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## Chapter 9. Productivity

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**Chapter 9.**Productivity Yasar A. Ozcan**Outline**• Trends in Healthcare Productivity: Consequences of 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 • Productivity Dilemmas • Multiple Dimensions of Productivity: New Methods • Data Envelopment Analysis (DEA) • Productivity Improvement Yasar A. Ozcan**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 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). Yasar A. Ozcan**Trends in Productivity: Consequences of PPS**• 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. Yasar A. Ozcan**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 Yasar A. Ozcan**Productivity Definitions and Measurements**• 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. Yasar A. Ozcan**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. Solution: First, define the inputs and the outputs for the analysis. Is the proper measure of inputs the number of nurses or of hours worked? In this case the definition of the input would be total nursing hours. When the total number of nursing hours worked per nurse is used as the input measure, then the productivity measures for the two units are: Yasar A. Ozcan**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 Benchmarkingis 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. Yasar A. Ozcan**Productivity Definitions and Measurements**MultifactorProductivity. Example 9.1demonstrated a measure of labor productivity. Because it looks at only one input, nursing hours, it is example of a partial productivity measure. 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. Yasar A. Ozcan**Example 9.2**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 ($) 50 50 Annual tests 10,000 10,700 Total labor costs($) 150,000 158,000 Material costs ($) 8,000 8,400 Overhead ($) 12,000 12,200 Determine and compare the multifactor productivity for historical benchmarking. . Solution: Yasar A. Ozcan**Commonly Used Productivity Ratios**• Hours Per Patient Day (or Visit) inpatient outpatient Yasar A. Ozcan**Commonly Used Productivity Ratios**Example 9.3: Annual statistical data for two nursing units in Memorial Hospital are as follows: Measurements Unit A Unit B Annual Patient Days 14,000 10,000 Annual Hours Worked 210,000 180,000 Calculate and compare hours per patient day for two units of this hospital. Solution: hours hours Yasar A. Ozcan**Commonly Used Productivity Ratios**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 Suburban Downtown Annual Visits 135,000 97,000 Annual Paid Hours 115,000 112,000 Calculate and compare the hours per patient visit for the suburban and the downtown locations of this practice. Solution: hours or 51 minutes. hours or 69 minutes. Yasar A. Ozcan**Adjustments for Inputs**Skill-Mix Adjustmentweigh 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. If RNs, LPNs and Aides are earning $35.00, $28.00, and $17.50 an hour, respectively; Then, 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. . Yasar A. Ozcan**Adjustments for Inputs**Adjusted Hours = 1.0*(RN hours) + 0.8*(LPN hours) + 0.5*(Aide hours) Yasar A. Ozcan**Adjustments for Inputs**Adjusted Hours = 1.0*(RN hours) + 0.8*(LPN hours) + 0.5*(Aide hours) Yasar A. Ozcan**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) Yasar A. Ozcan**Adjustments for Inputs**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. Yasar A. Ozcan**Adjustments for Inputs**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. Standardized Cost of Labor. hours. hours. Using adjusted hours, Unit A, which appeared productive according to the first measure (see example 9.3), no longer appears as productive. Yasar A. Ozcan**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). Yasar A. Ozcan**Adjustments for Inputs**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 of 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. Yasar A. Ozcan**Adjustments for Inputs**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 CostSuburban = $110 (115,000*0.50) + $85 (115,000*0.30) + $45 (115,000*0.20). Labor CostSuburban = $110 (57,500) + $85 (34,500) + $45 (23,000). Labor CostSuburban = $10,292,500. Labor CostDowntown = $110 (112,000*.30) + $85 (112,000*0.50) + $45 (112,000*0.20). Labor CostDowntown = $110 (33,600) + $85 (56,000) + $45 (22,400). Labor CostDowntown = $9,464,000. Yasar A. Ozcan**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. . Yasar A. Ozcan**Adjustments for Outputs**Service-Mix Adjustments . Example 9.7: Two hospitals, each with unadjusted volume of 10,000 patient days per month, provide only two services, S1 and S2, requiring respectively 3 and 7 hours of nursing time per patient day. Hospital A has a service-mix distribution of 2000 patient days for S1 and 8000 patient days for S2. Hospital B has 8000 days for S1 and 2000 days for S2. Calculate adjusted patient days for both hospitals. Yasar A. Ozcan**Adjustments for Outputs**Service-Mix Adjustments Solution: In this case, total unadjusted volume is simply the sum of the volume for each service in each hospital, or Unadjusted Volume = X1 + X2. . Adjusted Volume = W1X1 + W2X2. 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. Yasar A. Ozcan**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. Yasar A. Ozcan**Adjustments for Outputs**Case-Mix Adjustments 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, 4.5, 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. Yasar A. Ozcan**Adjustments for Outputs**Case-Mix Adjustments Solution: . . . . . . Yasar A. Ozcan**Adjustments for Outputs**Case-Mix Adjustments 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. Yasar A. Ozcan**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: Yasar A. Ozcan**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. Yasar A. Ozcan**Productivity Measures Using Direct Care Hours**• Example 9.9: • Using information from Examples 9.3 and 9.8 • calculate: • hours of direct care • percentage of hours in direct care, and • 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. Yasar A. Ozcan**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 115,000 and 112,000, respectively. Yasar A. Ozcan**Productivity Measures Using Direct Care Hours**Solution: . . Yasar A. Ozcan**Productivity Measures Using Direct Care Hours**Solution: . Yasar A. Ozcan**Quality of Output**Hospital A QA Hospital B QB Quantity of Inputs (Staffing Level) I2 I1 Figure 9.1 Productivity and Quality Tradeoff A QA” Q A’’ A’ B I IA” Source: Shukla, R.K. Theories and Strategies of Healthcare: Technology-Strategy-Performance, Chapter 4, Unpublished Manuscript, 1991. Printed with permission. Yasar A. Ozcan**Productivity Wall?**• Quality is difficult to measure, and its definition is ambiguous • The relationships between quantity of care provided and quality are often uncertain Yasar A. Ozcan**Many people confuse. . .**The concepts of productivity, efficiency, and effectiveness. Yasar A. Ozcan**It’s quite simple really!**• 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 Yasar A. Ozcan**But efficiency has varying dimensions..**• 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) efficiency-- adds cost to the measure of technical efficiency. Yasar A. Ozcan**MDs**4 3 2 1 C A B Nurse Practitioners (NPs) 0 1 2 3 4 5 Graphically, Iso-cost Isoquant Assume NPs and MDs can be substituted. The hospital can either use 3 MDs and 2 NPs (pt. A), or 1 MD and 5 NPs (pt. B). Both result in the same level of quality and can produce the same quantity of output. Are points A and B both technically efficient? Is point C technically efficient, why or why not? Remember what an isoquant is? Are all points on an isoquant technically efficient? economically efficient? Yasar A. Ozcan**Let’s expand our discussion. . .**• Data envelopment analysis is a recently developed technique that can be used to measure the multiple dimensions of productivity. • It allows multiple inputs and outputs to be used in a linear programming model that develops a score of technical efficiency. Yasar A. Ozcan**Data Envelopment Analysis (DEA)**• DEA can be used to measure productivity of hospitals, physicians, group practices, or any other unit of analysis, referred to as the decision making unit (DMU) • The technical efficiency score of optimally producing DMUs equals 1 (and lies on the isoquant). All other DMUs are measured against these technically efficient DMUs, and have a score of between 0 and 1. Yasar A. Ozcan**Physicians**Inputs P1 P2 P3 P4 Visits 2 1 3 2 Medications 1 4 1 3 DEA-- A Simple Example Inefficiency Physicians P1, P2, and P3 are technically efficient, ceteris paribus, and would receive an efficiency score of 1. Physician 4, however is inefficient and must reduce either visits and or use of medications to become as efficient as his/her peers. The amount of the reduction necessary is called inefficiency. Supplies 4 3 2 1 P2 P4 P1 P3 LOS 0 1 2 3 Yasar A. Ozcan**DEA-- An ApplicationOzcan and Luke (1993), A National Study**of the Efficiency of Hospitals in Urban Markets • The study examines the contribution of various hospital characteristics to hospital technical efficiency • Outputs included: • Treated cases • Outpatient visits • Teaching FTEs • Inputs included: • Capital • Plant complexity • Labor • Supplies Yasar A. Ozcan**DEA Applications, cont.**• Slack values allow the manager to determine just how much the input/output mix must be changed for inefficient DMUs to reach efficiency • DEA is also useful for benchmarking or development of report cards, making it particularly useful in a managed care environment Yasar A. Ozcan**Improving Healthcare Productivity**• Develop productivity measures for all operations in their organization, • 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. Yasar A. Ozcan**The End**Yasar A. Ozcan