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Printed in Mexico Print Number: 01 Print Year: 2018 Contents Contributors Foreword Preface vi ix x PART ONE Introduction / 2 Chapter 1 Delivering Value: The Global Challenge in Health Care Management Chapter 2 Leadership and Management: A Framework for Action 3 32 PART TWO Micro Perspective / 56 Chapter 3 Organization Design and Coordination 57 Chapter 4 Motivating People 82 Chapter 5 Teams and Team Effectiveness in Health Services Organizations 98 Chapter 6 Communication 132 Chapter 7 Power, Politics, and Conflict Management 156 Chapter 8 Complexity, Learning, and Innovation 186 Chapter 9 Improving Quality in Health Care Organizations (HCOs) 213 PART THREE Macro Perspective / 240 Chapter 10 Strategy and Achieving Mission Advantage 241 Chapter 11 Managing Strategic Alliances: Neither Make Nor Buy but Ally 277 Chapter 12 Health Policy and Regulation 303 Chapter 13 Health Information Technology and Strategy 332 Chapter 14 Consumerism and Ethics 348 Chapter 15 The Globalization of Health Care Delivery Systems 379 Appendix Acronyms 418 Glossary Author Index Subject Index 421 433 443 Contributors Jane Banaszak-Holl, PhD Professor of Public Health School of Public Health and Preventive Medicine Monash University Melbourne, Australia Elizabeth Howe Bradley, PhD, MBA President Vassar College Poughkeepsie, New York Amanda Brewster, PhD Assistant Professor of Health Policy & Management School of Public Health University of California Berkeley, California Lawton Robert Burns, PhD, MBA The James Joo-Jin Kim Professor, Professor of Health Care Management, and Director of the Wharton Center for Health Management and Economics The Wharton School, University of Pennsylvania Philadelphia, Pennsylvania Martin P. Charns, MBA, DBA Professor of Health Policy and Management School of Public Health, Boston University Investigator and Director Emeritus Center for Healthcare Organization & Implementation Research VA Boston Healthcare System Boston, Massachusetts Jon A. Chilingerian, PhD Professor of Management Heller School, Brandeis University Adjunct Professor of Public Health & Community Medicine Tufts School of Medicine Waltham, Massachusetts Ann F. Chou, PhD, MPH, MA Associate Professor of Family and Preventive Medicine College of Medicine University of Oklahoma Health Sciences Center Oklahoma City, Oklahoma Ann Leslie Claesson-Vert, PhD, MSN, PSP Associate Clinical Professor Lead Faculty Personalized Learning MSN Program Northern Arizona University, North Valley Campus Phoenix, Arizona Thomas D’Aunno, PhD Professor of Management Robert F. Wagner Graduate School of Public Service New York University New York, New York Mark L. Diana, MBA, MSIS, PhD Drs. W.C. Tsai and P.T. Kung Professor in Health Systems Management Associate Professor and Chair, Department of Health Policy and Management Tulane University New Orleans, Louisiana Amy C. Edmondson, PhD Novartis Professor of Leadership and Management Harvard Business School Boston, Massachusetts Bruce Fried, PhD Associate Professor Department of Health Policy and Management University of North Carolina at Chapel Hill Chapel Hill, North Carolina Mattia J. Gilmartin RN, PhD, FAAN Executive Director NICHE I Nurses Improving Care for Healthsystem Elders Rory Meyers College of Nursing New York University New York, New York Jennifer L. Hefner, PhD, MPH Assistant Professor Division of Health Services Management and Policy College of Public Health The Ohio State University Columbus, Ohio Christian D. Helfrich, PhD, MPH Core Investigator, VA Puget Sound Health Services Research and Development Research Associate Professor, Health Services School of Public Health University of Washington Seattle, Washington CONTRIBUTORS  Timothy Hoff, PhD Professor of Management, Healthcare Systems, and Health Policy D’Amore-McKim School of Business School of Public Policy and Urban Affairs Northeastern University Boston, Massachusetts Peter D. Jacobson, JD, MPH Professor Emeritus of Health Law and Policy Director, Center for Law, Ethics, and Health University of Michigan School of Public Health Ann Arbor, Michigan John R. Kimberly, PhD Henry Bower Professor of Entrepreneurial Studies Professor of Management Professor of Health Care Management The Wharton School, University of Pennsylvania Philadelphia, Pennsylvania Sumit R. Kumar, MD, MPA Resident Physician, Yale New Haven Hospital Department of Internal Medicine Yale School of Medicine New Haven, Connecticut Kristin Madison, JD, PhD Professor of Law and Health Sciences Northeastern University Boston, Massachusetts Ann Scheck McAlearney, ScD, MS Executive Director, Professor of Family Medicine CATALYST, The Center for the Advancement of Team Science, Analytics, and Systems Thinking College of Medicine, Ohio State University Columbus, Ohio Eilish McAuliffe, PhD, MSc, MBA Professor of Health Systems School of Nursing, Midwifery, and Health Systems College of Health and Agricultural Sciences University College Dublin Dublin, Ireland Mario Moussa, PhD, MBA Adjunct Instructor Division of Programs in Business School of Professional Studies New York University New York, New York Ingrid M. Nembhard, PhD, MS Fishman Family President’s Distinguished Associate Professor of Health Care Management The Wharton School, University of Pennsylvania Philadelphia, Pennsylvania Derek Newberry Adjunct Professor Organizational Dynamics and Anthropology University of Pennsylvania Ann Nguyen, PhD, MPH Postdoctoral Fellow Department of Population Health School of Medicine New York University New York, New York Laurel E. Radwin, PhD, RN Research Health Scientist (formerly) Center for Healthcare Organization and Implementation Research Boston VA Healthcare System Boston, Massachusetts Kevin W. Rockmann, PhD Professor, School of Management George Mason University Fairfax, Virginia Aditi Sen, PhD Assistant Professor of Health Policy and Management Bloomberg School of Public Health Johns Hopkins University Baltimore, Maryland Lauren Taylor, MPH Doctoral Candidate Harvard Business School Harvard University Gregory L. Vert Assistant Professor College of Security and Intelligence Embry Riddle Aeronautical University Prescott, Arizona Karen A. Wager, DBA Professor and Associate Dean for Student Affairs Department of Healthcare Leadership and Management College of Health Professions Medical University of South Carolina Charleston, South Carolina Stephen L. Walston, PhD Professor Director, MHA Program David Eccles School of Business University of Utah Salt Lake City, Utah vii viii CONTRIBUTORS Bryan Jeffrey Weiner, PhD Professor, Departments of Global Health and Health Services University of Washington Seattle, Washington Gary J. Young, JD, PhD Director, Northeastern University Center for Health Policy and Healthcare Research Professor of Strategic Management and Healthcare Systems Northeastern University Boston, Massachusetts Edward J. Zajac, PhD James F. Beré Professor of Organization Behavior J. L. Kellogg Graduate School of Management Northwestern University Evanston, Illinois Foreword F or twenty-five years and six editions, we have attempted to provide an integrative perspective to the organization and management of health services, presenting the major management theories, concepts, and practices of the day. We have also provided practical illustrations and guidelines to assist managers and prospective managers in the provision of health services in a variety of settings. The book is divided into three sections. The first section provides two insightful introductory chapters presenting the challenges of providing health services and some of the conceptual maps necessary to help guide managers in the decision-making process and providing a framework for understanding the role and contributions of management and leadership within a variety of health care settings. As we go to press, we have entered the era of health care reform, presenting new and perhaps not so new challenges and opportunities. Under the leadership of Rob Burns, Elizabeth Bradley, and Bryan Weiner, the invited chapter authors have provided a thoughtful and in-depth analysis of the theories, concepts, and approaches that managers and prospective managers need to address the critical issues in the provision of health services as well as meet the challenges and opportunities resulting from health care reform. The next section focuses on the Micro Perspective— Managing the Internal Environment. This perspective addresses the classic issues of organization design, motivation, communications, power, organizational learning, performance/quality improvement, and managing groups and teams. Each chapter provides an “In Practice” scenario that sets the scene for the concepts and tools for effective management. While these represent significant changes in the operation of the delivery system, the fundamental managerial challenges remain and will continue to require skillful attention if health care and the various delivery organizations are to realize their potential. Issues of maintaining a motivated workforce, assuring state-of-the-art practice patterns, coordinating various disciplines and specialties to the benefit of patient care, and accommodating an ever-expanding technology within a market economy that would benefit the patient and the larger community have been and will continue to be the major responsibility of management. managers will need to succeed in the years ahead. The last section, the Macro Perspective—Managing the External Environment, focuses on the organizational conThe passage of health care reform brings a great text and addresses the challenge of achieving competitive deal of uncertainty as it attempts to address the long-­ advantage and managing alliances. Four new chapters standing problems of access, quality, cost contain- will help prepare managers for the uncertainty of the ment, and ­significant disparities under unprecedented years ahead. These include the challenges of managing ­economic conditions. Much has changed as reflected an ever-expanding information technology, consumerism, in the ­mandates regarding access to coverage, coverage an increasingly complex regulatory environment, and itself, the role of public and private programs, and health finally the recognition that we live in a globalized world. insurance exchanges as well as the role of comparative Health services management has come of age, and effective studies, payment reforms, accountable care Burns, Bradley, Weiner, and their colleagues have preorganizations, and patient-centered medical homes. sented the theories, concepts, and guidelines that future This seventh edition provides readers with the relevant theories, concepts, tools, and applications to address operational issues that managers face on a daily basis. As described in the lead chapter, the key challenge facing organizations and their managers is to deliver “value”— the ratio of quality to cost. While this has always been a concern, the reality of present-day economics and the developing science has made this imperative. Stephen M. Shortell, PhD Blue Cross of California Distinguished Professor of Health Policy & Management Professor of Organizational Behavior, Haas School of Business and Dean, School of Public Health University of California, Berkeley Berkeley, California Arnold D. Kaluzny, PhD Professor Emeritus of Health and Policy & Management, Gillings School of Global Public Health, and Senior Research Fellow Cecil G. Sheps Center for Health Services Research, University of North Carolina at Chapel Hill, Chapel Hill, North Carolina Preface INTRODUCTION facing health care organizations, and examines the roles of leaders and managers in influencing organizational culture, performance, and change. Part 2 focuses on core leadership and managerial tasks within organizations. These include motivating people, guiding teams, designing structure, coordinating work, communicating effectively, exerting influence, resolving conflict, negotiating agreements, improving performance, and managing innovation and change. Part 3 describes the broader context in which health care organizations operate and discusses the managerial implications of several emerging trends and issues. These include the pursuit of strategies to achieve the organization’s mission, the growth of strategic alliances in the health sector, the expansion and complexity of health law and regulation, the uses and challenges of health information technology, the rise of consumerism in health care, and the global interconnectedness of health systems. This book is intended for those interested in a systemic understanding of organizational principles, practices, and insights pertinent to the management of health services organizations. The book is based on state-of-the-art organization theory and research with an emphasis on application. Although the primary audience is graduate students in health services administration, management, and policy programs, the book will also be of interest to undergraduate programs, extended degree programs, executive education programs, and practicing health sector executives interested in the latest developments in organizational and managerial thinking. It is also intended for students of business, public administration, medicine, nursing, pharmacy, social work, and other health professions who will assume managerial responsibilities in health sector organizations or who want to learn more about the organizations in which they will spend the major portion of their professional lives. Previous editions have been translated into­ Polish, Korean, Ukrainian, and Hungarian, and we look The Seventh edition continues several popular features forward to the book’s continued use by our international from the sixth edition. These include the following: colleagues. • An explicit list of topics provided at the beginning of each chapter. FEATURES TEXT APPROACH The seventh edition broadens the view of the health care sector beyond the traditional focus on hospitals and other provider organizations to include suppliers, ­b uyers, regulators, and public health and financing ­organizations. It offers a comparative, global perspective on how the United States and other countries address issues of health and health care. Additionally, the book discusses managerial implications of emerging issues in health care such as public reporting, pay for performance, information technology, retail medicine, ethics, and medical tourism. Finally, this seventh edition expands upon a major theme of prior editions: health care leaders must effectively design and manage health care organizations while simultaneously influencing and adapting to changes in environmental context. Managing the boundary between the internal organization and its external environment is therefore a central task of health care leadership. ORGANIZATION The organization of the book reflects this expanded theme. Part 1 provides an overall perspective on the health care sector, discusses the distinctive challenges • Specific behaviorally oriented Learning Objectives highlighted at the beginning of each chapter. • A list of Key Terms that readers should be able to define and apply as a result of reading each chapter. • An “In Practice” column describing a practical situation facing a health services organization. • A section in several chapters called “Debate Time,” which poses a controversial issue or presents divergent perspectives to stimulate the reader’s thinking. • Comprehensive Managerial Guidelines and Summary points at the conclusion of each chapter. • Discussion Questions that help reinforce chapter concepts. NEW TO THIS EDITION The seventh edition updates the case studies included in the sixth edition along with the case discussion questions. It also updates the ongoing developments in health policy and regulation, as well as the research evidence in each chapter’s subject matter. It also includes several new authors, expanding the community of healthcare management scholars contributing to this volume. PREFACE MINDTAP MindTap is a personalized teaching experience with relevant assignments that guide students to analyze, apply, and improve thinking, allowing you to measure skills and outcomes with ease. • MindTap features a complete integrated course combining additional quizzing and assignments, and application activities along with the enhanced ebook to further facilitate learning. • Personalized Teaching: Becomes yours with a Learning Path that is built with key student objectives. Control what students see and when they see it. Use it as-is or match to your syllabus exactly–hide, rearrange, add and create your own content. • Guide Students: A unique learning path of relevant readings and activities that move students up the learning taxonomy from basic knowledge and comprehension to analysis and application. • Promote Better Outcomes: Empower instructors and motivate students with analytics and reports that provide a snapshot of class progress, time in course, engagement and completion rates. INSTRUCTOR RESOURCES Instructor Companion Site The Instructor Companion site for this text offers many valuable support materials. To access the Instructor Companion site, go to http://login.cengage.com. If you have a Cengage SSO account: Sign in with your e-mail address and password. If you do not have a Cengage SSO account: Click Create My Account and follow the prompts. The following support materials are included: • Electronic Instructor’s Manual—The Instructor’s Manual that accompanies this book includes an overview of the In Practice and Debate Time material from the text, suggested solutions to the end-of-chapter discussion questions and case studies, teaching tips and exercises, complimentary reading lists, suggested solutions to the Vignette material in the study guide, and an overview of additional Debate Time material from the study guide. • PowerPoint presentations —This book comes with ­Microsoft PowerPoint slides for each chapter. They’re included as a teaching aid for classroom p ­ resentation, to make available to students on the network for chapter review, or to be printed for classroom distribution. Instructors, please feel free to add your own slides for additional topics you introduce to the class. • ExamView®—ExamView®, the ultimate tool for o­ bjectivebased testing needs, is a powerful test generator that xi enables instructors to create paper, LAN, or Webbased tests from test banks designed specifically for their Cengage Course Technology text. Instructors can utilize the ultraefficient QuickTest Wizard to ­c reate tests in less than five minutes by taking advantage of Cengage Course Technology’s questions banks or customize their own exams from scratch. • Sample Course Syllabus —The Sample Syllabus was developed to help instructors customize specific course titles. ABOUT THE AUTHORS Lawton Robert Burns is the James Joo-Jin Kim Professor and Professor of Health Care Management in the Health Care Management Department at the Wharton School, University of Pennsylvania. He is also Director of the Wharton Center for Health Management and Economics, and Co-Director of the Roy & Diana Vagelos Program in Life Sciences and Management. His research focuses on hospital–physician relationships, strategic change, integrated health care, supply chain management, health care management, formal organizations, physician networks, and physician practice management firms. Dr. Burns is the author of several books, including Managing Discovery: Harnessing Creativity to Drive Biomedical Innovation (2018), China’s Healthcare System and Reform (2017), India’s Healthcare Industry (2014), The Business of Healthcare Innovation (2012), Health Care History and Policy in the United States (2006), and The Health Care Value Chain (2002). He is the recipient of numerous grants, fellowships, and awards, including the 2015 Keith Provan Distinguished Scholar Award from the Academy of Management and its Health Care Administration Division. Dr. Burns has also provided expert witness testimony for the federal government as well as for the private sector. He is a member of the Academy of Management and the American Hospital Association. Lawton R. Burns has a Bachelor of Arts Degree in Sociology and Anthropology, a Master’s Degree in Sociology, a Masters in Business Administration, and a Doctor of ­Philosophy Degree in Sociology. Elizabeth Howe Bradley, PhD, is the President of ­ assar College in Poughkeepsie, New York. She was preV viously a Professor of Public Health at the Yale School of Public Health, where she directed the Health Management Program for a decade and subsequently the Global Health Leadership Institute. Bradley is renowned internationally for her work on quality of hospital care and large-scale health system strengthening efforts within the US and abroad. Bradley is the author of The American Healthcare Paradox: Why Spending More Is Getting Us Less and the 2018 recipient of the William B. Graham Prize for Health Services Research, the highest distinction that researchers in the health services field can xii PREFACE achieve. Bradley was elected to the National Academy of Medicine in 2017. President Bradley has a Bachelor of Arts Degree in Economics, a Master of Business Administration, and a Doctor of Philosophy Degree in Health Policy and Health Economics. Bryan Jeffrey Weiner, PhD, is Professor in the Departments of Global Health and Health Services at the University of Washington. Dr. Weiner directs the Implementation Science Program in the Department of Global Health and serves as the Strategic Hire in Implementation Science for the School of Public Health. His research focuses on the adoption, implementation, and sustainment of innovations and evidence-based practices in health care organizations. He is member of the Academy of Management, Academy Health, and the American Public Health Association. Dr. Weiner has a Bachelor of Arts Degree in Psychology, a Master of Arts Degree in Organizational Psychology, and a Doctor of Philosophy Degree in Organizational Psychology. ACKNOWLEDGMENTS We believe that the major strength of this text is the diversity of the talented authors, who contributed multiple perspectives, experiences, skills, and expertise to each chapter. The new and substantially revised chapters reflect the breadth and depth of the authors’ expertise as well as their fresh perspectives. We wish to acknowledge with gratitude the immeasurable contribution that Stephen Shortell and Arnold Kaluzny have made in the fields of health care management research and education. As scholars, advisors, mentors, and colleagues, they have deeply influenced our work and our professional lives. Through the six editions of this book, over the past twenty-five years, they have helped educate a generation of health services researchers, policy makers, managers, and health professionals. We hope that the seventh edition sustains the tradition of excellence that these gentlemen have established. Finally, we wish to acknowledge Lauren Taylor and Rachelle Alpern for their excellent editorial assistance. Lawton Robert Burns University of Pennsylvania Elizabeth Howe Bradley Vassar College Bryan Jeffrey Weiner University of Washington 1 Part one Introduction Chapter 1 Delivering Value: The Global Challenge in Health Care Management Lawton Robert Burns, Elizabeth H. Bradley, and Bryan J. Weiner CHAPTER OUTLINE • The Challenge: Deliver Value • Challenge of Rising Health Care Costs: Supply- and Demand-Side Price and Volume Drivers • Other Challenges Exacerbating the Value Challenge • The Challenges are Global • Complexity of the U.S. Health Care System • Why Changing the Health Care System Is So Difficult • Systemic Views of Health and U.S. Health Care • Organization and Management Theory • Summative Views of Organization Theory • Organization Theory and Behavior: A Guide to This Text LEARNING OBJECTIVES After completing this chapter, the reader should be able to: 1. Discuss the challenge of delivering value in health care 2. Identify the major forces affecting the delivery of health services 3. Distinguish the similarities and differences in the forces shaping health services globally 4. Discuss why it is difficult to change the health care industry 5. Develop a system view of health care delivery 6. Discuss the different types of firms operating in a health care system 7. Identify, discuss and apply the major perspectives and theories on organizations to real problems facing health care organizations 8. Analyze in analyzing problems from multiple theoretical lenses KEY TERMS Ambidexterity Evidence-Based Medicine Bending the Cost Curve External Environment Bounded Rationality Health Systems Bureaucracy Hospital–Physician Relationships Classical School of Administration Human Relations School Complex Adaptive System Institutional Theory Contingency Theory Iron Triangle Decision-Making School Macro Perspective 4 PART 1 • Introduction Micro Perspective Social Network Approach Moral Hazard Strategic Management Perspective Open Systems Theory System Perspectives Population Ecology Triple Aim Resource Dependence Theory Value Scientific Management School Value Chain • • • IN PRACTICE: The GAVI Alliance The Global Alliance for Vaccines and Immunization (GAVI) is one of the largest global health initiatives (GHIs) that targets specific diseases/conditions to help meet Millennium Development Goals. GAVI was launched at the World Economic Forum on January 31, 2000, to improve the distribution of new and underused vaccines to low-income countries and thereby reduce childhood mortality and morbidity, and increase the health status of these populations (GAVI Alliance, 2010; Martin and Marshall, 2003; Milstien et al., 2008). GAVI was a partnership of developing countries, organizations involved in international development and finance (e.g., United Nations Children’s Fund, the World Health Organization, the World Bank), the pharmaceutical industry, and philanthropic organizations (e.g., the Bill and Melinda Gates Foundation provided seed funding of $750 million). GAVI lacked presence at the local level, and thus relied on its partners for planning and implementation in each country. A number of managerial challenges faced the GAVI Alliance in achieving its goals. First, the vision of the GAVI Alliance had to motivate local countries to participate in this vaccination program and gradually increase their own funding for it. Second, local countries needed to accept the responsibility to deliver the vaccine programs and the attendant results. Third, these countries had to help develop and manage local infrastructure to deliver the vaccines to rural populations—often referred to as the last hundred yards or miles of the supply chain. This meant the countries needed not only transportation and distribution networks but also a cadre of local health care workers with training in vaccine storage and administration. Fourth, the GAVI Alliance had to manage diverse stakeholders, including its core founding members such as the World Bank, WHO, UNICEF, and the Gates Foundation. Fifth, the GAVI Alliance had to operate with a lean structure such that bureaucracy did not slow its progress. Sixth, the alliance had to develop leverage over pharmaceutical firms to purchase the needed drugs at a lower cost, which local countries could afford. Last, the GAVI Alliance needed a clear governance structure with defined responsibilities for partners. Since its inception in 2000 through 2013, GAVI directly supported the immunization of 440 million children (e.g., for Hepatitis B, Haemophilus influenzae type B (Hib), and yellow fever), with an increase in global immunization coverage rates from 70 percent to 83 percent. Such efforts have helped to decrease the global under-five mortality rate. In addition to speeding up population access to underused vaccines, GAVI has also pursued efforts in strengthening health systems, improving vaccine storage and delivery, getting immunization onto national health agendas, and stimulating research and development for vaccines (World Bank Group, 2012). Despite its success, GAVI has not been without its problems. Although the alliance necessarily focused heavily on developing partnerships and initiating vaccine coverage, less attention was paid to implementation of plans and mobilization of resources for ongoing treatment (in-country follow-up). One reason may be that vaccine costs have risen both absolutely and as a percentage of the total health expenditures, and vaccinations may not be the top priority of developing-country governments (Milstien et al., 2008; Muraskin, 2004). Moreover, the alliance partners needed to grapple with the large supply chain “system costs” required to handle, transport, and store the drugs (Lydon et al., 2008) and the issue of securing long-term financial commitments from its partners. An additional problem is that GAVI’s single-minded focus on vertical programs such as vaccination may have diverted countries from broader efforts to develop and finance their health systems. The “Gates Foundation approach” to global health, focused on targeted technical solutions with clear and measurable outcomes, did not fit easily with broader investments needed in the social determinants of health (e.g., social and economic development) (Storeng, 2014). GAVI acknowledged this issue by adopting “health system strengthening” (HSS) as a core principle, but such support was still heavily concentrated on procuring drugs, equipment, and supplies (Tsai, Lee, and Fan, 2016). Finally, in 2008, GAVI reorganized its informal alliance model to become an independent legal entity that diluted the influence of its founding partners. World Bank interactions with and financing of GAVI immunization efforts subsequently declined. Chapter 1 • Delivering Value: The Global Challenge in Health Care Management CHAPTER PURPOSE A central challenge in delivering health care services in the new millennium is the challenge of delivering value. Value is created when (a) additional features of quality or customer service desired by a customer can be provided at the same cost or price, (b) a given set of features of quality or customer service can be delivered at a lower cost or price relative to other producers, or (c) additional features of quality can be provided at a lower cost. At a societal level, health and wealth exert beneficial effects on one another. Investments in health care delivery that improve quality and/or reduce cost can improve health status, which in turn can support economic growth and political stability (Burns, D’Aunno, and Kimberly, 2003; Esty et al., 1999; Sachs, 2001). Conversely, economic development that raises the standard of living and ­s ocioeconomic conditions improves the population’s health (Cutler, Deaton, and Lleras-Muney, 2006; Liu, Yao, and Du, 2015). Nevertheless, health investments that enhance value are not always made. For instance, despite evidence of the benefits of immunization coverage (Martin and Marshall, 2003; World Health Organization, 1996) and a steady increase globally during the 1970s and 1980s, immunization coverage declined sharply in the 1990s due to curtailed government funding in low-income countries. For example, Mao’s agenda to increase public health investments in China, which led to rapidly increasing life expectancy, was reversed and subordinated to economic growth under Deng Xiaoping as a part of the country’s economic liberalization reforms. The GAVI Alliance entered in 2000 and, during its first 13 years, raised over $8.4 billion, disbursed over $6 billion to 76 countries, improved the quality and safety of vaccines administered in poor countries, reduced the procurement cost of these drugs through centralized purchasing, and immunized nearly half a billion children against deadly or disabling diseases. Why was this approach not already taken? To effect major changes in health care delivery and increase value, as the GAVI Alliance has, organizations require extraordinary approaches. Such approaches critically hinge on several management competencies. These include assembling (global) alliances, clarifying the governance structure of the alliance, developing the local health care infrastructure to deliver the needed services, balancing global and local commitments, and developing local ownership of health initiatives. Managerial skills (including but not limited to developing alliances, negotiating governance and roles, conflict management, managing change, forging strategic plans and leadership) are critical components of the manager’s “tool kit” in any health care system. These skills are described in subsequent chapters in this volume. 5 THE CHALLENGE: DELIVER VALUE The key challenge facing health care firms is to deliver value, defined as the quotient of quality divided by cost (Porter and Teisberg, 2006). That is, firms are asked to deliver a higher level of quality at the same cost, the same level of quality at a lower cost, or higher quality at a lower cost (Institute for Health Care Improvement, 2009). More expansive definitions include patient access and convenience along with quality features (Lee, 2015). In the United States, this challenge has been proposed to (a) providers, in the form of accountable care organizations (ACOs), pay-for-performance (P4P), and other types of value-based contracting; (b) insurers, in the form of value-based insurance design (VBID); and (c) suppliers, in the form of outcomes-based contracts with insurers (Barlas, 2016). Value-based health care has recently become a global concern. In 2016, the World Economic Forum launched its “Value in Healthcare” project to stimulate national health system reforms around value. That same year, The Economist Intelligence Unit (2016) issued its global assessment of value-based health care across 25 countries. Common components of value-based health care include an ecosystem of supporting institutional and policy structures, coalitional support from broad stakeholders, support of professionals who are trained in value-based health care, quality measurement and standardization, cost measurement, integrated and patient-focused care, and payment based on outcomes. In order to create and deliver value, health care organizations must find a way to address three health policy goals of our health care system since the late 1920s: improve the quality of care, improve access to care, and reduce cost and cost acceleration—for example, bending the cost curve, or the reducing of health spending relative to projected trends (Commonwealth Fund, 2007a). In past decades, providers have been asked to demonstrate a similar value (quality/cost) proposition using a series of management techniques, such as total quality management (e.g., reducing process variation and simultaneously raising the level of process performance), ­supply chain management (e.g., standardizing products to achieve consistency in use and lower unit cost), and clinical integration (standardizing care paths and protocols to reduce clinical practice variations and improve quality of care). Numerous health services researchers have questioned whether all three goals are simultaneously attainable (Chen et al., 2010; Katz, 2010) or require a balancing act (Berwick, Nolan, and Whittington, 2008). The achievement of these three goals is sometimes referred to as the iron triangle of health care (Kissick, 1994). Picture an equilateral triangle, with three equal angles of 6 PART 1 • Introduction 60 degrees, and assume that each angle is one of these three policy goals. Any effort to address one policy angle widens that angle (e.g., access) at the expense of one or both of the other two angles (e.g., quality or cost). For example, the Patient Protection and Affordable Care Act (PPACA) expanded insurance coverage to 24 million citizens but at a cost of roughly $1 trillion that needed to be recouped via taxes, lower provider reimbursements, and other programmatic savings (CMS, 2010). Provider organizations in the health care industry have nevertheless been required to accomplish the quality and cost goals at the same time. Since the 1990s, employers have monitored health plans (and thus their provider networks) in terms of four domains of measures known as the Healthcare Effectiveness Data and Information Set (HEDIS), which resemble the iron triangle: effectiveness of care, access/availability of care, utilization and relative resource use, and experience of care. The Institute of Medicine (IOM, 2001)—now known as the National Academy of Medicine—articulated six “aims for improvement” in a high-performing health care system: care should be safe, effective, patient-centered, timely, efficient, and equitable. Most recently, providers in the United States have been encouraged to pursue “the triple aim” that builds upon the IOM’s six aims: improving the patient’s experience of care, improving the health of the population, and reducing the per capita cost of care (Berwick, Nolan, and Whittington, 2008). These three aims have been baked into the quality scorecard used to measure ACO performance in the Medicare program. The balancing of broad health policy goals is apparent on a global scale as well. The World Health Organization (WHO, 2000) uses three criteria to rank national health systems: health status (similar to quality), responsiveness to the expectations of the population (similar to access), and social and financial risk protection (similar to cost). CHALLENGE OF RISING HEALTH CARE COSTS: SUPPLY- AND DEMANDSIDE PRICE AND VOLUME DRIVERS One reason why the health system is challenged to deliver value is that the denominator—health costs—has risen steadily over time and proven difficult to restrain. National health expenditures in the United States have been rising at roughly 2.3 percent annually above the growth in gross domestic product for the past five decades (Altman, 2010; Blumenthal, Stremikis, and Cutler, 2013). Some have argued that public and private sector efforts work to temporarily rein in this rate of increase, only to see the cost escalation return (Altman and Levitt, 2002; Jost, 2012). Such rising costs make health care increasingly unaffordable to the individual and crowd out other public spending. Why do costs rise inexorably? Many experts argue that the underlying driver of rising costs is technology and its broad application to new patients and patient indications (Aaron and Ginsburg, 2009; Commonwealth Fund, 2007b; Congressional Budget Office, 2008a, b). Following Weisbrod (1991), technological improvements spur higher prices, higher demand, and higher costs— all of which call for greater insurance coverage for the new technology, which then drives further technological innovation. Technology contributes to rising costs in other ways. In contrast to other industries, health care technology is often a complement rather than a substitute for labor—for example, requiring many technicians to utilize the new equipment. Moreover, providers often compete for patients based on the sophistication of the services and equipment they offer, leading to expensive excess capacity and duplication in a local market (“technology wars”). Insurance is another driver of rising costs, as broader coverage (e.g., for more people or more benefits) increases demand and thus health spending, as well as the attendant problem of moral hazard (Arrow, 1963) whereby the insured utilize more health care than they would if they paid for services out of pocket (i.e., from their own resources without insurance). There are several supply- and demand-side drivers of rising health costs. On the supply side, costs are driven by imperfect information markets whereby purchasers and consumers of health care are not able to discern quality differences perfectly among health care providers, make few repeat purchases, and enjoy less transparency of pricing, which allows great variation in the economic rents earned by providers of the same product or service. Such rents also result from provider market power. Costs are also driven in part by providers’ practice of defensive medicine, providers’ focus on acute rather than chronic care or prevention, and poor coordination of services among providers (Studdert et al., 2005; Towers Perrin, 2008). Finally, costs are driven by geographic variations in the supply of hospital beds and specialist physicians, which may induce demand (Roemer, 1961). On the demand side, costs are driven by the tax-free treatment of health care benefits (which contributes to richer health benefit packages and induces moral hazard), as well as public and private sector financing of health care through a third-party payment system of insurers and other fiscal intermediaries outside the patient–provider relationship. Favorable tax treatment and a third-party payer system combine to insulate the consumer/patient from the true cost of the health care services they demand. In addition, demand is driven by a country’s national wealth, the expectations of its population, the highly technological nature of health care Chapter 1 • Delivering Value: The Global Challenge in Health Care Management 7 GEOGRAPHIC VARIATION IN HEALTH CARE SPENDING: A CLOSER LOOK Health care expenditures in the United States have been rising for decades (Jost, 2012), but per capita spending on health care varies widely across the country. There are well-known variations in spending across states, hospitals, and even physicians to treat the same condition. Earlier, the Dartmouth Atlas suggested that the cost and quality of the services rendered to the Medicare population were either negatively correlated or not correlated at all, suggesting that Medicare spending could be reduced by decreasing such variations without harming quality (Wennberg, Fisher, and Skinner, 2002). Why does health care spending vary so much across the country? The reasons are complex and difficult to tease apart. Differences in prices of health care services and severity of illness play an important role, but together these factors account for only half of the geographic variation in spending. Regional differences in the supply of specialist physicians and health care facilities are also thought to play a role. Regional differences in provider willingness to adopt new technologies or provide costly treatments that might or might not improve health care outcomes are also thought to increase costs. Most recently, research has identified variations in the cost and utilization of post-acute care services (e.g., nursing homes) as a major driver (Newhouse and Garber, 2013). Researchers have also challenged the Dartmouth Atlas research findings noted above by showing that across all funding sources (e.g., Medicare, commercial payers, etc.) higher levels of spending in wealthier states may translate into higher quality of care (Cooper, 2008). Scholars and policy makers looking to slow the rate of growth in health care expenditures (“bend the cost curve”) point to organized delivery systems that focus on coordinated care and prevention as a promising way to reduce the costs associated with the efficiencies, misaligned incentives, and poor quality attributed to the highly fragmented nature of the health care system that currently exists in the United States. In his efforts to promote health reform, for example, President Barack Obama praised the Mayo Clinic in Minnesota and the Cleveland Clinic in Ohio as examples of hospitals providing the highest-quality care at costs well below the national norm and suggested that all providers in the country practice their type of medicine. Debate Time: Overuse, Underuse, and Misuse of Health Care Researchers at the Rand Corporation suggest that the health care system suffers from three process problems in delivering quality: overuse of services, underuse of other services, and misuse of still other services (Schuster, McGlynn, and Brook, 1997). Overuse characterizes those services and procedures that are expensive and where the potential for harm to patient’s health exceeds the possible benefit, such as the excessive use of antibiotics for viral infections. Underuse characterizes those services that are likewise costly to perform but increase the quality of care and produce favorable patient outcomes, such as vaccinations, preventive visits, and taking medications as prescribed. Misuse, finally, characterizes those services that add costs without necessarily harming the patient, such as extra lab tests, unnecessary screening (PSA), or avoidable complications. In early 2017, The Lancet devoted an entire issue to the global nature of these three problems. What do you think? • Which of these three problems do you think is most prevalent? • Which of these three problems do you think is most important to address? • What managerial strategies might you employ to address each one? services, and the health behaviors of its population. These supply and demand drivers are listed in Table 1.1. There are many price and volume drivers of rising costs as well. Price drivers include provider consolidation and the resulting lack of competition, development of new technologies, rising labor costs, provider cost-shifting, and consumer preferences for care in higher-cost settings. Volume drivers include fee-for-service payment, rise of chronic diseases, consumer demand, defensive medicine, lack of care coordination, and fraud and abuse. A handful of axioms govern the demand side of this vast system that may be peculiar to health care. The first is that technological innovations and their application are desired by providers, desired by patients, and drivers of rising health care costs (“the technological imperative”) 8 PART 1 • Introduction (Fuchs, 1986; Gelijns and Rosenberg, 1994). A second axiom is that technology drives specialization in the medical (and nursing) field, which further drives up health care costs. A third axiom is that every citizen deserves the finest health care now made available by these technological developments (often defined as the product or service offered by my firm) as long as someone else pays for it. Another axiom following from the technological imperative is that cost and price are the key issues germane to all parties. Indeed, the one issue that currently unites the entire value chain in health care is reimbursement; many analysts anticipate that it will be the patient/ consumer who unites the chain in the future. Last, technological innovation and its attendant costs spur the spread of insurance coverage for such innovation, which increases spending on innovation, which fuels yet more innovation (Weisbrod, 1991). OTHER CHALLENGES EXACERBATING THE VALUE CHALLENGE Complicating the difficulty of providing value, health care systems face a number of other challenges. One key problem involves measuring and managing quality of care. Providers are confronted by multiple payers with different quality performance scorecards; moreover, many of the quality metrics are not highly correlated with one another (cf. Smith et al., 2017). Another key problem is the growing burden of chronic illness in the population (both in the United States and globally), which requires more clinician time and resources to treat. Other challenges include increasing patient demand and expectations, increasing payer and societal demands for accountability, unexpected epidemiological shifts, calls for greater patient safety, increasing complexity, strains on federal and state government budgets, inadequate supply of primary care practitioners, reported shortages of specialists and other health personnel, erosion of the public’s trust in physicians and hospitals, growing concerns over privacy of personal health information, lack of transparency in prices and information, conflicts of interest and incentives, lack of consumerism, lack of efficient and effective use of information technology, and provider resistance to change (Dranove, 2008; Herzlinger, 2006; Porter and Teisberg, 2006). On top of these challenges one can lay a series of delicate balancing acts that health care firms (and society as a whole) must deal with beyond the value equation. These include meeting rising demand and expectations with finite resources (both capital and labor), addressing chronic care needs with an acute care–based delivery system, fostering population-based models of care amidst a system based on physicians in small groups or solo practice, sharing information while respecting patient privacy, incorporating modern therapeutic and technological advances while restraining the rate of growth in cost, and promoting wellness behaviors in a system that finances acute care seeking. Table 1.1 Supply- and Demand-Side Drivers of Health Costs Supply-Side Drivers Demand-Side Drivers Imperfect information regarding price and quality Tax treatment of health care benefits Provider market power Third-party payment system Nonprice competition (e.g., technology wars) Breadth and depth of insurance coverage Technology and its diffusion Moral hazard Geographic variations Rising national income Poor coordination among providers Poor healthy behaviors Fee-for-service payment systems Private sector financing of care, which supplements public spending, encourages greater coverage, and may promote cost-shifting Excess capacity Acute care focus of delivery system Limited primary care Malpractice fears and pressures Chapter 1 • Delivering Value: The Global Challenge in Health Care Management THE CHALLENGES ARE GLOBAL The problems, issues, and challenges facing the health care industry are global, confronting health care systems in many countries (Burns, 2014; Burns and Liu, 2017; see also Chapter 15). As an illustration, Table 1.2 identifies some of the common issues and problems facing the health care systems of India, China, and the United States. These countries have populations that are quickly aging—true especially of China, and increasingly so for both India and the United States. All three countries face a huge epidemiologic transition from acute care to chronic illness, with underdeveloped systems for dealing with chronic care (especially true in the East). Populations in all three countries have developed more sedentary lifestyles, with increasing incidence of diabetes, obesity, and hypertension. All three countries have populations with substantial national wealth that are now demanding more health care services and thereby increasing health care costs Table 1.2 Parallel Concerns in the United States, India, and China • Concern with iron triangle • Concern with high hospital costs as cause of impoverishment/bankruptcy • Concern with the high costs of technology • Concern with geographic disparities in health status • Concern with conflicts of interest and supplier-induced demand • Concern with prices as driver of rising health care costs • Concern with lifestyle issues and behaviors rapidly. Not surprisingly, all three countries also report that health care costs are a major source of personal and family bankruptcy. Finally, all three countries face the common issue of how to balance the demand for technological innovation by providers and patients with its high cost. At the same time, there are several major divergences between these health care systems (see Table 1.3). The U.S. health care system compared with India or China spends a much higher proportion of its gross domestic product on health care and provides a higher level of insurance coverage to its population. While health insurance programs are now spreading across India (increasingly private sector) and China (mostly public sector), they provide coverage for a limited range of services (e.g., focused until recently on hospital inpatient care). Hospital ownership patterns also diverge widely. China’s hospital system is almost entirely public sector (although the country recently announced its intention to allow more entry by private hospitals), while India’s formerly public sector hospital system has seen the emergence of a thriving private sector comprised of multihospital systems (e.g., Apollo, Fortis, Wockhardt, and MaxHealthcare). By contrast, much of the U.S. hospital market is voluntary and nonprofit in character. Such differences and commonalities suggest that management strategies to meet the value challenge must consider the local context, but may nevertheless share many similar elements. As Chapter 15 notes, these strategies may encompass prospective payment systems, enhanced provider reimbursement rates, patient marketing and recruitment, etc. Table 1.3 Areas of Divergence: United States versus India and China • Health care spending per capita • High number of specialists • Percentage of national health expenditures (NHE) accounted for by patient out-of-pocket spend • Hospital waste and inefficiency • Development of private health insurance • Lack of a primary care system • Depth and breadth of insurance coverage • Fee-for-service payment system • Presence of centralized purchasers • Mixture of financing mechanisms: government, employer, individual • Percentage of NHE spent on drugs • Fragmentation in government ministries/bureaucracy 9 • Tradition of private sector ownership of hospitals • Low consumer information • Development of the central government’s role in health care • Competing spending priorities (education, social services, health) at the local government level • Development of governance mechanisms to monitor providers 10 PART 1 • Introduction COMPLEXITY OF THE U.S. HEALTH CARE SYSTEM The United States lacks a single national health insurance program (other than the Medicare program for the elderly) to pay for health care. Thus, one confronts a variety of mechanisms to finance health care by federal, state, and local governments, as well as employers, individuals, and philanthropic organizations. Over time, the financing system has shifted from private payers to public payers, and from out-of-pocket payment to third-party payment using insurers. The U.S. system also has a fully developed value chain (i.e., interlinked activities among a set of firms whereby suppliers provide raw material inputs to manufacturers who process them and produce outputs for downstream markets) (Burns, 2002; Porter, 1985). For example, the United States has thousands of product manufacturers (pharmaceuticals, biotechnology, medical-surgical supplies, capital equipment, medical devices, and information technology), wholesalers and distributors, hospitals, physicians, nursing homes, pharmacies, home health agencies, insurers and insurance brokers, and employers offering health insurance coverage to their employees. It also has hundreds of group purchasing organizations (GPOs) and public health agencies; 50 State Medicaid programs; a vast federal bureaucracy (literally, government by bureaus or offices), which finances care, delivers health care services, regulates providers, approves new innovation, funds basic and applied research, and provides public health; and lots of niche firms offering pharmacy benefit management and disease management services (see Figure 1.1). This is a huge industry with lots of stakeholders, divergent interests and perspectives, and entrenched positions. Effective management of any one sector of this system requires not only an understanding of the competitive developments within that sector but also an understanding of the other sectors, what is taking place within them, and how they interact with one another (Burns, 2005). Some of the health care managerial approaches and actions over the last decade reflect cross-sector understanding Buyers Government: Suppliers Medicare and Medicaid Veterans Administration Indian Health Service Pharmaceuticals Biotechnology Medical-Surgical Supplies Medical Devices Capital Equipment Information Technology Employers: Individuals/Out-of Pocket Philanthropy Insurers & Insurance Brokers Managed Care Consumer-Directed Plans Pharmacy Benefit Managers Group Purchasing Organizations Wholesalers/Distributors Medical Professionals/Labor Diagnostic Centers Outpatient Care Pharmacies Dental Services Hospitals Physicians Complementary and Alternative Medicine Home Health Agencies Regulators State Insurance Commissioners State Licensing Boards Food and Drug Administration Occupational Safety and Health Administration Federal Trade Commission Justice Department Office of the Inspector General Figure 1.1 System View of the U.S. Health Care Industry. Retail Clinics Consumers/ Patients Nursing Homes Public Health Agencies National Institutes of Health Department of Defense Centers for Disease Control and Prevention Environmental Protection Agency Dept. of Health & Human Services Health Resources and Services Admin. Veterans Administration Public Health Service Chapter 1 • Delivering Value: The Global Challenge in Health Care Management and efforts. Such efforts include but are not limited to: managing under new P4P systems developed by both public and private sector payers; working with outside vendors (e.g., hotel chains, consulting firms, General Electric) to improve customer service, patient flow, and revenue cycle management; working with information technology companies to develop and implement electronic medical records (EMRs) systems (see Chapter 13); hospitals partnering with physicians to improve quality of care or develop new ambulatory care sites; and hospitals working with GPOs to lower supply costs. WHY CHANGING THE HEALTH CARE SYSTEM IS SO DIFFICULT In addition to being complex, the health care system is slow to change. There are several reasons for this. First, the industry is heavily regulated at both the state and federal levels by myriad agencies and professional associations. The federal government is also the dominant payer, reimbursing health care via administered prices. Market forces have thus given way to more regulation and piecemeal legislative action (due to legislative gridlock) at the federal level (Altman and Rodwin, 1988; Field, 2007). Second, consumerism is a newcomer to health care. Until recently, consumerism was stifled by the prevalence of third-party payment and first-dollar coverage, the old 11 sociological view of the patient playing the “sick role” (Parsons, 1951), the prevalence of customized transactions, infrequent (and few repeat) purchases, uncertainty over product quality, and the fact that roughly three-quarters of all monies spent were on products and services previously unseen by the patient. Today, consumerism can be found in a number of areas: high-deductible health plans (HDHPs) and health savings accounts (HSAs), boutique/concierge medicine offered by physicians seeking to avoid managed care organizations (MCOs), complementary and alternative medicine (CAM), personal health records (PHRs), directto-consumer (DTC) advertising by pharmaceutical and medical device firms, health care financial services (smart cards), employer wellness programs, and consumer costsharing programs (see Chapter 14). However, in most of these areas, consumer engagement is not widespread. Studies suggest that perhaps as many as 40 percent of all patients are not “activated” in taking care of themselves. Moreover, there is a fair degree of “health illiteracy” among the U.S. population, preventing them from making wise choices about providers, health plans, and their own health (Parker, Regan, and Petroski, 2014; Schlesinger and Grob, 2017; Thorpe, 2007). Third, health care delivery is heavily influenced by the medical profession, which controls (directly or indirectly) up to 85 percent of all spending (Sager and Socolar, 2005). While physicians do compete with one another, they nevertheless enjoy a monopoly or near monopoly over most important decisions governing resource allocation, including prescribing an ethical pharmaceutical, • • • IN PRACTICE: Does Pay-for-Performance Work? The Case of the Premier Hospital Quality Incentive Demonstration In 2003, the Centers for Medicare and Medicaid Services (CMS) and Premier Inc., a large national GPO, launched the Premier Hospital Quality Incentive Demonstration (PHQID) to determine if economic incentives are effective at improving the quality of inpatient care. Hospitals participating in the PHQID collected and submitted data on 33 quality measures for five clinical conditions. For each condition, hospitals performing in the top decile (i.e., 10 percent) received a 2 percent bonus in addition to their usual Medicare payment. Hospitals in the second decile received a 1 percent bonus. Hospitals that underperformed on quality indicators were liable for a 1–2 ­percent financial penalty in the third year. Initial results suggested P4P was value-enhancing. Between 2003 and 2007, CMS awarded more than $36.5 million to high-performing hospitals; bonuses averaged $71,960 per year, and ranged from $914 to $847,227 (Premier, 2009). According to Premier, participating hospitals raised their overall quality by an average of 17.2 percent over four years and outperformed nonparticipating hospitals by an average of 6.9 percentage points on 19 quality measures. Academic research tells a more mixed story. Lindenauer et al. (2007) compared 207 PHQID hospitals with 406 hospitals that did not participate in the demonstration and found modest differences in quality (about 3 ­percent) after statistically adjusting for other factors. Conversely, Ryan (2009) found no evidence that PHQID had a significant effect on risk-adjusted 30-day mortality or risk-adjusted 60-day cost for four of the conditions, suggesting no value effect. Another evaluation found no impact on outcome measures of quality in hospitals (Jha et al., 2012). A meta-analysis of P4P programs reported no positive impact on patient outcomes in any care setting but did find positive effects on process measures in ambulatory care (Mendelson et al., 2017). 12 PART 1 • Introduction performing a surgical procedure, scheduling a laboratory or imaging test, and admitting a patient to a hospital bed. Freidson (1970) long ago discussed the professional dominance of physicians. Physicians are largely autonomous, community-based entrepreneurs with (until recently) little employment relationship with hospitals in which many of these decisions are made (Burns, Goldsmith, and Sen, 2013). Due to professional training and the legal distinction between the hospital and its medical staff, hospitals have historically been challenged to alter the practice patterns and behaviors of their physicians. Moreover, while provider organizations are increasingly being reimbursed using “alternative payment methods” (APMs) such as P4P and shared risk, the organizations do not pass these incentives down to their physician members. The most recent effort to push APMs (MACRA, 2015) will reportedly impact not more than 800,000 physicians in 2017 by giving them a reprieve from reporting requirements. Fourth, most of the nongovernmental sectors in health care have consolidated over the past two to three decades, thereby reducing competition, conferring market power and fostering higher prices. Consolidation has occurred in the following sectors (time periods): pharmaceuticals (late 1980s to the present), pharmaceutical wholesalers (1980s–1990s), medical devices (1990s), hospitals (1990s), insurers (1990s), GPOs (1990s), pharmacy benefit managers (1990s–2000s), and hospitals again (2010s to the present). These trends have fostered the emergence of several bilateral monopolies (e.g., big insurers negotiating with large hospital systems) in local markets. Fifth, the delivery of hospital care (which accounts for roughly 30 percent of national health expenditures) is heavily dominated by nonprofit institutions, such as nonprofit community hospitals and municipal/state-owned facilities. Investor-owned facilities comprise only about 15–20 percent of the hospital sector—a percentage that has remained relatively flat for decades. Nonprofit hospital ownership and accountability to local boards and communities (rather than shareholders) may mitigate against pressures to alter their missions, strategies, and operating practices. Theory suggests that nonprofits exhibit relatively poor supply response to changes in demand, more limited entrepreneurship owing to constraints on the distribution of earnings, and choice of optimization of various outcomes (e.g., quantity of services provided, focus on physician convenience and returns) rather than profits (Hansmann, 1987). The empirical evidence here is generally equivocal outside of the nursing home industry (Sloan et al., 2001). Sixth, like politics, health care delivery is largely local. Physicians are licensed to practice in a given state and, like most hospitals, generally draw their patients from the local geographic area. Insurance companies are likewise licensed and regulated at the state level, and credential and contract with provider networks in local markets. The United States has 389 metropolitan statistical areas that act as local markets with different configurations of power among key stakeholders (e.g., employers, insurers, hospitals, local government, etc.). Such differences necessitate tailored strategies by manufacturers in order to sell their products. While there has been much talk about medical tourism, more domestic tourism (e.g., to regional centers of excellence) than foreign tourism (e.g., to Thailand or India) seems to take place (Deloitte, 2009). Similar barriers have inhibited the utilization of telemedicine to span across markets. The largely local character of health care certainly complicates (and perhaps mitigates against) any concerted efforts to try to change the system from above. Seventh, there is a widespread lack of valid data about quality and cost in health care. Until recently, most patient–provider transactions were captured and stored in paper-based systems (e.g., physician notes, patient charts, and medical records). This made it nearly impossible to analyze practice patterns to improve care quality and efficiency. To the extent that good patient care data existed, it rested in the hands of insurers who reimbursed providers for the care but did not share the granular information with them. This information asymmetry benefited insurers at the bargaining table with providers. In 2009, President Obama’s stimulus package included funding for the diffusion of EMRs across physician offices to begin to address problems of data capture, although the issues of data validity and complexity of interpretation remain. Eighth, and finally, efforts to change the health care system using business practices imported from the outside have repeatedly come up short (Arndt and Bigelow, 2000a; Burns and Pauly, 2002; Westphal, Gulati, and Shortell, 1997). One reason is that these practices have been adopted for normative reasons (e.g., to look efficient, to satisfy boards they are improving efficiency, and/or to imitate what other forward-looking organizations in the market are doing) as well as, or sometimes rather than, rational reasons (e.g., to remedy their operating problems). This would explain, for example, why hospitals have not invested more time and capital in the implementation of any given practice, or the coordination and integration among multiple practices, but rather pursued a series of discrete practice solutions over time (see Table 1.4) as they have come into vogue (flavor-of-the-month management) (Pfeffer and Sutton, 2006). Another reason is that such practices may not fully consider the institutional differences noted above and thus are not customized to health care settings. Given the managerial problems that need to be confronted in health care, and given the complexity of the health care system and its peculiarities, what approaches seem fruitful for addressing them? One approach is to Chapter 1 • Delivering Value: The Global Challenge in Health Care Management Table 1.4 Business Practices Adopted by Hospitals, 1985–2010 • Corporate restructuring/holding companies • Corporate diversification into new businesses • Theory Z management • Total quality management/continuous quality improvement (TQM/CQI) • Horizontal integration (e.g., mergers and acquisitions) • Vertical integration (physician acquisition, continuum of care, insurance) • Strategic alliances with physicians and hospital networks • Reengineering/work restructuring • Product line management/service line management • Customer focus/patient-centered care • Focused factories • Lean manufacturing and the Toyota Production System apply system analysis to glean insights into the behavior of complex settings. Another approach is to apply organization and management theory. The next two sections sketch out some of these perspectives and how they might be usefully applied. SYSTEMIC VIEWS OF HEALTH AND U.S. HEALTH CARE A major source of complexity is the multifactorial nature of the determinants of health including social and environmental determinants (e.g., housing, occupation, income, access to parks and recreation), behavioral determinants (e.g., smoking, drug use, exercise), and medical determinants (e.g., blood pressure, cholesterol, mental health). Decades of research in public health has suggested that the vast majority of a population’s health is determined by social, environmental, and economic factors and less by medical factors, including the use of biomedical care. Nevertheless, the United States spends far more on medical care than on social services that may greatly influence health (Bradley and Taylor, 2013; Bradley et al., 2016). Research has indicated that among high-income countries, those that spend relatively more on social services and relatively less on medical care, have subsequently better health outcomes, adjusted for gross domestic product (Bradley and Taylor, 2013); 13 similar patterns of spending and health outcomes are also apparent within the United States (Bradley et al., 2016). Descriptions of the health care industry in the United States often begin with a discussion of whether it is a “system.” Webster’s dictionary defines a system as a complex unity formed of many, often diverse, parts subject to a common plan or serving a common purpose. Clearly, the U.S. health care industry does not meet this standard. As noted above, the multiple players have different goals (triple aim) and divergent interests (“patients need my product/service, you should pay for it,” consolidation versus competition, integrated versus niche models). Is a system view important? We think so, for many r­easons. First, from a macro perspective, health outcomes are determined by an array of forces and factors that spans much more than a nation’s health care infrastructure. There are multiple systems frameworks that describe these forces and factors (Shakarishvili, 2009). Hsiao (2003), World Health Organization (2000), and Roberts et al. (2003) have each developed a generic framework for the overall structure of any country’s health care system. These frameworks describe several background forces (environment, nutrition, sanitation, professional training, and others) that affect the policy levers available to a system. These levers (“control knobs”) include financing, payment, organization, regulation, and behavior. These control knobs are modeled to impact intermediate health system outcomes (efficiency, quality, and access—similar to the iron triangle), which in turn produce the ultimate health outcomes of health status, financial risk protection, and satisfaction (see Figure 1.2). Second, as noted earlier, there are so many interdependent players that a systemic view helps to organize them and their interactions. Figure 1.1 provides such a framework for the U.S. context. Providers of health care services occupy the middle of the diagram for a specific reason: they are the main focus of everyone else. Buyers reimburse them for services rendered to their employees/ beneficiaries, suppliers seek to sell them their products, regulators spend much of their time overseeing their quality/safety environment and their competitive conduct, and public health agencies seek to enhance population health by financing research and educational activities undertaken by providers as well as exercising oversight generally outside the direct provision of health care services. For the two parties in the upper-left and upper-right portions of the diagram (suppliers and buyers, respectively), two sets of intermediaries channel their services to providers. This suggests a third reason for the importance of system views. The concept of a value chain (Porter, 1985)—that is, a firm or industry’s input, throughput, and output activities that are served by a host of support functions—suggests that value is created along this collection of activities and requires effective partnerships. Value can be created by making the appropriate 14 PART 1 • Introduction Background Factors Policy Levers Intermediate Outcomes Ultimate Ends Financing Initiatives Efficiency & Cost of Healthcare Health Status Access to Healthcare Satisfaction Quality of Healthcare Financial Risk Protection Cultural Context Social & Community Networks Payment Initiatives Environment Food & Nutrition Education & Literacy Organizational Initiatives Housing & Sanitation Lifestyle Factors Socioeconomic Conditions Regulatory Initiatives Occupational Structure Behavioral Initiatives Figure 1.2 The Health Care System. make-versus-buy decisions on how much of the value chain to occupy. For example, should providers operate their own insurance vehicles or contract with payers in the local market? Much of health care today is undertaking an analysis of make-buy decisions with this system view in mind. Pharmaceutical firms are now considering whether or not they should shed their research and development arms, allow such functions to be performed by smaller and more nimble actors like biotechnology firms, and concentrate their efforts on the sales and marketing functions. Conversely, hospitals are now considering whether they should assume more of the functions of the GPOs they have historically contracted with and do their own in-house contracting. Historically, suppliers have deliberated whether or not they should serve as their own wholesalers/distributors, while employers/buyers have experimented with operating their own provider networks. A system view is important for a fourth reason. Management theory teaches that successful innovation requires concomitant changes among the system’s components (sectors) to achieve congruence or “fit” (Senge, 2006; Tushman and O’Reilly, 1997). Similar thinking has been applied to the U.S. health care system: payment reforms in the buyer sector must be accompanied by corresponding reforms in the provider delivery system. Thus, for proposed payment changes—P4P, gainsharing, or bundled payment—to work, provider organizations require new models of physician–hospital collaboration (Burns, Goldsmith, and Muller, 2010). This perspective is at the center of current calls for “transformation from volume to value” in the U.S. system (Miller, 2008). More broadly, efforts to reform one sector of the health care system must consider their impacts on the others to assess congruence with their interests and resources. Fifth, as noted above, organizations within the health care industry have increasingly consolidated into systems over the past two decades with the stated objective of being more efficient, but may not operate as such. While mergers and acquisitions (M&A) have received a lot of attention (both by the merging firms and the media), postmerger integration activities have not. It is not clear that large multiunit systems can operate in a systemic fashion; extract scale economies from their operations; increase their productivity; add value; and address the multiple goals of access, quality, and acceptable cost. Systemic views of newly consolidated health care organizations and their potential (if any) to add value may thus be in society’s interest. Indeed, between 2002 and 2004, the Federal Trade Commission (FTC) and Department of Justice (DOJ) conducted a series of workshops to assess the competitive and efficiency benefits of horizontal and vertical forms of consolidation (FTC/DOJ, 2004). Thus, for example, despite the continuation of larger mergers (Pfizer and Wyeth, Merck and Schering Plough), research suggests that pharmaceutical M&A does not improve research productivity or profitability over the long term (Burns, Nicholson, and Evans, 2005). Instead, there are now suggestions that “big pharma” needs to “get small,” perhaps by de-verticalizing their value chains, shedding their R&D activities, and focusing on a smaller set of activities. Similarly, the hospital systems that developed during the 1990s have devolved into more decentralized Chapter 1 • Delivering Value: The Global Challenge in Health Care Management collections of autonomous operating units rather than centralized operations acting in concert (Burns et al., 2012). Indeed, the systems lens of federalism (the appropriate division of federal and state powers) suggests alternative ways for these hospital systems to organize themselves. ORGANIZATION AND MANAGEMENT THEORY Schools of management thought have evolved over the past century to provide conceptual maps of how to deal with internal and external challenges. These conceptual maps include theories of how things work, what causes what, and how to act. The theories are not mutually exclusive and can serve as multidimensional or multilayered models to guide managerial action. Executives benefit from being familiar with, and adept at using, many of these conceptual maps. This is no easy task; it is akin to being ambidextrous, both left-brain and right-brain, and more a fox than a hedgehog (Berlin, 1953). Early Writings on Bureaucracy and Organization Western management theory received its early impetus in the writings of Max Weber (1964), a German sociologist writing about the Prussian civil service in the late nineteenth century. Weber described the prominent features of this “bureaucracy” (literally, government by bureaus or offices) in terms of offices and officeholders, a vertical hierarchical ordering of these offices into organizational pyramids, a horizontal division of labor that separated offices and their functions, the use of explicit procedures to govern activities, the presence of records and files, and the selection of officeholders based on achievement rather than ascription. For Weber, bureaucracy was that form of administrative organization that operated under legal authority and was capable of the highest level of efficiency. Research suggests that the bureaucratic model of organization is technically efficient and even superior to other forms under certain environmental, technological, and task conditions (Lawrence and Lorsch, 1967; Woodward, 1965). There is also considerable research on how to apply this model to the six common pathologies of the bureaucratic division of labor (Bacharach, Bamberger, and Conley, 1990): • Role overlap (duplication): two roles perform the same task • Role gap (accountability): neither role performs the needed task • Role underuse (boredom): role not assigned enough tasks 15 • Role overload (burnout): role assigned too many tasks • Role ambiguity (anxiety): role not clear what the tasks are • Role conflict (stress): role’s tasks are at cross-purposes Bureaucracies are endemic to all organizations, including those in the health care industry. The degree of bureaucracy tends to be associated with both the firm’s size and age. Thus, bureaucracy is less pronounced in small work groups and entrepreneurial start-ups (e.g., biotechnology firms) and more pronounced in hospitals and large consolidated firms (e.g., pharmaceuticals). Hospitals are peculiar bureaucracies in that they feature a “dual hierarchy”—a centralized system governing the nonmedical activities and a decentralized, collegial one governing the medical staff (Begun, Luke, and Pointer, 1990; Pool, 1991). Physician group practices, the majority of which are quite small, are peculiar in that they feature consensual governance rather than a bureaucracy. As many researchers have noted, physicians dislike and distrust authority (Burns and Wholey, 2000). Organization size has been a staple of management research. This is due to ease of measurement as well as a range of hypotheses regarding its impact on survival, efficiency and performance, innovation, change (or inertia), entrepreneurship and risk-taking, firm legitimacy and influence, top management cohesion, political activity (both internal and external), employee commitment and human resource practices, internal coordination of market exchanges, internal coordination of different specialties, and (more recently) social responsibility practices and market power. Across all of these impacts, size has both positive and negative effects. There is nothing inherently evil in large size. To be sure, there is a managerial bias to pursue growth and larger scale (Josefy et al., 2015). Bureaucracy has also become a staple of management research. There is nothing inherently evil in bureaucracy, given that it is needed to help coordinate the efforts of interdependent departments and personnel, control decision making to yield more standardized decisions, and develop routines for efficient functioning (e.g., delegation and decentralization). However, in modern parlance bureaucracy has taken on a negative connotation of poor service, lack of responsiveness, lack of consensus and change, and inscrutable, byzantine operation. At its essence, management and bureaucracy are all about “control.” The word “manage” derives from the French word manege, used in dressage, meaning to put a horse through its paces (Braverman, 1974). Control is not necessarily evil either. Control involves mechanisms to orient workers’ attention toward firm goals, as well as motivate and encourage them to act in ways that support these objectives (Cardinal, Kreutzer, and Miller, 2017). To be sure, these goals may conflict with the goals of 16 PART 1 • Introduction • • • IN PRACTICE: Efforts to Deal with Bureaucratic Dysfunctions Considerable research has highlighted the dysfunctional consequences of bureaucracy including its inward focus (rather than focus on the client or the environment), its tendency to rigidity and inertia, and its stultifying effects on individual creativity and thus organizational change. Nothing has changed here; as late as the 1980s and 1990s, major firms such as General Electric (GE) used change programs like “Work-Out” to attack their bureaucracies (Ulrich, Kerr, and Ashkenas, 2002). After downsizing its workforce, GE found that the remaining managers and employees had more work and responsibilities to handle. To reduce the load, they gathered employee suggestions for how to get non-value-adding work out of GE’s processes (hence, the title of the program). The company discovered that Work-Out was more than just trimming excess work, however. It was also an “exercise” work-out for employees to study and diagram their work processes, as well as a mechanism for conflict resolution as different departments worked out their differences in how processes overlapping their areas might be simplified. the employees. The challenge for the modern m ­ anager is to utilize the clarifying elements of ­b ureaucracy (e.g., to resolve the six pathologies above) while at the same time avoiding the classic bureaucratic pitfalls of too many hierarchical levels that separate executives at the top from frontline workers down below, or too many ­horizontal divisions or units that effectively create ­boundaries inside and outside the firm, which impede interaction and the flow of information, or too many rules and regulations, which stifle creative problem-solving. Chapters 3, 4, and 8 in this book consider these issues. Frederick Taylor and Scientific Management The scientific management school (Taylor, 1911) extended the Weberian model by explicitly emphasizing the ­“control” element of bureaucracy. Scientific management was an attempt to apply the methods of science to increasingly complex problems of controlling work in rapidly growing firms (Braverman, 1974). For example, Frederick Taylor employed time–motion studies to analyze a steelworker’s task into its simplest components and then systematically improve the worker’s performance of each component to maximize productivity and ensure conformity to the one best way of production. Such thinking became embedded in assembly-line technologies like auto making by industrialists like Henry Ford. Scientific management had an enormous impact on management practice and theory for decades to come. Of particular importance to us are three assumptions. First, Taylor assumed that workers were guided by ­intuition and variable training and thus were unable to perform their tasks in the best way. Instead, armed with s­ cientific techniques (e.g., time–motion studies), management must control every aspect of the labor process and dictate precisely how it should be done. Workers were left with no discretion in their jobs, while managers were vested with all decision making regarding task design. This separation of decision making at the top from execution/implementation down below in the firm came to pervade all management and strategy thinking (Mintzberg, 1994). A second related assumption was that management needed to closely supervise workers to ensure adherence to standardized tasks and prevent any “soldiering” (deliberate restriction of output); rather than being intrinsically motivated, workers responded primarily to monetary incentives and external control. Third, due to the large variability in how to do one’s job (e.g., which methods, which tools), scientific management focused on reducing the variations and finding the one best way to perform the work in order to maximize productivity. This school presaged several recent movements in management thinking. The emphasis on decomposing tasks into their constituent elements and worker training anticipated the early work on job design; later efforts to amend this approach included the job redesign approach (Hackman et al., 1975; Hackman, 1981), human factors engineering (Herzberg, Mausner, and Snyderman, 1959), and the quality of work life movement. These topics are taken up in Chapters 3 and 5. The emphasis on reducing variations in work anticipated the later work of W. Edwards Deming and total quality management movement in the United States of the 1980s—a topic taken up in Chapter 9. And the emphasis on specialized tasks and productivity anticipated the focused factories of the 1980s and 1990s (Herzlinger, 1997). Classical School of Administration The writings of Gulick (1937), Gulick and Urwick (1937), and Fayol (1949) collectively known as the Classical School of Administration took many of the concepts developed by Weber and Taylor and formulated them into general principles of management—essentially continuing Taylor’s view of “one best way” to manage. These principles included unity of command (i.e., one boss), unity of direction (one objective, one plan, one boss), subordination of individual interest to general Chapter 1 • Delivering Value: The Global Challenge in Health Care Management interest, centralization, authority, span of control (optimal number of people to supervise), and departmentalization (Fayol, 1949). Much attention was also paid to the construction of “organizational charts” depicting these principles on paper. Such principles directed managerial practice for much of the twentieth century. Departmentalization has been one of the most enduring principles articulated by this school. These writers identified two principal models for the firm’s division of labor: process departmentalization and purpose departmentalization. These have since been relabeled functional and divisional organization: organizing by functional area versus organizing by product line, customer, or geographic area. Alfred Chandler (1962) depicted the large-scale shift in the organization of American enterprise from the former to the latter. Twenty years later, Goldsmith (1981) described a similar transformation taking place among U.S. hospitals. Efforts to commingle the two forms of management gave rise to matrix structures utilized both in industry and in health care (Burns, 1989; Galbraith, 1973). Alternative forms of departmentalization comprise the core of thinking on organization design and coordination, the topic of Chapter 3. Human Relations School The human relations school developed a model of worker motivation that sharply differed from the Taylorist approach and thus suggested a different way of management. Work conducted by Elton Mayo (1945) and Roethlisberger and Dickson (1947) at the Hawthorne plant of the Western Electric Company ironically began as a Taylorism project to assess the impact of lighting changes on worker productivity. In contrast to Taylor’s focus on individual workers and their jobs, their research anticipated Kurt Lewin’s (1951) insight about the primacy of the group in structuring individual behavior. The findings implied that to improve productivity, management must attend to a new set of considerations beyond monetary incentives and top-down control of work. Managers must instead understand the informal organization of workers (groups, group sentiments, team work), the need of workers to be listened to and participate in the design of their work (participation, self-governance), and the importance of morale and satisfaction as motivators of worker effort. This view also anticipated later research on social networks of relationships and informal social structures (that emerged as employees pursued their own interests and needs), which supplanted earlier research on the organizational charts for which the Classical School was so famous (McEvily, Soda, and Tortoriello, 2014). Group structure and process are considered in Chapter 5; communication skills are discussed in Chapter 6. Mayo’s work suggested that workers are less rational than Taylor believed, guided less by financial incentives and more by human sentiments. Workers were 17 also motivated to be accepted by their peer groups and achieve social solidarity. Finally, workers had an array of goals and needs that did not necessarily coincide with, or were subordinated to, the firm’s interests. This insight led to an entirely new managerial approach called “organization development,” which recognized the interdependence of the organization and groups of employees and sought ways to simultaneously achieve both the firm’s goals and those of its workers. By extension, this school paved the way for later recognition of the employee as the firm’s key asset. Subsequent research and writing expanded the human relations school’s approach. Douglas McGregor (1960) contrasted this school and its emphasis on managing human resources (Theory Y) with scientific management and its emphasis on control and coercion (Theory X). For McGregor, human relations management sought ways to integrate the firm and the worker, as well as ways to harness the worker’s creativity and imagination. Taking account of Maslow’s (1943) hierarchy of needs, McGregor argued that satisfying the worker’s higher-order needs of belongingness, esteem, and self-actualization was critical. Herzberg refined Maslow’s approach and suggested that such intrinsic motivation was inherently satisfying, while extrinsic factors were merely dissatisfying if not met. These approaches led to the entire field of job-redesign (Hackman, 1981) and self-managing work teams. The topics of motivating people and developing teams are considered in Chapters 4 and 5. Contingency Theory of Leadership By the mid-twentieth century, two schools of management thought had been established. One argued for greater structure, control, top-down decision making, and reliance on extrinsic rewards (Theory X); the other argued for more participative management, self-governance, bottom-up decision making, and reliance on intrinsic rewards (Theory Y). For decades, these schools were often (but erroneously) viewed as polar opposites. Subsequent research conducted during the 1960s and 1970s (summarized in Bass, 1981) suggested the choice of leadership style is not either-or. Instead, the effectiveness of specific management approaches depends on key situational factors (see Chapter 2), now known as Contingency Theory. Decision-Making School The decision-making school of management—also labeled the “Neo-Weberian” model (Perrow, 1986)—developed during the 1950s and 1960s, spearheaded by researchers at Carnegie Mellon University (Cyert and March, 1963; March and Simon, 1958; Simon, 1947). This school focused as much on how decisions were made 18 PART 1 • Introduction and goals were set as on the structure of the firm—but all within a context with which Weber and scientific managers were comfortable: control of the work process and the worker. In contrast to both scientific management and human relations, the decision-making school focused neither on top executives nor on lower-level workers, but rather on the large cadre of middle managers that had developed inside the large firms of the mid-twentieth century. Such managers and their decisions needed to be controlled. Because of limits on managers’ cognition—known as bounded rationality—decision making needed to be guided by “satisficing” behavior (limited search among alternative options and selection of first acceptable solution) and the use of “programs” and “routines” (e.g., solutions or problem-solving paths used before) (cf. March and Simon, 1958; Simon, 1947). Such approaches served as points of stability and biases against innovation by narrowing the strategic choices available to managers. Decision making was also organized and controlled through means-ends hierarchies, in which the goal (ends) of one layer of management (e.g., increase profits) became translated into subg…

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