Quantifying the Quality Performance Gaps


The objective of this chapter is to lay out a strategic planning framework driven by organizational performance considerations. This framework is based on setting of performance targets and then identification of gaps between the current status and the performance targets. In contrast to the conventional finance-centered planning process, this framework will be driven not only by financial performance targets but also by quality performance targets. Thus, any strategy adopted will have to balance the financial and quality aspirations of the organization both in the short run and in the long run.


After reading this chapter, the reader should be able to:

  1. Define performance measurement.
  2. Describe the process of performance measure selection.
  3. Describe the relationship between financial performance and quality performance.
  4. Describe the equilibrium between financial performance and quality performance.
  5. Describe why and how organizations should assess their performance status.
  6. Describe the role of an organization’s values and mission in assessment of organizational performance.
  7. Define the business case for quality.
  8. Explain how performance targets could be set.


As discussed previously in this text, it is helpful to have a good understanding of what is involved in the definition and achievement of organizational success. The next important step once success is envisioned is measurement; for without measurement, the organization will not know where it stands along the path to defined success. It may not even know how to communicate its vision of success to others. Therefore, this chapter will focus on measurement and quantification of performance expectations and performance gaps, which is necessary to communicate direction as well as distance to success.

The basic concepts of strategy and performance were previously introduced in this text, and the importance of finance and quality in organizational performance and success were reviewed. Performance measurement, not surprisingly, is often a poorly defined concept. Even if defined, the degree of variability involved in measurement of performance across a range of dimensions often makes organizational comparisons difficult. There exist models that have been used for measurement of performance in an organization with various dimensions of success, such as balanced scorecard,1 performance prism,2 and competing values framework.3

Lack of a clear definition of what constitutes a business performance measurement (BPM) system spans from features of such a system to its role and even its processes.4 The roles of a BPM can be captured in one or more of the following4:

  1. Performance measurement
  2. Strategy management
  3. Communication
  4. Behavior modification
  5. Learning and improvement

The process of creating a BPM is captured in the following categories4:

  1. Selection/design of measures
  2. Collection/manipulation of data
  3. Information management
  4. Performance evaluation
  5. System review

It is important to reemphasize that organizational performance is not synonymous with financial performance. If there ever was a time that finance was the only focus for business executives, that era has long passed, and modern business executives need to (and often do) look beyond immediate financial goals.

There is no dispute that a long-term goal of businesses is financial viability, which in turn may have somewhat different meanings depending on the for-profit versus nonprofit nature of an organization. As the business environment has grown in its complexity and sophistication, the path to long-term success may go through long periods of shifting priorities for the organization. Such priorities all aim to secure the organization’s future viability; these priorities may at times be at odds with financial objectives, but management recognizes that to win the war, it may have to lose a particular battle here and there.

By assuming such a position, management realizes that “enhanced competitiveness depends on starting from scratch and asking: ‘Given our mission, what are the most important measures of performance?’ ‘How do these measures relate to one another?’ ‘What measures truly predict long-term financial success in our businesses?’”5

Decline in product quality while management had its eyes on the financial ball has been blamed for the eventual downturn in the financial performance of some businesses.5 Today, the story of GM versus Toyota is common knowledge. Although this does not directly translate to medical care, local, regional, and national competition in health care is a fact of life today, and we are already seeing some international travel for medical care, the so-called medical tourism phenomenon.6,7 For now, the main drivers are cost and value as defined earlier; in the future this may also include specific consideration of quality. As it is widely recognized that quality of health care is an important component of performance, two questions need to be answered:

  1. How should quality be measured?
  2. How can finance and quality be balanced?

Both of these questions can be answered by iterative processes similar to the eight-step process described for balanced scorecard8 and are discussed further in the following paragraphs.

Measures, Indicators, and Metrics

As described previously in this text, a quality measure is defined as “a mechanism to assign a quantity to quality of care by comparison to a criterion.”9 This definition was expanded to define measure as a mechanism to assign a quantity to a variable of interest according to a criterion. This is to ensure consistency of definition across different aspects of organizational performance.

As described previously, an indicator is defined as a composite of measures grouped together according to a consensus. Subsequently, a quality metric was defined as a composite of quality indicators that represent a specific dimension of quality. In the context of this text, different aspects of healthcare quality are grouped under six main categories represented by the six aims (dimensions) introduced by the Institute of Medicine (IOM). Therefore, there will be six groups of quality indicators.

Finally, a performance metric is defined as a summary representation of a group of indicators that are closely related to a broad aspect of organizational performance, such as each of the six IOM aims for a group of operations (Figure 8-1).

The example of labeling medication bags with patient’s name and medical record number was used to illustrate the grouping of measures into indicators and the use of indicators to create metrics. It must, however, be emphasized that the organization’s management and board of directors will determine what indicators and metrics will best provide them with quality information they need.

Financial Performance Metrics

There exist multiple financial metrics for measurement of performance and to aid decision making during strategic planning. These metrics are strongly related to other financial indicators and to more subtle financial measures in a financial performance measurement system. As part of the discussion of interactions of finance and strategy, it is important to recognize the high-level financial metrics. Two of these, NPV and IRR methods, were discussed earlier in this text, and that discussion will not be repeated here. This context for organizational performance has evolved and has been refined over a long period of time. To a large extent, the treatment of quality performance has yet to go through a similar evolution and refinement.

FIGURE 8-1. A hierarchical view of quality measures, indicators, and metrics. A metric corresponds to one or more of the IOM aims. An organization can create an aggregate value of the metrics as “top quality metric” and define it as appropriate to represent its quality performance level. Of course, boundaries have to be defined, and the metric must have true meaning. This will allow an organization to monitor periodically its performance with respect to quality.

Quality Performance Metrics

Like most other things in life, outcomes are the bottom line with respect to measurement of success along the path of quality improvement. However, without a careful analysis of the link between access, process, and structure of care, improvements in outcomes seem unattainable.

Fortunately, this important relationship has been recognized, and such relationships are being actively studied. Various government and nongovernment organizations are investigating a number of clinical (process) and organizational (structure) variables to determine their role in improvement of outcomes. The catch is that there are too many variables, and their weights in how they affect outcomes are different. Additionally, the ultimate net effect of modifying these variables is confounded by the prevalence, acuity, and natural course of different illnesses.

As a result, the organization that plans to include quality as a major performance metric must have a deep understanding of the related indicators and measures, its patient population, and its case-mix before it can optimally allocate its resources and deploy them to specific tasks. Quality measures must clearly be linked to modifiable elements in domains of access, process, or structure so that an intervention could be introduced as needed. As discussed in the “Measures, Indicators, and Metrics” section, indicators are groups of measures that are closely related under a domain or dimension of care, and metrics are constructed from groups of indicators that address one or more domains or dimensions of care for operational categories or the entire enterprise. To build the aggregate indicators and eventually metrics, the organization’s management should develop a framework that adequately represents its patient population and the range of diagnoses and procedures that the organization covers according to their frequency and level of importance. Unfortunately, such a system is not available “off the shelf” and must be developed by the organization’s management. Successful execution of this important step will create meaningful, reliable, and valid metrics for quality that can be used and understood by the executives and the board of directors. The potential is there for complexity and excessive detail in pursuit of this important aspect of organizational performance. Consequently, each organization will have to decide what areas within its clinical services will receive the highest priority and focus in building its quality performance system. To try to cover all areas with maximum detail will overwhelm the resources of the organization and therefore will defeat the overall purpose of introducing quality alongside finance as an important basis for organizational performance.

In addition to creation of aggregate metrics for the six IOM aims, a healthcare organization may create a top metric that is an aggregate of all quality metrics. To be meaningful, such a metric must represent the weighted sum of the IOM metrics and must be evaluated over time within the organization to ensure its reliability and validity in representing the aggregate level of quality within the organization. The weighting must also be determined according to the needs of the organization. For example, because safety has life and death consequences, it may carry more weight than efficiency. Organizations, depending on the population they serve and their for-profit, nonprofit, or government status, may have different priorities, which may be reflected in the weights they give to the six IOM aims.

An important caveat is that such a top metric will not be appropriate for comparison of one organization with another. Rather, it will be a measure of the internal state of quality and will serve to guide the organization’s direction along its quality path. As such, it will be of use to board members and executives as part of the organization’s navigation system. If properly linked to real-time data, this metric can be updated frequently and serve as one of the vital signs of the organization’s own health. Should there be an unexpected change, management can trace back the source of the deviation and address it accordingly using drill down functions to get to lower level metrics, indicators, or even measures. The IOM metrics can also be treated the same way; however, at times a single metric may be more desirable than six.

Later in this text, organizational feedback and control will be discussed in more detail.

Determination of Measures of Performance

What to measure and how to measure are the key questions when it comes to measurement of performance. There exist multistep processes that add more detail on how this can be done, the most popular one being the balanced scorecard.8,10

Researchers suggest that the best approach would be to start with five generic measures: technical quality, customer satisfaction, speed, product cost reduction, and cash flow from operations, ensuring they are11 (1) integrated, hierarchically and across business functions, and (2) based on a thorough understanding of the organization’s cost drivers.

Upon closer examination of these five generic measures, one may conclude that these five actually belong to two broader categories of measures: financial measures (speed, product cost reduction, and cash flow from operations) and quality measures (technical quality, customer satisfaction). Of the two performance categories of finance and quality, the former has been the center of attention of executives and investors for a very long time. Therefore, the measures for financial performance have become well developed and accepted. In contrast, especially in health care, quality performance measures are still evolving. Fortunately, in recent years research in this area has picked up some momentum and has grown in sophistication.

From a practical point of view, quality measures must meet the general requirements of a business performance measure. Although this is a necessary condition, in the case of health care it is not sufficient; more is expected of a healthcare quality performance measure. To that end, the Agency for Healthcare Research and Quality has established a clearinghouse that evaluates proposed healthcare quality measures based on a set of requirements. This entity is called the National Quality Measure Clearinghouse, or NQMC.9

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FIGURE 8-2. Measure design process.
Source: Adapted from Neely et al.12

To develop a properly and fully operationalized performance measure, a process must be in place. There are many such processes described in the literature, and one that has the most relevant features is presented here12 (Figure 8-2).

Selected measures must be clearly defined and owned. The link between the measure, related outcomes, and consequences of success and failure with respect to the measure must be firmly understood. Finally, intervention with respect to the measure must be possible.12

Linking Financial and Quality Performances

When quality measures are selected and incorporated into the performance model for an organization’s quality, an estimate of the impact of the measures on other performance indicators for the organization is useful in the evaluation of the remedial actions necessary for overall performance. Although this will establish a link between quality and finance, it does not necessarily mean that the financial bottom line will dictate the course of action. Rather, it means that management will be able to foresee the consequences of the alternative actions and determine the most cost-effective alternative given the conditions in the business environment. In other words, a value can be quantified for quality that can help with decision making; there is supporting evidence in the literature for the usefulness of such efforts.13

This is not dissimilar to the conflicts between marketing and finance14 and should be resolved in a similar fashion.

Equilibrium of Finance and Quality in the Strategic Plan

With the recognition of the bidirectional link between quality and finance in a healthcare organization, it follows that any changes to one can have an echo in the other. To determine the net result of a change in overall performance status of the organization, one must determine the point where the results of echoes will reach equilibrium. This state of equilibrium will give a much more accurate picture of the organization’s performance status as a result of a strategy, and alternatives could be evaluated more rigorously.

To implement such a model, the consequences of strategic adjustments to affect quality performance on the organization’s financial performance must be determined along with any potential feedback that might affect quality performance. The opposite is also true in the case of changes made that affect financial performance that in turn may have consequences on quality and subsequent feedback to financial performance.

The following example will illustrate this effect. Suppose that due to a difficult economic environment, an organization decides to reduce its nursing staff to save cost and improve the bottom line. If such an action results in deterioration of quality (increased medication errors or increased rate of preventable mishaps), quality may decline, and the organization will likely lose more in nonpayment from the payers than it will save. This in turn will further jeopardize the financial bottom line resulting in further decline in quality. Overall, this will have been a bad decision. However, if a decrease in nursing staff is judicious or is coupled with other measures that ensure maintenance of the quality level (through technology or other less expensive alternatives), the effect on quality may be negligible, making the move strategically sound.

Although the implications of this example may appear obvious, similar dynamics in more complex situations may well be overlooked during the planning process. Hence, the point of this text is that in very much the same way that the financial impact of any strategic decision is measured, the quality impact of any such decision must also be considered.


Assessment of quality involves assessment of access, process, structure, outcomes, and patient experience.15,16 For practical purposes, the IOM’s definition of quality and the six related aims are appropriate areas that deserve primary focus.17 It is incumbent upon management to systematically examine the quality of care delivered within the organization with respect to those six dimensions using instruments that are valid and reliable. Other characteristics of such an instrument are listed in Figure 8-2.

Other elements in quality will come to light when one looks at the processes in terms of overuse, underuse, and misuse.18 Evaluation of error and defect rates in the organization by auditing processes will also reveal valuable information about quality of care delivered. These are different vantage points that provide invaluable information that could be used to address the underlying causes of the observed effects.

Useful indicators that reflect performance in each of those areas must be identified and validated by the management and then processed into relevant and clear quality indicators on the dashboard or quality report card. This is an incremental process and should always be considered as a work in progress given that the flow of new discoveries and treatments is a fact of life in health care. A measurement framework that consists of measures, indicators, and metrics with respect to organizations operations, as well as domains and dimensions of quality, was discussed elsewhere in the text. This framework must be implemented in conjunction with a performance presentation and reporting framework to enable the organization access to performance data as shown in Figure 8-3.

Insight into an Organization’s Standing on the Quality Scale

A well-designed quality performance measurement system is not only able to identify and report variances but also is useful in identifying contributing causes. Management must prioritize the variances and problems in terms of their impact on mortality, morbidity, financial bottom line, and other factors that affect the overall effectiveness of the organization in provision of quality care and then initiate corrective action to address the problems.

Focusing of efforts on quality and quality improvement in a healthcare organization requires the broad participation of the rank and file of the organization. The only way to ensure that the organization as a whole is appreciative of and sensitive to the quality of care it provides would be to engage all parties involved.

FIGURE 8-3. The quality measurement framework must have a matching framework for presentation and reporting of the performance data. Only then can the collected data be used to calculate composite metrics for each of the six IOM aims and even a single metric of quality if the organization so chooses. There is evidence in the literature that active participation of nurses may play a significant role in improvement of outcome, potentially at no additional cost.19

Lower levels will be concerned with what happens in their own domains, but executives and boards must be involved in all aspects of quality in the same way they are concerned with the overall financial performance of the organization.

Reconciling Values, Mission, and Vision with Quality Status of the Organization

Values and mission are the foundation of an organization’s identity. They are the fundamental motivation and clarity of purpose that constantly guide all employees and members of the organization toward the same goals. The organization’s vision, which management wants all to participate in achieving, is constructed on a foundation of values and mission. These foundational principles should provide a clear message as to what the organization’s attitude and purpose is with respect to the quality of care it delivers. It would not be surprising to find that the employees of many healthcare organizations are not aware of the values, mission, or vision of their respective organizations.20

For an organization effectively to improve the quality of care it delivers, not only is it necessary to reconcile the values, mission, and vision statements with the organization’s quality status and goals, but also it is imperative that all employees be familiar with these statements, as the statements will provide a valuable sense of direction to employees in the daily performance of their duties.

Beyond Regulatory Requirements: The Business Case for Quality

It is possible that an organization may satisfy the regulatory requirements for quality. It may even be possible that the organization may not perceive any real quality threats vis-à-vis its competitors. Should the organization continue with its quality improvement initiatives? Should it set goals beyond what is required ? How can the investment be justified?

If a healthcare organization seeks to improve its quality of care beyond the minimum requirements, both regulatory and competitive, then expecting a return on the investment in that improvement would seem logical. This expectation and associated results have been studied, and consequently, a “business case” for quality has emerged.

A business case for a healthcare quality improvement intervention exists if the organization realizes a financial return on the investment required for the intervention in a reasonable time frame using a reasonable rate of discounting. This return may be in the form of profits, reduction in losses, or avoided costs. A business case may also exist if the organization believes that a positive indirect effect on its function and sustainability will accrue within a reasonable time frame.21

One of the most influential forces in the healthcare quality movement is, no doubt, the payment system. In order for healthcare organizations to provide higher-quality care, they must make specified investments and commitments. Where chronic diseases and third-party payers are involved, the benefits of these investments might not accrue directly to the healthcare organization making those commitments. A deliberate study of the current environment and the mechanisms by which quality improvement efforts can potentially be rewarded or punished is a topic that involves all parties in the U.S. healthcare system, but more importantly, it involves the payers and policy makers.

Pay-for-performance is an attempt at aligning the incentives between payers and providers, including healthcare organizations, to adopt quality-enhancing interventions. This applies especially where there may exist a negative business case for quality from the perspective of the provider; however, the payer may benefit from the intervention. In these circumstances, a business case can be made if the sum of these two effects is positive. Consequently, a pay-for-performance agreement can be made between the payer and the provider, and therefore the intervention can be adopted.22 It is imperative to understand that for such arguments to be made, the costs of quality-enhancing interventions, including investment and operating costs of implementation as well as the changes in revenue and costs that result from the interventions, must be carefully tracked and projected.23,24


The first priority after identifying the measures and developing the indicators and performance metrics that will be used to declare success or failure is to review the organization’s standing for each and every one of the quality indicators selected. This will establish the point of origin from which the organization hopes to advance.

The next step is to establish targets. The usual exercises of selection of targets as part of any strategic planning process apply here as well. Targets must be derived from an organization’s mission and be relevant to its vision. The targets must take into account a realistic application of an organization’s capabilities and must also recognize (and exploit) the opportunities that the organization faces. Finally, they must also realistically acknowledge the internal weaknesses and external threats facing the organization.

Overreaching targets that are incompatible with an organization’s capabilities will only serve to disappoint or frustrate, and setting of too modest a target will result in an organization falling far short of its potential. Therefore, a thorough exercise in analysis of strengths, weaknesses, opportunities, and threats (SWOT analysis) is essential. In addition, the quality targets must be reviewed in light of their impact on overall outcomes indicators such as mortality. This is one way that management can prioritize where it wants to allocate resources. Synergistic interactions among targets must also be examined.

The organization will have to be cognizant of at least three distinct levels for quality performance, or any other performance metric for that matter. The first level (A) is the minimum requirement as set by regulations or otherwise below which there is no point in remaining in the business. The second important level (B) is where an organization’s competitors in that market stand and their relative distance to where the organization is. The third level (C) is where the organization’s ideals picture it to be. Thinking in these terms will allow the organization’s board and management to find a sense of direction by surpassing the minimum requirements, setting their posture relative to competition, and moving toward the ideal. This process, often referred to as positioning, is central to the long-term viability of the organization.

When the current state is determined and targets are set, the gaps will determine the time frame and resources needed to undertake the tasks that will result in achieving the targets. Once the organization has identified its current position and determines its existing (and desired) relative position to the competition, it can position itself in the community or marketplace. In many industries, quality (a subtype of differentiation) is one of the three generic recipes for success, the other two being cost leadership and focus.25 This may be different in health care, as it is not clear whether the informed consumer will choose lower quality over cost. A safer strategy would be to match or surpass the competition while containing cost by way of improved productivity. At times, circumstances may necessitate matching or surpassing the competition even at greater cost in the short term, although unless this is coupled with increased productivity or other cost recovery measures over the long term, this strategy will not be sustainable. Figure 8-4 depicts these dynamics.

In looking at Figure 8-4, the reader is cautioned against simply considering productivity as a function of outputs given the inputs of the organization. An instance of this definition that is most widely used by healthcare organizations uses the number of encounters, discharges, or patients served as the output. This interpretation of output in this definition is a narrow one at best and can be misleading. To measure productivity properly, quality must be factored in when output is measured.

FIGURE 8-4. Relationship between quality, cost, and productivity. A, B, and C are iso-quality curves plotting organizations that deliver the same quality of care at different average costs. The higher the cost, the lower the productivity. The dashed line denotes a path to improvement of quality that is coupled with an increase in productivity.

To demonstrate the flaw in the above definition, consider a hospital that serves n patients per year, with a cumulative mortality and morbidity rate of m. This hospital finds out that by cutting certain costs, it can serve the same n patients per year at a 5% reduction in its use of resources (i.e., at 95% input). The drawback is an increase in cumulative mortality and morbidity rate. Using the common instance of the definition (i.e., number of patients n served per year over input), one can show an increase in productivity (Equation 8-1).

Equation 8-1. Increased productivity P as a result of a reduction in input.

However, this comes at a cost: decreased quality. It must be emphasized that oftentimes, such changes are not linked to changes in quality. It is, therefore, appropriate and even necessary to consider the role of quality in measurement of productivity.

By looking at Figure 8-4, one can see that different organizations that share a similar quality performance level will fall on a curve plotted against average cost and productivity. Achieving a higher level of quality for one organization would mean moving from one curve to the next one. Depending on an organization’s strategy, this could result in increased average cost (the y axis will represent incremental average cost) at the same level of productivity or a smaller increase in cost if combined with increased productivity. In rare instances, it may even be possible to have no increase in cost by simply improving productivity and at the same time achieving a higher level of quality.

Other factors that influence these curves and movement from one to another include cost recovery strategies, competition, and time frame envisioned for the change.


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