Improving competitiveness through performance-measurement systems: An integrated performance-measurement system can improve competitiveness by meshing the organization's long-term goals with its day-to-day clinical and administrative functions - health care industry

Healthcare Financial Management, Dec, 2001 by Louis J. Stewart, Archie Lockamy

Parallels exist between the competitive pressures felt by U.S. manufacturers over the past 30 years and those experienced by healthcare providers today. Increasing market deregulation, changing government policies, and growing consumerism have altered the healthcare arena. Responding to similar pressures, manufacturers adopted a strategic orientation driven by customer needs and expectations that led them to achieve high performance levels and surpass their competition. The adoption of integrated performance-measurement systems was instrumental in these firms' success. An integrated performance-measurement model for healthcare organizations can help to blend the organization's strategy with the demands of the contemporary healthcare environment. Performance-measurement systems encourage healthcare organizations to focus on their mission and vision by aligning their strategic objectives and resource-allocation decisions with customer requirements.

Many U.S. manufacturing firms use integrated performance-measurement systems to meet the complex management challenges posed by competitive, rapidly changing markets. Financial managers of healthcare organizations face similar challenges. A conceptual model of an integrated performance-measurement system used by manufacturing firms can be adapted to the particular needs of healthcare organizations.

Performance-measurement systems provide a means to align strategic objectives and market requirements, coordinate the effective use of organizational resources, and monitor progress toward predefined strategic objectives. For example, many U.S. manufacturing firms have adopted the improvement of product, process, and service quality as a crucial strategic objective for achieving world-class performance levels. However, sustainable world-class performance will not occur unless a firm's strategic objectives and actual market requirements are aligned. Additionally, organizational coordination of market-driven initiatives is essential for ensuring the efficient use of resources.

Specific action programs supporting strategic objectives are required, as well as integrated performance-measurement systems that facilitate the organization's achievement of objectives. (a) Performance-measurement systems are composed of three elements: performance criteria, performance measures, and performance standards. Performance criteria are the relative elements used to evaluate performance. Performance measures are the actual results achieved in relation to the performance criteria over a specified period. Performance standards are the acceptable measures of performance for each criterion.

HEALTHCARE PERFORMANCE-MEASUREMENT SYSTEMS

Traditionally, formal performance-measurement systems in healthcare organizations have been administrative functions. As such, these systems have been focused exclusively on financial performance. William Cleverley presented a strategic-management model that links a hospital's strategic objectives to its operating activities through a concise set of financial-statement-based ratios. (b) These financial ratios are used to summarize salient aspects of the organization's fiscal condition and operating results. Collectively, they measure the profitability, liquidity, solvency, and asset-employment efficiency of the healthcare organization. This perspective views the organization's current financial performance and condition as the realization of past management decisions and operating activities.

This formal, financially focused, performance-measurement system does not monitor the process or outcomes of the patient care delivery systems and generally defers to the individual physician's professional judgment regarding matters such as the selection of the appropriate medical technology and level of care. Oversight of the exercise of that judgment and the quality of the service-delivery process are to be monitored through physician peer review and the hospital-based quality-assurance process. Thus, healthcare organizations typically have used separate evaluative processes for service quality, clinical effectiveness, and financial performance.

Kenton Walker has observed that there are three major deficiencies of a reliance on separate evaluative processes for service quality, clinical effectiveness, and financial performance in healthcare organizations, particularly hospitals and integrated delivery systems (IDSs). (c) First, physicians' clinical decisions and resulting practice patterns are the primary cost drivers in hospitals and IDSs. Consequently, any effort to improve financial performance that does not consider clinical activities can offer only limited success. Second, efforts to control costs by improving productivity and reducing resource utilization are likely to meet strong resistance from healthcare professionals unless these efforts simultaneously deal with the issues of service quality and patient satisfaction. Third, independent evaluative processes are internally focused. Thus, each one reflects and communicates only the views of the healthcare provider's clinical or administrative personnel. The perceptions of quality, effectivene ss, and efficiency held by payers, patients, and government agencies are not explicitly considered in the independent evaluative processes used in healthcare organizations.