Tosemary and Rhyme Hospital (TRH) is a small hospital for the treatment of patients with only minor injuries. Patients arriving at TRH with more serious injuries are referred to a larger hospital nearby. Those with minor injuries are admitted into TRH and wait to be seen by a doctor. After treatment, most patients leave the hospital and need not return. If their treatment has failed, however, they are re-admitted for additional treatment.
Patients do not have to pay for treatment at TRH, which is a not-for-profit, public sector hospital. It is funded entirely by the government from taxation and a fixed level of funding is received from the government each year. It is up to TRH to allocate its funding to different areas, such as doctors’ salaries, medicines and all other costs required to run a hospital.
TRH’s objectives are:
– to give prompt access to high quality medical treatment for patients
– to provide value for money for the taxpayer, as measured by the ‘3Es’ framework of economy, efficiency and effectiveness
– to contribute to medical science by developing innovative ways to deliver treatment to patients.
It has been suggested to TRH that the hospital has inadequate performance measurement systems in place to assess whether it is achieving its objectives, and that insufficient attention is given to the importance of non-financial performance indicators. You have been asked for your advice, and have met with some of the doctors to get their opinions.
One senior doctor has told you, ‘I think TRH always delivers value for money. We’ve always achieved our total financial budgets. Doctors here work much longer hours than colleagues in other hospitals, often without being paid for working overtime. There is not enough government funding to recruit more doctors. At busy times, we’ve started referring more patients arriving at TRH to the larger hospital nearby. This has helped reduce average waiting times. Patients arriving at TRH are now seen by a doctor within 3 hours 50 minutes rather than 4 hours as was previously the case. So, we’re already doing all we can. I don’t know how much time we spend developing innovative ways to deliver treatment to patients though, as most of the performance data we doctors receive relates to financial targets.’
Recent performance data for TRH and national average information has been provided in Appendix 1. This is indicative of the data which the doctors at TRH receive.
Explain why non-financial performance indicators are particularly important to measure the performance of not-for-profit organisations such as TRH.
Lack of profit-making objective
Not-for-profit organisations do not, by definition, have profit as an overriding motive. Patients are not charged for receiving treatment, so TRH does not have a revenue stream. It may also be difficult to define a cost unit as this could be cost per patient arriving at hospital or cost per patient successfully treated.
Not-for-profit public sector organisations, such as TRH, have strict constraints on the amount of funding they receive, such as a fixed amount of funding received entirely from the government. They cannot obtain funding from elsewhere, so financial measures cannot be ignored completely. TRH must exist within its financial means, and the use of budgets to control costs is critical.
TRH provides an essential public service. Political, legal and social influences would prevent it from closing down a service just because it became more expensive or uneconomic to provide it. For all of these reasons, financial objectives are less relevant than for most commercial organisations, and its objectives are mainly non-financial in nature.
Not-for-profit organisations also undergo more public scrutiny and have multiple stakeholders, so non-financial indicators will be necessary to manage expectations. For example, patients are stakeholders who will have relatively little interest in how TRH exists within its financial constraints. They will have much more interest in non-financial performance, such as how quickly and successfully they are treated.
Multiple objectives
Not-for-profit organisations have multiple objectives, and it may be unclear which are the most important. Except for some aspects of giving value for money to the taxpayer, TRH’s objectives are all non-financial.
The outputs or benefits of the services provided are non-financial in nature, for example, giving prompt and high-quality treatment to patients. Therefore NFPIs are required to measure performance.
Justify one performance measure for each of the components of the value for money framework used at TRH and, using that measure evaluate whether TRH is delivering value for money.
Value for money in public sector organisations can be measured using the ‘three Es’: economy, efficiency and effectiveness.
Economy
Economy means obtaining resources at the lowest cost. Doctors’ salaries will be a significant expense for TRH, and salary per doctor is a suitable measure of economy. Doctors at TRH have an average salary of $150,000 ($3·75m/25), compared to the national average of $175,000 ($4·20m/24).
The relatively lower salaries of doctors may be due to differences in levels of experience or that they work unpaid overtime. It may also be one of the reasons why the staff satisfaction is so much lower at 9% compared to the national level of 89%.
Efficiency
Efficiency relates to obtaining the greatest possible outputs from the resources available. Treating patients is a key objective of TRH, and the number of doctors is an important resource. The number of patients treated per year by each doctor is a good measure of efficiency. In TRH, each doctor treats an average of 975 (24,375/25) patients per year, 17% more (975 v 833) than the national average 833 (20,000/24). This may be because they work longer hours than their colleagues in other hospitals.
Effectiveness
Effectiveness means how well TRH achieves its objectives. TRH has multiple objectives, one of which is to provide high quality medical treatment for patients. Where patients are re-admitted to TRH because their treatment had failed, this represents a failure to provide high-quality medical care, so the rate of re-admission of patients is a measure of effectiveness. The rate of re-admission at TRH is 7·5% (1,830/24,375), much higher than the national average of 1·5% (300/20,000). TRH seems to have performed relatively very poorly in this respect.
Summary
Overall, the results from the measurement of the 3Es are consistent with the doctor’s comments that they are working without being paid overtime and treating more patients than their colleagues in other hospitals. TRH appears to deliver better economy and efficiency than the national average. This seems to be reducing performance, however, in respect of providing high-quality medical treatment for patients, where TRH is less effective than the national average.
Evaluate the extent to which the management style at TRH can be said to be budget constrained and advise on the implications of this approach for managing TRH’s performance.
Extent to which the management style is budget constrained
A budget-constrained management style emphasises the need to achieve short-term performance measures, for example, the annual financial budgets.
The doctor said that TRH has always achieved its total financial budgets, and this is supported by the fact that the doctors’ salaries for the year to 31 August 2017 equalled the budget set for the period. Though it is unclear what NFPIs are measured at TRH as a whole, doctors receive only a limited set of financial and non-financial performance data. The discussion about this data, however, is mainly related to financial targets. This implies greater emphasis is given to performance against financial targets, rather than non-financial ones.
All of this suggests that TRH has a budget-constrained management style. An advantage of this is that it ensures TRH operates with the financial constraints of the fixed amount of funding received from the government.
Implications of a budget-constrained approach at TRH
This management style encourages short-termism, by encouraging doctors to work long hours without being paid overtime, or not making funding available to recruit new doctors to alleviate the situation. An implication of this is that TRH may reduce its performance against its objectives, and this is already seen by the relatively high rates of re-admission as an indicator of a reduced quality of medical treatment. Job-related tension is a consequence of a budget-constrained management style, and the low staff satisfaction score could have resulted from this.
This management style encourages manipulation of results, or the way they are measured, to show better performance. At busy times, more patients are referred to the nearby larger hospital. There is apparently no medical need for this, which is inconsistent with the objective to deliver high-quality treatment. It appears to be a way to distort waiting times to demonstrate improved performance in treating patients promptly. From patients’ perspective, though, this will mean they are treated less promptly than if treated at TRH.
Being unable to recruit new doctors reduces TRH’s flexibility in reducing waiting times at busy periods, as the steps already taken seem to have had minimal effect. This management style does not encourage innovation, probably because doctors have insufficient time for this. Though this may have long-term benefits, it seems to be taken as less important than the other key objectives, to provide prompt, high-quality treatment.