The Balanced Scorecard for Hospital

Performance and Productivity

ABSTRACT

The purpose of this paper is to provide an overview of the usefulness of the Balanced

Scorecard in improving a hospital's management and delivery of health care at reduced cost

without loss of quality. This paper describes an approach to designing and implementing a

balanced scorecard system for measuring performance and productivity in a hospital setting.

Specific measures of performance criteria are suggested as well as interpreted. Guidelines for

measuring productivity are also suggested and interpreted. How these measures may be used

by a hospital to improve its administration of health care while reducing costs and

maintaining quality are described. This paper is a useful resource for hospital managers

looking to improve their performance and productivity.

The balanced scorecard is a management tool that is widely used in the manufacturing

industry. This paper fulfills a need by healthcare providers to obtain information on

implementing a balanced scorecard system that specifically addresses issues unique to

hospitals. This paper also addresses how to measure productivity within a balanced scorecard

system.

Keywords: Hospital Performance, Balanced Scorecard, Hospital Productivity

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1. INTRODUCTION

Performance measurement and productivity in health care are important issues to

individuals and at a national level. Medical costs continue to rise and consume an

increasing proportion of GNP worldwide. Cost pressures are producing dramatic changes

in the health care environment. The government continues to search for ways to control

spiraling costs, principally through caps on reimbursement rates, and at the same time the

public seeks coverage for more services. Competition among health care providers is

intense as alternative delivery systems grow and compete with public health facilities

forcing all health care organizations to lower their costs, downsize, or close facilities

(Gumbus et al. 2003). Increasingly health care providers are cutting services to, or

refusing to treat, Medicare and Medicaid patients because of inadequate reimbursement

rates.

One result of cost pressures faced by individuals, employers, insurance

companies, and the government is to shift health care provider performance priorities in

several areas. Previously, a primary objective of health care provider organizations was to

attract more patients (a revenue focused strategy). Now, they are concerned with reducing

costs to meet patient demand. In the past, hospitals wanted simply to attract leading

doctors trained in the latest procedures and technologies (a high-cost strategy). Now, the

emphasis is on improved service quality to meet the demands of payers and regulators.

Historically, hospitals wished to bill more care to more patients (another revenue

enhancing strategy). Now, they seek to balance cost versus patient outcomes resulting in

shorter stays, less expensive treatments, and fewer tests. Traditionally, hospitals allowed

doctors free reign in treatment plans, which increased demand for hospital services (and

costs). Now, hospitals seek to attract patients from managed-care plans and balance the

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goal of maintaining physician loyalty with limits (i.e., lower costs) on the use of the

latest, and more expensive, medical technologies. Finally, hospitals encouraged only

limited innovation in delivery of core services and administration. Now, high rates of

innovation in both areas are necessary to achieve cost effective and efficient health care.

Key to achieving cost controls in health care is adopting new approaches to

performance and performance measurement (Adler et al. 2003). Hospitals have been slow

to develop and implement formal performance and productivity measurement systems

(Voelker et al. 2001). The primary problems that have inhibited hospitals from making

greater progress in this area are culture, organization, and managerial practices that are

inconsistent with competitive business, including operating practices that are not cost

driven. Some specific reasons why hospitals have not been active in this area include the

following: many hospital boards are composed of members lacking experience in

competitive environments, lack of employee participation, particularly among doctors,

and because many individuals regard hospital services as intangible and impossible to

measure. Medical staff relations and quality of care are important attributes of hospital

performance that can be difficult to measure, interpret, and compare with other health

care organizations (Zelman et al. 2003).

The balanced scorecard (BSC) is fundamentally a customized performance

measurement system that looks beyond traditional financial measures and is based on

organization strategy. This paper discusses fundamental concepts in developing

performance metrics, provides an overview of issues in developing balanced scorecard

measures, and gives numerous illustrations of performance measures. As shown later, the

BSC is an active area of research within the medical community. However, previous

research does not report on the fundamental linkages between hospital inputs, outputs,

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 and the creation of performance metrics. In addition, these articles provide few specific

examples of balanced scorecard measures and illustrations of how the balanced scorecard

translates action into improved performance.

2. PERFORMANCE MEASUREMENT AND THE BALANCED SCORECARD IN

HEALTHCARE

Emphasis on financial measures of performance in response to cost pressures may

be a dangerous impediment to creating future economic value (Weber 2001). Hospitals

can benefit by using a balanced scorecard (BSC) to measure performance and

productivity. The BSC consists of an integrated set of performance measures that are

derived from the hospital's management strategy. The BSC is designed to translate

management's strategy into performance measures that employees can understand and

implement. Using a balanced scorecard can provide a hospital with the following

benefits:

* It aligns the hospital around a more patient-focused strategy,

* It facilitates, monitors, and assesses the implementation of the overall strategy,

* It provides a communication and collaboration mechanism,

* It assigns accountability for performance at all levels of the hospital, and

* It provides continual feedback on the strategy and promotes adjustments to changing

market and regulatory factors.

The BSC was originally developed by Kaplan and Norton (1992; 1993) from the

notion that reliance on financial measures of performance alone is insufficient for

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managing complex organizations, especially as those organizations become more

customer focused and want to benefit from their knowledge-based human capital. The

BSC has evolved into a strategic management system that uses a framework and core

principles to translate an organization's mission and strategy into a comprehensive set of

performance measures (Kaplan 1996).

Kaplan and Norton suggest measuring an organization's performance around four

perspectives: (1) financial, (2) customer, (3) internal processes, and (4) learning and

growth. This framework provides a balance between short- and long-term objectives,

financial and non-financial measures, and external and internal performance indicators.

The scorecard also balances the results the organization wants to achieve (typically the

financial and customer perspectives) with the drivers of those results (typically the

internal processes and the learning and growth perspectives) (Inamdar and Kaplan 2002).

Zelman et al. (2003) establish the relevance of the balanced scorecard to health

care, but with modifications to recognize unique characteristics of the industry and

organizational characteristics. Numerous articles exist concerning the balanced scorecard

and healthcare. One area of research on this topic is concerned with the internal process

of developing the balanced scorecard in a generic sense (see Voelker et al. 2001; Pink et

al. 2001; Inamdar and Kaplan 2002; Sioncke 2005). Another group is concerned with

developing measures at specific organizations or within defined patient populations (see

Kershaw and Kershaw 2001; Gumbus et al. 2002; Gumbus et al. 2003; Sugarman and

Watkins 2004; Woodward et al. 2004; Wells and Weiner 2005). Fundamentally,

measuring performance gives health care providers more control over their services.

Performance measures are designed to answer the following questions;

* Are the service objectives appropriate?

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* Are the services meeting their objectives?

* Are the services meeting the desired standards in terms of quality, effectiveness, access,

and efficiency?

Measures are based on inputs (e.g., staff, services, supplies, equipment, facilities),

outputs (services rendered, e.g., acute and elective services, professional advice, training),

and outcomes (results of inputs and outputs, e.g., health status, disability, continuing

care). Examples of hospital services, outputs, and outcomes are shown in Table I.

Efficiency measures are ratios of inputs to outputs and it relates to achievement of

specific objectives. The effectiveness of a department is a measure of how well the

outcomes are achieving desired outcomes. The cost effectiveness of a service is the

resources required to achieve the outcome, for example the total cost of achieving

mobility and/or pain relief.

Table I: Examples of Hospital Services, Outputs, and Outcomes

Service Output Outcome

Obstetrics Live birth Healthy child and

mother

Pathology Diagnostic test results Correct diagnosis,

effective treatment

Engineering Preventive maintenance Decreased machine

downtime, reduced
operating costs

Financial services Financial reports Effective financial

management

Faced with increasing cost pressures, extensive government regulation, high

expectations by the public, and increasing criticism health service providers must be able

to not only do many things well but communicate their achievements in a clear and

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 concise manner. Hospitals can benefit by applying the BSC approach to answer the

following questions about performance:

* Has financial performance improved?

* Do patients recognize that we are delivering more value?

* Have we improved key services and processes so that we can deliver more value to

patients?

* Are we maintaining our ability to learn and improve?

3. ESTABLISHING AND INTERPRETING PERFORMANCE CRITERIA

There are some simple principles to follow when using a BSC approach to

establishing performance indices and monitoring performance in hospitals. First, major

health goals for the hospital must be established. Second, these goals will serve as a

roadmap for service managers of major segments of the organization to establish related

goals and supporting objectives. Third, a series of indicator measures should be

developed to assess service delivery and effectiveness, operational performance, and the

organization's response to the environment. All measures of performance/productivity are

interpreted in light of the hospital's goals. Table II provides a high-level view of indicator

measures, how they should link with hospital goals, objectives, and environmental

concerns. Indicators are consistent with the perspectives outlined for application of the

balanced scorecard, i.e., they may be financial, patient focused, operational, and/or

learning/growth oriented.

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 Table II: Role of Indicator Measures in a Hospital

Relate To Monitored By Timescale

Service Goals Departmental Probably

Effectiveness managers annually
Indicators

Service Objectives Departmental/ Monthly or

Delivery cost center weekly
Indicators managers

Operational/ Detailed Cost center Monthly

Organizational objectives/ managers
Indicators action plans

Environmental Assumptions, Corporate and Ad hoc, but

Indicators goals, and departmental preferably
objectives managers annually

Following are brief descriptions and examples of performance measures for a

public hospital using the perspectives of the BSC.

3.1. FINANCIAL PERSPECTIVE

The financial perspective garners the greatest amount of attention when cost

control is paramount. However, it is difficult for most hospital managers to follow

direct costs through to the general ledger and then relate them to the activities they

manage. Health care organizations need to be able to accumulate this information in a

concise and understandable way. Categories of financial measures might include

financial health, capital, human resources, and efficiency.

Financial Health.

Measures such as the percent by which revenues exceed expenses, return on assets,

liquidity measures (e.g., current ratio, working capital ratio) will certainly be used.

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 Capital.

In an era of ever expensive medical technology, the percentage of total expenses

accounted for by capital equipment is important to monitor.

Human Resources.

The costs of direct care staff are another important, and rising, health care cost

component. Nurses, for example, are in short supply and hospitals regularly bid up the

costs for their services. Measures such as "nursing care hours as a percentage of total

inpatient/outpatient nursing hours" indicate the percentage of all inpatient/outpatient

nursing hours for staff who are available to carry out the activities that contribute

directly to care of in/outpatients.

Efficiency.

A measure of unit cost performance is the percent by which planned cost per weighted

case differs from actual. Hospitals should monitor the cost of administrative services as

a percentage of total expenses. Day in inventory is a useful measure of the efficiency of

inventory usage.

3.2. CUSTOMER PERSPECTIVE

Patient service must include developing a positive perception of care delivery and

an ability by the organization to quickly correct patient service problems (Kershaw and

Kershaw 2001; Gumbus et al. 2003). Several categories of customer/patient measures

may be important. These include measures of patient satisfaction, patient involvement,

and waiting time.

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 Patient satisfaction.

The number of complaints provides an indication of satisfaction. The results should be

interpreted in light of the number of patient advocates, how well their presence is

publicized, and if a centralized complaints system exists. The pattern of complaints

should be monitored. Patient surveys should be conducted.

Patient involvement.

Indicators for patient involvement in treatment choices includes the number of sources

from which treatment information is available, the proportion of treatment services for

which protocols exist, and the proportion of consumers offered treatment choices.

Monitoring of consumer involvement in the broader decision making process is

difficult, with a possible measure being the number of consumers on service

development groups.

Waiting lists.

Waiting lists for services should be monitored separately. If the notional days required

to clear either of these waiting lists is high, the percent change in patients on the list

should be examined. In addition, the average length of time that patients have to wait

for specialists should be surveyed because this may impact on the demand for public

hospital services.

3.3. INTERNAL PROCESSES PERSPECTIVE

Hospitals need to identify the internal processes (service development, service

delivery, service evaluation) that have the greatest impact on what patients (customers)

value. Excellence in these areas is determined by measures that capture time to market,

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delivery time, cost, and process quality (Kershaw and Kershaw 2001). Ultimately,

balanced scorecard measures such as patient satisfaction (from surveys), retention, and

safety, establishment of minimally invasive surgery programs, accreditation, and patient

referral rates will determine the outcome of internal process initiatives. Patient flow

(timely discharge of patients) suggests another important area to measure. Following

are some areas of concern for internal processes that may lead to well-functioning

processes.

Staffing.

The ratio of staff to the area population and the staff workload should be monitored in

aggregate and for specific work groups such as medical practitioners and nurses. An

indication of the hospital's commitment to equal employment opportunity (EEO) could

be gauged by examining the workforce by ethnicity and gender mix.

Efficiency.

If the average cost per inpatient or outpatient case by treatment is high, then the key

determinants of cost, namely average length-of-stay and staff costs should be examined.

Staff costs should be analyzed to identify whether costs are high because of the base

cost of staff, the workload per staff member, or because of high overtime costs.

Additionally, "utilization rates" such as occupancy rates, throughput rates, and

outpatient clinic time utilized should be examined in assessing how efficiently services

are provided.

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 Facility utilization.

The overall proportion of specialized treatment facilities or equipment time allocated to

a medical service should be monitored as well as this time in relation to specialty

treatment beds and patient population in the hospital. It is also important to analyze how

facilities or equipment time is used.

Equity of access.

The balance between use of inpatient, outpatient, and community services should be

monitored as well as the balance between provision of services in the public and private

facilities. Other factors affecting access that should be monitored include staffing levels,

average travel time, and the availability of facilities to accommodate families. Activity

rates should be monitored in aggregate and by age, sex, ethnicity, and domicile.

Mortality rates.

Overall mortality rates for procedures should be examined and related back to the

morbidity rates included in equity of access.

3.4. Learning and Growth Perspective

Measures from the learning and growth perspective attempt to identify the skills

and tools needed to improve important internal processes. Key areas of concern include

the skill levels of employees, availability of training, and employee satisfaction. Patient

loads and training hours per caregiver are important BSC measures. Other concerns and

measures in this area include.

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4. CONTINUING PROFESSIONAL EDUCATION, TRAINING, AND EMPLOYEE

SATISFACTION.

Most medical practitioners are subject to continuing professional education

requirements. Measures that encourage employees to remain current in their fields and

enhance their credentials should be part of a balanced scorecard system. In addition,

learning and growth measures should be present to encourage innovation in delivering

medical services. Examples of measures include budgets and expenditures to support

cutting edge procedures, number of experimental treatments attempted, and the number of

test projects funded to improve service delivery.

A service department must establish its own performance standards. It is not

particularly helpful to monitor the activity levels, incident rates, etc. if there is no standard

or budget for comparison. For example, expected throughput for surgical services should

be specified on a month-by-month basis, and a standard should be set for post-operative

infection rates (it may be appropriate to set a target level together with an acceptable or

minimum standard). The deviation from these standards is the key management

information that should be monitored.

Comparative information should be used carefully. In addition to measuring the

difference in actual performance from planned, it is often useful to compare current

performance with historical and similar departments in other organizations. When

comparing performance with outside departments or standards, differences in objectives

and standards, measurement practices, information systems, environmental factors, and

resource constraints should be considered. Careful study and comparisons of other

organizations' criteria and standards should be undertaken (e.g., admission rates, length of

stay, environmental standards). Despite these difficulties, there are many examples where

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 careful use of simple comparative information has helped improve the quality and

productivity of service delivery.

5. PRODUCTIVITY: A PARTICULARLY USEFUL TYPE OF OPERATIONAL

AND ORGANIZATIONAL MEASURE

Increasingly, techniques borrowed from production organizations are being

utilized to measure productivity and performance and to balance staff resources for

greater flexibility in meeting patient demand. Productivity measures are very useful in

hospitals if they are constructed with a clear purpose in mind and have the support of

employees. Productivity measures are used for two purposes. First, they report

information not previously known by asking the questions;

* Is an activity on schedule?

* What is the cost of an activity or service?

* How productive is a department?

Second, they are used to control activities that need to be monitored or limited in

some fashion. To be successful, productivity measures must affect employee behavior

through a change in the relationship between performance and rewards and generate

commitment by employees to productivity improvement.

Hospital department staffs are being asked to do more with less. Where hospital

departments historically staffed according to peak loads, they now staff to meet the

average load. This demands much greater flexibility in staffing, the greatest productivity

challenge to hospitals because of the tremendous fluctuations in demand for hospital

services. However, staffing flexibility impacts on service quality in periods when staffing

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is low and service demand is high. As a result, efforts to improve productivity need to be

balanced with quality of care, effectiveness, and social equity. Productivity is easier to

measure than these other factors so there is a tendency to focus on productivity measures

to the detriment of other important factors in health care, although improvements in

productivity may help improve throughput, accessibility to services, and quality of

services.

A few simple guidelines are useful for building and sustaining a good productivity

measurement system. The measures should be developed participatively. A participative

approach lessens resistance to measurement and has motivational benefits. The measures

should reflect where the hospital wants to be. If the strategic direction changes, then so

should the measures. Productivity is a long-term process. Patience is required concerning

expected results.

Regarding the specific measures used, choose a mix of individual and group

performance measures. Clearly, the performance of a hospital depends on a combination

of individual and team efforts. Clinical employees often view their work as a set of

technical activities that they perform independently. They fail to connect their work to

that of individuals and departments preceding and following them. Develop measures that

consider the customer's point of view. Frequently productivity measures neglect to

consider that a hospital exits to satisfy patient needs.

Develop a family of measures for each department that encompasses productivity,

performance, quality, and other relevant measures. Rarely does a single measure

adequately describe performance. Broad indices such as nursing hours paid per admission

are unlikely to be helpful in identifying the factors behind the performance index or

helping managers decide what action needs to be taken. Specific measures may be

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 developed by analyzing the chain of factors between the initial decision to treat a patient

and the actual expenses incurred. By looking at each link in the chain, it is possible to

identify the factors that generate nursing costs. It is also possible to consider the

interrelationship between these measures. For example, a relatively high index for

admissions/population may be linked with low average patient activity.

6. COMMUNICATING PERFORMANCE INFORMATION

Performance should be communicated to three groups;

* Staff

* Management

* External groups contributing to your objectives.

Health managers can only change service delivery through changing the behavior

of their staff employees. Therefore, it is necessary to communicate performance

information that is credible and meaningful to those personnel. A brief outline of a

process for constructing performance measures, feeding back the information, and

facilitating staff involvement in performance and productivity improvement may include;

* Identifying the key issues relating to both quality and productivity,

* Developing a few selected indicators that are useful for that particular work setting,

* Establishing the monitoring system and baseline standards/targets,

* Facilitating employee involvement in interpreting information, solving problems, and

changing behavior, and

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 * Rewarding performance.

This degree of participation may not be appropriate to all units but it is imperative

that this process start "top-down" to demonstrate management's commitment and ensure

consistency in application. Regardless of the degree of staff participation, the

performance indices must be credible, the performance information must be

communicated simply and frequently, and the information must be used for action to

identify and solve problems, encourage improvements, and reward good behavior.

Traditionally, management reporting has been on the basis of inputs, primarily

deviations from budget (e.g., bed and staff numbers), outputs and activity levels (e.g.,

numbers of admissions, operations, tests conducted, inspections, etc.), and progress in

implementing plans.

Communication with external groups requires information that is simple and

credible. The objective of the communication should be very clear. If behavioral change

is desired, then the communication will need to be reinforced with discussions and

develop mutually acceptable action plans.

7. LEVELS OF MONITORING AND REPORTING

Individuals throughout the organization will be interested in different performance

levels of throughput. For example, the manager of surgical services for a multi-location

facility might be concerned with total throughput in each surgical specialty (broken into

acute and elective), quality as measured by post-operative morbidity, cost as measured by

variance from budget, and accessibility as measured by average waiting time. The

manager of surgical services at one location might be concerned with far greater detail.

Finally, the manager of operating rooms might monitor;

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 * availability of time for elective work (against an agreed upon standard),

* availability of workers for acute work (against an agreed upon standard),

* quality as measured by anesthetic related complications,

* costs broken down into nursing, senior medical, junior medical, technical, etc.,

* staff costs associated with scheduled and unscheduled sessions,

* costs of OR and anesthetic supplies,

* average cost per hour, and

* unproductive time due to non-availability of staff.

The managers of the surgical departments might also monitor a number of factors

relating to their own specialties such as quality as measured by surgical related

complications, use of allocated time, unproductive time due to non-availability of

surgeons, delays in access to operating rooms for acute operations, and surgeon

productivity.

8. CONCLUSION

Concern by hospital management for performance and productivity measurement

has grown in proportion to cutbacks in government funding for health services, pressure

from businesses and insurance companies, and public concerns about the rising costs of

health care. These factors have produced heightened competition in the health services

industry. Many hospitals are responding by adopting the performance/productivity

measurement techniques more commonly found in manufacturing businesses, such as the

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balanced scorecard. Although scorecards may appear as a fad in the healthcare field, they

have in fact earned a permanent place in strategic planning (Pieper 2005). A successful

performance/productivity measurement system should follow a few important principles

and take account of the unique characteristics of health care. Application of these

measurement methods along with some creativity, initiative, and cooperation among

hospital employees, customers, and consumers can improve the management and delivery

of health care at reduced cost and without loss of quality.

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