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The Diffusion of Operations Management Concepts into the Health Care Sector

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The Diffusion of Operations Management Concepts into the Health Care Sector

Victoria Hanna and Kannan Sethuraman

aDepartment of Management, University Of Melbourne, Parkville, Victoria, 3010, Australia bMelbourne Business School, University of Melbourne, Carlton, Victoria 3053, Australia.

Submitted for ANZAM Conference 2005


This paper presents a preliminary review of the literature on the application of operations management concepts in the health care sector. The work is part of a larger study focusing on improving operational efficiency and effectiveness in the health care value chain. The review critically examines the current state of research in this field and speculates on potential areas hospitals could exploit to improve their ability to meet the needs of their diverse stakeholders.


The health care industry today is a complex industry with ever changing relationships between patients, physicians, hospitals, insurers, employers, communities, and government. A combination of factors - including the emergence of intense, dynamic competition and consolidation, increasing expectations of demanding, sophisticated consumers, and decreasing funding and utilization - have generated an increasingly challenging environment for hospitals and the health care value chain. With the health care costs continuing to escalate more quickly than general inflation1, a theme that resonates throughout the health care field today and receives increasing attention of policy makers, academia and industry is the necessity to control costs: cost containment2. The health care sector all over the world is experiencing tremendous pressure to not only control the escalating costs but also improve the quality of care it provides to its consumers (Gaucher & Coffey, 1993, p.4)

Hospitals present an interesting improvement challenge. The clinical methods used in health care and disease cure are easily understood. Yet when combined into institutions and broadened into social systems, the management of them becomes surprisingly convoluted (Glouberman and Mintzberg 2001). From the view point of operations management (OM) academics there is a strong resonance between the need for dealing with the issue of sustainability in hospitals (even not-for-profit organizations must be able to manage their cash flow and deliver funds for reinvestment), the glut of resources required to run an inefficient system and the ability of core OM concepts to alleviate the situation.

1 The cost of providing health care in the OECD countries range from 7 to 9 percent of GDP (Folland et al. 1997) and is expected to rise due to the ageing population and costs of new technology.

2 Cost containment is defined as the attainment of optimal operating efficiency within the constraints of providing a high standard of service to patients - i.e., effectiveness. (Smith et al. 1981)

The significance of OM principles to organizations outside the manufacturing sector is a conviction shared by both OM researchers and practitioners. Levitt (1972, 1976) was an early advocate who warned that service industries, in comparison with manufacturing industries were primitive, sluggish and inefficient and strongly suggested: "The managerial rationality embodied in the practical imagination we see exercised so effectively everywhere in manufacturing can, given the effort, be applied with similarly munificent results in the service industries." This belief in the value of OM concepts and techniques has not been fully translated into activity though, at least as evidenced by the lack of publications. Pannirselvam et al. (1999) and Zamora et al. (2003) estimate that only a very small proportion of the papers in the leading operations management journals were devoted to applications in service sector. Lane (2004), however, suggests that there is a significant literature on the application of operations management principles in the health care sector. He cites the reason for this work not showing up in earlier surveys to the lack of cross-referencing between the health care management journals and operations management journals. Our initial search on the topic of OM and selected OR applications in health care sector yielded more than 56 journals publishing articles. This diversity means that while a broad range of professionals are potentially reading about these issues, there is little critical mass being created and knowledge is predominantly residing in individual silos.

Operations Management

At the core of operations management are the topics of process flow and capacity management, process design and layout, technology choice and management, quality management, lean manufacturing, supply chain management and operations strategy. How far has this knowledge diffused into the health care setting? In the sections below, we discuss each of these topics and how they have been applied in the health care sector.

1 Process Flow and Capacity Management

The achievement of improved process flow and the associated planning of capacity is one of most fundamental OM preoccupations. Relatively simple techniques, such as capacity and demand management, have been shown to be useful in the health care environment. For instance, hospitals can achieve substantial improvement in patient flow and hospital throughput and reduction in unit costs through the application of techniques such as process mapping and simulation modeling. Henderson et al (2004) report a successful implementation of a patient flow improvement project at St. John's Hospital, located in Springfield, Missouri. An important point for understanding and improving patient flow is to look at the whole system of care, rather than the individual units in isolation. Coffey et al. (2005) investigate the use of critical paths to minimize delays and resource utilization and to maximize quality of care. They document and show how critical paths, developed through collaborative efforts of physicians, nurses, pharmacists, and others, help lower variation in the care provided, facilitate expected outcomes, reduce delays, reduce length of stay, and improve cost effectiveness.


Forecasted demand begins with admissions planning. Admissions planning decides on the number of patients admitted for surgery each day, and the mix of patients admitted. The various types of patients can be differentiated by their resource requirements. The type of resources required for an admission are beds, operating theatre, surgical team, nursing care and potentially an intensive care bed. The mix of patients is,



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