Topics

1. Topics • With Uncertainty Present • Span of Control • Governance and Management • Measuring Performance • Management Revisited • HCO Boards • Accountability “We find islands of conscious power in this ocean of unconscious co-operation like lumps of butter coagulating in a pail of buttermilk.” D.H. Robertson* *Two important quotes in this set of slides were found in Nobel Prize winner Ronald Coase’s seminal article, The Nature of the Firm, 1937.

2. With Uncertainty Present “With the introduction of uncertainty—the fact of ignorance and the necessity of acting upon opinion rather than knowledge—into this Eden-like situation†, its character is entirely changed… With uncertainty present doing things, the actual execution of activity, becomes in a real sense a secondary part of life; the primary problem or function is deciding what to do and how to do it.” Frank Knight* † The “Eden-like” situation was an environment where decision makers had perfect information.

3. Span of Control • A sole proprietor has the ultimate ability to know his/her own level of effort and to direct his/her activities in pursuit of goals • As organizations increase in size well-known managerial activities must be performed • Hiring employees who are not owners • Planning activities to pursue goals • Directing employees to perform activities • Monitoring employee performance • Monitoring goal achievement

4. Span of Control (cont.) • Planning, directing, and monitoring are cyclical processes • Account for plans that don’t work • Account for external “shocks” that require plan revision • “Span of Control” is the number of subordinates a supervisor can effectively monitor and direct • Typically 4-6 people • Number varies with task and observation complexity

5. Span of Control (cont.) • Larger organizations need to introduce intermediate layers of management • Coordination and direction have costs and increasing limitations on effectiveness • See Coase paper about limitations to organization size as coordination costs increase • Costs increase and effectiveness decreases with: • Number of different activities to coordinate • Complexity of activities performed • Difficulty in monitoring activity and performance • Unpredictability of external environment

6. Entrepreneurial Rewards • A key element of organizational management is the allocation of profits • In general, employees are guaranteed a fixed payment for their efforts • Owners… • …assume the risk of loss or failure • …have residual rights to the surplus (profits) • The profit allocation is distorted by • Not-for-profit and government organizations • Need to align employee difficult-to-observe efforts with owner goals

7. Governance and Management • “The boundary between governance and management is not clear-cut” (p. 385) • We will consider “governance” the tasks executed by those directly accountable to owners for the organization’s performance • Board of directors or trustees • Owners themselves

8. Governance and Management (cont.) • The tasks discussed as “governance” in the text are characteristic of “strategic management” in management theory • Hiring top management • Mission setting • Major resource allocation • Organizational design • Program implementation • Setting performance objectives GroupPresentation#1

9. Governance and Management (cont.) • “Management” is the execution of the strategic plans or directions of the governing body • Activities vary with organizational hierarchy • Higher levels • Longer term horizons • Less granularity • More externally focused • Lower levels • Immediate/day-to-day time horizons • Very granular • Internal focus Examples of Each?

10. Governance and Management (cont.) • Top Managers Participation in Governance • Governing body is often not full time • Less informed • Dependent on management for • Information flows • Recommendations • Managers can shape the governance decision space • Often requires a willful (strong) board or crisis situation to encourage intervention • But some governing bodies intervene regularly

11. Governance and Management (cont.) • Managerial activities • Planning ‒ Organizing • Directing ‒ Coordinating • Controlling • Managerial Roles • Motivating others • Scanning the environment • Negotiating the political terrain • Generating and allocating resources • What can we say aboutthese two lists? • How do items differ with organizational level? • Is there overlap or conflict in the two lists?

12. Measuring Performance • Measurement Objectives • Determine progress toward meeting objectives • Identify problems and opportunities • Allocate resources • Reward and punish managers and staff • Detect changing circumstances • Many of these objectives affect strategic planning • Others affect lower-level operations

13. GroupPresentation#3 Measuring Performance (cont.) • External Constituents • Most organizations report aspects of performance to external constituents • Securities and Exchange Commission • Internal Revenue Service • HC Organizations have a richer set of external constituents • Insurers • Licensing agencies • Regulators • Accrediting bodies • SEC • IRS

14. HCO Ownership Models • HC Organizations have a rich set of ownership models • Private for-profit • Private not-for-profit • Charitable organizations • Religious affiliation • Public (government) • Some transitions are being made as financial pressures stress the viability of hospitals GroupPresentation#2

15. HCO Boards • Boards of Directors or Trustees are a very common governance structure • Represent shareholders in public companies • Exercise ownership in not-for-profit companies with no shareholders • Blended representation model in government-owned organizations • Boards • Distribute responsibility and workload • Allow mixed expertise and representation

16. HCO Boards (cont.) • Board member selection procedures are established in the by-laws and can vary widely • Board composition can also vary widely • Large HCO tend to have large percentage with business backgrounds • May include practitioners • May include union representation • Boards subject to increasing scrutiny and liability • Sarbanes-Oxley Act of 2002 created increased responsibility and liability for boards of publicly held organizations

17. Management Revisited • What is the relationship between managers and practitioners? • Physicians • Nurses • How does it vary with organizational setting? • How should managerial performance be evaluated? • What factors interfere with assessing managerial effectiveness? • How much should managers be paid? • How should level be determined?

18. Management Revisited (cont.) • Product Line Management • Managerial efficiency is affected by two distinctions • Assigning responsibility to those closest to where the work is being done • Assigning responsibility to those most familiar with the task • Product line management creates separate stovepipes of authority in the organization for functional tasks, especially in large organizations • What are the tradeoffs with this approach?

19. Accountability • Accountability is the responsibility for achieving objectives • Objectives must be specified • Measurements must be taken • Results compared to objectives • Action can be taken • HCO are accountable to a multitude of stakeholders • Formal and informal • Internal and external

20. Accountability (cont.) • HCO are accountable to a multitude of stakeholders • Formal and informal • Internal and external • Regulatory and legal requirements • Accountability for multiple objectives creates conflicts • Higher profits vs. Satisfied work force • Nurse/patient ratios vs. Costs • Physician autonomy vs. Managed Care standards • Risk management is a formal profession in HC