Effective Hospital Management
James E. Wawoeroendeng
James E. Wawoeroendeng Associates, Loma Linda, California, USA
Effective organizational performance in health services is
not just a goal in itself, but a means to improve patient outcomes
and community health. Normally one might assume that
improvement of patient outcomes is left to physicians and other
health professionals. Equally important, however, is manage-
ment s role in such an assumption which is to get resources to
these professionals effectively , to see that such resources are
used efficiently, and to ensure that professionals evaluate and
improve patient care.
Today, control over hospital resources and the power to
allocate these have shifted to management although patient
admissions, orders for care are controlled by physicians. In
recognition of increased administrative dominance, most hos-
pital management have become more sophisticated in applying
modern managerial technologies, such as cost accounting,
finance, management engineering, risk management, strategic
planning and marketing to achieve more effective management
of the complex and costly hospital organization.
The purpose of this paper is to review and describe selected
specialized management techniques and methods or approaches
used in managing a modern hospital in the United States. Today
hospitals have become more complex and the planning and
coordination responsibilities of management have grown in
importance. This paper is not advocating the American hospital
management model rather it is to serve as a springboard for
discussions and comparisons for the hospital management of
today, as we explore for the most effective .way of managing
hospitals and plan for tomorrow.
Presented at the VIth Congress of the Indonesian Hospitals Association
Hospital Expo, Jakarta 21-- 25 November 1993
HOSPITAL MANAGEMENT
The administrator of a charitable hospital is the executive
officer directly in charge of the hospital, responsible only to the
governing board. He is the general supervisor of all the opera-
tions of the hospital. The governing board delegates powers to the
administrator whereby he is able to fulfill this responsibility.
Although he may in turn delegate specific areas of responsibility
to various subordinate supervisors, the administrator is primarily
responsible for the efficient and orderly management of the
hospital.
The administrator has only those duties delegated to him by
the hospital governing board. Legal responsibility for the con-
duct of the hospital is vested in the governing board. The
delegation of authority to the administrator may be broad or
narrow, depending upon the policy of the board. He must carry
out the policies of the board by implementing these policies in
the various departments of the hospital, medical staff and other
personnel.
Normally, the administrator are authorized to select or
recommend selection of administrative department heads. He
then delegates to department heads the authority to select their
assistants, but reserve authority to coordinate the overall opera-
tions of the departments. A suggested list of duties may be
possible. The administrator shall:
l) Maintain an organizational structure which defines and
makes known the authority responsibility of various positions
and their relationships and employ sufficient trained personnel to
adequately man the facility.
Cermin Dunia Kedokteran, Edisi Khusus
No. 91, 1994
83
2) Develop, with the assistance of hospital personnel and the
Medical Staff, a program of patient care and hospital operation
in line with goals of hospital and needs of patients served.
3) Measure the effectiveness of the hospital operation in terms
of goals and the expected results of patient care.
4) Maintain long-ranee plans to provide for the continuos
improvement of the hospital.
5) Consult with representatives of the organized Medical Staff
on matters which are of concern to the Medical Staff in its
hospital work.
6) Initiate proposal as to what the mission of the hospital should
be and what the priority mix and time schedule of programs
should be to achieve it.
7) Initiate proposal for policy changes in response to changing
conditions and trends.
8) Plan the course of the organization so it remains financially
otherwise viable while responding to public needs and expecta-
tions.
A survey of hospital CEOs in the US, may show the follow-
ing topics for continuing education programs as necessary in
order to be up to date with the changes affecting their duties.
1.
Financial Management
14.
Management Theory
2. Government Regulations
15.
Managed Care
3.
HR Management
16.
MBO
4.
Legal Affairs
17.
Computer Science
5.
Labor Relations
18.
Conbstruction Management
6.
Budgeting
19.
Org. Theory
7.
CEO to MDs Relations
20.
Systems Approach
8.
Planning
21.
Marketing
9.
Practical Problems
22.
Shared Services
10.
Prof. Standards Review
23.
Education of Board
11.
Public Relations
24.
Decision-making
12. Issues in Admin.
25.
Public Health
13. Health Legislation
26.
Occupational Safety Health
Safety Act (OSHA)
PLANNING
Health care planning is generally considered to be one of the
most important functions of management. The dynamics of
health care, the need to improve the delivery of health services,
and the increasing changes and pressures all indicate the need
to develop long range planning. Planning for health care
institutions has become a complex situation. Many hospitals
have planning committees as part of their governing board and
occasionally include operating personnel. Staff services are
essential to the planning process and are usually left to the
administrator or someone else who specializes in planning and
forecasting techniques. Consultants frequently provide planning
services on a contractual basis. Normally, it is the responsibility
of the board to initiate institutional planning process, but leave
the operation to the Chief Executive Officer. Some of the major
issues addressed in planning are the following:
·
Institutional mission, goals, objectives, and strategy for
growth
·
New services or programs, facility evaluation construc-
tions
·
Capital formation, borrowing
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Cermin Dunia Kedokteran, Edisi Khusus No. 91, 1994
·
Corporate restructuring, joint ventures, diversification,
mergers shared services, affiliation with chains system and
managed care organizations
The requirement for Certificate of Need (CON), a control
feature vested with the government, forces hospitals to be more
proactive in planning. Any large capital expenditures beyond a
given threshold for equipment purchases, construction and or
expansion, are subjected to government review and approval for
the purposes of restraining medical costs and preventing un-
necessary duplication. The merit of this approach is still in doubt
as this has created unintended monopoly and interference of the
market forces which in itself is capable of regulating oversupply
or duplication. Nevertheless, the CON process, revised at higher
threshold, is a strong impetus for conducting institutional plann-
ing. Some hospitals have a planning department staffed by a
planner reporting directly to the Chief Executive Officer. His
main responsibilities are to forecast demand, project utilization,
identify competition and opportunities, prepares the CON review
documents, and assist in the marketing function of the hospital.
MARKETING
Marketing is one of the functions of management. It is
integrated with other management subsystems of Production,
Finance, and Human Resources. Marketing determines the needs
of the consumer in the marketplace and lays out a plan for
satisfying these needs. It is a management tool that must be
blended with strategic planning and economic analysis. Some of
the components of hospital marketing are as follows:
1) Marketing Research, Planning and Strategy Development.
2) Public Relations, Community Relations which describes the
action for communicating with the publics that interact with the
health organization.
3) Contracting, arranging the hospital care of company
employees, school.
4) Fund Development, fund raising for charitable contribu-
tions.
Existing operating and planning practices will need to be
modified in a changing health services environment. Specifi-
cally, this refers to the determination of when a new or expand
program should be considered as part of a health provider s role
or responsibility. Frequently, motivations for new services,
programs, equipment or expansion of existing activities come
from influential physicians, other political interests or restricted
donations. Motivations for new program should be based on
sound market research identifying need, potential market and
financial viability, not emotional enthusiasm. The program itself
may not be a moneymaker but may generate other avenues of
revenue that may bring about a continued and longer term benefit
to the total institution.
Hospital Marketing Activities
Attitude survey of current or discharge patients
Marketing research techniques to assist in feasibility studies
Patient-oriented advertising
Direct mail promotion to physicians
Patient
,
demographic profile
Defined hospital target market
Formal marketing plan
Study of services offered by nearby hospitals, survey
Scope of Responsibilities Between Public Relations and Marketing
Public Relations
PR Marketing
(jointly)
Marketing
Internal publications
Media releases
Hospital tours
Social programs
Auxiliary board programs
Volunteer programs
Program alteration
Public surveys
Patient discharges
Media strategy
Recruitment
Fund raising
Market research
Program pricing
Forecasting
Portfolio management
New service development
Marketing strategy
INTERNAL AUDITING
The internal auditor has an important role in ensuring that
top management has provided a good control system and in
assuring the administration the system is working well. The
benefits hospitals can expect are the same as those that large
corporations already experience with internal auditors. These
include:
1. Appraising the soundness, adequacy, and applications of
accounting, financial, and operating internal controls, and pro-
moting effective control at the least cost.
2. Appraising the extent to which employees comply with the
established hospital policies and procedures.
3. Appraising the accountability and safety of hospital aseets.
4. Appraising the reliability of management information sys-
tems.
5. Appraising personnel performance.
6. Recommending operating improvements.
Operations auditing may be applied to virtually any patient
care area of the hospital. Internal auditors eventually must
evaluate the entire hospital to be certain all departments and
operating areas are contributing to the institution s goals. Some
of the focus of internal auditing has been at abuses of privileges
or authorities at the departmental level involving the use of
hospital resources, its misuse, or misrepresentation. A few areas
that may be worth focusing are: (1) delegated purchasing authori-
ties and procedures with vendors, salesmen, (2) the use, distribu-
tion and storage of medications, (3) the handling of cash, receipt
and payment of hospital invoices (4) the ordering of supplies, in
the kitchen, laboratory, pharmacy.
There are well recognized internal auditing control measures
that can be implemented to ensure these abuses and misuses are
minimize or eliminated. The services of an internal auditor is
usually a full time basis in a large hospital. However, a small size
hospital could combine internal auditing function with that of the
chief financial officer who in turn is supervised and controlled by
the CEO. A consultant could be hired on a one time basis to install
a control system but enforcement would have to be continuos.
The push for cost containment and higher productivity have
made internal auditing function an important part of management
as efforts in this area minimizes expenses or misuse.
MANAGEMENT ENGINEERING
A unique aspect of management engineering is its emphasis
on improvements; in contrast, administrators, physicians, and
others are sometimes more concerned with maintenance. It is
apparent that improvements, like maintenance require team
work. Today, with more concerns for cost containment, manage-
ment places more importance on systems engineering, and evi-
dence shows demand for such managers are increasing. The
following list includes several specific functions performed by
management engineers in hospitals:
Hospital-wide productivity reporting systems
Standard setting in hospital departments
Work simplification and systems improvement in departments
Functional space utilization and layout
Staff scheduling
Capital budget decision
Purchase vs lease decisions
Quality definition and evaluation
Position control system
Information systems and computer evaluation and development
Long-range planning
Contract versus in-house service decisions
Inventory control
"Reengineering" a term now becoming more popular is a
new approach used in the corporate world or industrial sector but
are becoming adaptable in hospital setting. The thrust of Reengi-
neering can be illustrated by looking the operation with a new set
of blue print. Instead of improving the old or current system,
reengineering forces analyst to begin a new approach and a new
look at the given goal and objective. Also, the concept is sensitive
to external demands and preferences. It has application in hospi-
tals especially as hospitals are forced to survive with limited
resources. It forces management to look at problem anew, seek-
ing new alternative and new approaches.
COST ACCOUNTING
Cost accounting have been practiced in US hospitals for
some time now. Lately because a new payment method called
Prospective Payment System, which is characterized by a fixed
fee for each given diagnostic group, this field has grown in
importance. The ability to understand and identify costs related
to each diagnostic group is vital to maximum reimbursement
under this system. The term "product line" is in style because now
each product or each program become a competitive entity and
are subjected to price competition. As a result of this develop-
ment, the disciplines of cost accounting and medical records
systems are integrated in a way that management will know
precisely and quickly the diagnosis for each admission. A new
position emerged, the DRG Coordinator, whose main role is to
ensure that proper diagnosis are assigned to each admission, and
to maximize rate of reimbursement by understanding the catego-
ries of each DRG so that diagnosis are properly classified.
The primary lesson of this practice in the United States
which may have implications with any other country is the
Cermin Dunia Kedokteran, Edisi Khusus
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85
growing acceptance of the prospective payment system with
payors of health care, insurance or large employers. The out-
standing feature of this of system is that it removes the incentive
from providers of care to order unnecessary tests or hospital
admissions. If forces the hospital and the physicians to work
jointly in controlling costs of care because together both are at
risks. I submit that in not too distant future, this method of
payment will be adopted even here in Indonesia.
A visible consequence of the PPS approach is the increased
importance given to productivity management or productivity
improvement, "doing more with less" because hospitals now gain
by doing less and the resulting difference between the fixed fee
assigned and the actual costs incurred, are the amount kept for
hospitals as profit.
FINANCIAL MANAGEMENT
Consistently in survey after survey, financial management
shows up at the top as the one most important topic hospital
management would like to stay or remain current. Beginning
with 1966, Medicare and Medicaid legislation, financial ma-
nagement has been increasingly concerned with cost accounting
and total financial requirements. This more comprehensive
approach is a departure from the routine practice consisted of
bookkeeping, financial accounting and collection. The new
approach was emphasized in the American Hospital Associa-
tion s statement in 1979, indicating the need for the accountabi-
lity of the total financial requirements of health providers which
covers such areas as:
·
Costs of doing business, such as salaries, supplies, utilities,
bad debts, and taxes.
·
Costs of staying in business, such as maintenance of working
capital and maintenance of assets
·
Cost of changing business, to meet competitors and take
advantage of new opportunities, such as additional assets and
working capital
·
Costs of attracting and/or holding capital, or return to capital
sources, such as interest on debt, payment of debt, required
returns to equity holders, and maintenance of the equity base.
To support the operation of the financial management of
hospitals, staff in this department include specialists in budget,
reimbursement, cash investments, cost report or accounting, cost
management and productivity, equipment and inventory spe-
cialist, and strategic financial planner.
Capital Formation
To finance construction and expansion or purchases of
high-priced equipment, hospitals in the United States have
increasingly find it unable to rely strictly upon donations, grants
or government subsidy or from its own operating gains. As a
result they have turned to debt financing through such instru-
ments as tax exempt bonds. Because it is unlikely that hospitals
will be able to generate higher surpluses, the pressure to borrow
increases. In the past, debt financing was not considered a viable
means of obtaining the funds needed to expand the services of
health care institutions because banks and lenders considered
these institutions high risk investments. The change occurred
when Medicare and Medicaid, government health programs,
provided hospitals with dependable source of revenue that forms
a basis for loan security.
Below are commonly used financial ratios helpful in ana-
lyzing a hospital financial position:
Desired Positions
Current
Trend
Up
Industry Average
Above
Acid Test
Up
Above
Collection Period
Down
Below
Average Payment
Down
Below
Long Term Debt To Fixed Assets
Down
Below
Long Term Debt To Equity
Down
Below
Times Interest Earned
Up
Above
Debt Service Coverage
Up
Above
Cash Flow To Debt
Yp
Above
Total Asset Turnover
Up
Above
Fixed Asset Turnover
Up
Above
Current Asset Turnover
Up
Above
Inventory Turnover
Up
Above
Mark-up
Up
Above
Deductible
Down
Below
Operating Margin
Up
Above
Non-operating Revenue
Up
Above
Return on Assets
Up
Above
Viability Index
Down
Below
HOSPITAL INFORMATION SYSTEM
Computers are used in hospitals at three levels: administra-
tive data processing, clinical data processing and medical infor-
mation systems.
Administrative Data Processing (Data Processing)
At the first level, the role of the computer is the same in the
hospital as in any business:
Patient Billing System
Inventory
Accounts Receivable
Report data from laboratory
Accounts Payable
Report data on drugs
Payroll
Report data on equipment
Census
Menu planning
Materials Management
Admission/Discharge/Transfer
Fixed asset accounting
Order entry
Clinic scheduling
Time attendance
Admission Records
Operating room schedule
Clinical Data Processing
At this level, complete patient medical records are main-
tained during a patient s hospital stay. Such system may also
provide specialized services to the clinical laboratory, radiology,
nursing stations, and pharmacy. Typically, such systems provide
immediate inquiry response by operating in "real time" or in-
stantly available information, and they provide "on line" medical
information which can be used in decision making in administer-
ing both the individual patient s hospital stay and the overall
hospital.
Medical Information
The third level, a complete medical information system,
provides management information that can be used in decision
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Cermin Dunia Kedokteran, Edisi Khusus
No. 91, /994
making in administering both the individual patient s hospital
stay and the overall hospital. Patient management system is a
fully integrated approach to maintaining patient care information
and provides an opportunity for enhancing communication
between members of the health care team. The foundation of this
integrated system is a set of comprehensive data bases containing
various medical, financial, statistical and other pertinent infor-
mation. The largest of these is the patient data base, which
includes all relevant information about each patient registered at
the hospital.
The data base include: Patient identification, biographic and
financial data, patient allergies, physicians orders, for patient
care, medication, therapeutics and diagnostic services, test results,
interpretations and progress notes, drug profile and medication
administration records, medical activity summaries data, and
nursing care plans and associated results.
This comprehensive and integrated approach provide multiple
benefits to the medical team administering care to patients:
·
Reduction of clerical effort
·
Accurate and timely availability of patient data
·
Faster order entry
·
Better control of patient accounts and records
·
Improved coordination of ancillary and support services
·
Easy access and inquiry into patient case-related informa-
tion
·
Improved control over intra-unit patient transfers
Progress in extending and improving computer applications
in hospitals continue at a fast pace. Changes and innovations
occur in such a short span of time that equipment or hardware
purchased a year ago may have become obsolete or less desirable
today. It is important for management to make an informed and
knowledgeable decision when planning to install a new data
processing or information system.
CONCLUSION
Much of the potential for success or failure of a hospital lies
largely with the leadership level at the top whose decisions and
actions has to be accurate and timely. Some of have called this
strategic management. Strategic, because it means prioritizing
and calculating before making . any important a move. The
complexity of a modern hospital is such that top management
must be guided by a clear sense of mission and goal-oriented in
managing the hospital scarce or limited resources.
McKinsey Co., a well known US management consulting
firm have developed a concept called the 7 S s which includes the
following variables:
·
Superordinate Goals
·
Strategy
·
Structure
·
Systems
·
Staff (the concern for having the right sort of people to do the
work)
·
Skills (training and developing people to do what is needed)
·
Style (the manner in which management handles subordi-
nates, peers, and superiors).
Within this structure there are two group. The first group are
the "soft S s" and the "hard S s". It is argued that Japanese
companies are effective because of their attention and dedication
to the integrative forces of superordinate goals and for their
concern for those variables which habe to do with the human
factor, the soft S s. These are the factors which American ma-
nagers allegedly pay too little attention to: staff, skills, and most
importantly style. The hard S s which complete the Seven S
model are: strategy structure and systems.
Given the logic of the seven variables model above, the
concept serve to amplify the crucial role hospital management or
specifically the chief executive s power and potential in setting,
arranging and manipulating all seven variables -- for the purposes
of accomplishing the delivery of good patient care. It is a very
profound thought, as therein lies the potential for success or
failure of management.
ROLE AND FUNCTIONS OF EXECUTIVE MANAGE-
MENT
Executive management should initiate and monitor orga-
nizational mechanisms to ensure that the hospital has effective
organizational structures and processes.
Executive management should develop and recommend to
the governing board an effective organizational plan that takes
into consideration the interdependent leadership roles of execu-
tive management, the governing board, and the medical staff and
that clearly assigns responsibilities for specific organizational
programs and services to specific components and individuals.
The organizational plan should clearly define relationships
between the board s broad policy responsibility for the quality of
care, and the executive management s responsibility for overall
operations.
Executive management should assume primary responsibi-
lity for ensuring that members of the hospital organization are
kept informed about public policy and environmental issues and
their effects on the hospital.
Executive management is responsible for establishing
mechanisms for identifying and obtaining information about
public policy issues and decisions affecting the hospital and,
when necessary, for developing an appropriate organizational
response. Executive management should take the initiative to
work with other community organizations on public policy
issues and decisions affecting the health status of the community.
Executive management should take the initiative in ensuring
that the hospital has a broadly based strategic planning program.
Strategic planning provides the hospital with a powerful
management tool to help determine its goals and objectives in
relationship to changes in the environment and the needs of its
community, to establish its priorities, to choose the most appro-
priate organizational structure to achieve its goals and objectives,
and to provide benchmarks fort evaluating the achievements of
its goals and objectives.
Executive management should assume responsibility for the
cost-effective management of the hospital s resources.
Cermin Dunia Kedokteran, Edisi Khusus
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87
This responsibility requires a commitment to provide the
most economical and highest quality services possible in keeping
with available resources and to communicate this commitment to
the entire organization and the community. This commitment
implies a willingness to assume leadership, along with the
governing board and the medical staff, in introducing new patient
care technologies and programs that are of high quality and are
medically necessary and appropriate, and as efficiently yet
compassionately provided. It implies a responsibility to engage
the medical staff in a cooperative effort to eliminate obsolete
technologies and programs, and a willingness to introduce new
management techniques and improve the utilization of human
and financial resources. It also suggests a willingness to experi-
ment with and make the community aware of alternatives to
traditional means of health care delivery and financing, such as
health maintenance organizations, independent practice associa-
tions, consumer choice health plans and others. Finally, it implies
the existence of an effective system for financial and manage-
ment reporting that enhances the monitoring and evaluation of,
organization performance.
Executive management should provide a work atmosphere
that recognizes the vital importance of human resources to the
health care organization.
The provision of a positive work atmosphere indicates a
moral and ethical commitment to the needs of people, a concern
for their health and status and quality of life, and commitment to
fostering respect and satisfaction for all.
(AHA Statement)
8 8
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