Burns | Bradley | Weiner
Shortell & Kaluzny’s
Organization Design and Behavior
Health Care Management:
Seventh Edition
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Seventh Edition
Shortell and Kaluzny’s
Health Care Management
Organization Design and Behavior
Seventh Edition
Shortell and Kaluzny’s
Health Care Management
Organization Design and Behavior
Lawton Robert Burns | Elizabeth Howe Bradley | Bryan Jeffrey Weiner
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Management: Organization Design and
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Contents
Contributors
Foreword
Preface
vi
ix
x
PART ONE
Introduction / 2
Chapter 1
Delivering Value: The Global Challenge in Health Care Management
Chapter 2
Leadership and Management: A Framework for Action
3
32
PART TWO
Micro Perspective / 56
Chapter 3
Organization Design and Coordination
57
Chapter 4
Motivating People
82
Chapter 5
Teams and Team Effectiveness in Health Services Organizations
98
Chapter 6
Communication
132
Chapter 7
Power, Politics, and Conflict Management
156
Chapter 8
Complexity, Learning, and Innovation
186
Chapter 9
Improving Quality in Health Care Organizations (HCOs)
213
PART THREE
Macro Perspective / 240
Chapter 10
Strategy and Achieving Mission Advantage
241
Chapter 11
Managing Strategic Alliances: Neither Make Nor Buy but Ally
277
Chapter 12
Health Policy and Regulation
303
Chapter 13
Health Information Technology and Strategy
332
Chapter 14
Consumerism and Ethics
348
Chapter 15
The Globalization of Health Care Delivery Systems
379
Appendix
Acronyms
418
Glossary
Author Index
Subject Index
421
433
443
Contributors
Jane Banaszak-Holl, PhD
Professor of Public Health
School of Public Health and Preventive Medicine
Monash University
Melbourne, Australia
Elizabeth Howe Bradley, PhD, MBA
President
Vassar College
Poughkeepsie, New York
Amanda Brewster, PhD
Assistant Professor of Health Policy & Management
School of Public Health
University of California
Berkeley, California
Lawton Robert Burns, PhD, MBA
The James Joo-Jin Kim Professor, Professor of Health
Care Management, and Director of the Wharton
Center for Health Management and Economics
The Wharton School, University of Pennsylvania
Philadelphia, Pennsylvania
Martin P. Charns, MBA, DBA
Professor of Health Policy and Management
School of Public Health, Boston University
Investigator and Director Emeritus
Center for Healthcare Organization &
Implementation Research
VA Boston Healthcare System
Boston, Massachusetts
Jon A. Chilingerian, PhD
Professor of Management
Heller School, Brandeis University
Adjunct Professor of Public Health & Community
Medicine
Tufts School of Medicine
Waltham, Massachusetts
Ann F. Chou, PhD, MPH, MA
Associate Professor of Family and Preventive Medicine
College of Medicine
University of Oklahoma Health Sciences Center
Oklahoma City, Oklahoma
Ann Leslie Claesson-Vert, PhD, MSN, PSP
Associate Clinical Professor
Lead Faculty Personalized Learning MSN Program
Northern Arizona University, North Valley Campus
Phoenix, Arizona
Thomas D’Aunno, PhD
Professor of Management
Robert F. Wagner Graduate School of
Public Service
New York University
New York, New York
Mark L. Diana, MBA, MSIS, PhD
Drs. W.C. Tsai and P.T. Kung Professor in Health
Systems Management
Associate Professor and Chair, Department of Health
Policy and Management
Tulane University
New Orleans, Louisiana
Amy C. Edmondson, PhD
Novartis Professor of Leadership and Management
Harvard Business School
Boston, Massachusetts
Bruce Fried, PhD
Associate Professor
Department of Health Policy and Management
University of North Carolina at Chapel Hill
Chapel Hill, North Carolina
Mattia J. Gilmartin RN, PhD, FAAN
Executive Director
NICHE I Nurses Improving Care for Healthsystem
Elders
Rory Meyers College of Nursing
New York University
New York, New York
Jennifer L. Hefner, PhD, MPH
Assistant Professor
Division of Health Services Management and Policy
College of Public Health
The Ohio State University
Columbus, Ohio
Christian D. Helfrich, PhD, MPH
Core Investigator, VA Puget Sound Health Services
Research and Development
Research Associate Professor, Health Services
School of Public Health
University of Washington
Seattle, Washington
CONTRIBUTORS
Timothy Hoff, PhD
Professor of Management, Healthcare Systems,
and Health Policy
D’Amore-McKim School of Business
School of Public Policy and Urban Affairs
Northeastern University
Boston, Massachusetts
Peter D. Jacobson, JD, MPH
Professor Emeritus of Health Law and Policy
Director, Center for Law, Ethics, and Health
University of Michigan School of Public Health
Ann Arbor, Michigan
John R. Kimberly, PhD
Henry Bower Professor of Entrepreneurial Studies
Professor of Management
Professor of Health Care Management
The Wharton School, University of Pennsylvania
Philadelphia, Pennsylvania
Sumit R. Kumar, MD, MPA
Resident Physician, Yale New Haven Hospital
Department of Internal Medicine
Yale School of Medicine
New Haven, Connecticut
Kristin Madison, JD, PhD
Professor of Law and Health Sciences
Northeastern University
Boston, Massachusetts
Ann Scheck McAlearney, ScD, MS
Executive Director, Professor of Family Medicine
CATALYST, The Center for the Advancement of Team
Science, Analytics, and Systems Thinking
College of Medicine, Ohio State University
Columbus, Ohio
Eilish McAuliffe, PhD, MSc, MBA
Professor of Health Systems
School of Nursing, Midwifery, and Health Systems
College of Health and Agricultural Sciences
University College Dublin
Dublin, Ireland
Mario Moussa, PhD, MBA
Adjunct Instructor
Division of Programs in Business
School of Professional Studies
New York University
New York, New York
Ingrid M. Nembhard, PhD, MS
Fishman Family President’s Distinguished Associate
Professor of Health Care Management
The Wharton School, University of Pennsylvania
Philadelphia, Pennsylvania
Derek Newberry
Adjunct Professor
Organizational Dynamics and Anthropology
University of Pennsylvania
Ann Nguyen, PhD, MPH
Postdoctoral Fellow
Department of Population Health
School of Medicine
New York University
New York, New York
Laurel E. Radwin, PhD, RN
Research Health Scientist (formerly)
Center for Healthcare Organization and
Implementation Research
Boston VA Healthcare System
Boston, Massachusetts
Kevin W. Rockmann, PhD
Professor, School of Management
George Mason University
Fairfax, Virginia
Aditi Sen, PhD
Assistant Professor of Health Policy and
Management
Bloomberg School of Public Health
Johns Hopkins University
Baltimore, Maryland
Lauren Taylor, MPH
Doctoral Candidate
Harvard Business School
Harvard University
Gregory L. Vert
Assistant Professor
College of Security and Intelligence
Embry Riddle Aeronautical University
Prescott, Arizona
Karen A. Wager, DBA
Professor and Associate Dean for
Student Affairs
Department of Healthcare Leadership
and Management
College of Health Professions
Medical University of South Carolina
Charleston, South Carolina
Stephen L. Walston, PhD
Professor
Director, MHA Program
David Eccles School of Business
University of Utah
Salt Lake City, Utah
vii
viii
CONTRIBUTORS
Bryan Jeffrey Weiner, PhD
Professor, Departments of Global Health
and Health Services
University of Washington
Seattle, Washington
Gary J. Young, JD, PhD
Director, Northeastern University Center for
Health Policy and Healthcare Research
Professor of Strategic Management
and Healthcare Systems
Northeastern University
Boston, Massachusetts
Edward J. Zajac, PhD
James F. Beré Professor of Organization Behavior
J. L. Kellogg Graduate School of Management
Northwestern University
Evanston, Illinois
Foreword
F
or twenty-five years and six editions, we have
attempted to provide an integrative perspective to
the organization and management of health services,
presenting the major management theories, concepts,
and practices of the day. We have also provided practical
illustrations and guidelines to assist managers and prospective managers in the provision of health services in a
variety of settings.
The book is divided into three sections. The first section provides two insightful introductory chapters presenting the challenges of providing health services and
some of the conceptual maps necessary to help guide
managers in the decision-making process and providing
a framework for understanding the role and contributions
of management and leadership within a variety of health
care settings.
As we go to press, we have entered the era of health
care reform, presenting new and perhaps not so new challenges and opportunities. Under the leadership of Rob
Burns, Elizabeth Bradley, and Bryan Weiner, the invited
chapter authors have provided a thoughtful and in-depth
analysis of the theories, concepts, and approaches that
managers and prospective managers need to address the
critical issues in the provision of health services as well
as meet the challenges and opportunities resulting from
health care reform.
The next section focuses on the Micro Perspective—
Managing the Internal Environment. This perspective
addresses the classic issues of organization design, motivation, communications, power, organizational learning,
performance/quality improvement, and managing groups
and teams. Each chapter provides an “In Practice” scenario that sets the scene for the concepts and tools for
effective management.
While these represent significant changes in the operation of the delivery system, the fundamental managerial
challenges remain and will continue to require skillful
attention if health care and the various delivery organizations are to realize their potential. Issues of maintaining
a motivated workforce, assuring state-of-the-art practice
patterns, coordinating various disciplines and specialties to the benefit of patient care, and accommodating
an ever-expanding technology within a market economy
that would benefit the patient and the larger community
have been and will continue to be the major responsibility of management.
managers will need to succeed in the years ahead.
The last section, the Macro Perspective—Managing the
External Environment, focuses on the organizational conThe passage of health care reform brings a great text and addresses the challenge of achieving competitive
deal of uncertainty as it attempts to address the long- advantage and managing alliances. Four new chapters
standing problems of access, quality, cost contain- will help prepare managers for the uncertainty of the
ment, and significant disparities under unprecedented years ahead. These include the challenges of managing
economic conditions. Much has changed as reflected an ever-expanding information technology, consumerism,
in the mandates regarding access to coverage, coverage an increasingly complex regulatory environment, and
itself, the role of public and private programs, and health finally the recognition that we live in a globalized world.
insurance exchanges as well as the role of comparative
Health services management has come of age, and
effective studies, payment reforms, accountable care Burns, Bradley, Weiner, and their colleagues have preorganizations, and patient-centered medical homes.
sented the theories, concepts, and guidelines that future
This seventh edition provides readers with the relevant
theories, concepts, tools, and applications to address
operational issues that managers face on a daily basis. As
described in the lead chapter, the key challenge facing
organizations and their managers is to deliver “value”—
the ratio of quality to cost. While this has always been
a concern, the reality of present-day economics and the
developing science has made this imperative.
Stephen M. Shortell, PhD
Blue Cross of California Distinguished
Professor of Health Policy & Management
Professor of Organizational Behavior,
Haas School of Business and Dean,
School of Public Health
University of California, Berkeley
Berkeley, California
Arnold D. Kaluzny, PhD
Professor Emeritus of Health and Policy
& Management,
Gillings School of Global Public Health, and Senior
Research Fellow
Cecil G. Sheps Center for Health Services Research,
University of North Carolina at Chapel Hill,
Chapel Hill, North Carolina
Preface
INTRODUCTION
facing health care organizations, and examines the roles
of leaders and managers in influencing organizational
culture, performance, and change. Part 2 focuses on
core leadership and managerial tasks within organizations. These include motivating people, guiding teams,
designing structure, coordinating work, communicating
effectively, exerting influence, resolving conflict, negotiating agreements, improving performance, and managing
innovation and change. Part 3 describes the broader context in which health care organizations operate and discusses the managerial implications of several emerging
trends and issues. These include the pursuit of strategies
to achieve the organization’s mission, the growth of strategic alliances in the health sector, the expansion and
complexity of health law and regulation, the uses and
challenges of health information technology, the rise of
consumerism in health care, and the global interconnectedness of health systems.
This book is intended for those interested in a systemic
understanding of organizational principles, practices,
and insights pertinent to the management of health services organizations. The book is based on state-of-the-art
organization theory and research with an emphasis on
application. Although the primary audience is graduate students in health services administration, management, and policy programs, the book will also be of
interest to undergraduate programs, extended degree
programs, executive education programs, and practicing
health sector executives interested in the latest developments in organizational and managerial thinking. It
is also intended for students of business, public administration, medicine, nursing, pharmacy, social work,
and other health professions who will assume managerial responsibilities in health sector organizations
or who want to learn more about the organizations in
which they will spend the major portion of their professional lives. Previous editions have been translated into
Polish, Korean, Ukrainian, and Hungarian, and we look The Seventh edition continues several popular features
forward to the book’s continued use by our international from the sixth edition. These include the following:
colleagues.
• An explicit list of topics provided at the beginning of
each chapter.
FEATURES
TEXT APPROACH
The seventh edition broadens the view of the health
care sector beyond the traditional focus on hospitals
and other provider organizations to include suppliers,
b uyers, regulators, and public health and financing
organizations. It offers a comparative, global perspective
on how the United States and other countries address
issues of health and health care. Additionally, the book
discusses managerial implications of emerging issues
in health care such as public reporting, pay for performance, information technology, retail medicine, ethics, and medical tourism. Finally, this seventh edition
expands upon a major theme of prior editions: health
care leaders must effectively design and manage health
care organizations while simultaneously influencing and
adapting to changes in environmental context. Managing
the boundary between the internal organization and its
external environment is therefore a central task of health
care leadership.
ORGANIZATION
The organization of the book reflects this expanded
theme. Part 1 provides an overall perspective on the
health care sector, discusses the distinctive challenges
• Specific behaviorally oriented Learning Objectives
highlighted at the beginning of each chapter.
• A list of Key Terms that readers should be able to
define and apply as a result of reading each chapter.
• An “In Practice” column describing a practical situation facing a health services organization.
• A section in several chapters called “Debate Time,”
which poses a controversial issue or presents divergent perspectives to stimulate the reader’s thinking.
• Comprehensive Managerial Guidelines and Summary
points at the conclusion of each chapter.
• Discussion Questions that help reinforce chapter
concepts.
NEW TO THIS EDITION
The seventh edition updates the case studies included
in the sixth edition along with the case discussion
questions. It also updates the ongoing developments
in health policy and regulation, as well as the research
evidence in each chapter’s subject matter. It also
includes several new authors, expanding the community
of healthcare management scholars contributing to this
volume.
PREFACE
MINDTAP
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or match to your syllabus exactly–hide, rearrange,
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readings and activities that move students up the
learning taxonomy from basic knowledge and comprehension to analysis and application.
• Promote Better Outcomes: Empower instructors and motivate students with analytics and reports that provide
a snapshot of class progress, time in course, engagement and completion rates.
INSTRUCTOR RESOURCES
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The following support materials are included:
• Electronic Instructor’s Manual—The Instructor’s Manual
that accompanies this book includes an overview of
the In Practice and Debate Time material from the
text, suggested solutions to the end-of-chapter discussion questions and case studies, teaching tips
and exercises, complimentary reading lists, suggested solutions to the Vignette material in the study
guide, and an overview of additional Debate Time
material from the study guide.
• PowerPoint presentations —This book comes with
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resentation,
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ABOUT THE AUTHORS
Lawton Robert Burns is the James Joo-Jin Kim Professor
and Professor of Health Care Management in the Health
Care Management Department at the Wharton School,
University of Pennsylvania. He is also Director of the
Wharton Center for Health Management and Economics,
and Co-Director of the Roy & Diana Vagelos Program in
Life Sciences and Management. His research focuses on
hospital–physician relationships, strategic change, integrated health care, supply chain management, health
care management, formal organizations, physician
networks, and physician practice management firms.
Dr. Burns is the author of several books, including Managing Discovery: Harnessing Creativity to Drive Biomedical Innovation (2018), China’s Healthcare System and
Reform (2017), India’s Healthcare Industry (2014), The
Business of Healthcare Innovation (2012), Health Care
History and Policy in the United States (2006), and The
Health Care Value Chain (2002). He is the recipient of
numerous grants, fellowships, and awards, including the
2015 Keith Provan Distinguished Scholar Award from
the Academy of Management and its Health Care Administration Division. Dr. Burns has also provided expert
witness testimony for the federal government as well as
for the private sector. He is a member of the Academy
of Management and the American Hospital Association.
Lawton R. Burns has a Bachelor of Arts Degree in Sociology and Anthropology, a Master’s Degree in Sociology,
a Masters in Business Administration, and a Doctor of
Philosophy Degree in Sociology.
Elizabeth Howe Bradley, PhD, is the President of
assar College in Poughkeepsie, New York. She was preV
viously a Professor of Public Health at the Yale School of
Public Health, where she directed the Health Management Program for a decade and subsequently the Global
Health Leadership Institute. Bradley is renowned internationally for her work on quality of hospital care and
large-scale health system strengthening efforts within the
US and abroad. Bradley is the author of The American
Healthcare Paradox: Why Spending More Is Getting Us
Less and the 2018 recipient of the William B. Graham
Prize for Health Services Research, the highest distinction that researchers in the health services field can
xii
PREFACE
achieve. Bradley was elected to the National Academy of
Medicine in 2017. President Bradley has a Bachelor of
Arts Degree in Economics, a Master of Business Administration, and a Doctor of Philosophy Degree in Health
Policy and Health Economics.
Bryan Jeffrey Weiner, PhD, is Professor in the Departments of Global Health and Health Services at the
University of Washington. Dr. Weiner directs the Implementation Science Program in the Department of Global
Health and serves as the Strategic Hire in Implementation Science for the School of Public Health. His
research focuses on the adoption, implementation, and
sustainment of innovations and evidence-based practices
in health care organizations. He is member of the Academy of Management, Academy Health, and the American Public Health Association. Dr. Weiner has a Bachelor
of Arts Degree in Psychology, a Master of Arts Degree in
Organizational Psychology, and a Doctor of Philosophy
Degree in Organizational Psychology.
ACKNOWLEDGMENTS
We believe that the major strength of this text is the
diversity of the talented authors, who contributed multiple perspectives, experiences, skills, and expertise to
each chapter. The new and substantially revised chapters
reflect the breadth and depth of the authors’ expertise
as well as their fresh perspectives. We wish to acknowledge with gratitude the immeasurable contribution that
Stephen Shortell and Arnold Kaluzny have made in the
fields of health care management research and education. As scholars, advisors, mentors, and colleagues, they
have deeply influenced our work and our professional
lives. Through the six editions of this book, over the past
twenty-five years, they have helped educate a generation
of health services researchers, policy makers, managers,
and health professionals. We hope that the seventh edition sustains the tradition of excellence that these gentlemen have established.
Finally, we wish to acknowledge Lauren Taylor and
Rachelle Alpern for their excellent editorial assistance.
Lawton Robert Burns
University of Pennsylvania
Elizabeth Howe Bradley
Vassar College
Bryan Jeffrey Weiner
University of Washington
1
Part one
Introduction
Chapter 1
Delivering Value: The Global
Challenge in Health Care
Management
Lawton Robert Burns, Elizabeth H. Bradley, and
Bryan J. Weiner
CHAPTER OUTLINE
•
The Challenge: Deliver Value
•
Challenge of Rising Health Care Costs: Supply- and Demand-Side Price and Volume Drivers
•
Other Challenges Exacerbating the Value Challenge
•
The Challenges are Global
•
Complexity of the U.S. Health Care System
•
Why Changing the Health Care System Is So Difficult
•
Systemic Views of Health and U.S. Health Care
•
Organization and Management Theory
•
Summative Views of Organization Theory
•
Organization Theory and Behavior: A Guide to This Text
LEARNING OBJECTIVES
After completing this chapter, the reader should be able to:
1. Discuss the challenge of delivering value in health care
2. Identify the major forces affecting the delivery of health services
3. Distinguish the similarities and differences in the forces shaping health services globally
4. Discuss why it is difficult to change the health care industry
5. Develop a system view of health care delivery
6. Discuss the different types of firms operating in a health care system
7. Identify, discuss and apply the major perspectives and theories on organizations to real problems facing
health care organizations
8. Analyze in analyzing problems from multiple theoretical lenses
KEY TERMS
Ambidexterity
Evidence-Based Medicine
Bending the Cost Curve
External Environment
Bounded Rationality
Health Systems
Bureaucracy
Hospital–Physician Relationships
Classical School of Administration
Human Relations School
Complex Adaptive System
Institutional Theory
Contingency Theory
Iron Triangle
Decision-Making School
Macro Perspective
4
PART 1 • Introduction
Micro Perspective
Social Network Approach
Moral Hazard
Strategic Management Perspective
Open Systems Theory
System Perspectives
Population Ecology
Triple Aim
Resource Dependence Theory
Value
Scientific Management School
Value Chain
• • • IN PRACTICE: The GAVI Alliance
The Global Alliance for Vaccines and Immunization (GAVI) is one of the largest global health initiatives (GHIs)
that targets specific diseases/conditions to help meet Millennium Development Goals. GAVI was launched at
the World Economic Forum on January 31, 2000, to improve the distribution of new and underused vaccines to
low-income countries and thereby reduce childhood mortality and morbidity, and increase the health status of
these populations (GAVI Alliance, 2010; Martin and Marshall, 2003; Milstien et al., 2008).
GAVI was a partnership of developing countries, organizations involved in international development and
finance (e.g., United Nations Children’s Fund, the World Health Organization, the World Bank), the pharmaceutical industry, and philanthropic organizations (e.g., the Bill and Melinda Gates Foundation provided seed funding
of $750 million). GAVI lacked presence at the local level, and thus relied on its partners for planning and implementation in each country.
A number of managerial challenges faced the GAVI Alliance in achieving its goals. First, the vision of the GAVI
Alliance had to motivate local countries to participate in this vaccination program and gradually increase their
own funding for it. Second, local countries needed to accept the responsibility to deliver the vaccine programs
and the attendant results. Third, these countries had to help develop and manage local infrastructure to deliver
the vaccines to rural populations—often referred to as the last hundred yards or miles of the supply chain.
This meant the countries needed not only transportation and distribution networks but also a cadre of local
health care workers with training in vaccine storage and administration. Fourth, the GAVI Alliance had to manage
diverse stakeholders, including its core founding members such as the World Bank, WHO, UNICEF, and the Gates
Foundation. Fifth, the GAVI Alliance had to operate with a lean structure such that bureaucracy did not slow its
progress. Sixth, the alliance had to develop leverage over pharmaceutical firms to purchase the needed drugs at
a lower cost, which local countries could afford. Last, the GAVI Alliance needed a clear governance structure with
defined responsibilities for partners.
Since its inception in 2000 through 2013, GAVI directly supported the immunization of 440 million children
(e.g., for Hepatitis B, Haemophilus influenzae type B (Hib), and yellow fever), with an increase in global immunization coverage rates from 70 percent to 83 percent. Such efforts have helped to decrease the global under-five
mortality rate. In addition to speeding up population access to underused vaccines, GAVI has also pursued efforts
in strengthening health systems, improving vaccine storage and delivery, getting immunization onto national
health agendas, and stimulating research and development for vaccines (World Bank Group, 2012).
Despite its success, GAVI has not been without its problems. Although the alliance necessarily focused heavily
on developing partnerships and initiating vaccine coverage, less attention was paid to implementation of plans
and mobilization of resources for ongoing treatment (in-country follow-up). One reason may be that vaccine costs
have risen both absolutely and as a percentage of the total health expenditures, and vaccinations may not be the
top priority of developing-country governments (Milstien et al., 2008; Muraskin, 2004). Moreover, the alliance
partners needed to grapple with the large supply chain “system costs” required to handle, transport, and store
the drugs (Lydon et al., 2008) and the issue of securing long-term financial commitments from its partners. An
additional problem is that GAVI’s single-minded focus on vertical programs such as vaccination may have diverted
countries from broader efforts to develop and finance their health systems. The “Gates Foundation approach”
to global health, focused on targeted technical solutions with clear and measurable outcomes, did not fit easily
with broader investments needed in the social determinants of health (e.g., social and economic development)
(Storeng, 2014). GAVI acknowledged this issue by adopting “health system strengthening” (HSS) as a core principle, but such support was still heavily concentrated on procuring drugs, equipment, and supplies (Tsai, Lee,
and Fan, 2016). Finally, in 2008, GAVI reorganized its informal alliance model to become an independent legal
entity that diluted the influence of its founding partners. World Bank interactions with and financing of GAVI
immunization efforts subsequently declined.
Chapter 1 • Delivering Value: The Global Challenge in Health Care Management
CHAPTER PURPOSE
A central challenge in delivering health care services in
the new millennium is the challenge of delivering value.
Value is created when (a) additional features of quality or
customer service desired by a customer can be provided
at the same cost or price, (b) a given set of features of
quality or customer service can be delivered at a lower
cost or price relative to other producers, or (c) additional
features of quality can be provided at a lower cost. At a
societal level, health and wealth exert beneficial effects
on one another. Investments in health care delivery that
improve quality and/or reduce cost can improve health
status, which in turn can support economic growth and
political stability (Burns, D’Aunno, and Kimberly, 2003;
Esty et al., 1999; Sachs, 2001). Conversely, economic
development that raises the standard of living and
s ocioeconomic conditions improves the population’s
health (Cutler, Deaton, and Lleras-Muney, 2006; Liu,
Yao, and Du, 2015).
Nevertheless, health investments that enhance value
are not always made. For instance, despite evidence of
the benefits of immunization coverage (Martin and Marshall, 2003; World Health Organization, 1996) and a
steady increase globally during the 1970s and 1980s,
immunization coverage declined sharply in the 1990s
due to curtailed government funding in low-income
countries. For example, Mao’s agenda to increase public health investments in China, which led to rapidly
increasing life expectancy, was reversed and subordinated to economic growth under Deng Xiaoping as a part
of the country’s economic liberalization reforms.
The GAVI Alliance entered in 2000 and, during its first
13 years, raised over $8.4 billion, disbursed over $6
billion to 76 countries, improved the quality and safety
of vaccines administered in poor countries, reduced the
procurement cost of these drugs through centralized purchasing, and immunized nearly half a billion children
against deadly or disabling diseases.
Why was this approach not already taken? To effect
major changes in health care delivery and increase value,
as the GAVI Alliance has, organizations require extraordinary approaches. Such approaches critically hinge
on several management competencies. These include
assembling (global) alliances, clarifying the governance
structure of the alliance, developing the local health care
infrastructure to deliver the needed services, balancing
global and local commitments, and developing local
ownership of health initiatives. Managerial skills (including but not limited to developing alliances, negotiating
governance and roles, conflict management, managing
change, forging strategic plans and leadership) are critical components of the manager’s “tool kit” in any health
care system. These skills are described in subsequent
chapters in this volume.
5
THE CHALLENGE:
DELIVER VALUE
The key challenge facing health care firms is to deliver
value, defined as the quotient of quality divided by cost
(Porter and Teisberg, 2006). That is, firms are asked to
deliver a higher level of quality at the same cost, the
same level of quality at a lower cost, or higher quality
at a lower cost (Institute for Health Care Improvement,
2009). More expansive definitions include patient access
and convenience along with quality features (Lee, 2015).
In the United States, this challenge has been proposed
to (a) providers, in the form of accountable care organizations (ACOs), pay-for-performance (P4P), and other types
of value-based contracting; (b) insurers, in the form of
value-based insurance design (VBID); and (c) suppliers,
in the form of outcomes-based contracts with insurers
(Barlas, 2016).
Value-based health care has recently become a global
concern. In 2016, the World Economic Forum launched
its “Value in Healthcare” project to stimulate national
health system reforms around value. That same year,
The Economist Intelligence Unit (2016) issued its
global assessment of value-based health care across 25
countries. Common components of value-based health
care include an ecosystem of supporting institutional
and policy structures, coalitional support from broad
stakeholders, support of professionals who are trained
in value-based health care, quality measurement and
standardization, cost measurement, integrated and
patient-focused care, and payment based on outcomes.
In order to create and deliver value, health care organizations must find a way to address three health policy
goals of our health care system since the late 1920s:
improve the quality of care, improve access to care, and
reduce cost and cost acceleration—for example, bending
the cost curve, or the reducing of health spending relative to projected trends (Commonwealth Fund, 2007a).
In past decades, providers have been asked to demonstrate a similar value (quality/cost) proposition using a
series of management techniques, such as total quality management (e.g., reducing process variation and
simultaneously raising the level of process performance),
supply chain management (e.g., standardizing products
to achieve consistency in use and lower unit cost), and
clinical integration (standardizing care paths and protocols to reduce clinical practice variations and improve
quality of care).
Numerous health services researchers have questioned
whether all three goals are simultaneously attainable
(Chen et al., 2010; Katz, 2010) or require a balancing act (Berwick, Nolan, and Whittington, 2008). The
achievement of these three goals is sometimes referred
to as the iron triangle of health care (Kissick, 1994). Picture an equilateral triangle, with three equal angles of
6
PART 1 • Introduction
60 degrees, and assume that each angle is one of these
three policy goals. Any effort to address one policy angle
widens that angle (e.g., access) at the expense of one or
both of the other two angles (e.g., quality or cost). For
example, the Patient Protection and Affordable Care Act
(PPACA) expanded insurance coverage to 24 million citizens but at a cost of roughly $1 trillion that needed to be
recouped via taxes, lower provider reimbursements, and
other programmatic savings (CMS, 2010).
Provider organizations in the health care industry have
nevertheless been required to accomplish the quality and
cost goals at the same time. Since the 1990s, employers have monitored health plans (and thus their provider
networks) in terms of four domains of measures known
as the Healthcare Effectiveness Data and Information
Set (HEDIS), which resemble the iron triangle: effectiveness of care, access/availability of care, utilization
and relative resource use, and experience of care. The
Institute of Medicine (IOM, 2001)—now known as the
National Academy of Medicine—articulated six “aims for
improvement” in a high-performing health care system:
care should be safe, effective, patient-centered, timely,
efficient, and equitable. Most recently, providers in the
United States have been encouraged to pursue “the triple aim” that builds upon the IOM’s six aims: improving
the patient’s experience of care, improving the health of
the population, and reducing the per capita cost of care
(Berwick, Nolan, and Whittington, 2008). These three
aims have been baked into the quality scorecard used to
measure ACO performance in the Medicare program.
The balancing of broad health policy goals is apparent
on a global scale as well. The World Health Organization
(WHO, 2000) uses three criteria to rank national health
systems: health status (similar to quality), responsiveness
to the expectations of the population (similar to access),
and social and financial risk protection (similar to cost).
CHALLENGE OF RISING
HEALTH CARE COSTS:
SUPPLY- AND DEMANDSIDE PRICE AND VOLUME
DRIVERS
One reason why the health system is challenged to
deliver value is that the denominator—health costs—has
risen steadily over time and proven difficult to restrain.
National health expenditures in the United States
have been rising at roughly 2.3 percent annually above
the growth in gross domestic product for the past five
decades (Altman, 2010; Blumenthal, Stremikis, and
Cutler, 2013). Some have argued that public and private sector efforts work to temporarily rein in this rate of
increase, only to see the cost escalation return (Altman
and Levitt, 2002; Jost, 2012). Such rising costs make
health care increasingly unaffordable to the individual
and crowd out other public spending.
Why do costs rise inexorably? Many experts argue that
the underlying driver of rising costs is technology and
its broad application to new patients and patient indications (Aaron and Ginsburg, 2009; Commonwealth
Fund, 2007b; Congressional Budget Office, 2008a, b).
Following Weisbrod (1991), technological improvements
spur higher prices, higher demand, and higher costs—
all of which call for greater insurance coverage for the
new technology, which then drives further technological innovation. Technology contributes to rising costs in
other ways. In contrast to other industries, health care
technology is often a complement rather than a substitute for labor—for example, requiring many technicians
to utilize the new equipment. Moreover, providers often
compete for patients based on the sophistication of the
services and equipment they offer, leading to expensive
excess capacity and duplication in a local market (“technology wars”). Insurance is another driver of rising costs,
as broader coverage (e.g., for more people or more benefits) increases demand and thus health spending, as well
as the attendant problem of moral hazard (Arrow, 1963)
whereby the insured utilize more health care than they
would if they paid for services out of pocket (i.e., from
their own resources without insurance).
There are several supply- and demand-side drivers of
rising health costs. On the supply side, costs are driven
by imperfect information markets whereby purchasers
and consumers of health care are not able to discern
quality differences perfectly among health care providers, make few repeat purchases, and enjoy less transparency of pricing, which allows great variation in the
economic rents earned by providers of the same product
or service. Such rents also result from provider market
power. Costs are also driven in part by providers’ practice
of defensive medicine, providers’ focus on acute rather
than chronic care or prevention, and poor coordination
of services among providers (Studdert et al., 2005; Towers Perrin, 2008). Finally, costs are driven by geographic
variations in the supply of hospital beds and specialist
physicians, which may induce demand (Roemer, 1961).
On the demand side, costs are driven by the tax-free
treatment of health care benefits (which contributes to
richer health benefit packages and induces moral hazard), as well as public and private sector financing of
health care through a third-party payment system of
insurers and other fiscal intermediaries outside the
patient–provider relationship. Favorable tax treatment
and a third-party payer system combine to insulate the
consumer/patient from the true cost of the health care
services they demand. In addition, demand is driven by
a country’s national wealth, the expectations of its population, the highly technological nature of health care
Chapter 1 • Delivering Value: The Global Challenge in Health Care Management
7
GEOGRAPHIC VARIATION IN HEALTH CARE SPENDING: A CLOSER LOOK
Health care expenditures in the United States have been rising for decades (Jost, 2012), but per capita spending
on health care varies widely across the country. There are well-known variations in spending across states, hospitals, and even physicians to treat the same condition. Earlier, the Dartmouth Atlas suggested that the cost and
quality of the services rendered to the Medicare population were either negatively correlated or not correlated at
all, suggesting that Medicare spending could be reduced by decreasing such variations without harming quality
(Wennberg, Fisher, and Skinner, 2002).
Why does health care spending vary so much across the country? The reasons are complex and difficult to
tease apart. Differences in prices of health care services and severity of illness play an important role, but
together these factors account for only half of the geographic variation in spending. Regional differences in the
supply of specialist physicians and health care facilities are also thought to play a role. Regional differences
in provider willingness to adopt new technologies or provide costly treatments that might or might not improve
health care outcomes are also thought to increase costs. Most recently, research has identified variations in the
cost and utilization of post-acute care services (e.g., nursing homes) as a major driver (Newhouse and Garber,
2013). Researchers have also challenged the Dartmouth Atlas research findings noted above by showing that
across all funding sources (e.g., Medicare, commercial payers, etc.) higher levels of spending in wealthier states
may translate into higher quality of care (Cooper, 2008).
Scholars and policy makers looking to slow the rate of growth in health care expenditures (“bend the cost
curve”) point to organized delivery systems that focus on coordinated care and prevention as a promising way to
reduce the costs associated with the efficiencies, misaligned incentives, and poor quality attributed to the highly
fragmented nature of the health care system that currently exists in the United States. In his efforts to promote
health reform, for example, President Barack Obama praised the Mayo Clinic in Minnesota and the Cleveland
Clinic in Ohio as examples of hospitals providing the highest-quality care at costs well below the national norm
and suggested that all providers in the country practice their type of medicine.
Debate Time: Overuse, Underuse, and Misuse of Health Care
Researchers at the Rand Corporation suggest that the health care system suffers from three process problems in
delivering quality: overuse of services, underuse of other services, and misuse of still other services (Schuster,
McGlynn, and Brook, 1997). Overuse characterizes those services and procedures that are expensive and where
the potential for harm to patient’s health exceeds the possible benefit, such as the excessive use of antibiotics
for viral infections. Underuse characterizes those services that are likewise costly to perform but increase the
quality of care and produce favorable patient outcomes, such as vaccinations, preventive visits, and taking medications as prescribed. Misuse, finally, characterizes those services that add costs without necessarily harming
the patient, such as extra lab tests, unnecessary screening (PSA), or avoidable complications. In early 2017, The
Lancet devoted an entire issue to the global nature of these three problems.
What do you think?
• Which of these three problems do you think is most prevalent?
• Which of these three problems do you think is most important to address?
• What managerial strategies might you employ to address each one?
services, and the health behaviors of its population.
These supply and demand drivers are listed in Table 1.1.
There are many price and volume drivers of rising costs
as well. Price drivers include provider consolidation and
the resulting lack of competition, development of new
technologies, rising labor costs, provider cost-shifting,
and consumer preferences for care in higher-cost settings. Volume drivers include fee-for-service payment,
rise of chronic diseases, consumer demand, defensive medicine, lack of care coordination, and fraud and
abuse.
A handful of axioms govern the demand side of this
vast system that may be peculiar to health care. The first
is that technological innovations and their application are
desired by providers, desired by patients, and drivers of
rising health care costs (“the technological imperative”)
8
PART 1 • Introduction
(Fuchs, 1986; Gelijns and Rosenberg, 1994). A second
axiom is that technology drives specialization in the medical (and nursing) field, which further drives up health
care costs. A third axiom is that every citizen deserves
the finest health care now made available by these technological developments (often defined as the product or
service offered by my firm) as long as someone else pays
for it. Another axiom following from the technological
imperative is that cost and price are the key issues germane to all parties. Indeed, the one issue that currently
unites the entire value chain in health care is reimbursement; many analysts anticipate that it will be the patient/
consumer who unites the chain in the future. Last, technological innovation and its attendant costs spur the
spread of insurance coverage for such innovation, which
increases spending on innovation, which fuels yet more
innovation (Weisbrod, 1991).
OTHER CHALLENGES
EXACERBATING THE VALUE
CHALLENGE
Complicating the difficulty of providing value, health
care systems face a number of other challenges. One
key problem involves measuring and managing quality of care. Providers are confronted by multiple payers
with different quality performance scorecards; moreover,
many of the quality metrics are not highly correlated
with one another (cf. Smith et al., 2017). Another key
problem is the growing burden of chronic illness in the
population (both in the United States and globally),
which requires more clinician time and resources to treat.
Other challenges include increasing patient demand and
expectations, increasing payer and societal demands for
accountability, unexpected epidemiological shifts, calls
for greater patient safety, increasing complexity, strains
on federal and state government budgets, inadequate
supply of primary care practitioners, reported shortages
of specialists and other health personnel, erosion of the
public’s trust in physicians and hospitals, growing concerns over privacy of personal health information, lack of
transparency in prices and information, conflicts of interest and incentives, lack of consumerism, lack of efficient
and effective use of information technology, and provider
resistance to change (Dranove, 2008; Herzlinger, 2006;
Porter and Teisberg, 2006).
On top of these challenges one can lay a series of delicate balancing acts that health care firms (and society
as a whole) must deal with beyond the value equation.
These include meeting rising demand and expectations
with finite resources (both capital and labor), addressing chronic care needs with an acute care–based delivery
system, fostering population-based models of care amidst
a system based on physicians in small groups or solo
practice, sharing information while respecting patient
privacy, incorporating modern therapeutic and technological advances while restraining the rate of growth in
cost, and promoting wellness behaviors in a system that
finances acute care seeking.
Table 1.1 Supply- and Demand-Side Drivers of Health Costs
Supply-Side Drivers
Demand-Side Drivers
Imperfect information regarding price and quality
Tax treatment of health care benefits
Provider market power
Third-party payment system
Nonprice competition (e.g., technology wars)
Breadth and depth of insurance coverage
Technology and its diffusion
Moral hazard
Geographic variations
Rising national income
Poor coordination among providers
Poor healthy behaviors
Fee-for-service payment systems
Private sector financing of care, which supplements
public spending, encourages greater coverage, and may
promote cost-shifting
Excess capacity
Acute care focus of delivery system
Limited primary care
Malpractice fears and pressures
Chapter 1 • Delivering Value: The Global Challenge in Health Care Management
THE CHALLENGES ARE
GLOBAL
The problems, issues, and challenges facing the health
care industry are global, confronting health care systems
in many countries (Burns, 2014; Burns and Liu, 2017;
see also Chapter 15). As an illustration, Table 1.2
identifies some of the common issues and problems
facing the health care systems of India, China, and
the United States. These countries have populations
that are quickly aging—true especially of China, and
increasingly so for both India and the United States.
All three countries face a huge epidemiologic transition
from acute care to chronic illness, with underdeveloped
systems for dealing with chronic care (especially true
in the East). Populations in all three countries have
developed more sedentary lifestyles, with increasing
incidence of diabetes, obesity, and hypertension. All
three countries have populations with substantial
national wealth that are now demanding more health
care services and thereby increasing health care costs
Table 1.2 Parallel Concerns in the United States, India,
and China
• Concern with iron triangle
• Concern with high hospital costs as cause of
impoverishment/bankruptcy
• Concern with the high costs of technology
• Concern with geographic disparities in health status
• Concern with conflicts of interest and
supplier-induced demand
• Concern with prices as driver of rising health care
costs
• Concern with lifestyle issues and behaviors
rapidly. Not surprisingly, all three countries also report
that health care costs are a major source of personal
and family bankruptcy. Finally, all three countries face
the common issue of how to balance the demand for
technological innovation by providers and patients with
its high cost.
At the same time, there are several major divergences
between these health care systems (see Table 1.3). The
U.S. health care system compared with India or China
spends a much higher proportion of its gross domestic product on health care and provides a higher level
of insurance coverage to its population. While health
insurance programs are now spreading across India
(increasingly private sector) and China (mostly public
sector), they provide coverage for a limited range of services (e.g., focused until recently on hospital inpatient
care). Hospital ownership patterns also diverge widely.
China’s hospital system is almost entirely public sector
(although the country recently announced its intention
to allow more entry by private hospitals), while India’s
formerly public sector hospital system has seen the
emergence of a thriving private sector comprised of multihospital systems (e.g., Apollo, Fortis, Wockhardt, and
MaxHealthcare). By contrast, much of the U.S. hospital
market is voluntary and nonprofit in character. Such differences and commonalities suggest that management
strategies to meet the value challenge must consider the
local context, but may nevertheless share many similar
elements. As Chapter 15 notes, these strategies may
encompass prospective payment systems, enhanced
provider reimbursement rates, patient marketing and
recruitment, etc.
Table 1.3 Areas of Divergence: United States versus
India and China
• Health care spending per capita
• High number of specialists
• Percentage of national health expenditures (NHE)
accounted for by patient out-of-pocket spend
• Hospital waste and inefficiency
• Development of private health insurance
• Lack of a primary care system
• Depth and breadth of insurance coverage
• Fee-for-service payment system
• Presence of centralized purchasers
• Mixture of financing mechanisms: government,
employer, individual
• Percentage of NHE spent on drugs
• Fragmentation in government ministries/bureaucracy
9
• Tradition of private sector ownership of hospitals
• Low consumer information
• Development of the central government’s role in
health care
• Competing spending priorities (education, social
services, health) at the local government level
• Development of governance mechanisms to
monitor providers
10
PART 1 • Introduction
COMPLEXITY OF THE U.S.
HEALTH CARE SYSTEM
The United States lacks a single national health insurance program (other than the Medicare program for the
elderly) to pay for health care. Thus, one confronts a
variety of mechanisms to finance health care by federal,
state, and local governments, as well as employers, individuals, and philanthropic organizations. Over time, the
financing system has shifted from private payers to public payers, and from out-of-pocket payment to third-party
payment using insurers.
The U.S. system also has a fully developed value chain
(i.e., interlinked activities among a set of firms whereby
suppliers provide raw material inputs to manufacturers
who process them and produce outputs for downstream
markets) (Burns, 2002; Porter, 1985). For example, the
United States has thousands of product manufacturers
(pharmaceuticals, biotechnology, medical-surgical supplies, capital equipment, medical devices, and information technology), wholesalers and distributors, hospitals,
physicians, nursing homes, pharmacies, home health
agencies, insurers and insurance brokers, and employers
offering health insurance coverage to their employees.
It also has hundreds of group purchasing organizations
(GPOs) and public health agencies; 50 State Medicaid
programs; a vast federal bureaucracy (literally, government by bureaus or offices), which finances care, delivers health care services, regulates providers, approves
new innovation, funds basic and applied research, and
provides public health; and lots of niche firms offering
pharmacy benefit management and disease management
services (see Figure 1.1). This is a huge industry with
lots of stakeholders, divergent interests and perspectives,
and entrenched positions.
Effective management of any one sector of this system
requires not only an understanding of the competitive
developments within that sector but also an understanding
of the other sectors, what is taking place within them, and
how they interact with one another (Burns, 2005). Some
of the health care managerial approaches and actions
over the last decade reflect cross-sector understanding
Buyers
Government:
Suppliers
Medicare and Medicaid
Veterans Administration
Indian Health Service
Pharmaceuticals
Biotechnology
Medical-Surgical Supplies
Medical Devices
Capital Equipment
Information Technology
Employers:
Individuals/Out-of Pocket
Philanthropy
Insurers & Insurance Brokers
Managed Care
Consumer-Directed Plans
Pharmacy Benefit Managers
Group Purchasing Organizations
Wholesalers/Distributors
Medical Professionals/Labor
Diagnostic
Centers
Outpatient
Care
Pharmacies
Dental
Services
Hospitals
Physicians
Complementary
and Alternative
Medicine
Home
Health
Agencies
Regulators
State Insurance Commissioners
State Licensing Boards
Food and Drug Administration
Occupational Safety and Health
Administration
Federal Trade Commission
Justice Department
Office of the Inspector General
Figure 1.1 System View of the U.S. Health Care Industry.
Retail
Clinics
Consumers/
Patients
Nursing
Homes
Public Health Agencies
National Institutes of Health
Department of Defense
Centers for Disease Control and
Prevention
Environmental Protection Agency
Dept. of Health & Human Services
Health Resources and Services Admin.
Veterans Administration
Public Health Service
Chapter 1 • Delivering Value: The Global Challenge in Health Care Management
and efforts. Such efforts include but are not limited to:
managing under new P4P systems developed by both
public and private sector payers; working with outside
vendors (e.g., hotel chains, consulting firms, General
Electric) to improve customer service, patient flow, and
revenue cycle management; working with information
technology companies to develop and implement
electronic medical records (EMRs) systems (see
Chapter 13); hospitals partnering with physicians to improve
quality of care or develop new ambulatory care sites; and
hospitals working with GPOs to lower supply costs.
WHY CHANGING THE
HEALTH CARE SYSTEM IS
SO DIFFICULT
In addition to being complex, the health care system is
slow to change. There are several reasons for this. First,
the industry is heavily regulated at both the state and
federal levels by myriad agencies and professional associations. The federal government is also the dominant
payer, reimbursing health care via administered prices.
Market forces have thus given way to more regulation
and piecemeal legislative action (due to legislative gridlock) at the federal level (Altman and Rodwin, 1988;
Field, 2007).
Second, consumerism is a newcomer to health care.
Until recently, consumerism was stifled by the prevalence
of third-party payment and first-dollar coverage, the old
11
sociological view of the patient playing the “sick role”
(Parsons, 1951), the prevalence of customized transactions,
infrequent (and few repeat) purchases, uncertainty over
product quality, and the fact that roughly three-quarters of
all monies spent were on products and services previously
unseen by the patient. Today, consumerism can be found in
a number of areas: high-deductible health plans (HDHPs)
and health savings accounts (HSAs), boutique/concierge
medicine offered by physicians seeking to avoid managed
care organizations (MCOs), complementary and alternative
medicine (CAM), personal health records (PHRs), directto-consumer (DTC) advertising by pharmaceutical and
medical device firms, health care financial services (smart
cards), employer wellness programs, and consumer costsharing programs (see Chapter 14). However, in most of
these areas, consumer engagement is not widespread.
Studies suggest that perhaps as many as 40 percent of all
patients are not “activated” in taking care of themselves.
Moreover, there is a fair degree of “health illiteracy” among
the U.S. population, preventing them from making wise
choices about providers, health plans, and their own health
(Parker, Regan, and Petroski, 2014; Schlesinger and Grob,
2017; Thorpe, 2007).
Third, health care delivery is heavily influenced by the
medical profession, which controls (directly or indirectly)
up to 85 percent of all spending (Sager and Socolar,
2005). While physicians do compete with one another,
they nevertheless enjoy a monopoly or near monopoly over
most important decisions governing resource allocation,
including prescribing an ethical pharmaceutical,
• • • IN PRACTICE: Does Pay-for-Performance Work? The Case of the Premier
Hospital Quality Incentive Demonstration
In 2003, the Centers for Medicare and Medicaid Services (CMS) and Premier Inc., a large national GPO,
launched the Premier Hospital Quality Incentive Demonstration (PHQID) to determine if economic incentives are
effective at improving the quality of inpatient care. Hospitals participating in the PHQID collected and submitted data on 33 quality measures for five clinical conditions. For each condition, hospitals performing in the top
decile (i.e., 10 percent) received a 2 percent bonus in addition to their usual Medicare payment. Hospitals in the
second decile received a 1 percent bonus. Hospitals that underperformed on quality indicators were liable for a
1–2 percent financial penalty in the third year.
Initial results suggested P4P was value-enhancing. Between 2003 and 2007, CMS awarded more than $36.5
million to high-performing hospitals; bonuses averaged $71,960 per year, and ranged from $914 to $847,227
(Premier, 2009). According to Premier, participating hospitals raised their overall quality by an average of
17.2 percent over four years and outperformed nonparticipating hospitals by an average of 6.9 percentage points
on 19 quality measures.
Academic research tells a more mixed story. Lindenauer et al. (2007) compared 207 PHQID hospitals with
406 hospitals that did not participate in the demonstration and found modest differences in quality (about
3 percent) after statistically adjusting for other factors. Conversely, Ryan (2009) found no evidence that PHQID
had a significant effect on risk-adjusted 30-day mortality or risk-adjusted 60-day cost for four of the conditions,
suggesting no value effect. Another evaluation found no impact on outcome measures of quality in hospitals (Jha
et al., 2012). A meta-analysis of P4P programs reported no positive impact on patient outcomes in any care setting but did find positive effects on process measures in ambulatory care (Mendelson et al., 2017).
12
PART 1 • Introduction
performing a surgical procedure, scheduling a laboratory
or imaging test, and admitting a patient to a hospital
bed. Freidson (1970) long ago discussed the professional
dominance of physicians. Physicians are largely
autonomous, community-based entrepreneurs with (until
recently) little employment relationship with hospitals
in which many of these decisions are made (Burns,
Goldsmith, and Sen, 2013). Due to professional training
and the legal distinction between the hospital and its
medical staff, hospitals have historically been challenged
to alter the practice patterns and behaviors of their
physicians. Moreover, while provider organizations are
increasingly being reimbursed using “alternative payment
methods” (APMs) such as P4P and shared risk, the
organizations do not pass these incentives down to their
physician members. The most recent effort to push APMs
(MACRA, 2015) will reportedly impact not more than
800,000 physicians in 2017 by giving them a reprieve
from reporting requirements.
Fourth, most of the nongovernmental sectors in health
care have consolidated over the past two to three decades,
thereby reducing competition, conferring market power
and fostering higher prices. Consolidation has occurred
in the following sectors (time periods): pharmaceuticals
(late 1980s to the present), pharmaceutical wholesalers
(1980s–1990s), medical devices (1990s), hospitals
(1990s), insurers (1990s), GPOs (1990s), pharmacy
benefit managers (1990s–2000s), and hospitals again
(2010s to the present). These trends have fostered the
emergence of several bilateral monopolies (e.g., big insurers
negotiating with large hospital systems) in local markets.
Fifth, the delivery of hospital care (which accounts for
roughly 30 percent of national health expenditures) is
heavily dominated by nonprofit institutions, such as nonprofit community hospitals and municipal/state-owned
facilities. Investor-owned facilities comprise only about
15–20 percent of the hospital sector—a percentage that
has remained relatively flat for decades. Nonprofit hospital ownership and accountability to local boards and communities (rather than shareholders) may mitigate against
pressures to alter their missions, strategies, and operating practices. Theory suggests that nonprofits exhibit
relatively poor supply response to changes in demand,
more limited entrepreneurship owing to constraints on
the distribution of earnings, and choice of optimization
of various outcomes (e.g., quantity of services provided,
focus on physician convenience and returns) rather than
profits (Hansmann, 1987). The empirical evidence here
is generally equivocal outside of the nursing home industry (Sloan et al., 2001).
Sixth, like politics, health care delivery is largely local.
Physicians are licensed to practice in a given state and,
like most hospitals, generally draw their patients from the
local geographic area. Insurance companies are likewise
licensed and regulated at the state level, and credential
and contract with provider networks in local markets.
The United States has 389 metropolitan statistical areas
that act as local markets with different configurations of
power among key stakeholders (e.g., employers, insurers, hospitals, local government, etc.). Such differences
necessitate tailored strategies by manufacturers in order
to sell their products. While there has been much talk
about medical tourism, more domestic tourism (e.g.,
to regional centers of excellence) than foreign tourism
(e.g., to Thailand or India) seems to take place (Deloitte,
2009). Similar barriers have inhibited the utilization of
telemedicine to span across markets. The largely local
character of health care certainly complicates (and perhaps mitigates against) any concerted efforts to try to
change the system from above.
Seventh, there is a widespread lack of valid data
about quality and cost in health care. Until recently,
most patient–provider transactions were captured and
stored in paper-based systems (e.g., physician notes,
patient charts, and medical records). This made it nearly
impossible to analyze practice patterns to improve care
quality and efficiency. To the extent that good patient
care data existed, it rested in the hands of insurers who
reimbursed providers for the care but did not share the
granular information with them. This information asymmetry benefited insurers at the bargaining table with
providers. In 2009, President Obama’s stimulus package
included funding for the diffusion of EMRs across physician offices to begin to address problems of data capture, although the issues of data validity and complexity
of interpretation remain.
Eighth, and finally, efforts to change the health care
system using business practices imported from the
outside have repeatedly come up short (Arndt and Bigelow,
2000a; Burns and Pauly, 2002; Westphal, Gulati, and
Shortell, 1997). One reason is that these practices have
been adopted for normative reasons (e.g., to look efficient,
to satisfy boards they are improving efficiency, and/or to
imitate what other forward-looking organizations in the
market are doing) as well as, or sometimes rather than,
rational reasons (e.g., to remedy their operating problems).
This would explain, for example, why hospitals have not
invested more time and capital in the implementation of
any given practice, or the coordination and integration
among multiple practices, but rather pursued a series
of discrete practice solutions over time (see Table 1.4)
as they have come into vogue (flavor-of-the-month
management) (Pfeffer and Sutton, 2006). Another
reason is that such practices may not fully consider the
institutional differences noted above and thus are not
customized to health care settings.
Given the managerial problems that need to be confronted in health care, and given the complexity of the
health care system and its peculiarities, what approaches
seem fruitful for addressing them? One approach is to
Chapter 1 • Delivering Value: The Global Challenge in Health Care Management
Table 1.4 Business Practices Adopted by Hospitals,
1985–2010
• Corporate restructuring/holding companies
• Corporate diversification into new businesses
• Theory Z management
• Total quality management/continuous quality
improvement (TQM/CQI)
• Horizontal integration (e.g., mergers and acquisitions)
• Vertical integration (physician acquisition,
continuum of care, insurance)
• Strategic alliances with physicians and hospital
networks
• Reengineering/work restructuring
• Product line management/service line management
• Customer focus/patient-centered care
• Focused factories
• Lean manufacturing and the Toyota Production
System
apply system analysis to glean insights into the behavior
of complex settings. Another approach is to apply organization and management theory. The next two sections
sketch out some of these perspectives and how they
might be usefully applied.
SYSTEMIC VIEWS OF HEALTH
AND U.S. HEALTH CARE
A major source of complexity is the multifactorial nature
of the determinants of health including social and environmental determinants (e.g., housing, occupation,
income, access to parks and recreation), behavioral
determinants (e.g., smoking, drug use, exercise), and
medical determinants (e.g., blood pressure, cholesterol,
mental health). Decades of research in public health has
suggested that the vast majority of a population’s health
is determined by social, environmental, and economic
factors and less by medical factors, including the use of
biomedical care. Nevertheless, the United States spends
far more on medical care than on social services that
may greatly influence health (Bradley and Taylor, 2013;
Bradley et al., 2016). Research has indicated that among
high-income countries, those that spend relatively more
on social services and relatively less on medical care,
have subsequently better health outcomes, adjusted
for gross domestic product (Bradley and Taylor, 2013);
13
similar patterns of spending and health outcomes are also
apparent within the United States (Bradley et al., 2016).
Descriptions of the health care industry in the United
States often begin with a discussion of whether it is a
“system.” Webster’s dictionary defines a system as a complex unity formed of many, often diverse, parts subject to
a common plan or serving a common purpose. Clearly,
the U.S. health care industry does not meet this standard. As noted above, the multiple players have different
goals (triple aim) and divergent interests (“patients need
my product/service, you should pay for it,” consolidation
versus competition, integrated versus niche models).
Is a system view important? We think so, for many
reasons. First, from a macro perspective, health outcomes
are determined by an array of forces and factors that
spans much more than a nation’s health care infrastructure. There are multiple systems frameworks that describe
these forces and factors (Shakarishvili, 2009). Hsiao
(2003), World Health Organization (2000), and Roberts
et al. (2003) have each developed a generic framework for
the overall structure of any country’s health care system.
These frameworks describe several background forces
(environment, nutrition, sanitation, professional training,
and others) that affect the policy levers available to a system. These levers (“control knobs”) include financing,
payment, organization, regulation, and behavior. These
control knobs are modeled to impact intermediate health
system outcomes (efficiency, quality, and access—similar
to the iron triangle), which in turn produce the ultimate
health outcomes of health status, financial risk protection, and satisfaction (see Figure 1.2).
Second, as noted earlier, there are so many interdependent players that a systemic view helps to organize
them and their interactions. Figure 1.1 provides such a
framework for the U.S. context. Providers of health care
services occupy the middle of the diagram for a specific
reason: they are the main focus of everyone else. Buyers
reimburse them for services rendered to their employees/
beneficiaries, suppliers seek to sell them their products,
regulators spend much of their time overseeing their quality/safety environment and their competitive conduct, and
public health agencies seek to enhance population health
by financing research and educational activities undertaken by providers as well as exercising oversight generally
outside the direct provision of health care services. For
the two parties in the upper-left and upper-right portions
of the diagram (suppliers and buyers, respectively), two
sets of intermediaries channel their services to providers.
This suggests a third reason for the importance of
system views. The concept of a value chain (Porter,
1985)—that is, a firm or industry’s input, throughput,
and output activities that are served by a host of support functions—suggests that value is created along this
collection of activities and requires effective partnerships. Value can be created by making the appropriate
14
PART 1 • Introduction
Background Factors
Policy Levers
Intermediate
Outcomes
Ultimate
Ends
Financing Initiatives
Efficiency &
Cost of
Healthcare
Health
Status
Access to
Healthcare
Satisfaction
Quality of
Healthcare
Financial
Risk
Protection
Cultural Context
Social & Community
Networks
Payment Initiatives
Environment
Food & Nutrition
Education & Literacy
Organizational Initiatives
Housing & Sanitation
Lifestyle Factors
Socioeconomic
Conditions
Regulatory Initiatives
Occupational Structure
Behavioral Initiatives
Figure 1.2 The Health Care System.
make-versus-buy decisions on how much of the value
chain to occupy. For example, should providers operate
their own insurance vehicles or contract with payers in
the local market? Much of health care today is undertaking an analysis of make-buy decisions with this system
view in mind. Pharmaceutical firms are now considering
whether or not they should shed their research and development arms, allow such functions to be performed by
smaller and more nimble actors like biotechnology firms,
and concentrate their efforts on the sales and marketing functions. Conversely, hospitals are now considering
whether they should assume more of the functions of the
GPOs they have historically contracted with and do their
own in-house contracting. Historically, suppliers have
deliberated whether or not they should serve as their own
wholesalers/distributors, while employers/buyers have
experimented with operating their own provider networks.
A system view is important for a fourth reason. Management theory teaches that successful innovation
requires concomitant changes among the system’s components (sectors) to achieve congruence or “fit” (Senge,
2006; Tushman and O’Reilly, 1997). Similar thinking
has been applied to the U.S. health care system: payment reforms in the buyer sector must be accompanied
by corresponding reforms in the provider delivery system.
Thus, for proposed payment changes—P4P, gainsharing,
or bundled payment—to work, provider organizations
require new models of physician–hospital collaboration
(Burns, Goldsmith, and Muller, 2010). This perspective
is at the center of current calls for “transformation from
volume to value” in the U.S. system (Miller, 2008).
More broadly, efforts to reform one sector of the health
care system must consider their impacts on the others
to assess congruence with their interests and resources.
Fifth, as noted above, organizations within the health
care industry have increasingly consolidated into systems
over the past two decades with the stated objective of being
more efficient, but may not operate as such. While mergers
and acquisitions (M&A) have received a lot of attention
(both by the merging firms and the media), postmerger
integration activities have not. It is not clear that large
multiunit systems can operate in a systemic fashion;
extract scale economies from their operations; increase
their productivity; add value; and address the multiple
goals of access, quality, and acceptable cost. Systemic
views of newly consolidated health care organizations and
their potential (if any) to add value may thus be in society’s
interest. Indeed, between 2002 and 2004, the Federal
Trade Commission (FTC) and Department of Justice (DOJ)
conducted a series of workshops to assess the competitive
and efficiency benefits of horizontal and vertical forms of
consolidation (FTC/DOJ, 2004).
Thus, for example, despite the continuation of larger
mergers (Pfizer and Wyeth, Merck and Schering Plough),
research suggests that pharmaceutical M&A does not
improve research productivity or profitability over the long
term (Burns, Nicholson, and Evans, 2005). Instead, there
are now suggestions that “big pharma” needs to “get
small,” perhaps by de-verticalizing their value chains,
shedding their R&D activities, and focusing on a smaller set
of activities. Similarly, the hospital systems that developed
during the 1990s have devolved into more decentralized
Chapter 1 • Delivering Value: The Global Challenge in Health Care Management
collections of autonomous operating units rather than centralized operations acting in concert (Burns et al., 2012).
Indeed, the systems lens of federalism (the appropriate
division of federal and state powers) suggests alternative
ways for these hospital systems to organize themselves.
ORGANIZATION AND
MANAGEMENT THEORY
Schools of management thought have evolved over the
past century to provide conceptual maps of how to deal
with internal and external challenges. These conceptual
maps include theories of how things work, what causes
what, and how to act. The theories are not mutually
exclusive and can serve as multidimensional or multilayered models to guide managerial action. Executives benefit from being familiar with, and adept at using, many of
these conceptual maps. This is no easy task; it is akin to
being ambidextrous, both left-brain and right-brain, and
more a fox than a hedgehog (Berlin, 1953).
Early Writings on Bureaucracy
and Organization
Western management theory received its early impetus in
the writings of Max Weber (1964), a German sociologist
writing about the Prussian civil service in the late nineteenth century. Weber described the prominent features
of this “bureaucracy” (literally, government by bureaus or
offices) in terms of offices and officeholders, a vertical
hierarchical ordering of these offices into organizational
pyramids, a horizontal division of labor that separated
offices and their functions, the use of explicit procedures
to govern activities, the presence of records and files,
and the selection of officeholders based on achievement
rather than ascription. For Weber, bureaucracy was that
form of administrative organization that operated under
legal authority and was capable of the highest level of
efficiency.
Research suggests that the bureaucratic model of
organization is technically efficient and even superior to
other forms under certain environmental, technological,
and task conditions (Lawrence and Lorsch, 1967; Woodward, 1965). There is also considerable research on how
to apply this model to the six common pathologies of the
bureaucratic division of labor (Bacharach, Bamberger,
and Conley, 1990):
• Role overlap (duplication): two roles perform the
same task
• Role gap (accountability): neither role performs the
needed task
• Role underuse (boredom): role not assigned enough
tasks
15
• Role overload (burnout): role assigned too many tasks
• Role ambiguity (anxiety): role not clear what the tasks
are
• Role conflict (stress): role’s tasks are at cross-purposes
Bureaucracies are endemic to all organizations, including those in the health care industry. The degree of
bureaucracy tends to be associated with both the firm’s
size and age. Thus, bureaucracy is less pronounced in
small work groups and entrepreneurial start-ups (e.g.,
biotechnology firms) and more pronounced in hospitals
and large consolidated firms (e.g., pharmaceuticals).
Hospitals are peculiar bureaucracies in that they feature
a “dual hierarchy”—a centralized system governing the
nonmedical activities and a decentralized, collegial one
governing the medical staff (Begun, Luke, and Pointer,
1990; Pool, 1991). Physician group practices, the majority of which are quite small, are peculiar in that they feature consensual governance rather than a bureaucracy.
As many researchers have noted, physicians dislike and
distrust authority (Burns and Wholey, 2000).
Organization size has been a staple of management
research. This is due to ease of measurement as well
as a range of hypotheses regarding its impact on
survival, efficiency and performance, innovation, change
(or inertia), entrepreneurship and risk-taking, firm
legitimacy and influence, top management cohesion,
political activity (both internal and external), employee
commitment and human resource practices, internal
coordination of market exchanges, internal coordination
of different specialties, and (more recently) social
responsibility practices and market power. Across all
of these impacts, size has both positive and negative
effects. There is nothing inherently evil in large size. To
be sure, there is a managerial bias to pursue growth and
larger scale (Josefy et al., 2015).
Bureaucracy has also become a staple of management
research. There is nothing inherently evil in bureaucracy,
given that it is needed to help coordinate the efforts of
interdependent departments and personnel, control decision making to yield more standardized decisions, and
develop routines for efficient functioning (e.g., delegation and decentralization). However, in modern parlance
bureaucracy has taken on a negative connotation of poor
service, lack of responsiveness, lack of consensus and
change, and inscrutable, byzantine operation.
At its essence, management and bureaucracy are all
about “control.” The word “manage” derives from the
French word manege, used in dressage, meaning to put
a horse through its paces (Braverman, 1974). Control is
not necessarily evil either. Control involves mechanisms
to orient workers’ attention toward firm goals, as well as
motivate and encourage them to act in ways that support
these objectives (Cardinal, Kreutzer, and Miller, 2017).
To be sure, these goals may conflict with the goals of
16
PART 1 • Introduction
• • • IN PRACTICE: Efforts to Deal with Bureaucratic Dysfunctions
Considerable research has highlighted the dysfunctional consequences of bureaucracy including its inward focus
(rather than focus on the client or the environment), its tendency to rigidity and inertia, and its stultifying effects
on individual creativity and thus organizational change. Nothing has changed here; as late as the 1980s and
1990s, major firms such as General Electric (GE) used change programs like “Work-Out” to attack their bureaucracies (Ulrich, Kerr, and Ashkenas, 2002). After downsizing its workforce, GE found that the remaining managers and employees had more work and responsibilities to handle. To reduce the load, they gathered employee
suggestions for how to get non-value-adding work out of GE’s processes (hence, the title of the program). The
company discovered that Work-Out was more than just trimming excess work, however. It was also an “exercise” work-out for employees to study and diagram their work processes, as well as a mechanism for conflict
resolution as different departments worked out their differences in how processes overlapping their areas might
be simplified.
the employees. The challenge for the modern m
anager
is to utilize the clarifying elements of b ureaucracy
(e.g., to resolve the six pathologies above) while at the
same time avoiding the classic bureaucratic pitfalls of
too many hierarchical levels that separate executives
at the top from frontline workers down below, or too
many horizontal divisions or units that effectively create
boundaries inside and outside the firm, which impede
interaction and the flow of information, or too many rules
and regulations, which stifle creative problem-solving.
Chapters 3, 4, and 8 in this book consider these issues.
Frederick Taylor and Scientific
Management
The scientific management school (Taylor, 1911) extended
the Weberian model by explicitly emphasizing the
“control” element of bureaucracy. Scientific management
was an attempt to apply the methods of science to
increasingly complex problems of controlling work in
rapidly growing firms (Braverman, 1974). For example,
Frederick Taylor employed time–motion studies to analyze
a steelworker’s task into its simplest components and
then systematically improve the worker’s performance
of each component to maximize productivity and ensure
conformity to the one best way of production. Such
thinking became embedded in assembly-line technologies
like auto making by industrialists like Henry Ford.
Scientific management had an enormous impact on
management practice and theory for decades to come. Of
particular importance to us are three assumptions. First,
Taylor assumed that workers were guided by intuition
and variable training and thus were unable to perform
their tasks in the best way. Instead, armed with s cientific
techniques (e.g., time–motion studies), management
must control every aspect of the labor process and
dictate precisely how it should be done. Workers were
left with no discretion in their jobs, while managers
were vested with all decision making regarding task
design. This separation of decision making at the top
from execution/implementation down below in the firm
came to pervade all management and strategy thinking
(Mintzberg, 1994). A second related assumption was
that management needed to closely supervise workers to
ensure adherence to standardized tasks and prevent any
“soldiering” (deliberate restriction of output); rather than
being intrinsically motivated, workers responded primarily
to monetary incentives and external control. Third, due to
the large variability in how to do one’s job (e.g., which
methods, which tools), scientific management focused
on reducing the variations and finding the one best way
to perform the work in order to maximize productivity.
This school presaged several recent movements in
management thinking. The emphasis on decomposing
tasks into their constituent elements and worker training
anticipated the early work on job design; later efforts to
amend this approach included the job redesign approach
(Hackman et al., 1975; Hackman, 1981), human factors engineering (Herzberg, Mausner, and Snyderman,
1959), and the quality of work life movement. These topics are taken up in Chapters 3 and 5. The emphasis on
reducing variations in work anticipated the later work of
W. Edwards Deming and total quality management movement in the United States of the 1980s—a topic taken
up in Chapter 9. And the emphasis on specialized tasks
and productivity anticipated the focused factories of the
1980s and 1990s (Herzlinger, 1997).
Classical School of Administration
The writings of Gulick (1937), Gulick and Urwick
(1937), and Fayol (1949) collectively known as the
Classical School of Administration took many of the
concepts developed by Weber and Taylor and formulated
them into general principles of management—essentially
continuing Taylor’s view of “one best way” to manage.
These principles included unity of command (i.e., one
boss), unity of direction (one objective, one plan, one
boss), subordination of individual interest to general
Chapter 1 • Delivering Value: The Global Challenge in Health Care Management
interest, centralization, authority, span of control (optimal
number of people to supervise), and departmentalization
(Fayol, 1949). Much attention was also paid to the
construction of “organizational charts” depicting these
principles on paper. Such principles directed managerial
practice for much of the twentieth century.
Departmentalization has been one of the most enduring
principles articulated by this school. These writers identified two principal models for the firm’s division of labor:
process departmentalization and purpose departmentalization. These have since been relabeled functional and
divisional organization: organizing by functional area versus organizing by product line, customer, or geographic
area. Alfred Chandler (1962) depicted the large-scale
shift in the organization of American enterprise from the
former to the latter. Twenty years later, Goldsmith (1981)
described a similar transformation taking place among
U.S. hospitals. Efforts to commingle the two forms of
management gave rise to matrix structures utilized both
in industry and in health care (Burns, 1989; Galbraith,
1973). Alternative forms of departmentalization comprise the core of thinking on organization design and
coordination, the topic of Chapter 3.
Human Relations School
The human relations school developed a model of worker
motivation that sharply differed from the Taylorist approach
and thus suggested a different way of management. Work
conducted by Elton Mayo (1945) and Roethlisberger and
Dickson (1947) at the Hawthorne plant of the Western
Electric Company ironically began as a Taylorism project
to assess the impact of lighting changes on worker
productivity. In contrast to Taylor’s focus on individual
workers and their jobs, their research anticipated Kurt
Lewin’s (1951) insight about the primacy of the group
in structuring individual behavior. The findings implied
that to improve productivity, management must attend to
a new set of considerations beyond monetary incentives
and top-down control of work. Managers must instead
understand the informal organization of workers (groups,
group sentiments, team work), the need of workers to
be listened to and participate in the design of their work
(participation, self-governance), and the importance of
morale and satisfaction as motivators of worker effort. This
view also anticipated later research on social networks of
relationships and informal social structures (that emerged
as employees pursued their own interests and needs),
which supplanted earlier research on the organizational
charts for which the Classical School was so famous
(McEvily, Soda, and Tortoriello, 2014). Group structure
and process are considered in Chapter 5; communication
skills are discussed in Chapter 6.
Mayo’s work suggested that workers are less rational
than Taylor believed, guided less by financial incentives and more by human sentiments. Workers were
17
also motivated to be accepted by their peer groups and
achieve social solidarity. Finally, workers had an array of
goals and needs that did not necessarily coincide with,
or were subordinated to, the firm’s interests. This insight
led to an entirely new managerial approach called “organization development,” which recognized the interdependence of the organization and groups of employees and
sought ways to simultaneously achieve both the firm’s
goals and those of its workers. By extension, this school
paved the way for later recognition of the employee as
the firm’s key asset.
Subsequent research and writing expanded the human
relations school’s approach. Douglas McGregor (1960)
contrasted this school and its emphasis on managing
human resources (Theory Y) with scientific management
and its emphasis on control and coercion (Theory X).
For McGregor, human relations management sought
ways to integrate the firm and the worker, as well as
ways to harness the worker’s creativity and imagination.
Taking account of Maslow’s (1943) hierarchy of needs,
McGregor argued that satisfying the worker’s higher-order
needs of belongingness, esteem, and self-actualization
was critical. Herzberg refined Maslow’s approach and
suggested that such intrinsic motivation was inherently
satisfying, while extrinsic factors were merely dissatisfying
if not met. These approaches led to the entire field of
job-redesign (Hackman, 1981) and self-managing work
teams. The topics of motivating people and developing
teams are considered in Chapters 4 and 5.
Contingency Theory of Leadership
By the mid-twentieth century, two schools of management
thought had been established. One argued for greater
structure, control, top-down decision making, and
reliance on extrinsic rewards (Theory X); the other argued
for more participative management, self-governance,
bottom-up decision making, and reliance on intrinsic
rewards (Theory Y). For decades, these schools were often
(but erroneously) viewed as polar opposites. Subsequent
research conducted during the 1960s and 1970s
(summarized in Bass, 1981) suggested the choice of
leadership style is not either-or. Instead, the effectiveness
of specific management approaches depends on key
situational factors (see Chapter 2), now known as
Contingency Theory.
Decision-Making School
The decision-making school of management—also labeled
the “Neo-Weberian” model (Perrow, 1986)—developed
during the 1950s and 1960s, spearheaded by researchers at Carnegie Mellon University (Cyert and March,
1963; March and Simon, 1958; Simon, 1947). This
school focused as much on how decisions were made
18
PART 1 • Introduction
and goals were set as on the structure of the firm—but
all within a context with which Weber and scientific managers were comfortable: control of the work process and
the worker.
In contrast to both scientific management and human
relations, the decision-making school focused neither on
top executives nor on lower-level workers, but rather on
the large cadre of middle managers that had developed
inside the large firms of the mid-twentieth century. Such
managers and their decisions needed to be controlled.
Because of limits on managers’ cognition—known as
bounded rationality—decision making needed to be guided
by “satisficing” behavior (limited search among alternative options and selection of first acceptable solution)
and the use of “programs” and “routines” (e.g., solutions
or problem-solving paths used before) (cf. March and
Simon, 1958; Simon, 1947). Such approaches served as
points of stability and biases against innovation by narrowing the strategic choices available to managers. Decision making was also organized and controlled through
means-ends hierarchies, in which the goal (ends) of one
layer of management (e.g., increase profits) became
translated into subg...
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