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Understanding Quality and Performance

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Understanding Quality and Performance

Understanding Quality and Performance


From a managerial perspective, organizational success should be defined by the achievement of the organization’s performance objectives. Once the organization has defined its view of success in these terms, it needs a plan to achieve the objectives. Clarity with respect to the concepts of performance, performance measurement, and strategy are essential to the effective leadership and management of any organization. With that in mind, it seems appropriate to start by building a foundation on which to develop an understanding of these concepts.


After reading this chapter, the reader should be able to:

  1. Define strategy, organizational performance, finance, and quality and their interactions.
  2. Discuss accountability within a healthcare organization.
  3. Discuss the significance of values, mission, and vision statements for a healthcare organization.
  4. Discuss internal factors within and external factors outside the organization that impact quality of care.
  5. Define and discuss value in health care.
  1. Discuss the strategic decision-making process on the basis of financial metrics.
  2. Discuss the strategic decision-making process on the basis of financial and quality metrics and describe a quality equivalent for return on investment (ROI).


Organizational performance, as derived from the mission of the organization, includes both financial and quality considerations—the “two bottom lines” described previously in this text. In the short term, these two components of organizational performance are contained in the general domain of operating performance as reflected in the organizational budgets, whereas longer-term financial and quality measures are bundled under the umbrella of strategic performance, which is expected to result from the successful execution of the organization’s strategic plan (Figure 7-1).

FIGURE 7-1. The main components of performance.

Clearly, long-term or strategic performance is represented by an accumulation of a succession of short-term performances. This is true in the case of financial performance and certainly should be the case for quality performance. What should be added to this notion of performance is that to ensure sustainability of financial performance and quality performance over the long term, key initiatives and investments must be undertaken. These key initiatives and investments are the basic elements of strategy and its successful implementation (i.e., the successful execution of strategy is what will ensure long-term, strategic performance). Although in large part the success of a strategy is often measured in financial terms, as goals and targets are usually either set in those terms or are readily translated to financial terms, for many years there has been an awareness of the importance of other indicators of performance such as quality.1 Given the necessity of financial health, quality has often taken a back seat to finance in the definition and measurement of organizational performance.

Quality as a performance measure is in many ways still in its infancy in the healthcare industry, and perhaps the biggest challenge to its successful integration into this industry is in recognizing its relationship to financial performance. This is similar to the challenges in recognizing and understanding the relationship between strategy and finance, where any new strategy must meet the financial seal of approval before executives can set out on implementation of the strategy. The same principles and conceptual connections apply here, with perhaps one caveat: aside from mounting regulatory pressure in its favor, quality is an increasingly important strategic weapon against the competition.2

In traditional strategic planning, the process includes strategic and operational feasibility determination followed by confirmation of financial feasibility before concluding whether the strategic initiative could or should be adopted. Strategic performance, in turn, is assessed in financial terms, and in fact the “value” of a strategy is often described in terms of the financial returns that the strategy produces.

One might argue that any number of quality initiatives could be evaluated through the same process and be adopted or rejected. Furthermore, quality performance could ultimately be assessed in financial terms once the initiative is implemented and course corrections can be executed as needed depending on the level of performance being achieved relative to expectations. It must be r ecognized that the way in which quality affects financial performance can be quite variable—ranging from provision of efficiencies in the organization’s cost structure to improved market position through the delivery of a superior competitive product or service. At the same time, enhanced product or service quality may be more costly, and in that case the offset should be improved market position.

FIGURE 7-2. A balance between finance and quality is required for the success of an organization’s mission. M: Mission; F: Finance; Q: Quality.

The point of contention here is that quality of care delivered in a healthcare organization is an integral part of the organization; it is in many ways the most important distinguishing attribute of the organization. Therefore, quality of care provided should have at least equal importance to volume measures such as the number of surgeries performed or the number of patient discharges. For this reason, performance along the quality axis must be addressed with the same zeal as that for performance along the finance axis.

If such a balanced view is adopted in the organization, the quality impact of any initiative should be evaluated during strategic and operational feasibility studies, and the final decision should be based on a comprehensive and balanced view of feasibility, not just on financial feasibility.

Assuming such a position, it would naturally follow that it is in fact the interactions between quality and finance (and their corresponding levels of performance) that will provide evidence of the organization’s success in fulfilling its mission and accomplishing its strategic goals. Any imbalance that puts too much emphasis on finance or quality at the expense of the other will compromise long-term strategic success and overall mission fulfillment (Figure 7-2).


Quality alone is rarely the driving force behind a consumer’s choice. Instead, most consumers use a derivative of quality as the basis of their selection of the product or service they will purchase. This derivative is value. A brief discussion of value in health care is central to understanding some of the unique dynamics of consumer–provider interactions in the healthcare system.

Most people when shopping for a product or good look for more than one feature; when buying a computer, it is not just the CPU speed or RAM capacity. At the same time, again for most people, price is also a factor. When looking at all of these considerations, the consumer looks for value in comparing features to price—the more features for the same price or the same features at a lower price both suggest higher value to the consumer. Unless one is so wealthy that price is immaterial, value is at the core of our decision making in the purchase and consumption of goods and services.

Why is it, then, that such a basic and commonsense principle is so scarce in health care? Is it possible that it is the unintended result of the way the healthcare system operates?

For most healthcare consumers, and this is perhaps unique to the healthcare industry, the concept of value does not apply. Why? In large part it is because they do not pay directly for health services (except for the out-of-pocket component, which is 22% of total expenditure for privately insured individuals3) and frequently are unaware of the charges and reimbursement for the care they receive. As odd as it sounds, most consumers of health services, including physicians, are not aware of the prices of or payment for services, with the possible exception of the above-mentioned out-of-pocket expenses: co-pay, deductible, and co-insurance. Consumers either have some form of private or public healthcare coverage or have no coverage. In either case, they frequently show little sensitivity to price. As a result, important questions such as, “Do I need this test?” or “Is there a less expensive and similarly effective alternative?” seldom get asked. Moreover, they also do not have a full understanding and appreciation of the quality of the health service they are consuming. For the most part, value can be defined as shown in Equation 7-1.

Equation 7-1. The basic relationship that describes value.

When maximizing value, most shoppers look at this ratio, and this is one of the forces in the free market economy that affects the market share and success or failure of competing organizations. Unfortunately, because payers and consumers are often not the same entity in health care, and because most consumers are unable to discern quality differences, this ratio is not as reflective of consumption behavior as it might be in other industries.

Payers can use this equation to contract with providers that provide greater value by reducing price and increasing quality or by increasing quality at a faster rate than that of increase in price. However, which approach is chosen is not determined by the consumer, and in fact the consumer may disagree with the chosen approach.

Another important parameter in the analysis of value in health care is consumers’ lack of medical knowledge, resulting in their dependence on physician agents, which is commonly referred to as asymmetry of information.4 This is known to result in overuse (supplier- or, in this case, provider-induced demand) of the resources and reduction in value, unbeknownst to the consumer.5

It has been suggested that a better understanding by providers and payers of the relationship between costs and outcomes (i.e., value) may hold the key to controlling the rising costs of the U.S. healthcare system. Indeed, the inability to measure value using the proper costs and proper outcomes is identified as the main reason costs cannot be controlled.6

Value is a concept related to cost effectiveness of care. Comparative effectiveness is also an approach to integrate value into the healthcare model. Both of these methods are at the level of policy makers, and perhaps this lack of understanding or involvement of consumers and providers with these concepts is the reason for this issue to be a political minefield.7–9


The organization’s quality performance is influenced by many factors, some internal to the organization and some external. Figure 7-3 illustrates some of the more influential factors. An understanding of these factors can contribute significantly to the development and execution of the organization’s strategy, as will be seen later in this text. This understanding also can help with the identification of the organization’s strengths, weaknesses, opportunities, and threats (SWOT).

Internal Influences

Internal influences are components or characteristics of the organization itself and find meaning only within the context of the organization. They can be considered as strengths or weakness for the organization and can result in creation of opportunities or threats for the organization. Modification of these components or characteristics can be part of an organization’s strategy and can result in a change in quality performance.

FIGURE 7-3. A number of factors can influence the quality of care delivered in a hospital; some are listed in the illustration.

Organizational Identity

What is the basis for judging the level of performance on a metric in an organization? In other words, what is the expectation for that metric in the context of the organization? This leads to a different question: What is the context or overall purpose of the organization?

This purpose, the rationale for the organization’s existence, should be captured in its mission statement.10,11 Most organizations have statements of values, mission, and vision upon which they build a supporting long-term strategy. These statements can be very helpful in guiding the development of strategy.12 At the same time, the foundational statements also provide the basis for assessment of organizational performance. It is expected that metrics used by the organization actually provide, directly or indirectly, a means for measuring the organization’s fulfillment of mission and therefore a basis for mission accountability. If the metrics do not flow from mission, their usefulness and justification are open to question.

It stands to reason, therefore, that quality must be a mission focus for it to be relevant to the assessment of success or failure of a strategic plan that aims to at least partially fulfill the organization’s mission by delivering a desired level of quality in its products or services. Consequently, whereas mission incorporates the desire to provide quality services, the determination of whether that quality, in the context of mission, has been delivered is based on achieving the quality targets contained in the performance expectations for the organization.

The mission statements of four organizations of considerable reputation in health care are listed below.


Massachusetts General Hospital declares its mission as13:

Guided by the needs of our patients and their families, we aim to deliver the very best health care in a safe, compassionate environment; to advance that care through innovative research and education; and, to improve the health and well-being of the diverse communities we serve.

One can infer from the above statement that quality of care delivered is of concern to the organization.

  1. D. Anderson Cancer Center defines its mission as14:

The mission of The University of Texas M. D. Anderson Cancer Center is to eliminate cancer in Texas, the nation, and the world through outstanding programs that integrate patient care, research and prevention, and through education for undergraduate and graduate students, trainees, professionals, employees and the public.

There is no direct reference to quality in this statement. M. D. Anderson is one of the best cancer centers in the nation, and yet quality is not directly addressed in its mission statement. Of course, with some imagination, one can detect an indirect reference to quality in the above statement; perfection, as in eliminating cancer, has a hint of quality in it.

Cleveland Clinic Foundation defines its mission as15:

The mission of Cleveland Clinic is to provide better care of the sick, investigation into their problems, and further education of those who serve.

Quality is ot directly referenced in this statement.

Mayo Clinic Foundation defines its mission as16:

To inspire hope and contribute to health and well-being by providing the best care to every patient through integrated clinical practice, education and research.

Quality is directly referenced here as the “best care.”

As seen in these mission statements, if quality is not explicitly stated, it does not necessarily translate to lower quality or lack of quality in that organization. However, it does seem reasonable and consistent with best practices to include quality as a core value or part of the mission statement if it indeed is something of which the organization is mindful. At the same time, a reference to quality in the mission statement does not translate to higher quality in the delivery of health services by those organizations—particularly if they do not have a mechanism for “mission accountability.”

If quality is incorporated into the mission statement, it will at least provide an explicit basis for inclusion in the organization’s strategic planning and positioning and will guide the staff in their daily operations, eventually resulting in higher-quality delivery of care. This in turn may afford the organization a competitive edge. In fact, as suggested earlier, quality may be considered a strategic weapon1 and may even be considered as integral to strategy.17

The importance of the mission statement in the life of an organization has been discussed for many years. Yet, surprising as it may sound, healthcare organizations appear far behind other industries in using the mission statement to give meaning to their existence. This is not limited to stating their position on quality; it also applies to other concepts such as finance, cost, and access.18

Governance and Management

From an organizational perspective, management is delegated the responsibility for the operational and financial functions, and their activities are overseen by a board of directors. The board of directors holds the executive team accountable for compliance with the organization’s values and mission while ensuring the organization’s path toward its vision by achievement of the performance targets approved by the board (Figure 7-4). The one area of shared responsibility, and some contention, is that of strategy development, which links the governance domain with that of management. Embedded in this shared responsibility is the consideration of quality for the organization. For the remainder of this chapter, references to a board refer to a board of directors with fiduciary responsibilities, unless specifically stated otherwise.

Quality of care and the role of a board of directors in quality improvement have been the subject of in-depth research. This chapter will focus on some of the more important issues related to the board’s role and strategies for its success in quality improvement.

Since publication of the Institute of Medicine (IOM) report To Err Is Human,19 quality of hospital care has come into the national spotlight.

FIGURE 7-4. Strategy is a shared responsibility between the board and the management of an organization. Oversight of management’s compliance with the organization’s mission and values is the duty of the board. The identity of an organization can best be thought of in two layers: values upon which the organization is built will serve as the motivation for its mission and purpose; mission will specify the organizational purpose and “journey.” Vision will articulate the “destination” for the journey on which the organization is embarked. Performance is based on this foundation and should be the basis for progress toward the destination.

Clearly, boards have a fiduciary responsibility for what happens in their organizations and as a result are legally liable for the appropriate discharge of their duties. As such, quality of care is one such duty, and boards are actually liable for the quality of care delivered in their organizations.20–23 Additionally, a board in a general sense has authority over the management team and can remove or appoint the CEO of the organization. This is a significant lever that a board has in its hands, and a board can use it to steer the organization and affect the direction of quality improvement.21

What are the economic and financial costs associated with the pursuit of quality? Is quality expensive? To achieve a higher level of quality, new mechanisms must be put in place; this may require additional staffing, equipment, audits, and so forth. This all costs money. As it turns out, lack of quality may be even more expensive, and there may be, over time or immediately, a net positive economic effect after a higher level of quality is achieved.24 This business case for quality should place it at the top of a board’s agenda.

There are other persuasive arguments for making quality a board priority. National trends demand higher quality of care, and boards should recognize and respond to them in order to ensure the long-term viability of the organization. This suggests not only that the organization’s board has a critical role to play in the determination of the organization’s quality standards but also that quality should be a key item on the board’s agenda.25–27

The failure of boards in promoting a quality agenda is multidimensional. It has to do with several different internal and external factors that come to play in the scope of organizational governance. The structure between hospital boards and the medical staff has been blamed for not permitting the boards to monitor the quality for which they are legally responsible.20 It has been suggested that boards of trustees are legally and ethically responsible for the quality of patient care; however, they do not have the structure and function to know or improve the quality of care. It is imperative to examine and determine whether the current structure facilitates the solution or accentuates the problem.20

Still, there is more to this problem. In comparison with the automotive industry, some of the barriers to successful quality improvement in health care include inadequate organizational structure, lack of quality measures, quality improvement indicators focused on nonclinical areas, lack of information, and lack.

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