ONE. Chapter Outlines and Support Materials CHAPTER 1. Organization Theory and Health Services Management. Stephen M. Shortell and Arnold D.

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1 sho01910_ch01 10/21/05 12:45 PM Page 1 S E C T I O N ONE Chapter Outlines and Support Materials CHAPTER 1 Organization Theory and Health Services Management Stephen M. Shortell and Arnold D. Kaluzny LECTURE OUTLINE A. Chapter Purpose This chapter focuses on the dynamic nature of the health services field and the implications for managers. The purpose of the chapter is to describe the primary organizational components of the health care system. It presents a framework for understanding the commonalities and differences among health services organizations. The chapter also highlights some of the major approaches to and perspectives on the study of organizations and provides a framework for the remainder of the text. B. The Changing Health Care System Economic, political, and social forces have moved the health services system from a reactive acute care paradigm to a more holistic paradigm emphasizing population-based wellness. 1. Forces Influencing Health Care Delivery a. Financial incentives that reward superior performance. b. Payment based on performance. c. Growth of new technology emphasizing outpatient, workplace, and at-home treatment. d. Aging of the population and associated increase in chronic illness. e. Increased ethnic and cultural diversity of the population. f. Changes in the supply and education of health professionals. g. Social morbidity (AIDS, drugs, homicides, bioterrorism, new surprises ). h. Information production and management. i. Globalization and expansion of the world economy. 2. Elements of the Paradigm Shift in Health Care a. Emphasis on the continuum of care rather than acute inpatient care. b. Emphasis on maintaining and promoting wellness rather than treating illness. 1

2 sho01910_ch01 10/21/05 12:45 PM Page 2 2 SECTION ONE Chapter Outlines and Support Materials c. Accountability for the health of defined populations instead of individual patients. d. Emphasis on intangible knowledge/relation-based assets rather than tangible physical assets. e. Providers differentiated based on ability to add value (previously providers were essentially similar). f. Success achieved by keeping people well instead of increasing market share of patient admissions. g. Goal is to provide care at the most appropriate level rather than to fill beds. h. Integrated health delivery systems instead of separate providers and health plans. i. Managers provide leadership for improving the value of services delivered. j. Managers actively pursue continuous improvement of quality and individual and community health. k. Care provided by health care teams working together in collaboration. l. Information is a dynamic means for sharing knowledge with patients for their use. C. Ecology of Health Services Organizations 1. Number and Variety of Organizations Figure 1.2 depicts the number and variety of organizations engaged in the process by which service s are ultimately delivered to patients. This includes providers (e.g., primary care providers, acute care providers, rehabilitation centers, and maintenance providers such as nursing homes and hospices), supplier organizations, and payers (including insurance companies, self-insured employers, and government payers such as Medicare and Medicaid). 2. Are Health Services Organizations Unique? Health services differ from typical industrial organizations in significant ways that increase the complexity of the management role in these organizations. Some of the most frequently mentioned differences are: a. Defining and measuring output are more difficult. b. Work is more variable and complex. c. Work is of an emergency and nondeferrable nature. d. Work permits little tolerance for ambiguity or error. e. Work activities are interdependent, requiring a high degree of coordination. f. Work involves an extreme degree of specialization. g. Organizational participants are highly professionalized (their primary loyalty is to the profession rather than to the organization). h. Little effective managerial control exists over the group (physicians) most responsible for generating work and expenditures. i. Dual lines of authority exist that create problems of coordination and accountability and confusion of roles. D. Key Dimensions of Health Services Organizations Health services organizations can be compared on a variety of attributes and characteristics to stimulate thinking about differences and similarities among the organizations and the implications for management. 1. External Environment Managers must have a good understanding of the external environment in terms of complexity, susceptibility to change, and competitiveness.

3 sho01910_ch01 10/21/05 12:45 PM Page 3 CHAPTER 1 Organization Theory and Health Services Management 3 2. Vision/Mission/Goals The mission and goals have both an external and an internal purpose. Externally they communicate what the organization is about to those who may want to use its services, and internally they serve as a source of motivation and direction. 3. Strategies Strategies are plans for achieving the organization s mission and goals and primarily involve positioning the organization to succeed in its environment relative to its competitors. The generic strategies that health care organizations may adopt include being low-cost providers or differentiating on high quality. 4. Differentiation The major way organizations compete is through the array of products and services that they offer. This is referred to as differentiation and involves the development of specialized knowledge, functions, departments, and viewpoints. 5. Integration Integration is the degree of coordination required across specialized functions and processes to achieve unity of effort. Organizations that are more differentiated require a greater degree of integration. Integration involves issues of work group design (discussed in Chapters 6 and 7), communication and coordination (Chapter 8), the overall design of the organization (Chapter 10), and strategic alliances (Chapter 11). 6. Centralization Centralization is the degree to which decision making and selected functions are made by the top management or by individual hospitals or physician groups. The degree of centralization has important implications for how quickly decisions are made, how effectively decisions are implemented, the ability of the organization to adapt to change, and how well the organization meets the accountability demands of external groups. This issue is explored further in Chapters 9, 10, 11, 12, and Change/Innovation The ability to create and manage change and to innovate are necessary for long-run viability. Organizational innovation and change are the focus of Chapter 12. E. Health Services Organizations as Systems A closed system view emphasizes the need to maximize internal efficiency, predictability, and order. In contrast, an open system view emphasizes the need for openness, adaptability, and innovation. An open system view is necessary if an organization is to change and adapt to meet the challenges posed by the external environment. Both approaches are needed to understand and manage health service organizations. Each function or department within the organization should be viewed in terms of its interconnectedness with others, in addition to being influenced by the external environment. It is useful to consider six primary functions or processes that occur in health services organizations. 1. Production Provides the product or service and is at the center of most organizational activities. 2. Boundary Spanning Focuses on the interface between the organization and its external environment.

4 sho01910_ch01 10/21/05 12:45 PM Page 4 4 SECTION ONE Chapter Outlines and Support Materials 3. Maintenance Concerned with both the physical (e.g., capital acquisition) and human (e.g., employee growth and development) infrastructure of the organization. 4. Adaptation Using innovation to anticipate and adjust to needed changes. 5. Management A distinct function that organizes, directs, and oversees all the other functions. 6. Governance The function that provides overall strategic direction to management, and holds management and the organization accountable. F. Areas of Managerial Activity 1. Organizational Behavior/Micro Approach Emphasizes examining individuals within organizations. This includes such topics as motivation, leadership, and conflict management (the focus of Chapters 3 through 5). 2. Organization Theory/Macro Approach Treats the organization as a social system and focuses on organizational design, interorganizational relationships, change and innovation, and performance and strategy (covered in Chapters 10 through 15). G. Major Perspectives on Health Services Organizations Ten different perspectives regarding how organizations function have evolved over the years. 1. Bureaucratic Theory The organization is guided by specific procedures for governing activities, characterized by hierarchical structure, lack of individual freedom, and rigid behavior. 2. The Scientific Management School Emphasizes span of control, unity of command, appropriate delegation of authority, departmentalization, and use of work rules and methods to improve efficiency. 3. The Human Relations School Focus is on the individual, group dynamics, and the relationships between group members, and between the members and their supervisor. Also emphasizes the usefulness of participatory decision making that involves the individual in the organization, and the role of intrinsic self-actualizing aspects of the work. 4. Contingency Theory Suggests that the best form of organization (either mechanistic or organic) is situational; it depends on the level of stability, simplicity of tasks and technology, and the percentage of professional workers employed. 5. Resource Dependency Theory Emphasizes the importance of the organization s abilities to secure needed resources from its environment in order to survive.

5 sho01910_ch01 10/21/05 12:45 PM Page 5 CHAPTER 1 Organization Theory and Health Services Management 5 6. Strategic Management Perspective Emphasizes the importance of positioning the organization relative to its environment and competitors in order to achieve its objectives and ensure its survival. 7. Population Ecology Theory Argues that environmental forces select out certain organizations for survival; minimizes the role of managers. 8. Institutional Theory States that organizations face environments characterized by external norms, rules, and requirements with which the organizations must conform to receive legitimacy and support. 9. Social Network Perspective Emphasizes that all behavior is social in nature and successful organizations will develop and use social networks to their advantage. 10. Complex Adaptive Systems States that organizational elements are highly interdependent, embedded, and unpredictable. Progress is made through experimentation, application of simple rules, and coevolution of the organization and its environment. H. Metaphors of Health Services Organizations The preceding perspectives are recast as metaphors of health services organizations. The metaphors are machines, tyrants, brains, playing fields, psychic prisons, biological organisms, political systems, and holograms. OVERVIEW OF CHAPTER IN PRACTICE AND DEBATE TIME MATERIAL IN PRACTICE: Henry Ford Health System Positions Itself for the Future 1 Identify the major forces affecting the delivery of health services as it pertains to the Henry Ford Health System (HFHS). The major forces are: (1) changing demographics, (2) continuing advances in medical technology and the biomedical sciences, (3) the growth of information technology, (4) workforce shortages and disruptions, and (5) dealing with the implications of globalization. 2 Identify how these major forces affect the role of the health services manager at the HFHS. In response to these forces, HFHS has developed strategic priorities related to growth, financial stability, development of a county hospital, recruitment and retention of professional staff and employees, system positioning emphasizing integrated and strategic, operating, and financial planning, and continuous attention to quality and cost performance. Health services managers focus on these goals as they help maintain and enhance the health of the public by providing leadership for improving the value of services delivered. IN PRACTICE: Group Health Cooperative (GHC) and Population-Based Health Management 1 What steps has Group Health Cooperative (GHC) taken to address the six aims of safety, effectiveness, efficiency, patient-centeredness, timeliness, and equity to real problems facing it?

6 sho01910_ch01 10/21/05 12:45 PM Page 6 6 SECTION ONE Chapter Outlines and Support Materials In addition to its clinical roadmaps, GHC has initiated a pay-for-performance initiative, implemented several chronic disease self-management programs, eliminated patient referrals, instituted a policy for guaranteed same-day appointments for PCP visits, and implemented an electronic web-based communication system for use between patients and physicians. 2 Identify the different areas of managerial activity as it pertains to GHC. In response to growing consumer dissatisfaction with tightly managed care and increasing competition from more loosely managed preferred provider organization products, the organization retooled its approaches to care management by offering more choice and flexibility in health care without losing its ability to improve clinical quality and manage costs and outcomes. Organizational Behavior / Micro Approach: Pay-for-performance initiative (as it impacts individual motivation), Organizational Theory / Macro Approach: Pay-for-performance initiative (as it impacts a unified approach to organizational performance), chronic disease self-management programs (new self-management infrastructure and organizational care-provision paradigm), staff model HMO changes in care management features. IN PRACTICE: Restructuring Chronic Illness Management 1 Consider the following concepts when answering these questions: The vision/mission/goals of an organization that dictate the major tasks to be carried out and the kinds of technologies and human resources to be employed; the strategies or plans for achieving the organization s mission/vision/goals; and the differentiation, or way in which an organization competes through the array of products and services that they offer. Also consider an organization s integration and centralization, its capacity for change and innovation, and its production function. IN PRACTICE: The Somerbridge Community Health Partnership 1 Identify and apply the major perspectives and theories on organizations as they relate to the Somerbridge Community Health Partnership (SCHP). The SCHP case illustrates the strategic management and resource dependency perspectives. The likely success of the partnership will depend on its ability to secure needed resources by aligning its strategies and services with the needs of the population, the partnership s own capabilities, and the larger environmental forces affecting the partnership. 2 Identify the major forces affecting the delivery of health services as it pertains to Somerbridge Community Health Partnership. The combined population of the two cities is extremely diverse from a socioeconomic, demographic, and cultural perspective. Both have experienced significant growth in immigrant populations, with dozens of different languages. DEBATE TIME Consider reviewing Table 1-5 in the text when addressing these perspectives, and possibly incorporating discussion of other perspectives. In the end, there may be relevant aspects of each of these perspectives that pertain to mergers and consolidations. Managers can draw from various aspects of each perspective discussed in the exercise in various combinations and perhaps aspects of other perspectives as well to develop a mental map of how things happen and improve understanding of how health services organizations operate, including how the issues play out in mergers and consolidations.

7 sho01910_ch01 10/21/05 12:45 PM Page 7 CHAPTER 1 Organization Theory and Health Services Management 7 I. Organization Theory and Behavior: A Framework for the Text DISCUSSION QUESTIONS AND SUGGESTED SOLUTIONS 1. As you think about the challenges facing Henry Ford Health System in the opening scenario, which of the major perspectives on organizations (bureaucratic, scientific management, human relations, contingency, resource dependence, strategic management, population ecology, institutional, social network, perspective, and complex adaptive system) would offer you the most assistance? Defend your choice. A rational argument might be made for choosing either the human relations, contingency, resource dependency, or strategic management perspective. Given the complex nature of the major issues facing Henry Ford Health System in the decade ahead, the best approach may be the contingency perspective. Contingency theorists suggest that a less bureaucratic (or more organic) form of organization is more effective when the environment is complex and dynamic, tasks and technologies are nonroutine, and a relatively high percentage of professionals are involved. The more organic organizational structure involves decentralized and more participative decision making. This type of structure could be beneficial as HFHS must make many decisions regarding future challenges, opportunities, and resource allocation. 2. During the past decade, hundreds of hospitals have closed, merged, or entered into various strategic alliances. How would you attempt to explain this reorganization? In addressing this question, refer to Debate Time 1-1 and consider the resource dependence, strategic management, population ecology, institutional, and complex adaptive system perspectives on organizations. Student opinions may vary based on their assumptions and personal experiences. The population ecology and institutional perspectives assert that environmental variables are the primary factors that explain why some institutions fail and why others reorganize. These perspectives argue that managers could have done little to prevent the inevitable outcome, and that the organizations are responding to their environment. In contrast, the resource dependence and strategic management perspectives assert that organizations have considerable control over their destiny, and that organizations fail because the leaders did not take the necessary steps to improve the organization s fit with changing environmental forces to assure its viability. Most students probably believe that managers have a considerable amount of control over the fate of their institutions. Otherwise, much of the health care administration curriculum would be useless and managers would have to simply let organizations run their natural course. 3. Several community health centers have hired you as a consultant to help them form an umbrella organization that in turn would be merged with the local county health department. Which of the metaphors of organizations (machine, tyrant, brain, playing field, psychic prison, biological organism, political system, hologram) would provide you with the greatest insight as you take on this assignment? Defend your choice. The hologram is probably the most appropriate metaphor. A hologram is an object in which each of the parts contains the entire essence of the overall object or image. An advantage of this perspective is that each health center would be viewed as a useful single entity, but also as part of a larger whole. Each of the health centers would be working toward a single overall purpose as part of the whole. This perspective is also useful in conceptualizing the coordination that needs to occur to integrate the multiple components. 4. State whether you agree or disagree with the following statement: For the most part, health services organizations are no different from most other organizations. Indicate the specific reasons for your agreement or disagreement and develop at least two reasons in addition to those presented in the chapter. Students will most likely state that they disagree with the statement. They will view health services organizations as uniquely different from other types of organizations, based on the nine differentiating factors listed on page 16 of the text (plus two additional reasons of their own).

8 sho01910_ch01 10/21/05 12:45 PM Page 8 8 SECTION ONE Chapter Outlines and Support Materials 5. Networks and alliances are marriages of money and convenience. Systems are marriages of commitment and values. Develop arguments and counterarguments for each statement. Health networks are described in the text as strategic alliances or contractual arrangements among hospitals, physicians, and other health services organizations that provide an array of health services to the community. Health systems are defined as arrangements among hospitals, physicians, and other provider organizations that involve direct ownership of assets on the part of the system. Networks and alliances are characterized by looser financial arrangements as opposed to the unified ownership of health systems. This question will require students to think in terms of the motivation factors that influence organizations to form networks, alliances, or systems. Arguments supporting the statements might refer to the loose nature of networks since they are contractual arrangements that may be short-term and lack a significant investment of resources, while systems are long-term commitments that are most successful when the organizations have similar values. In developing their counterarguments, students might point out that networks and alliances are often formed to provide a greater array of services to patients, while systems are really marriages of money since they evolve into organizations with common ownership. TEACHING TIPS AND EXERCISES 1. When discussing organization design, it might be useful to distinguish between the principles of differentiation and integration. Students should understand the purpose of differentiation as it relates to specialization of labor and the resultant efficiencies, but should also recognize why integration is important for communication within the organization. In other words, students should realize that differentiation and integration are both necessary components of work and organization design. We break the mission of the organization into specific jobs and work groups (differentiation) for increased efficiency. The jobs and work groups must then be coordinated in such a way as to enhance communication and decision making (integration). These concepts will be further developed in Chapters 8 and Explain to the students that the major perspectives on health service organizations represent paradigms of how an organization works and how things get done. In other words, they represent schools of management thought. The first three are presented in chronological order based on the time period in which they were the dominant management philosophy. There is no chronological order to the presentation of the last seven views, which are all fairly recent ideas. 3. Students might appreciate some background information on the development of the scientific management school, particularly the work of Frederick Taylor and his contribution in terms of work methods, standards, and work rules. Students usually relate well to an explanation of his work at the Philadelphia Midvale Steel Co. in the late 1880s. You might also discuss the work of Frank and Lillian Gilbreth regarding work simplification. While this information does not relate directly to health services organizations, students readily see the connections. You might also recommend that students watch the film Cheaper by the Dozen, based on the Gilbreth family. The film is an excellent example of scientific management and its broad applications in any type of organization, whether industrial, health services, or familial. It is also helpful to ask students for examples of scientific management in health services organizations today. Many students taking this course have had some previous exposure to management theory, but will find the review useful. 4. You might share with students some information regarding the Hawthorne Studies, which took place at the Chicago Western Electric Plant from 1924 to Although the Human Relations School did not become a widely accepted management theory until the 1950s, this early research study started managers and researchers thinking about the importance of the individual in organization design, job design, work rules, standards, and productivity.

9 sho01910_ch01 10/21/05 12:45 PM Page 9 CHAPTER 1 Organization Theory and Health Services Management 9 COMPLEMENTARY READINGS Avorn, J. (2004). Powerful medicines: The benefits, risks and costs of prescription drugs. New York: Knopf. Berwick, D. (2002). Escape fire: Lessons for the future of health care. New York: Commonwealth Fund. Bosk, C. L. (1979). Forgive and remember: Managing medical failure. Chicago: University of Chicago Press. Drucker, P. (2001). The next society. The Economist. November 3. Gawande, A. (2005). Piecework. The New Yorker. 81(7), Institute of Medicine (2001). Crossing the qualtiy chasm: A new health system for the 21st century. Washington DC: National Academy Press. Mick, S. & Wyttenbach, M. (eds). (2003). Advances in health care organizational theory. San Francisco: Jossey Bass. Ulrich, D. & Smallwood, N. (2004). Capitalizing on capabilities. Harvard Business Review, 82(6), , 138. Zuckerman, AM. (2000). Creating a vision for the twenty-first century healthcare organization. Journal of Healthcare Management, 45(5),