I Organizational Structure and Decision Making

The basic functions of management include planning, organizing, controlling, and leading. Often, the first three functions are called management or operational skills, summarized as “doing things right.” In contrast, leadership or strategic skills are defined as “doing the right things.” To thrive, an organization needs both.

What needs to be done depends on the organization. In the United States, there are for-profit corporations, public agencies, and not-for-profit organizations. Not-for-profits are also called “tax-exempt organizations,” or sometimes 501(c)(3)s, after the federal tax code provision that grants them their tax-exempt status. In any organization, it is vital to understand how revenues and expenses flow through the organization. Despite their name, even not-for-profit organizations need to make a profit to be financially viable. Not-for-profit organizations that do not generate sufficient financial resources will be unable to invest in infrastructure, new technology, or personnel development; consequently, they will eventually close or become obsolete.

To qualify as a not-for-profit, an organization’s purpose must meet one of the exempt purposes in the federal tax code, which include charitable, religious, educational, and scientific endeavours. Many companies, including not-for-profits, also articulate that purpose in a mission statement that guides the overall strategy of the organization. Such a mission might be “to improve the health of the population of town X” or to “end cancer.” Not-for-profits are governed by a board of trustees; in for-profits, such an oversight committee is called the board of directors. A board of trustees is the body ultimately responsible for setting the organization’s policies and strategies. One of the board’s most important jobs is to hire and fire the chief executive officer (CEO). The board also approves budgets and oversees the organizational performance. Underneath the CEO is a vice presidential suite, usually the chief financial officer (CFO), in charge of finances, and the chief operational officer (COO), who oversees day-to-day operations. Most organizations have additional chief officers, depending on their mission and size, such as chief nursing officer (CNO), chief medical officer (CMO), and chief information officer (CIO). In other organizations, such positions might be called vice president (VP, e.g., VP of Nursing, VP of Medical Affairs).

Organizations need to do more than just please their boards. They also have stakeholders. A stakeholder is anybody who is interested in or affected by the organization’s operations. Stakeholders can include patients, community members, local employers, churches, and unions. Most organizations cannot reach major public health goals by themselves and need to build coalitions with other stakeholders to leverage resources and build political will. Organizations applying for grants must show they can build and work with coalitions and partnerships.

Managers and leaders seeking ways to build such coalitions must motivate their staff. For these tasks, it is important to understand how to motivate people. It is customary to distinguish between extrinsic motivation (money, status, job perks) and intrinsic motivation (desire to do good, sense of accomplishment, desire to be in control). Often, managers must rely mostly on their employees’ intrinsic motivation. Fortunately, as long as people’s basic safety needs are met, intrinsic motivation is usually enough “to keep people going.”

Not everybody responds to the same motivations, however. Key motivators may be caring about doing a job well, job security, job title, the ability to mold things, the chance to learn new things, and the pleasure of working with likable people. These differences in motivators stem from personality types. There have been many ways of distinguishing different personality styles, such as the Myers-Briggs Personality Inventory that famously established introverts and extroverts. One popular rubric divides people into four types: the architect (interested in how things are put together), the strategist (interested in the “big picture”), the diplomat (interested in how things will be perceived and affect relationships), and the fact finder (interested in data, deadlines, and the bottom line).¹ Whatever system one prefers, what is most important is to recognize that such differences exist, and that effective managers address a performance challenge and its possible solutions in ways that meet as many of these dimensions as possible. In any case, when supervising employees, it is better to ask them what is important to them rather than to rely on a theoretical construct of what they ought to care about.

Public health is also a moral pursuit. This requires that the management of a public health agency should be ethical, and that the organization’s mission should be reflected in its management methods.

II Assessing Organizational Performance

If an organization is to survive, it must periodically assess various dimensions of its performance: finances, processes, people, and mission. Usually, assessment begins with the organization’s mission as the basis for goals and measurable objectives. Performance measurement is a cyclical process with these four steps²:

A Measurement Tools and Budgeting

An important way to assess operational organizational performance is benchmarking. To benchmark, an organization conducts a self-assessment and then compares itself to other, similar organizations to gauge its relative performance. For public health agencies, the National Public Health Performance Standards Program has developed such standards, for both state and local health agencies.³ The Joint Commission provides similar guidance for health care providers (see later).

Instruments to report performance include dashboards and balanced scorecards. Dashboards are operational management tools that track many indicators together. For each indicator, there are benchmarks; indicators outside acceptable benchmarks may be shaded red or yellow, whereas acceptable ones may be green. This allows managers and personnel to see immediately which domains are working well and which are not. Balanced scorecards provide similar feedback but present a more holistic picture of an organization to link strategic and operational domains. In balanced scorecards an organization’s vision, mission, and strategy are followed down into performance measures and initiatives, so that a mission goal can be followed all the way to a specific output and outcome metric⁴ (Fig. 28-1).

Figure 28-1 Example of balanced scorecard for a local government.

(From Rohm H: Perform 2[2]. Available at www.balancedscorecard.org/LinkClick.aspx?fileticket=ph%2b8b3YMoBc%3d&tabid=56)

In addition to providing a visual summary of certain benchmark indicators, balanced scorecards sometimes “weigh” dimensions by how much they contribute to the mission, providing a snapshot of the performance of the entire organization.

The main tool for assessing financial performance is a budget, because it can be used to plan, evaluate, and control expenditures. Most public health managers will encounter budgets, both in the planning process and when they are comparing actual performance to budgets. Budget planning is extremely important, since it is pointless to analyze variance from an unrealistic budget. However, all budgeting is based on assumptions and therefore represents a “best guess.” Such planning can use incremental budgeting. For example, a department with five salaried employees the previous year would budget for the next year for the same five employees, possibly with their salaries adjusted for any cost-of-living increases. The alternative to this is zero-based budgeting, in which an organization pretends it starts from zero. All expenditures must be justified not based on precedent, but rather by current need. Incremental budgets are easy to generate, but they may not serve an organization well if its conditions and environment have changed significantly. Zero-based budgeting allows optimal matching of recourses to current needs, although it can be disruptive to employees, stakeholders, and clients.

B Variance Analysis

The act of comparing actual performance to budgets is called variance analysis. This is an extremely important step, because it allows managers to decide if they need to take action now to spend more or less in the future.⁵ Budget variances are traditionally called favorable and unfavorable.

Table 28-1 provides a simple example of budget variance analysis. Budget variance can be caused by unexpected changes in clients, client mix, reimbursement, or expenses. Variance analysis needs to account for fixed and variable costs. As the name implies, fixed costs do not change with volume. For example, if one receptionist handles all the calls to an agency, that person’s salary is a fixed cost; the pay will not change, whether the receptionist answers 1 or 100 calls per day. In contrast, variable costs change with volume (e.g., test strips needed for exam, mileage costs for car).

Table 28-1 Variance Analysis, Unadjusted

Other types of variance include the following:

 Volume variance. There were fewer or more people served (e.g., more homeowners requested water safety assessment).

 Quantity (use) variance. It took more of a certain resource to deliver a certain service (e.g., restaurant inspector needed double the number of test strips per restaurant inspection than anticipated).

 Price (spending, or rate) variance. This variance occurs if the price of an input is different from the budgeted price. Price could be the price of a supply item such as radiology equipment.⁶

Table 28-2 provides another way to look at variances. Although the example shows a simple part of a budget from a company, the variance in a public health agency’s budget could be analyzed similarly. When analyzing budget variances, it is important to identify expected fluctuations from unexpected fluctuations. Unexpected fluctuations can usually be found by comparing revenue or expense fluctuations to previous years. If the differences are real, a manager needs to look for reasons. However, it is important first to make sure that there are no faulty calculations in the original budget and no errors in the actual results. It is also important not to respond to budget variances that are caused by singular, unexpected events (e.g., natural or man-made disasters). The most common reason for budget variance is a difference between assumptions and reality. Since budgets are informed guesses, it is easy to guess wrong. However, such differences require managerial action before the organization is in trouble.⁷

Table 28-2 Variance Analysis, with Adjusted Variance

For a public health agency, the budget in Table 28-2 might represent the fees brought in for new home inspections. By custom, favorable variances are shown as positive numbers; negative variances are shown in brackets. Since the revenue was below what was budgeted, one would expect a variance. However, since sales were below expected, the costs have to be adjusted for actual sales volume before further analysis.

Table 28-2 shows the budget revised for the actual volume. Now it is apparent that the sales value was actually higher (a good thing), but that both variable costs and fixed costs were also higher than expected (a bad thing). Armed with these numbers, the manager can investigate further and put fixes in place. For example, the manager might investigate why there is a different demand for the service, commend the salesperson for getting higher prices, and investigate why the fixed and variable costs were higher.

1 Break-even Calculation

Before buying new equipment or starting a new service line, it is important to model out how the new equipment or service would become profitable under various assumptions. Given that most people are too optimistic, it is important to have break-even calculations that recoup money under all or most realistic scenarios. The simplest way to view break-even calculations is to calculate the break-even point. For this calculation, one sums up the costs of the equipment and the fixed costs associated with it, then divides it by the expected volume times the profit margin of the procedure (i.e., the charge minus the costs):

In reality, the calculation needs to take many other factors into consideration. The most important other economic consideration would be the opportunity cost of this investment. Opportunity cost describes the next best use of the money and energy. Any investment needs to be better than doing nothing, but also better than the next best use. Other considerations include if the procedure would replace others currently done, if it would require remodeling of space, and how it would change referral patterns.

Box 28-1 outlines the process for buying a new piece of equipment for a physician’s office.

Box 28-1 Break-even Calculations for Buying a Piece of Medical Equipment

Estimate the number of procedures you will perform with the new medical equipment:

How many of your current patients go to another physician to have the procedure done?

How many of your current patients who otherwise would not have had the procedure done at all will now have you perform the procedure?

How many new patients will you attract by offering the procedure?

On average, how many procedures will each of these patients have per year?

What growth percentage do you expect each year in the number of procedures performed?

Estimated number of procedures for the first year:

Estimate the additional net revenue you expect to receive from the new procedure:

How much will you charge for the procedure?

What percentage of your practice is Medicare?

What is your discount rate for Medicare?

What percentage of your practice is Medicaid?

What is your discount rate for Medicaid?

What percentage of your practice is capitated managed care?

What is your discount rate for capitated managed care?

What percentage of your practice is discounted fee-for-service?

What is your discount rate for fee-for-service?

What percentage of your practice is self-pay?

What is your discount rate for self-pay?

What percentage of your practice is some other payer?

What is your discount rate for those payers on average?

Payer mix:

Estimated gross revenue:

Estimated adjustments to revenue:

Estimated total net revenue:

Estimated net revenue per procedure:

Estimate the lost revenue per year:

What is the amount of revenue you will lose by doing this procedure instead of what you normally do?

Estimated lost revenue per year:

Estimate the acquisition costs of the equipment:

What is the purchase price of the equipment (including any interest paid)?

What is the transportation cost of obtaining the equipment?

What are the remodeling costs associated with installation of the equipment?

Estimated acquisition costs:

Estimate the fixed costs of the equipment:

What is the cost of additional salaried personnel you will hire to use the equipment?

What is the cost of additional space you will acquire to use the equipment (including rent and property tax)?

What is the additional cost of insurance associated with the equipment (i.e., malpractice insurance, property insurance for the equipment, business hazard/loss of use insurance)?

Estimated fixed costs per year:

Estimate the variable costs of the equipment:

What is the additional wage and benefit cost for hourly personnel associated with each procedure?

What is the per-procedure cost of additional supplies you will use to perform this procedure?

Estimated variable costs per procedure:

Estimated total variable costs per year:

Estimate the rate of return on your alternative investments:

What percent return do you expect to make on your other investments during the duration of the analysis?

Modified from Willis DR: How to decide whether to buy new medical equipment. Fam Pract Manage 11:53–58, 2004. www.aafp.org/fpm/2004/0300/p53.html

III Basics of Quality Improvement

The quality of medical practice has been a major concern since the early 20th century. In 1910 the historic Flexner Report advocated for higher standards in medical education.⁸ After World War II, investigators began to define more clearly the dimensions of quality. In 1969, Donabedian⁹ pioneered the study of health care quality by proposing that quality should be examined in terms of structure (the physical resources and human resources that a hospital or HMO possesses for providing care), process (the way in which the physical and human resources were joined in the activities of physicians and other health care providers), and outcome (the end results of care, such as whether the patients actually do as well as would be expected, given the severity of their problems). Another important pioneer of medical quality research was Wennberg, who developed a method of determining population-based rates for the utilization and distribution of health care services. This method, called small-area analysis, revealed large variations in health care usage among different areas and was important in determining which procedures or diagnoses most needed standardization or improvement.¹⁰

Several institutions and programs evaluate the quality of health institutions. State accreditation of facilities usually emphasizes structural and procedural issues. The Joint Commission¹¹ (TJC), formerly the Joint Commission on Accreditation of Healthcare Organizations (JCAHO), is an independent, not-for-profit organization that evaluates the quality and safety of most health care institutions in the United States. Quality review programs of the past, including the programs of professional review organizations (PROs), tended to focus on particular aspects of process called procedural end points and offered a detailed review of the methods of care provided and an analysis of how well certain disease-specific treatment criteria were met. In contrast, current quality improvement efforts emphasize quality monitoring and focus increasingly on outcomes.

One of the primary national data sets on quality of care focuses on the services provided by managed care organizations (MCOs), with particular attention to prevention and health maintenance aspects of their health plans. Called the Healthcare Effectiveness Data and Information Set (HEDIS),¹² this includes the following areas of prevention: