insurance companies, and public concerns about the rising costs of health care. These factors have produced heightened competition in the health services industry. Many hospitals are responding by adopting the performance/productivity measurement techniques more commonly found in manufacturing businesses, such as the balanced scorecard. Although scorecards may appear as a fad in the healthcare field, they have in fact earned a permanent place in strategic planning (Pieper 2005). A successful performance/productivity measurement system should follow a few important principles and take account of the unique characteristics of health care. Application of these measurement methods along with some creativity, initiative, and cooperation among hospital employees, customers, and consumers can improve the management and delivery of health care at reduced cost and without loss of quality. REFERENCES Adler, P. S. , P. Riley, S. Kwon, J. Signer, B. Lee & R. Satrasala (2003). Performance improvement capability: Keys to accelerating performance improvement in hospitals. California Management Review 45(2), 12-33. Cleverly, W. & O. Cleverly (2005). Scorecards and dashboards using financial metrics to improve performance. Healthcare Financial Management 59(7), 64-69. Gumbus, A. , B. Lyons & D. E. Bellhouse (2002). Journey to destination 2005: How Bridgeport Hospital is using the balanced scorecard to map its course. Strategic Finance 84(2), 46-50. Gumbus, W. , D. E. Bellhouse & B. Lyons (2003). 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