Quality Analysis

Essentials of Applied
Quantitative Methods for
Health Services Managers

James B. Lewis, ScD
Associate Professor of Health Management & Policy

Robert J. McGrath, PhD
Assistant Professor of Health Management & Policy

Lee F. Seidel, PhD
Professor of Health Management & Policy

Department of Health Management and Policy
College of Health and Human Services

University of New Hampshire
Durham, New Hampshire

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Library of Congress Cataloging-in-Publication Data

Lewis, James B. (James Bradley), 1950-
Essentials of applied quantitative methods for health services managers / James B. Lewis, Robert J. McGrath,

and Lee F. Seidel.
p. ; cm.
Includes bibliographical references and index.
ISBN-13: 978-0-7637-5871-4 (pbk.)
ISBN-10: 0-7637-5871-X (pbk.)
1. Health services administration. 2. Quantitative research. I. McGrath, Robert J., 1967- II. Seidel, Lee F.
III. Title.
[DNLM: 1. Health Services Administration. 2. Statistics as Topic. 3. Program Evaluation. WA 950 L674e
2009]
RA971.L495 2009
362.1068—dc22
2009023884

6048

Printed in the United States of America
13 12 11 10 09 10 9 8 7 6 5 4 3 2 1

iii

Table of Contents

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

Chapter 1— The Role and Function of Quantitative Methods in Health
Services Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Section I: Foundation Competencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Chapter 2—Working with Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Chapter 3—Flow Charting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Chapter 4—Time Value of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Section II: Forecasting Competencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Chapter 5—The Art and Science of Forecasting . . . . . . . . . . . . . . . . . . . . . . 75
Chapter 6—Trend Forecasting Techniques . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Chapter 7—Regression Forecasting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

Section III: Designing and Analyzing Systems . . . . . . . . . . . . . . . . . . . . . . . 135
Chapter 8—Analyzing Capacity and Resources . . . . . . . . . . . . . . . . . . . . . 137
Chapter 9—Managing Waiting Lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

Section IV: Project Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
Chapter 10—Decision Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
Chapter 11—Economic Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
Chapter 12—Program Evaluation Review Technique: PERT . . . . . . . . . . . 231
Chapter 13—Financial Evaluation of Projects . . . . . . . . . . . . . . . . . . . . . . . 251
Chapter 14—Quality Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271

Section V: An Application of Quantitative Methods . . . . . . . . . . . . . . . . . . 299
Chapter 15—Quantitative Analysis in Strategic Planning . . . . . . . . . . . . . . 301

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317

v

Preface

Health services managers require a varied repertoire of skills and expertise, includ-
ing both qualitative and quantitative elements. The purpose of this book is to bring
numerous quantitative methods from other fields, including industrial engineering,
operations research, finance, and general systems analysis into the health services
arena, and enhance the quantitative skill set of health administration students.
The content and “tone” of the book are the result of working with undergraduate
and graduate health management students at the University of New Hampshire,
as well as elsewhere. The book builds upon our experience that many students
lack confidence in their quantitative abilities, and as a result develop a somewhat
incomplete set of skills.

The book assumes a basic understanding of algebra, statistics, and financial and
managerial accounting as well as familiarity with economics, healthcare organiza-
tions, and health services management. Based upon these foundation competen-
cies, quantitative methods are presented within a health services administration
context. Every effort has been taken to avoid clouding these methods behind alge-
braic or quantitative curtains. When doubts exist, we have simplified our presenta-
tion. This book is not meant to take the place of more advanced texts in any of the
techniques of quantitative analysis presented here. Although the array of quantita-
tive methods presented in the text is somewhat eclectic, the topics selected share
the characteristic of being routinely used by health services managers. Intention-
ally, the book includes basic concepts and foundations—it is essential that students
grasp these basics before moving on to applying more advanced analytical tools.
As such, the book is not intended to expand a student’s ability to perform health
services research.

Our experience also suggests that learning and being able to use quantitative
methods require learning experiences designed as loops, not straight lines. Basic
points, terms, and calculations need to be repeated to be effectively incorporated
into the student’s repertoire. Assuming that students possess complete recall of an
earlier course in statistics, for example, is an instructional blunder that jeopardizes
the effectiveness of a professor as well as the ability of students to learn.

vi Preface

Most of the quantitative applications presented can be completed using a general
spreadsheet program. However, we have avoided particular software applications and
instructions on how to use specific spreadsheet programs. After gaining a firm under-
standing of the mathematical concepts underlying the quantitative tools presented,
students are encouraged to use suitable computer (or even calculator) programs; we
feel it is important to gain this firm conceptual understanding first, however. In addition
to introducing (or in some cases reviewing) quantitative concepts, the book provides
students with an example of application of these tools within the context of completing
an external assessment component of a strategic plan. It is hoped that this application
provides students with a view of how the quantitative tools are used in practice.

Essentials in Quantitative Methods for Health Services Managers emerged
from the interests of three professors searching for a more effective approach to
teaching students how to use quantitative methods as health services managers.
Students deserve special recognition for helping us through the years to appreciate
the difference between teaching and learning quantitative methods and for assist-
ing in determining effective teaching and learning strategies. Throughout this book
practice as well as understanding is stressed. It is our conclusion that students are
better able to incorporate these methods into their professional repertoires when
they have had the opportunity to experience and apply these methods in a context
related to their professional interests. Exercises have been incorporated into each
chapter for students to use to experience a specific method. When we use this
book, students are often required to turn in assigned exercises as their ticket into
a specific class. Reading about a quantitative method is not the same as using the
methods to solve a realistic health services management problem.

Ultimately, of course, developing the comprehensive repertoire of skills needed
to be a competent manager of health services is a student’s responsibility; doing this
is a complex, ambiguous, and challenging endeavor that spans a career. No single
collection of quantitative methods is sufficient to meet this challenge. Hopefully,
however, this collection will assist many in developing their basic repertoire.

James B. Lewis, ScD
Associate Professor of Health Management & Policy

Robert J. McGrath, PhD
Assistant Professor of Health Management & Policy

Lee F. Seidel, PhD
Professor of Health Management & Policy

Department of Health Management and Policy
College of Health and Human Services

University of New Hampshire
Durham, New Hampshire

�

Chapter 1

The Role and Function of
Quantitative Methods in Health

Services Management

Learning Objectives

After studying this chapter, you should be able to:

�. Describe how health services managers analyze, design, and implement in
a systems context.

2. Differentiate between efficiency and effectiveness as vital managerial
interests.

3. Describe how quantitative methods fit into the repertoire of the health
services manager.

4. Describe the general systems model in relation to health services.

Learning Objective 1: e xamine H Ow Hea Lt H s er vices
m anagers a na Lyze, Design, an D i mp Lement in a
s ystems cO ntext

Health administration, as a profession, deals with the management of human,
fiscal, physical, and information resources to meet the goals and objectives of
healthcare organizations. Survival of the healthcare organization in a competitive
environment, as well as characteristics of this survival, involve multiple factors,
including the abilities of managers. The challenge is to provide healthcare orga-
nizations, and the communities, patients, and clients they serve, with competent
managers able to perform the robust and challenging role of manager.

Being a competent manager in a healthcare organization means fundamentally
different things depending upon specific role expectations, perspective, and cir-
cumstance. Within a healthcare organization, managers are assigned very different
functions, each with potentially different definitions of core competency. Manag-
ers in the human resources department of a hospital face different management
challenges than the managers in the hospital’s planning and marketing department
or the financial services department. Different types of healthcare organizations

may require different types of managers. Nursing homes may require managers
with different skills and values than public health clinics. Healthcare organiza-
tions also may shift their definition of desired or needed management competency
because of a shift in their objectives, in characteristics in their environment, or in
both. A hospital in the process of affiliating with a regional healthcare system may
require different management talents than the hospital intending to remain a solo
institution. Definitions of management competency also may change based upon
perceived or real changes in the field of management. The competencies expected
of professional health services managers encompass a very wide breadth and depth
of potential responsibilities, values, interests, and abilities. Health administrators
need a broad repertoire of skills to function in this dynamic situation. More specifi-
cally, multiple perspectives also exist concerning the role and function of the health
manager in a contemporary healthcare organization. Being able to use quantita-
tive methods designed to assist managers make decisions is one essential part of
this repertoire, regardless of the role and function of any health services manager.
Figure �-� is one framework able to integrate many of these perspectives and
is based upon the simple recognition that managers need the ability to analyze,
design, and implement.

Analyzing, as a core managerial competency, is the ability to discover what
is. It involves, for example, discovering the current market share of an organiza-
tion. It involves discovering the actual total cost of a specific service rendered by
the organization. It involves discovering who does what with what resources to
provide a specific service. It involves using forecasting to discover the logical or
reasonable future of the organization. The key and defining aspect of analysis is
discovery. Sometimes discoveries shift the organization’s goals and objectives.
Other times discovery is used to determine whether the organization is meeting
and how it is meeting its goals and objectives. To facilitate discovery, quantitative
methods provide the manager an analytical road map. Each quantitative method
has a unique analytical ability. For example, a method such as queuing theory can
only be used to analyze specific types of waiting lines. When incorporated into
the manager’s repertoire, quantitative methods provide the manager with useful
and robust tools.

Designing, as a core management competency, is the ability to identify and
arrange resources in a manner commensurate with goals and objectives. If the goal
is to provide a specific service, managers need to be able to design (or redesign)
the mix of resources needed to provide the service. The goal of operating a short-
stay surgical unit in a hospital requires that a manager identify and arrange the

Analyze Design or Redesign Implement

Figure 1-1 General Management Competencies

2 Chapter �: The Role and Function of Quantitative Methods

resources needed to realize the goal, such as specialized equipment and staff. If
the goal is for the organization to retain specific information, then managers must
be able to design work processes to capture, report, and store the desired informa-
tion. Design as a managerial competency often involves engineering because it
encompasses the ability to break down desired capabilities, such as an organiza-
tion’s goals and objectives, into requisite components or parts. If the organization
desires a new service, it is a manager’s responsibility to design the service by first
determining the different mix of human, fiscal, physical, and information resources
needed to provide the service, and then specifying exactly how much of each will
be needed to provide the service. Design of new work processes, or the redesign
of existing ones, involves developing detailed plans so that when the plans are
executed the desired capability has been incorporated into the organization. Design
also involves developing these detailed plans as to what is needed as well as how
the needed resources should be used. Design is performance oriented; the new or
revised design must establish the desired performance capability.

Implementing, as a core management competency, is the ability to change the
organization. The process of implementation may require the manager to change
the behavior of specific employees. It may also involve the ability of the manager
to accumulate and operationalize the resources necessary to achieve desired goals
and objectives. Whereas design may be the management competency that deter-
mines what is needed, implementation is the management competency that installs
new or revised elements in the organization. The manager’s repertoire needs to
include quantitative methods to assist implementing change within the organiza-
tion. These methods include, for example, Program Evaluation Review Technique
(PERT). The Program Evaluation Review Technique is a formal method used by
managers to plan and control projects. It informs managers of the desired and
schedule of activities needed to be accomplished to realize the overall completion
of a project or change within the organization, such as the opening of a new short
stay surgical unit in a hospital.

Learning Objective 2: t O Di FFerentia te b etween
eFF iciency an D eFF ectiveness as Key m anageria L
i nterests

m anaging in the Health s ervices Organization

A healthcare organization is any organization that provides health and medical
services to patients, residents, and clients, such as an acute care or specialty hos-
pital, a nursing home, an ambulatory care organization, such as a university health
services, public health clinic, and a home health agency. The defining characteris-
tic in this definition of a healthcare organization is patient care; care provided by

Learning Objective 2 3

4 Chapter �: The Role and Function of Quantitative Methods

physicians, nurses and therapists to prevent and treat disease or infirmity. The mis-
sion of these organizations serves to distinguish them as healthcare organizations.

Services provided to patients could include a surgical procedure, diagnostic
examination, specialized treatment, or disease prevention or screening program.
These services also could be an appropriate meal, a safe and comfortable envi-
ronment, or an accurate and timely bill for service. All healthcare organizations
provide a range of services and specialize in providing individual patients a par-
ticularized array of services based upon a patient’s needs or diagnosis. The central
and defining element of all healthcare organizations is the provision of a personal
and personalized experience, and high quality health or medical service. As such,
a central expectation shared by all health administrators is the expectation that
management practice will lead to the efficient provision of effective services to
people in need of service.

The interests of managers and the interests of the healthcare organizations that
employ health administrators as managers are difficult to distinguish. Both interests
emphasize that patients receive needed services and that services are provided in an
efficient manner. Healthcare organizations and health administrators rely upon phy-
sicians, nurses, and therapists to determine or diagnosis the needs of a patient accu-
rately and to plan and execute an intervention or treatment that has some probability
of success in maintaining or improving the health status of the patient. Clinical
interests stress the needs of individual patients and the identification of appropriate
service interventions. Decisions made by clinicians are based upon what they con-
sider to be effective approaches, interventions that have some probability of clinical
or medical success. The physician, nurse, or therapist has been educated and trained
to select and apply current knowledge to assist patients. Clinical interests and per-
spectives are focused on the effectiveness of a service—the ability of a service to
accomplish its predetermined objective. Although clinicians are not necessarily
oblivious or insensitive to efficiency, their unique role and function stem from their
commitment to provide effective service to patients. They alone have the expertise
to determine a patient’s needs (i.e., diagnosis) and to meet them (i.e., treatment) and
are judged by their peers, specific systems, and patients based upon their ability to
provide an effective, but not necessarily an efficient, service.

e fficiency as a m anagement i nterest

Efficiency is the ratio measure of output over input. High efficiency is achieved
when a service is rendered using the least amount of resources. Inefficient clinical
practice, such as requiring more clinical tests than necessary to make an accurate
diagnosis can lead to a highly inefficient healthcare organization. Using more
medical supplies than needed or even stocking more medical supplies than needed
are other examples of operational inefficiency. Using an excess number of people

to prepare a meal or render a bill is inefficient; an excess amount of input resources
are being used to produce a specific output. Unlike operational effectiveness which
is primarily in the province of the clinician, operational efficiency lies within the
dual province of both clinicians and managers. Health administrators are retained
to analyze, design, and implement work processes in the healthcare organization
that lead to desired levels of operational efficiency.

Inefficient work processes waste scarce resources. Efficient work processes
provide services that maximize the opportunities created by the mix of resources
used to produce the service. Managers are employed by organizations to ensure
that desired levels of efficiency are attained, not by accident, but by design. Being
interested in efficiency differentiates the health services manager from the health
service clinician. Striving for maximum appropriate efficiency is a management
value that requires a specific repertoire of skills—the ability to analyze current
levels of efficiency, the ability to design and redesign services to achieve desired
levels of efficient, and the ability to implement new or revised services.

e ffectiveness as a m anagement i nterest

Effectiveness means the ability to accomplish a defined task. For example, if a spe-
cific drug is able to cure a specific infection, then that drug can be considered effec-
tive. If a specific medical procedure or therapy is able to cure or alleviate a specific
disease or infirmity, then the procedure is effective. To be effective, the procedure
or drug must accomplish its intended purpose. Multiple factors may influence the
effectiveness of planned intervention or treatment. For example, some patients may
respond differently to the same drug. Sometimes the effectiveness of a procedure
or treatment is influenced by the behavior of the patient, something not totally
controllable by the clinician. Effective treatments are those treatments that have
a probability of success; sometimes these probabilities may be 5%, 50%, or 95%
depending upon the state of clinical and scientific knowledge and/or the existing
health status of the patient.

Healthcare organizations rely upon clinically trained professionals to select the
appropriate clinical services or treatments for specific patients from the array of
services offered by the organization. Clinical professionals are expected to select
appropriate services and, if not available in the healthcare organization, to refer
the patient to another organization. In the healthcare organization, managers are
not empowered to override or veto clinical judgments involving a patient’s diag-
nosis or treatment. Clinical protocols are established by clinical professionals,
not managers. At the operational level, the clinical staff determine how effective
the organization will be in accomplishing its mission to provide a high-quality
personal and personalized health or medical service to specific patients (to treat
disease or infirmity).

Learning Objective 2 5

� Chapter �: The Role and Function of Quantitative Methods

At the strategic or macro level of organizational decision making and action;
however, managerial interests involving organizational effectiveness emerge. For
example, the costs and benefits of investing in new technology must be identified
and examined from both a clinical and organizational perspective before the deci-
sion is made by the organization to acquire and implement it. Even though a new
technology may enhance the effectiveness of the clinicians affiliated with the orga-
nization and thereby increase the organization’s effectiveness, its acquisition and/
or operational cost to the organization may prevent the organization from acquiring
it. Managerial involvement in these types of strategic decisions is one example of
how managers influence the effectiveness of the healthcare organization. Health
administrators also are trained to use epidemiology and are expected to use epide-
miology to analyze the health and medical needs of the communities and groups
of individuals served or potentially serviced by the healthcare organization.

e fficiency and m anagerial c ompetence

Just as clinical operational effectiveness is the responsibility of the clinical pro-
fessional, operational and organizational efficiency is the primary responsibility
of the health administrator as manager. As stated, efficiency means providing a
needed service using no more resources than necessary; it is a ratio measure of
output and input. Health administrators are employed in part to ensure that any
service provided by the healthcare organization is supplied in an efficient manner.
Being able to determine current levels of efficiency is an example of analysis as
a managerial competency. Being able to design or redesign how the organization
does something to enhance efficiency is an example of design as a managerial
competency. Being able to change how the organization provides a service to
enhance operational efficiency is an example of implementation as a managerial
competency.

Striving to make the healthcare organization efficient is a dominating, unique,
and defining value associated with management and managers and the field of
health administration. Whereas the credit for effective clinical practice must be
given to the clinical sciences and professions and the technologies they use, credit
for efficient operations and the efficient use of resources must be given to health
administrators and their ability to analyze, design, and implement.

Learning Objective 3: Describe H Ow Quantit a tive
m et HODs Fit int O t He r eper t Oire OF t He Hea Lt H
s er vices m anager

Theoretical designs to describe or illustrate the role and function of management
abound. Models such as the Shewhart or Deming cycle (also known as the “Plan-Do-

Check-Act;” the PDCA approach), systems theory, chaos theory, management by
objectives, and many more have been developed to organize management thinking
and action. Indeed, the level of acceptance or “popularity” of these models has varied
over time, as models come into and fall out of favor. One constant remains, however.
It is clear that effective managers need to be able to do many things well.

Managers must be able to:

• Articulate organizational objectives.
• Assess opportunities and threats in the internal and external environments.
• Design effective and distinctive organizational strategies.
• Make decisions regarding the allocation of human, fiscal, physical, and infor-

mation resources to implement these strategies.
• Motivate staff and colleagues to work collaboratively on accomplishing the

strategies.
• Evaluate the effectiveness of the strategies.
• Modify the strategies and resource allocation decisions, as necessary.

Management should be viewed as both an art and a science; the principal focus
of this book is on the latter aspect, specifically developing skills and tools in quan-
titative analysis. We do not wish to suggest that quantitative data should be the sole
driver for management decision making; we are not advocating a cookie-cutter
approach to management or a slavish dependency on numbers. However, effective
managers use a variety of quantitative tools, skills, and techniques to complement
their intuitive, subjective, and qualitative analysis.

Managers remain very interested in formal methods that can assist them to
enhance the operational and organizational efficiency of the healthcare organiza-
tion. Given their professional concern involving efficiency, managers are expected
to know how to use specific methods to enhance the efficiency of healthcare orga-
nizations. Formal methods expand the ability of health administrators to analyze,
design, and implement and constitute an essential …