The Balanced Scorecard: An Integrative Approach To Performance Evaluation

Healthcare Financial Management, May, 2001 by Jason Oliveira

In addition to strict financial outcomes, healthcare financial managers should assess intangible assets that affect the organization's bottom line, such as clinical processes, staff skills, and patient satisfaction and loyalty. The balanced scorecard, coupled with data-warehousing capabilities, offers a way to measure an organization's performance against its strategic objectives while focusing on building capabilities to achieve these objectives. The balanced scorecard examines performance related to finance, human resources, internal processes, and customers. Because the balanced scorecard requires substantial amounts of data, it is a necessity to establish an organizational data warehouse of clinical, operational, and financial data that can be used in decision support. Because it presents indicators that managers and staff can influence directly by their actions, the balanced-scorecard approach to performance measurement encourages behavioral changes aimed at achieving corporate strategies.

Traditional financial management systems measure the tangible and financial assets of the healthcare organization. But healthcare financial managers also need to measure and respond to intangible assets of value to the organization, such as best-practice clinical processes, skilled staff, and satisfied and loyal patients, because of their substantial effect on the bottom line.

Robert Kaplan and David Norton have developed the balanced scorecard as a way of addressing this performance measurement limitation. [a] The balanced scorecard offers a framework for translating strategic objectives into performance measurements that measure the effects of implemented strategies and provide feedback on the performance of strategic initiatives.

A balanced scorecard requires that substantial amounts of widely disparate data be captured. To date, the implementation of a balanced scorecard in health care, as well as other industries, has been hampered by the lack of readily available performance data. Many healthcare organizations are considering the creation of data warehouses that integrate clinical, operational, and financial data for the purposes of decision support. The ability to implement a balanced scorecard can be used to justify a data warehouse project.

PERFORMANCE MEASUREMENT

A performance measurement system based solely on healthcare financial reporting indicators (eg, case-mix index, average length of stay, inpatient/outpatient volume, operating expenses, gross charges) has limitations because it focuses on past performance and takes a short-term view of strategy. When managers concentrate strictly on improving these indicators, they frequently miss the opportunity to evaluate and develop the intangible assets necessary to maximize the value of a customer over a lifetime.

Performance measurement aimed at management improvement rather than simply documentation must establish a relationship between corporate strategy and the tactical business objectives required to achieve the strategy. The balanced scorecard presents performance indicators that can be influenced directly by managers and staff, thereby encouraging changes in behavior and activities to achieve corporate strategies. These indicators are: staff development, internal efficiency, customer satisfaction, and long-term financial performance.

For example, in the case of a financial loss in a specific product line, the underlying reasons for the loss should be explored: Were cost or revenue objectives missed? If so, why? What processes and resource capabilities would improve performance in this area? Are patients dissatisfied with service delivery or medical care? The balanced scorecard ties each question that represents a corporate objective to an outcome measurement that provides the data to monitor the achievement of desired objectives. In turn, each outcome measurement is associated with a measurement of a supporting process, a "driver" that enables the achievement of the corporate objective.

The outcome measurement is called a lagging indicator because it measures what has happened (eg, costs decreased, revenue increased, quality decreased). The driver measurement is called a leading indicator, because it measures the building of capabilities to improve performance (eg, 90 percent of cases are being managed according to a critical pathway; 75 percent of case managers have been trained in team-building skills). A balanced scorecard that connects measurements of outcomes with measurements of drivers allows the organization's leaders to develop actions aimed at improving performance.

The cause-and-effect relationship of outcomes and drivers can be demonstrated by examining the measurement of the profitability performance objective. The following cause-and-effect chain is highlighted in Exhibit 1, an example of a balanced scorecard report. One way to achieve profitable growth is to reduce costs. One way to reduce costs is to reduce length-of-stay (LOS) rates in a medically responsible way. The LOS outcome measurement needs to be associated with a performance driver measurement that indicates how the LOS outcome is to be achieved. For example, the percentage of admissions in compliance with developed critical pathways is a driver measurement that influences the reduced LOS outcome.