HE380.0.1 Managed Healthcare Assignment 8
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Chapter5Option1.pdf
Financial indicators in healthcare quality management systems
Leonardo Sedevich-Fons Management Control, Núcleo de Asistencia Profesional, Villa Marı́a, Argentina
Abstract
Purpose – The purpose of this paper is to highlight the usefulness of financial information as a complementary tool for quality programs implemented in healthcare institutions and, subsequently, to introduce an approach to its systematic management. Design/methodology/approach – This paper begins with a description of the current status of quality management in healthcare services, continues with a theoretical explanation of the importance of financial indicators for making decisions, and finishes with a practical example showing how to integrate financial data into healthcare quality programs. Findings – Financial indicators play a key role in healthcare quality management systems (QMSs). These indicators can be managed jointly with traditional non-financial measures, through introducing minor adjustments to the ISO 9000 model. Research limitations/implications – The approach presented in the second part of this paper was built based on theoretical arguments and on its use in industries other than healthcare. Hence, further research is needed to provide evidence of its practical application. Originality/value – First, this work integrates disciplines which are usually managed separately, such as quality and accounting. Furthermore, it focusses on an industry such as healthcare, where QMSs are not highly developed.
Keywords Management accounting, Financial indicators, Healthcare institutions, Quality management systems (QMS)
Paper type Research paper
1. Introduction There seems to be a consensus among experts that the concept of quality has undergone an important change during the last decades of the twentieth century. Some authors refer to this turning point as the evolution from “Little Q” to “Big Q” ( Juran, 1998a) while others allude to it as the emergence of concepts and methods which are collectively called “total quality” or “total quality management” (Blanton Godfrey, 1998). According to these “Big Q” models, quality projects should no longer be restricted to manufacturing organizations and production departments but should also be used in service companies and business processes ( Juran, 1998b). In other words, quality programs, formerly exclusive to companies belonging to traditional industries such as automotive, food and high tech; have become also applicable, for instance, to educational, healthcare and governmental institutions.
Because of their complexity and uniqueness, healthcare services have taken longer than other industries to accept quality management schemes. Over most of the last century, the primary objective of quality programs in healthcare has been stabilization, and then consisted mainly in inspection activities (Berwick and Bisognano, 1998). Nevertheless, due to the increasing number of effectiveness and efficiency problems, different governments and international healthcare agencies are currently fostering the utilization of quality management tools in this sector. Out of the several schemes available, ISO 9000 QMS appears as one of the most appropriate to solve these difficulties, given that it has been successfully put into practice for many years in various industries worldwide.
The current issue and full text archive of this journal is available at www.emeraldinsight.com/1754-2731.htm
The TQM Journal Vol. 26 No. 4, 2014 pp. 312-328 r Emerald Group Publishing Limited 1754-2731 DOI 10.1108/TQM-01-2014-0009
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Despite the growing trend toward adopting quality management guidelines in the healthcare sector, there are not many appropriate tools available to evaluate the cost-effectiveness of quality projects undertaken by these institutions (see Øvretveit, 2000). The shortage of financial information has a negative effect on quality management initiatives, as it weakens the efficacy of the decision-making process. First, it makes it difficult to estimate the economic results of future quality projects, thereby lengthening the approval process by financial managers and increasing the likelihood of making wrong decisions. Second, it prevents managers from assessing the economic effects of past quality actions and, therefore, hinders the financial monitoring of resources consumed and undermines the reputation of the QMS as a cost-effective tool.
The aim of this paper is to emphasize the importance of the role that financial measures play in a healthcare quality management system (QMS), and to propose a method to include them among its key performance indicators.
2. The measurement and improvement process in healthcare QMSs As mentioned above, one of the most renowned quality management schemes is the QMS suggested in the ISO 9000 family of standards. Although originally developed to satisfy military and nuclear power industry necessities (Marquardt, 1998) these guidelines are currently applied to a wide range of economic sectors, both public and private. At the present time, the main components of this group of international standards are the ISO 9000 (International Organization for Standardization (ISO), 2005a), the ISO 9001 (International Organization for Standardization (ISO), 2008) and the ISO 9004 (International Organization for Standardization (ISO), 2009). Implementing a QMS according to this model involves the adoption of the process approach and the application of the PDCA cycle (Plan-Do-Check-Act) to manage each and every activity of the organization. The principal function of these systems is to improve the overall performance through both increasing the level of effectiveness, which is reflected in better customer satisfaction, and raising the degree of efficiency, which is evidenced by higher resource productivity.
With the passing of time, ISO 9000 standards have started to be adopted by numerous healthcare providers around the world. Although their use has been observed mainly in more mechanical services, such as laboratory, imaging and patient transport, these QMSs have also been implemented in whole hospitals and clinics (World Health Organization (WHO), 2003). As a result, some ISO guidelines specifically adapted to healthcare institutions have been issued in recent years, such as the IWA-1 (International Organization for Standardization (ISO), 2005b), the HS1-A2 (Clinical and Laboratory Standards Institute (CLSI), 2004), the HB-10202 (British Standard Index (BSI), 2002), the HB-90.8 (Standards Australia International (SAI), 2001), the EN-15224 (European Committee for Standardization (CEN), 2012) and the NIAHO program (DNV Healthcare Inc., 2013).
An ISO 9000 QMS, including the adjustments needed to make it suitable for healthcare institutions is displayed in Figure 1.
This model comprises four cyclic sequential macro-processes, each of which consists of several processes and activities:
(1) The planning macro-process involves setting out general objectives and strategies, designing the overall process map, issuing procedures and forms and, at the end of the cycle, reviewing the general performance.
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(2) The second macro-process includes all the activities contributing to the identification and provision of resources of different kinds, such as labor, supplies, medical equipment, facilities, IT and funds.
(3) Those processes embracing specific clinical activities, such as communication with the patient, determination of the diagnosis, formulation of the care plan and the treatment itself, are grouped together into the service provision macro-process.
(4) The last macro-process encompasses all the measurement and improvement processes required by the ISO 9001 standard, such as the monitoring and follow-up of services provided, the detection of non-conformities, the analysis of data and information, and the implementation of corrective and preventive actions.
As it can be inferred from Figure 1, the macro-process called “Measurement and Improvement” is a vital component of QMSs, since it provides a link between consecutive cycles. This function involves selecting and managing different groups of indicators which supply both actual and estimated data about past and future performance, respectively.
The indicators normally chosen by healthcare institutions can be classified into the three categories explicitly proposed in clause 8.2 of the ISO 9001 standard (ISO, 2008):
(1) Patient satisfaction – a commonly used indicator in this field is the average satisfaction level, which is obtained from surveys conducted with patients and family members. Some examples of the topics these surveys should cover are courtesy of staff, waiting time for an appointment or exam, likelihood of return visits, clinical outcomes and adverse events (ISO, 2005b).
(2) Process efficiency – as for measuring and monitoring of processes, it is important to remark that attention should be paid to both clinical and support activities that could affect quality (ISO, 2005b). The most common indicators in this area are those reporting on resource productivity, such as imaging equipment idle time, average time for patient reception or amount of medication wasted.
(3) Service effectiveness – at the level of each particular patient, service effectiveness is continually assessed during the treatment period by the physicians in charge. Nonetheless, there are general indicators appropriate to measure the overall effectiveness of processes, such as the average length of treatments, the number of malpractice cases and the emergency readmission rate.
3. Limitations of traditional quality indicators in healthcare institutions From what was said above it may be argued that, at present, most of the indicators considered in healthcare QMS reports are non-financial measures, such as satisfaction levels, waiting times, or numbers of errors. One of the main reasons for the lack of financial information is the mentioned underdevelopment of quality management tools in the healthcare sector, if compared to other industries. Because in these services the use of ISO standards is not very common and still subject for discussion (Does and Van den Heuvel, 2008), those few institutions that are already following these guidelines remain mainly focussed on the mandatory requisites or “shalls” stipulated in ISO 9001 and, therefore, have not yet adopted the further recommendations or “shoulds”
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included in ISO 9004. The ISO 9001 standard does not consider matters of economic effectiveness and cost efficiency (Marquardt, 1998) as the ISO 9004 does, but only establishes basic requirements for implementing a QMS.
A second factor contributing to the shortage of financial quality indicators is the endless controversy as to whether healthcare providers should be for profit or not. Even two decades ago, public opinion was already divided between those who thought that healthcare for profit results in a more efficient and effective system and those who believed that the pursuit of economic benefits is antithetical to the values central to medicine (Andre and Velasquez, 1988). This debate continues even at present, given that the notion of profit in sectors such as healthcare or education is still widely condemned (Schlomach, 2010). Such a discussion has given rise to the belief that certain healthcare quality dimensions, such as patient safety, access, equity and acceptability, cannot be assessed in financial terms. As a result, not many institutions belonging to this industry manage financial information associated with their QMSs.
The fact that quality reports in healthcare institutions contain only non-financial data could weaken the efficiency of measurement and improvement processes. The first consequence of the dearth of financial data on future projects is that it increases the likelihood of making wrong decisions. That is to say, assigning numbers to resources and results allows evaluating the value for money to be made (Øvretveit, 2000) and, therefore, facilitates the work of decision makers. Namely, even though healthcare managers should not decide based on profitability, estimating the likely economic effects of different options helps them select the best choice among those with similar quality results. For example, if one of the strategic objectives of the hospital top management is to improve the provision of food services, there are various possible courses of action to achieve it, such as incorporating new technology, training current employees or even outsourcing the whole service. Therefore, the absence of financial budgets for each alternative project might constitute an obstacle to making the right decision.
Furthermore, it is common practice for organizations to require financial or general managers to give the final approval for quality projects. Without financial measures, communication with these executives is slower and less effective, given that “Money is the basic language of upper Management” (Gryna, 1998, p. 8.2). For instance, if a quality manager suggested the implementation of a new software package to reduce patient waiting times in the emergency department, the effective execution of this suggestion might depend on its acceptance by financial officers. Accordingly, although the potential rewards of this project were evident to emergency professionals and quality supervisors, if the formal proposal did not consider expected costs and economic benefits, the purchase of the new software might be delayed. In summary, another limitation of regarding only non-financial indicators to report on future quality performance is that it hampers the timely approval of improvement plans.
As for past or current quality actions, one of the consequences of the scarcity of financial measures is that it impedes a proper comparison between expected and actual performance. Like any other organizational plan, every quality improvement project has a limited budget that must be met. Even if corrective and preventive actions are carried out as planned and their results are as expected, there are other variables that may cause deviations from financial projections, such as the unit cost of resources and the profit margin of affected medical services. A good example would be an improvement project in a laboratory, whose purpose is to increase the average number
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of tests performed per day through redesigning the procedures for taking and receiving samples. Even assuming that the amount of time spent on the reformulation tasks does not exceed the estimates and that the real increase in the level of activity is as high as expected, if the cost per hour of personnel rises or the price per test decreases the resulting economic benefits of this project will be lower than forecast. Briefly, not having past financial information prevents regular budgetary monitoring and, thereby, could threaten the continuity of improvement projects.
The other relevant constraint brought about by the lack of financial indicators about past performance is that it hinders the demonstration that quality management tools, if properly applied, contribute to the sustainable growth of healthcare institutions. According to the manufacturing-based approach of quality, enhancing healthcare processes not only increases quality but also reduces costs (Does and Van den Heuvel, 2008). Nevertheless, because in the past much effort has been focussed on imposing quality programs rather than optimizing the healthcare system (Tolga Taner et al., 2007), there is a tendency to think that the exclusive goal of quality systems is to comply with governmental guidelines. For instance, if a hospital is required by accreditation bodies to develop specific protocols for the use of high-risk medications, this action may help minimize adverse events and, therefore, their associated costs. However, without financial measures reporting on these benefits, it might give the impression that the only advantage of implementing these protocols is to abide by external regulations.
4. Financial indicators and their importance in healthcare quality programs A financial indicator can be defined as “something that shows how good a company’s financial situation or the situation of a financial market is” (Cambridge Dictionaries, 2011). When specifically applied to organizations, this concept is used to refer to those measures that are included in the various accounting and financial reports or to any ratio calculated from them. On the one hand, there are some financial measures, such as actual total costs and revenues, which are obtained from the financial statements that every institution issues in accordance with external accounting rules and formats. On the other hand, there are indicators such as profit margins per unit or standard costs and revenues, which are provided by management accounting reports prepared to support internal decisions. In healthcare institutions, net patient service revenues, costs of medical supplies and patient accounts receivable are examples of the former; while the contribution margin per MRI scan, the average daily cost per inmate and the estimated costs of future malpractice claims are instances of the latter.
According to the ISO 9004 standard, financial reporting on activities related to the performance of QMSs and product conformity are a necessary complement to traditional non-financial indicators, regardless of the economic sector the organization belongs to (ISO, 2009). Nonetheless, at present, the use of financial indicators about quality improvement actions is almost exclusively observed in manufacturing industries, where quality management tools have already been around for a couple of decades. The reason is that, during the first period after the implementation of a QMS, organizations normally pursue external certification and, therefore, their efforts are directed to fulfilling the basic requirements set out in the ISO 9001 standard. It is only after the quality management program has been working for several years that managers realize that it actually contributes to raising efficiency and optimizing the use of resources. Then, most institutions begin to incorporate financial data into their
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measurement and improvement process (as recommended in the ISO 9004 standard) only once the QMS has reached a certain maturity level.
Despite the existing controversy over the alleged incompatibility between quality and profitability, financial indicators in healthcare services play as important a role as in other industries. At present, due to diminishing reimbursements and increasing cost of labor and supplies, these institutions need to look within to find savings (Tolga Taner et al., 2007) and, for that reason, assessing the potential and actual economic effects of improvement projects is essential. Thus, the usefulness of quality financial measures in healthcare may sound rather obvious, above all to for-profit organizations; given that corrective and preventive actions help them reduce unnecessary expenses and, therefore, increase their net income.
Although less evident than for their investor-owned counterparts, translating performance indicators into monetary terms is also helpful for governmental or not-for-profit institutions, given that unrestricted net assets might be reinvested to meet their primary purposes. That is to say, even if increasing earnings is not its main objective, maximizing the difference between revenues and cost allows the institution to have more resources available to enhance treatment outcomes and strengthen patient safety. Hence, many of the indicators that not-for-profit organizations use to monitor the degree of accomplishment of their long-term goals are the same as those employed by for-profit companies; such as, for instance, the unit costs of products or services (Garcı́a, 1999).
5. Integration of financial indicators into healthcare QMSs As previously stated, the ISO 9001 standard concentrates on functions that directly impact the quality of products and services (see ISO, 2008) and, thus, it neither explicitly covers accounting processes nor demands the use of financial measures. On the other hand, external regulations on accounting and financial reporting mainly focus on the necessities of shareholders, potential investors and government authorities (Sedevich-Fons, 2012), thereby neglecting non-financial quality indicators typically required for internal decision making. The marked specificity of both groups of formal guidelines causes that, in many cases, the information related to processes such as commercialization, production or service provision, is managed completely separately from that associated with administrative departments, such as invoicing, payroll or cost analysis. In turn, the lack of adequate communication between these two clusters of activities prevents the information from flowing dynamically throughout the organization and, ultimately, constitutes an obstacle to assessing cause-effect relationships between non-financial and financial measures.
Accordingly, it could be concluded that a possible way to include financial indicators among the key quality measures of an organization, consists in incorporating accounting and administrative processes into its quality program. This integration requires extending the scope of the process approach to cover these bookkeeping activities (Sedevich-Fons, 2012), and identifying the links between them and the traditional core processes of the QMS. Once this consolidation is complete, a healthcare QMS may be represented as shown in Figure 2.
The model displayed in Figure 2 is similar to that in Figure 1, but with the addition of accounting processes, which makes it possible to monitor the financial impact of improvement actions. The first administrative activity depicted is “Payroll,” which is regarded as a sub-process of “Human resources management” and reports on the cost of salaries and benefits for the staff of different grades and areas. Both “Purchase
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invoicing” and “Depreciation calculation” activities provide information about the costs of supplies, medical equipment, facilities and IT resources and, for that reason, are considered components of “Resource management.” Similarly, “Collection” and “Payments” functions are deemed part of the “Financial resources management” process, given that definitive revenue and cost figures (after discounts and allowances) usually arise from them. The “Billing” process, which is carried out in parallel with “Service provision,” is another relevant bookkeeping activity, because it makes available updated information on prices of the different services provided by the institution. Lastly, the most comprehensive accounting functions, such as financial statement issuance and cost analysis, are included in the “Measurement and Improvement” macro-process; since they consolidate and organize financial information generated by all the other tasks.
As soon as the administrative processes have been incorporated into the QMS, financial data will flow easily through the different areas and, therefore, will be available for quality managers. Thus, cause-effect relationships between improvement actions and economic results could be determined so as to produce more comprehensive management control reports. For instance, if the institution decides to educate nurses in order to enhance their performance, and the QMS is working as shown in Figure 2, controllers and decision makers will be acquainted with the economic impact of that training program. That is to say, first, the traditional “Monitoring and measurement” and “Detection of non-conformities” processes will provide non-financial measures about the project, such as the number of training hours delivered, the percentage of reduction in medication consumption, and the decrease observed in error rates. Second, the accounting processes that were later integrated into the system will inform about the cost per hour of nursing staff (payroll reports), hourly fees paid to trainers (purchase invoicing reports), unit costs of different types of medications (purchase invoicing and payment records), and the average additional cost of every medication-related adverse event (cost analysis report). Consequently, combining these two groups of measures, quality management analysts will be able to calculate financial indicators about the training program, such as the total funds spent on it, the total savings obtained from it and, by subtraction, the profits it generated.
6. Financial indicators provided by a healthcare QMS This section presents a practical case describing some of the financial indicators that a healthcare institution could manage, as part of its quality program, after having incorporated the accounting processes into the QMS scope. In the first part (Section 6.1), the example exhibits the traditional non-financial measures that any institution having adopted a QMS according to Figure 1 would have available. Subsequently (in Section 6.2), it shows the financial information that could be added to quality reports if the organization embraced the more comprehensive model, such as that depicted in Figure 2. Because the main purpose of this paper is not to demonstrate the actual benefits of implementing improvement actions but to propose a methodology to measure their financial impact, this example presents a simplified, hypothetical situation.
6.1 Traditional QMS: non-financial measures The exemplifying case is about a healthcare provider that has been running a quality program according to the ISO family of standards during the last three periods.
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The first project undertaken by following these guidelines (Project A) provided the staff members with the training that was necessary for designing, implementing and maintaining a QMS under the ISO 9001 model. Therefore, as specified in those standards, the institution used a form to record the development of the project, from planning to monitoring, which is exhibited in Table I.
Once the basis of the QMS had been implemented, the institution began to monitor and measure the aspects on which the ISO 9001 standard places most emphasis, such as patient satisfaction, process efficiency and service effectiveness (see Section 2). As a first result, it was found out that, in the laboratory department, some extra inspection and sample reprocessing activities were required in order to ensure accuracy of blood test results. Even though this situation was not yet having an effect on either the final test reports or the patient satisfaction rate, it was indicating that processes were not completely reliable. This warning signal demanded a preventive measure (Project B) which consisted in a training program for laboratory staff. The planning, execution and follow-up stages of this preventive action are detailed in Table II.
Another important finding that emerged thanks to the implementation of the QMS was a non-conformity detected in the inpatient unit. The data extracted from satisfaction surveys indicated that the average duration of hospitalization for patients undergoing surgery was significantly longer than in other similar institutions. Through root-cause analysis, it was determined that there were unnecessary waiting times during the pre- and post-surgical periods. In response to these facts, top managers decided to assess the possibility of introducing some adjustments in protocols so as to minimize wasted time. For this purpose a corrective action was initiated (Project C) whose details are displayed in Table III.
In summary, Tables I-III exhibit the forms that were filled out for every quality action in order to comply with the requirements set out in Clause 8 of the ISO 9001
Improvement action Scope: quality management system Form code: FO-8.5.1
Project A Estimates: planning and resources management
Actual results: execution and monitoring
General objective: to design, implement and maintain a QMS according to ISO 9000 Goals/ results
To design and implement a QMS under ISO 9001 (period I) To obtain the ISO 9001 certification (period III) To maintain the QMS working even after certification
The ISO 9001 QMS was designed and implemented during period I The ISO certification was obtained in period III The QMS is still working after certification
Activities To allocate labor to the QMS project To train this staff in quality management
The labor needed was allocated to the project The quality staff was trained during the three periods
Resources Estimated labor hours (quality staff ) allocated to the project: 130 (80 in period I, 25 in period II and 25 in period III) Estimated hours of consultancy: 35 (20 in period I, 10 in period II and 5 in period III)
Actual labor hours (quality staff) allocated to the project: 130 (80 in period I, 25 in period II and 25 in period III)
Actual hours of consultancy: 35 (20 in period I, 10 in period II and 5 en period III)
Table I. Improvement action
record – Project A
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standard (ISO, 2008). As can be noted, the information contained in these records may be very helpful for making decisions before, during and after the execution of quality projects. Nonetheless, because this institution has adopted a traditional QMS (as that shown in Figure 1) these documents only provide indicators expressed in physical units, such as “number of patients” or “hours of labor” and, thus, they do not directly report on the economic impact of improvement programs.
6.2 Comprehensive QMS: financial perspective incorporated Despite the utility of traditional QMSs, had the institution been using a system like the one depicted in Figure 2 (which besides the processes included in the ISO 9001 standard encompasses accounting activities such as payroll, billing, purchase invoicing and cost analysis), quality management analysts would also have had readily available the data presented in Table IV.
Preventive action Scope: laboratory Form code: FO-8.5.3
Project B Estimates: planning and resources management
Actual results: execution and monitoring
General objective: to prevent errors in blood tests Goals/ results
To lower the likelihood of making mistakes during the processes, in order to reduce the labor time spent on inspection and reprocessing activities by 50 hours (30 in period I and 20 more in period II)
The likelihood of making mistakes lowered. As a result, the labor time spent on inspection and reprocessing activities was reduced by 80 hours (30 in period I, 10 more in period II and 40 more in period III)
Activities To train laboratory staff The laboratory staff was trained Resources Estimated hours of consultancy: 20 (all in
period I) Actual hours of consultancy: 16 (all in period I)
Table II. Preventive action record – Project B
Corrective action Scope: inpatient unit Form code: FO-8.5.2
Project C Estimates: planning and resources management
Actual results: execution and monitoring
General objective: to increase patient satisfaction by avoiding unnecessary waiting times during the inpatient stay Goals/ results
To increase patient satisfaction rates To release resources to be used to increase the number of patients treated per period by 20 (10 in period I and 10 more in period II)
The patient satisfaction rate increased over the periods Some resources were released and then the number of patients treated per period increased by 25 (all in period II)
Activities To adjust pre- and post-surgical protocols to minimize unnecessary waiting times
Some of the pre- and post-surgical protocols were adjusted
Resources Estimated physician work hours allocated to the project: 40 (all in period I)
Actual physician work hours allocated to the project: 48 (40 in period I and 8 in period II)
Table III. Corrective action record – Project C
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If this had been the case, it would have been possible to combine the information included in the improvement action records (Tables I-III) with this monetary data (Table IV), with the goal of producing a report such as that shown in Table V, which provides financial indicators on the effects of each of these actions, as well as on the overall economic impact of the whole QMS.
7. Benefits of managing financial indicators as part of healthcare QMSs Incorporating accounting processes into the QMS, as indicated in Figure 2, allows adding the financial perspective to the monitoring and measurement process through supplementary reports such as that shown in Table V. These kinds of measures inform managers about the total net income generated by the QMS disaggregated according to various dimensions. To start with, the different rows provide information about the profits obtained from each quality project separating resources spent from results accomplished. Besides, the columns present both estimated and actual quality-related economic benefits for each period. This financial annex should be regarded as a valuable aid for institutions to make strategic, tactical and operative decisions, and thus achieve sustainable growth. An explanation as to how these financial indicators could help healthcare decision makers is offered in the following paragraphs.
One of the advantages of managing financial data about future improvement actions is that it reports on their expected net income. In healthcare services, financial estimates are a key factor when choosing between courses of action with similar short-term expected results as regards treatment effectiveness and patient safety. In the example introduced above the laboratory managers were facing a situation of this nature before implementing Project B, given that they had to decide between continuing to carry out extra activities (inspection and reprocessing) and training the
Period I Period II Period III Information Item Estimated Actual Estimated Actual Estimated Actual source
Labor cost per hour (quality staff)
$6 $6 $6 $6 $6 $7 Payroll records
Cost per hour of consultancy (quality management)
$13 $13 $13 $16 $13 $22 Purchase invoicing/ payment records
Labor cost per hour (laboratory staff)
$6 $5 $6 $6 $6 $6 Payroll records
Cost per hour of consultancy (laboratory)
$12 $12 $12 $12 $12 $13 Purchase invoicing/ payment records
Cost per hour (physician work)
$10 $11 $10 $12 $10 $12 Payroll records
Average revenue per patient treated
$220 $220 $230 $220 $230 $230 Billing records
Average cost per patient treated
$200 $200 $190 $190 $180 $180 Data analysis records
Table IV. Financial data
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a n
ci a l
a n
n ex
: q
u a li
ty a ct
io n
s F
o rm
C o d
e: F
O –
8 .5
.4
P ro
je ct
s A
, B
a n
d C
P er
io d
I P
er io
d II
P er
io d
II I
C u
m u
la ti
v e
D es
cr ip
ti o n
F o
rm u
la ea
E st
im a te
d A
ct u
a l
E st
im a te
d A
ct u
a l
E st
im a te
d A
ct u
a l
E st
im a te
d A
ct u
a l
P ro
je ct
A :
im p ro
v em
en t
a ct
io n
– q u a li ty
m a n a g em
en t
sy st
em
R es
o u
rc es
T ab
le I/
T ab
le IV
T o ta
l la
b o r
co st
(q u
a li
ty st
a ff
) N
u m
b er
o f
h o u
rs (T
ab le
I) �
$ p
er h
o u
r
(T ab
le IV
)
� $ 4 8 0
� $ 4 8 0
� $ 1 5 0
� $ 1 5 0
� $ 1 5 0
� $ 1 7 5
� $ 7 8 0
� $ 8 0 5
T o ta
l co
st o f
co n
su lt
a n
cy
(Q u
a li
ty M
.)
N u
m b
er o f
h o u
rs (T
ab le
I) �
$ p
er h
o u
r
(T ab
le IV
)
� $ 2 6 0
� $ 2 6 0
� $ 1 3 0
� $ 1 6 0
� $ 6 5
� $ 1 1 0
� $ 4 5 5
� $ 5 3 0
N et
in co
m e
o f
P ro
je ct
A �
$ 7 4 0
� $ 7 4 0
� $ 2 8 0
� $ 3 1 0
� $ 2 1 5
� $ 2 8 5
� $ 1 ,2
3 5
� $ 1 ,3
3 5
P ro
je ct
B :
p re
v en
ti v e
a ct
io n
– la
b o ra
to ry
R es
o u
rc es
T ab
le II
/T ab
le IV
T o ta
l co
st o f
co n
su lt
a n
cy
(L ab
o ra
to ry
)
N u
m b
er o f
h o u
rs (T
ab le
II ) �
$ p
er h
o u
r
(T ab
le IV
)
� $ 2 4 0
� $ 1 9 2
$ 0
$ 0
$ 0
$ 0
� $ 2 4 0
� $ 1 9 2
G o a ls
/R es
u lt
s T
ab le
II /T
ab le
IV
In sp
ec ti
o n
a n
d re
p ro
ce ss
in g
co st
a v
o id
ed
N u
m b
er o f
h o u
rs re
d u
ce d
(T ab
le II
) �
$ p
er
h o u
r (T
ab le
IV )
$ 1 8 0
$ 1 5 0
$ 3 0 0
$ 2 4 0
$ 3 0 0
$ 4 8 0
$ 7 8 0
$ 8 7 0
N et
in co
m e
o f
P ro
je ct
B �
$ 6 0
� $ 4 2
$ 3 0 0
$ 2 4 0
$ 3 0 0
$ 4 8 0
$ 5 4 0
$ 6 7 8
P ro
je ct
C :
co rr
ec ti
v e
a ct
io n
– in
p a ti
en t
u n it
R es
o u
rc es
T ab
le II
I/ T
ab le
IV
T o ta
l co
st o f
p h
y si
ci a n
w o
rk N
u m
b er
o f
h o u
rs (T
ab le
II I) �
$ p
er h
o u
r
(T ab
le IV
)
� $ 4 0 0
� $ 4 4 0
$ 0
� $ 9 6
$ 0
$ 0
� $ 4 0 0
� $ 5 3 6
G o a ls
/r es
u lt
s T
ab le
II I/
T ab
le IV
A d
d it
io n
a l
p ro
fi ts
A d
d it
io n
a l
p a ti
en ts
(T ab
le II
I) �
(R ev
en u
e
– C
o st
p er
p a ti
en t)
(T ab
le IV
)
$ 2 0 0
$ 0
$ 8 0 0
$ 7 5 0
$ 1 ,0
0 0
$ 1 ,2
5 0
$ 2 ,0
0 0
$ 2 ,0
0 0
N et
in co
m e
o f
P ro
je ct
C �
$ 2 0 0
� $ 4 4 0
$ 8 0 0
$ 6 5 4
$ 1 ,0
0 0
$ 1 ,2
5 0
$ 1 ,6
0 0
$ 1 ,4
6 4
Q M
S (P
ro je
ct s
A ,
B ,
C )
T o ta
l n
et in
co m
e (P
ro je
ct s
A ,
B
a n
d C
)
� $ 1 ,0
0 0
� $ 1 ,2
2 2
$ 8 2 0
$ 5 8 4
$ 1 ,0
8 5
$ 1 ,4
4 5
$ 9 0 5
$ 8 0 7
N o te
s :
a F
ig u
re s
in ea
ch ro
w a re
o b
ta in
ed a p
p ly
in g
th e
fo rm
u la
e se
t o u
t in
th e
se co
n d
co lu
m n
, w
h ic
h re
q u
ir es
u si
n g
d a ta
in cl
u d
ed in
p re
v io
u s
re co
rd s
(T ab
le s
I- IV
). B
ef o re
ca lc
u la
ti n
g ea
ch fi
g u
re ,i
t m
u st
b e
d et
er m
in ed
w h
et h
er it
is a n
es ti
m a te
d o r
a n
a ct
u a l
fi g
u re
,a n
d th
e p
er io
d th
e fi
g u
re re
fe rs
to .F
o r
in st
a n
ce ,t
h e
es ti
m a te
d to
ta l la
b o r
co st
o f
q u
a li
ty
st a ff
fo r
th e
p er
io d
I, m
a y
b e
ca lc
u la
te d
a p
p ly
in g
th e
fo ll
o w
in g
fo rm
u la
:( E
st im
a te
d la
b o r
h o u
rs (q
u a li
ty st
a ff
) fo
r p
er io
d I
(T ab
le I)
) �
(E st
im a te
d la
b o r
co st
p er
h o u
r (q
u a li
ty st
a ff
)
fo r
p er
io d
I (T
ab le
IV ))
. I.
e. 8 0
h o u
rs �
$ 6
p er
h o u
r ¼
$ 4 8 0
Table V. Financial annex – Projects A, B and C
324
TQM 26,4
laboratory staff. That is to say, by considering only the information shown in Table II (just the estimates column at that time), it could have been concluded that the training program would not affect either patient safety or treatment effectiveness and, therefore, managers could have chosen to continue with the inspection and reprocessing activities. Nonetheless, if the Financial Annex displayed in Table V had also been available at the time of making the decision, managers would have been sure that the training option would be more convenient; given that, besides maintaining the accuracy level of test results, it could generate additional profits of around $540 only during the first three periods.
A second benefit of having forecast financial information before undertaking quality projects is that it contributes to their timely approval. In the previous example, the decision to embark on Project C, which consisted in adjusting pre- and post-surgical protocols so as to minimize waiting times, was based on the data provided by Table III (just the estimates column at that time). These non-financial measures, which reported on the resources this action required as well as on its expected results, were enough evidence for the inpatient unit manager to support the project. Nevertheless, because every improvement action normally needs to be endorsed by financial authorities, it would have been highly helpful to have available the indicators supplied by the Financial Annex (Table V). Through this report, the inpatient unit manager would have been able to amply demonstrate that the costs that had to be incurred to modify the protocols ($400) would be largely outweighed by the economic benefits that would arise during the first three periods ($2,000).
Financial measures of past/actual performance are also relevant for decision making, as they permit monitoring that improvement projects are executed in compliance with the budget. This utility of financial information may also be exemplified by the case introduced in the previous section. After the execution of Project A, the quality manager had access to its corresponding improvement action record (Table I), which presented a comparison between the estimated and actual resources involved in it. Table I indicated that the number of hours actually used in the project (both labor and consultancy hours) matched the estimates, thereby suggesting that the action had been carried out within budget. However, had the Financial Annex (Table V) been issued, the quality manager would have learnt that the amount of money spent on Project A by the end of period III ($1,335) was higher than the estimated figure ($1,235), mostly due to unexpected increases in consultancy per-hour costs (see Table IV).
Another important function of financial information about past performance is to contribute to demonstrating that, besides being necessary to comply with external regulations, quality projects can also help institutions increase their profits. As observed in the example, one of the objectives that the case institution had set out was to obtain the ISO 9001 certification. The improvement action record of Project A (Table I) already provided evidence that this purpose had successfully been achieved in Period III. Nonetheless, had financial data been made available to managers through the Financial Annex (Table V), they would also have been aware of the overall economic benefits that the QMS generated for the institution. That report highlights that, apart from allowing the institution to gain an ISO 9001 certificate, the implementation of the quality program gave rise to an additional net income of $807 during the first three periods. This figure results from subtracting the cost of the resources used in Project A ($1,335) from the sum of the net incomes produced by Project B ($678) and Project C ($1,464).
325
Financial indicators
in QMS
8. Conclusions At present, countless healthcare institutions around the world are starting to adopt quality management models that have been successfully applied in other industries, with the purpose of finding solutions to their effectiveness and efficiency problems. More specifically, there seems to be a growing acceptance of the ISO 9000 QMS model by healthcare providers, which can be confirmed by the recent emergence of specific guidelines promoting its implementation in these kinds of services. Nevertheless, many of the institutions that are beginning to work according to these guidelines are not yet managing financial indicators in conjunction with the required non-financial ones; mainly because of some particular features of this economic sector.
Because financial measures about both predicted and actual performance have been proven to be an important complement to quality management programs in different kinds of organizations, they are expected to play the same role in healthcare services. First, estimated financial information is a crucial factor when choosing between different quality projects, above all in those cases where the options have similar short- term effects on patients. Moreover, given that monetary measures are more significant than physical ones for financial managers, reports on expected costs and revenues could contribute to the prompt approval of improvement actions. Additionally, indicators about the financial performance of past quality projects allow detecting budget deviations caused by changes in either unit costs of resources or prices of services. Besides, these past-performance financial measures provide evidence on the positive economic impact brought about by quality actions, thereby demonstrating that the benefits of implementing a QMS in a healthcare institution go beyond mere compliance with external regulations.
Consequently, it may be concluded that there is a need to incorporate financial information into healthcare quality programs in order to take full advantage of their benefits through improved decision making. This might not be a straightforward step given that, apart from the mentioned specific features of this economic sector, in many organizations there is a marked dissociation between financial and non-financial information flows. Nevertheless, the integration of accounting processes and reports into the ISO 9000 QMS model appears as a solution to this problem. Such a combination involves regarding administrative activities (billing, purchase invoicing, payroll, depreciation calculation and cost analysis) as a close complement to the core processes of the institution (resource management, communication with the patient, diagnosis, care plan formulation, clinical treatment, measurement and improvement); which would allow measuring important quality variables (patient satisfaction, process efficiency and service effectiveness) in financial terms.
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About the author
Leonardo Sedevich-Fons has a degree in Finance and Accounting from the “Universidad Nacional de C�ordoba.” He is currently a PhD student in Economic Sciences at the same institution. He has held several positions in private companies before becoming a freelance consultant in 2007. As a researcher, he has taken part in several projects, presented works at international conferences and published papers in specialized journals. As a teacher he has worked as a trainer for different private institutions. His general areas of work and research are Management Accounting, Quality Management and Management Control, including specific tools and disciplines such as Cost Management, ISO 9001, Balanced Scorecard, Quality Cost, Strategic Cost Analysis, and Strategic Management Accounting. Leonardo Sedevich-Fons can be contacted at: [email protected]
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328
TQM 26,4
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