1. Ozcan: Chapter 9 Productivity ISE 491 Dr. Joan Burtner

2. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 2 Outline  Productivity Improvement  Trends in Healthcare Productivity: Consequences of Medicare Prospective Payment System (PPS)  Productivity Definitions and Measurements  Productivity Benchmarking  Multifactor Productivity  Commonly Used Productivity Ratios: Hours per Patient Day or Visit  Adjustment for Inputs  Skill-Mix Adjustment to Worked Hours  Cost of Labor  Adjustments for Output Measures :Service/Case-Mix Adjustments  Productivity Measures Using Direct Care Hours  Productivity – Quality Relationship

3. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 3 1.Develop productivity measures for all operations in their organization. 2.Look at the system as a whole (do not sub-optimize) in deciding on which operations/procedures to focus productivity improvements. 3. Develop methods for achieving productivity improvements, and especially benchmarking by studying peer healthcare providers that have increased productivity; and reengineer care delivery and business processes. 4. Establish reasonable and attainable standards and improvement goals. 5. Consider incentives to reward workers for contributions and to demonstrate management’s support of productivity improvements. 6. Measure and publicize improvements. Improving Healthcare Productivity

4. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 4 Trends in Productivity: Consequences of PPS The recent decades’ changes in reimbursement strategies aimed to end waste and promote innovative and cost-efficient delivery systems. Productivity gains from the Prospective Payment System (PPS) have not materialized to the extent predicted. Hospitals now employ more people to treat fewer patients, and the increase is not accounted for by the greater severity of patient illness in the late 1980s and in1990s. Although employers, insurers and public are spending less on inpatient care, the rising use of outpatient procedures has simply increased costs in that area which counters the savings (Altman, Goldberger, and Crane, 1990).

5. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 5 Trends in Productivity: Productivity Wall The constraints that force healthcare institutions into the role of cost centers, coupled with shifting patterns of inpatient acuity, tight healthcare labor markets, and society's expectations of high quality of care are leading healthcare organizations to a "productivity wall." When the wall is reached, it is quality of care that inevitably is sacrificed for the sake of productivity and profit (Kirk, 1990). It must be recognized that there are limits to ratcheting up productivity. It is not always possible to do more with less.

6. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 6 Productivity Definitions and Measurements  Productivity is one measure of the effective use of resources within an organization, industry, or nation.  The classical productivity definition measures outputs relative to the inputs needed to produce them. That is, productivity is defined as the number of output units per unit of input.

7. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 7 Sometimes, an inverse calculation is used that measures inputs per unit of output. Care must be taken to interpret this inverse calculation appropriately; the greater the number of units of input per unit of output, the lower the productivity. For example, traditionally productivity in hospital nursing units has been measured by hours per patient day (HPPD). That requires an inversion of the typical calculations: meaning total hours are divided by total patient days. Productivity Definitions and Measurements

8. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 8 8 Example 9.1 Nurses in Unit A worked collectively a total of 25 hours to treat a patient who stayed 5 days, and nurses in Unit B worked a total of 16 hours to treat a patient who stayed 4 days. Calculate which of the two similar hospital nursing units is more productive. Since the HPPD productivity ratio is expressed as input over output, lower is better. Unit B productivity is better than Unit A.

9. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 9 Productivity Definitions and Measurements Productivity Benchmarking. Productivity must be considered as a relative measure; the calculated ratio should be either compared to a similar unit, or compared to the productivity ratio of the same unit in previous years. Such comparisons characterize benchmarking. Many organizations use benchmarking to help set the direction for change. Historical Benchmarking is monitoring an operational units’ own productivity or performance over the last few years. Another way of benchmarking is to identify the best practices (best productivity ratios of similar units) across health organizations and incorporate them in one’s own.

10. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 10 Multi-factor Productivity Looking only at labor productivity may not yield an accurate picture. Newer productivity measures tend to include not only labor inputs, but the other operating costs for the product or service as well.

11. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 11 Example 9.2 Statement A specialty laboratory performs lab tests for the area hospitals. During its first two years of operation the following measurements were gathered: Measurement Year 1 Year 2 Price per test ($) 50 50 Annual tests 10,000 10,700 Total labor costs($)150,000158,000 Material costs ($) 8,000 8,400 Overhead ($) 12,000 12,200 Determine and compare the multifactor productivity for historical benchmarking.

12. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 12 Example 9.2 Solution Since the multi-factor productivity ratio is expressed as output over input, higher is better. Year 2 productivity is better than Year 1.

13. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 13 Commonly Used Productivity Ratios inpatient outpatient

14. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 14 Annual statistical data for two nursing units in Memorial Hospital are as follows: MeasurementsUnit A Unit B Annual Patient Days 14,000 10,000 Annual Hours Worked210,000180,000 Calculate and compare hours per patient day for two units of this hospital. Solution: Example 9.3 Since the HPPD productivity ratio is expressed as input over output, lower is better. Unit A productivity is better than Unit B.

15. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 15 Example 9.4 Performsbetter Associates – a two-site group practice, requires productivity monitoring. The following initial data are provided for both sites of the practice: Measurements SuburbanDowntown Annual Visits 135,000 97,000 Annual Paid Hours 115,000112,000 Calculate and compare the hours per patient visit for the suburban and the downtown locations of this practice. Solution: hours or 69 minutes. hours or 51 minutes. Conclusion: Suburb is better than Downtown

16. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 16 Adjustments for Inputs. Skill-Mix Adjustment weighs the hours of personnel of different skill levels by their economic valuation. One approach is to calculate weights based on the average wage or salary of each skill class. To do that, a given skill class wage/salary would be divided into the top class skill salary. Let’s assume RNs, LPNs and Nurses Aides are earning $35.00, $28.00, and $17.50 an hour, respectively. One hour of a nurse aide’s time is economically equivalent to 0.5 hours of a RN's time; and one hour of a LPN's time is equal to 0.8 hours of a RN's time.

17. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 17 Calculations: Adjustments for Inputs Adjusted Hours = 1.0*(RN hours) + 0.8*(LPN hours) + 0.5*(Aide hours)

18. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 18 Adjustments for Inputs. Similarly, in outpatient settings, if one hour of a nurse practitioner's (NP) time is economically equivalent to 0.6 hours of a specialist's (SP) time, and if one hour of a general practitioner’s (GP) time is equal to 0.85 hours of a specialist’s time, adjusted hours would be calculated as: Adjusted Hours = 1.0 (SP hours) + 0.85 (GP hours) + 0.6 (NP hours)

19. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 19 Example 9.5: Using data from Example 9.3, and economic equivalencies of 0.5 Aide = RN, 0.8 LPN = RN, calculate the adjusted hours per patient day for Unit A and Unit B. Unit A at Memorial Hospital employs 100% RNs. The current skill mix distribution of Unit B is 45% RNs, 30% LPNs, and 25% nursing aides (NAs). Compare unadjusted and adjusted productivity scores. Adjustments for Inputs: Example 9.5

20. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 20 Solution: The first step is to calculate adjusted hours for each unit. For Unit A, since it employs 100% RNs, there is no need for adjustment. For Unit B: Adjusted Hours (Unit B) = 1.0 (180,000*.45) + 0.80 (180,000*.30) + 0.50 (180,000*.25). Adjusted Hours (Unit B) = 1.0 (81,000) + 0.80 (54,000) + 0.50 (45,000). Adjusted Hours (Unit B) = 146,700. In this way, using the economic equivalencies of the skill-mix, the number of hours is standardized as 146,700 instead of 180,000. hours. Using adjusted hours, Unit A, which appeared productive according to the first measure (see example 9.3), no longer appears as productive. hours. Standardized Cost of Labor. Adjustments for Inputs Example 9.5 Solution

21. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 21 Adjustments for Inputs. Standardized Cost of Labor. Total labor cost comprises the payments to various professionals at varying skills. To account for differences in salary structure across hospitals or group practices, cost calculations can be standardized using a standard salary per hour for each of the skill levels Labor Cost = RN wages (RN hours) + LPN wages (LPN hours) + NA wages (Aide hours).

22. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 22 Adjustments for Inputs Ex. 9.6 Example 9.6: Performsbetter Associates in Example 9.4 pays $110, $85, and $45 per hour, respectively, to its SPs, GPs and NPs in both locations. Currently, the suburban location staff comprises 50% SPs, 30% GPs, and 20% NPs. The downtown location, on the other hand, comprises 30% SPs, 50% GPs, and 20% NPs. Calculate and compare the labor cost of care, and labor cost per visit for both locations.

23. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 23 Based on Annual Visits and Annual Paid Hours listed in Example 9.4 Adjustments for Inputs: 9.6 Solution First, calculate “Labor Cost of Care” for each location. Labor Cost = SP wages (SP hours) + GP wages (GP hours) + NP wages (NP hours), Labor Cost Suburban = $110 (115,000*0.50) + $85 (115,000*0.30) + $45 (115,000*0.20). Labor Cost Suburban = $110 (57,500) + $85 (34,500) + $45 (23,000). Labor Cost Suburban = $10,292,500. Labor Cost Downtown = $110 (112,000*.30) + $85 (112,000*0.50) + $45 (112,000*0.20). Labor Cost Downtown = $110 (33,600) + $85 (56,000) + $45 (22,400). Labor Cost Downtown = $9,464,000. Lower volume at Downtown location, Higher labor cost per visit

24. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 24 Adjustments for Outputs. Service-Mix Adjustments. Service-mix adjustment is useful tool for comparison of, for instance, two community hospitals that provide different services or have significantly different distributions of patients among their services. The service-mix adjusted volume is weighted by a normalized service-intensity factor.

25. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 25 Adjustments for Outputs. Example 9.7: Two hospitals, each with unadjusted volume of 10,000 patient days per month, provide only two services, S 1 and S 2, requiring respectively 3 and 7 hours of nursing time per patient day. Hospital A has a service-mix distribution of 2000 patient days for S 1 and 8000 patient days for S 2. Hospital B has 8000 days for S 1 and 2000 days for S 2. Calculate adjusted patient days for both hospitals. Service-Mix Adjustments

26. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 26 Adjustments for Outputs Solution: page 217 In this case, total unadjusted volume is simply the sum of the volume for each service in each hospital, or Unadjusted Volume = X 1 + X 2. Hospital-AHospital-B Service S 1 (3 hours/patient day)X 1 =2000X 1 =8000 Service S 2 (7 hours/patient day)X 2 =8000X 2 =2000 Total Unadjusted Volume10,000 Adjusted Volume = W 1 X 1 + W 2 X 2.. Adjusted volume for Hospital-A = 0.6*2,000+1.4*8,000 = 12,400. Adjusted volume for Hospital-B = 0.6*8,000+1.4*2,000 = 7,600. Service-Mix Adjustments

27. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 27 Adjustments for Outputs Case-Mix Adjustments. The methodology for case-mix adjustment is similar to that for service-mix adjustment. Although most hospitals rely on advanced acuity systems, each system is based on the weight factors for the different acuity categories. Patients in each category require similar amounts of nursing care over a given 24 hour time period; however, across categories the care requirements differ significantly. For acuity, the focus is on patients’ direct care requirements. The ratio of the hours of direct care provided to the total hours worked is another measure of productivity.

28. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 28 Adjustments for Outputs Example 9.8: Unit A and Unit B (from Example 9.3), a medical care unit in Memorial Hospital, classify patients into four acuity categories (Type I through Type IV), with direct care requirements per patient day being respectively, 0.5, 1.5, 4.0, and 6.0 hours. Annual distributions of patients in these four acuity categories in Unit A were 0.15, 0.25, 0.35, and 0.25. Annual distributions of patients in Unit B were 0.15, 0.30, 0.40, and 0.15. Calculate the case mix for these two units, and determine which unit has been serving more severe patients. Case-Mix Adjustments

29. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 29 Adjustments for Outputs Case-Mix Adjustments...... Solution: Page 219

30. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 30 Once the case-mix is determined, the output side of the productivity ratios can be adjusted by simply multiplying volume (patient days, discharges, visits) by case-mix index as: Adjusted Patient Days = Patient Days * Case-mix index. Adjusted Discharges = Discharges * Case-mix index. Adjusted Visits = Visits * Case-mix index. Adjustments for Outputs Case-Mix Adjustments

31. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 31 Productivity Measures Using Direct Care Hours Hours of Direct Care. “Hours of direct care” is an important component of productivity ratios. It serves as a building block for other ratios. To illustrate its development, let us assume that patients are categorized into acuity groupings requiring H1, H2, H3, …., Hm hours of direct nursing care per patient day. Further, assume that there are N1, N2, N3,.…, Nm annual patient days in units 1 through m. The total amount of direct nursing care in nursing unit j would be calculated as:

32. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 32 Productivity Measures Using Direct Care Hours Percentage of Hours in Direct Care. This is an additional measure can be derived from the “Hours of Direct Care” calculation, as the ratio of direct care hours to total care hours. Percentage of Adjusted Hours in Direct Care. We also can determine the percentage of adjusted nursing hours as adjusted for skill-mix in direct patient care.

33. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 33 Productivity Measures Using Direct Care Hours Example 9.9: Using information from Examples 9.3 and 9.8 calculate: a)hours of direct care b)percentage of hours in direct care, and c)percentage of adjusted hours in direct care for Units A and B of Memorial Hospital. Compare these results in terms of percentage of adjusted hours in direct care.

34. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 34 Productivity Measures Using Direct Care Hours Solution: Memorial Hospital uses an acuity classification system with 4 categories of direct hours of care per patient day: 0.5, 1.5, 4.0, and 6.0 hours. The annual distributions of patients in these four acuity categories in Unit A were 0.15, 0.25, 0.35, and 0.25. The annual distributions of patients in Unit B were 0.15, 0.30, 0.40, and 0.15. Annual patient days for Unit A were 14,000, and for unit B 10,000. Annual hours worked were 210,000 and 180,000, respectively.

35. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 35 Productivity Measures Using Direct Care Hours Solution:..

36. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 36 Productivity Measures Using Direct Care Hours. Solution:

37. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 37 Hospital A Hospital B Quantity of Inputs (Staffing Level) Quality of Output I 2 I 1 QAQA QBQB Figure 9.1 Productivity and Quality Tradeoff A B A’A’ I Q A ’’ Q A” I A” Source: Shukla, R.K. Theories and Strategies of Healthcare: Technology-Strategy-Performance, Chapter 4, Unpublished Manuscript, 1991. Printed with permission.

38. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 38  Inputs-- staffing level  Output-- quality of output (uniform definition of quality?)  Hospital A provides better level of quality for a given staffing level  According to Ozcan, this quality-adjusted productivity measurement is possible only if a uniform quality definition and a known quality-quantity relationship exist. Interpretation of Figure 9.1

39. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 39  Efficiency-- using the minimum number of inputs for a given number of outputs  Effectiveness-- refers to outputs. Are the proper inputs being used to produce the appropriate outcomes?  Productivity-- a broader concept than efficiency; refers to effective use of a given set of resources New Methods 1

40. ISE 491 Fall 2009 Dr. BurtnerOzcan Chapter 9 Productivity Slide 40 40  Dimensions of Efficiency  Technical Efficiency-- relationship between various inputs and related outputs; use minimum combination of resources for a given level of quantity or level of care.  Allocative (Economic) Eficiency-- adds cost to the measure of technical efficiency.  Data Envelope Analysis  Uses linear programming to search for optimal combinations of inputs and outputs New Methods 2