healthcare financial management association www.hfma.org

Steve DobbsJay Reddy

the 4 phases of quality maturity

REPRINT AUGUST 2011

2 AUGUST 2011 healthcare financial management

FEATURE STORY

Steve DobbsJay Reddy

Poor hospital practices and processes are likecancer: It’s sometimes difficult to know just howbad things are until the condition turns fatal.Safety, outcome, and patient satisfaction metricsmay signal the need to accelerate quality per-formance from a system perspective. Hospitalfinance leaders should understand, however, thathealthcare organizations cannot become qualityleaders overnight: They must help guide theirorganizations through an evolutionary processinvolving several phases to achieve a level ofquality maturity in which quality becomes astrategic competency.

Accomplishing this purpose requires a clearunderstanding of how hospitals mature along thequality evolutionary continuum. For this reason,we reviewed publicly available financial data,quality outcomes, and patient satisfaction data, aswell as data from 135 acute care hospitals.a Theanalysis also included quantitative and qualitativesurveys with 20 hospital systems and a review ofpublished best practices case studies.

Quality Maturity ModelHospital systems that achieve quality as a strate-gic competency go through four phases of trans-formation to achieve “quality nirvana”—the

ability to prioritize quality improvement (QI)programs and process improvements that havethe greatest impact on patient satisfaction andhospital financial performance. The time neededto achieve “strategic” status depends on seniormanagement commitment, reengineeringprocesses, process enablement using technology,and grass-roots change management.

Although certain characteristics distinguish eachphase of transformation, the quality maturity ofsome processes, DRGs, and service lines—such aspressure ulcer prevention, cardiac arrest, andstroke prevention—has the potential of beinggreater than others. To be considered “strategic”and enjoy full financial and competitive value,hospitals must achieve Phase IV across all majorservice lines, departments, processes, and DRGs.Within each phase in the evolutionary contin-uum, the hospital develops solutions to specificissues and encounters problems pointing to thenext phase. Hospitals that tackle each phaseexperience tangible and holistic change that hasquantifiable impact on total system quality andfinancial performance. Each phase providesgreater market advantage than previous phases.

An organization’s current objectives, focus, lead-ership, metrics, and budget must be examined todiagnose where the organization resides on thiscontinuum. Knowing how far an organization hasevolved in terms of quality validates current

a. In this article, “peer group” refers to 135 large acute carehospitals that belong to multifacility systems, as identified byThomson Reuters’ June 21, 2010, study 100 Top Hospitals: HealthSystem Benchmarks.

Quality-of-care improvements are often theresult of hospitals taking a trip through fourphases of quality transformation.

the 4 phases ofquality maturity

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performance and provides direction to achievebest-in-class performance.

To understand why a hospital system’s marketand financial advantage increases as its qualityorganization evolves through the four phases, it isnecessary to explore each phase’s dynamics andthe effect of those dynamics on market advantage.

Phase I: ReportingPhase I focuses on quality reporting. Individualswithin clinical departments or operations focuson tactical issues and make all critical decisionswith minimal input. Quality managers describetheir job as “collect, measure, report,” spending60 to 80 percent of their time on chart extraction,data cleansing, and generating reports. Phase Iquality managers lack job satisfaction and do notunderstand their impact on overall financial per-formance. They operate in the shadows of clinicaland operations teams, struggling to prove theircontributions.

At this phase, disparate quality teams operate insilos within their respective facilities in a multi-facility hospital system. At the facility level, adirector of quality leads the department andreports to the chief medical officer (CMO) orchief nursing officer (CNO). There is no

"corporate" position for quality, and teams actwith autonomy within their facility. Because eachhospital’s quality team is generally understaffed,it is difficult to gauge the team’s financial contri-bution or impact.

At Phase I, no defined outcome-based processes,goals, and methodologies exist to identify andprioritize quality opportunities. The quality teamrarely has credible result measurements or suc-cess stories to share with senior management.Performance metrics revolve around productiv-ity—e.g., number of measures reported by DRG,on-time delivery of reports, and number oferrors.

Chart extraction with Excel spreadsheets are thenorm. Data are manually extracted by reviewingclinical charts. Funding for quality roles andpositions falls on a facility cost center.

Quality teams have difficulty attracting individu-als with clinical and analytical backgrounds whounderstand the quality data. The labor-intensivetask of collecting data from disparate systemsmakes it error-prone. Data management is cum-bersome, leaving no time for meaningful analysisand criticism exists that reports and charts areoften subjective and unreliable.

AT A GLANCE

Evaluating a hospital’squality performanceinvolves several key considerations:> What drives the hospi-tal’s quality-of-carescores, and what arethe underlying driversof its outcomes andpatient satisfaction? > How does the hospital’squality and cost of carecompare with those ofits peers? > Does the organizationhave a road map forpredictable qualityimprovement?> How do qualityimprovement initiativesaffect financial performance?> Does the chief qualityofficer (CQO) have a“seat at the table” inboardroom meetings? > Does the strategic planinclude quality goals?> Does the hospital pos-sess analytical tools tomeasure and under-stand quality of carewith a holistic view andin financial context?

QUALITY MATURITY MODEL

Source: PSCI, Inc.

QUALITY MATURITY MODEL: PHASE CHARACTERISTICS

Phase I

"Reporting"

Laggards

1. Focus on externalquality reporting

2. Measure department productivity

3. Focus on data collection efficiencies

Improve Productivity

• Tactical• Director of quality• Facility cost center

Phase II

"Compliance"

Followers

1. Focus on quality compliance

2. Seek cross-functionalquality alignment

3. Focus on ad hocphysician integration

4. Minimize measurement errors

Improve Quality Scores

• Project orientation• Vice president of quality• Shared service center

Phase III

"Processes & Variance"

Leaders

1. Focus on internalquality improvementprojects

2. Facilitate changemanagement

3. Monitor and reportof project success

4. Focus on process-driven physician integration

Link Cost-Quality

• Process orientation• Chief quality officer• Shared service center

Phase IV

"Institutionalize Quality"

Innovators

1. Focus on hospital margin improvement

2. Focus on pay-for-performance, patientsatisfaction, clinical-financial alignment,physician integration

3. Link quality of care tocost of care, reportimpact of qualityimprovement activatedon margin

4. More use of physician scorecards

Maximize Quality-Revenue Curve

• Strategic orientation• Chief quality officer• Revenue center

Source: PSCI, Inc.

Phase I hospitals typically show negative operat-ing margins. Their overall patient satisfactionscores are 3 percent below their peers, on aver-age. The 30-day mortality rates and 30-day read-mission rates are 3 percent higher, on average,than those of their peer group. Operating revenueper bed is 17 percent below the peer group average.

Phase II: ComplianceBy Phase II, quality managers describe their jobresponsibilities as “collect, measure, analyze, andreport quality scores,” and they are eager to iden-tify quality improvement opportunities. ThePhase II quality team spends 40 to 60 percent ofits time on data analysis. When time allows, theteam attempts to identify quality improvementopportunities. A Phase II quality manager’s chiefcomplaint is spending inordinate time to collectand cleanse data before analyzing. At this stage,the focus is on measurement over hospital systemfinancial value.

Often, Phase II groups assume the phrase “qualityimprovement” as part of their titles, and theytypically enjoy a growing respect and credibilityamong clinicians, operations, physicians, and theexecutive team. They have started working oncross-functional teams as reporters of qualitydata, helping identify problem areas, and track-ing progress on quality projects.

Phase II quality groups build partnerships withkey departments on some critical DRG categoriesand occasionally share anecdotal success stories.Throughout Phase II, quality impact is recognizedbut not institutionalized because success is inter-mittent and a result of skills of one or severalindividuals.

There is some ambition to centralize qualityefforts across the system, but in most cases,Phase II quality groups still operate in siloswithin each facility. Each group is led by a vicepresident of quality who has a nursing

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background and can drive clinical change. Thequality team now boasts more people with nurs-ing backgrounds. These professionals interpretdata analysis in clinical terms, identify qualityimprovement projects, and communicate withphysicians, clinicians, and departments. At somepoint in Phase II, hospital systems begin placinga few team members at the system level to meetregulatory compliance reporting standards (e.g.,those established by the Centers for Medicare &Medicaid Services and the Joint Commission). Ifthe chief quality officer (CQO) position exists,this individual does not have a seat in the board-room and is a figurehead.

Phase II metrics involve compliance, with coremeasures and performance compared with that ofpeers. Data are transparent to consumers, payers,and regulatory bodies. Quality department met-rics are volume-based (e.g., number of projectsinitiated, project team feedback, weekly moni-toring, and reporting).

Quality teams begin leveraging project manage-ment tools to monitor progress on individualprojects. Charts, spreadsheets, and databases areused for data analysis instead of business intelli-gence and decision support tools. Team membersare frustrated about lack of applications, whichforces them to spend disproportionate time ana-lyzing data rather than focusing on qualityimprovement projects.

At this point on the evolutionary continuum,project cycle times are long and change manage-ment is superficial because in-depth cost andquality analysis does not exist. On the other hand,stakeholders demand insight on key quality driv-ers and the impact of improvement initiatives onfinancial performance. Quality teams struggle toquantify or articulate sophisticated metrics.

Our research suggests that the majority of U.S.hospitals fall within Phase II. On average, PhaseII hospitals have break-even operating marginsand 30-day mortality and 30-day readmissionrates are 2 percent and 1 percent higher than thepeer group, respectively. Operating efficiency

measured in terms of operating revenue per bedis 4 percent below that of the peer group. Phase IIhospitals manage operating efficiencies betterthan Phase I hospitals and enjoy 3.3 percenthigher operating margins. However, overallpatient satisfaction scores, as measured by CMS’sHospital Consumer Assessment of HealthcareProviders and Systems (HCAHPS) survey, are onpar with the peer group average.

Phase III: Processes and VarianceWith 60 percent or more of a Phase III qualitymanager’s time spent on quality improvementproject planning and development activities, thequality team will share frequent success storieswith senior management. Quality managersdescribe their job responsibilities as “track, ana-lyze, and monitor hospital quality performanceand variance analysis.” The quality team workswith physicians using data to break down silos,eliminate inefficiencies, and drive change. Qualityteams see links between cost and quality and pin-point value drivers among various departments.The team perceives patient needs as an integralpart of quality influence and responsibility. Wenow see early-stage cost-quality modeling anddata-driven, fact-based dialogue with physiciansand clinicians.

A CQO reports to the CEO and heads a centralizedquality organization, overseeing departmentquality managers or directors. The CQO may havea seat in the boardroom, and quality improve-ment discussions are on the board’s agenda. TheCQO, a well-respected physician with an exten-sive background and vision, is expected to delivera sustainable transformation and has a “quality as a way of life” mission. The CQO is a process-oriented systems thinker who believes process reengineering should revolve around the patient.All major processes are evaluated and redesignedto improve metrics, such as patient satisfaction,safety, and outcomes.

Quality teams now define “quality of care” as acomprehensive composite score that incorpo-rates readmission, infections, preventable casesof harm, CMS core metrics, and several key

FEATURE STORY

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performance indicators. The composite quality-of-care score is derived by assigning an appro-priate weight to each KPI based on systemstrategic goals. Compiling the composite quality-of-care score becomes a strategic activity thatinvolves the CFO, CMO, CNO, COO, and otherson the executive management team.

A hospital in Phase III clearly articulates the cor-relation between the composite quality score,outcomes, and costs. The Phase III quality team ischallenged by showing how realized qualityimprovement and cost savings fare against goals.They keep compliance in mind when identifyingperformance outliers and making quality deci-sions. The team’s compensation is often based onquality and financial improvement. Failure at thispoint in the evolution is due to poor leadershipchoices or the inability to implement systemthinking throughout the organization.

Hospital systems in Phase III make significantinvestments in automated quality measurementusing quality-of-care and cost-of-care decision sup-port tools. The objective is to help quality staff focuson value-added strategic activities and automate oroutsource data collection, cleansing and normaliza-tion, analysis, and reporting. Most of the quality stafffocuses on designing, executing, monitoring, andmeasuring quality improvement projects.

There has been vast improvement over Phases Iand II, but this team has challenges. The team hasexcellent databases, but lacks genuine analytictools that helps establish the link between qualitycomplexities and financial performance. Theteam insists that its job is too complex, and that itrequires more sophisticated tools to be able totruly identify trends and problems at an earlystage. It is impossible to predict the success ofany given improvement program, and the team isstill “feeling its way in the dark.”

The research findings suggest that most currentleaders in the hospital industry are in Phase III.Phase III hospitals have average operating marginsof 7.3 percent compared with the peer average of2.2 percent. Their overall patient satisfactionscores are 2 percent higher than those of the peergroup. Thirty-day mortality and 30-day readmis-sion rates are 2.3 percent and 2 percent better thanthe peer group, respectively. Operating efficiencyin terms of operating revenue per bed is 12 percentbetter than the peer group average.

Phase IV: Institutionalize QualityPhase IV teams focus on institutionalizingprocesses and evidence-based practices. “Betterthan peers” is not a basis for comparative effec-tiveness. “Best-in-class” is not just a clinical pri-ority—it’s the singular target and business

QUALITY MATURITY MODEL: TECHNOLOGY ENABLERS

Phase I

"Reporting"

Laggards

1. Data collection tools

2. Data normalization

Phase II

"Compliance"

Followers

1. Project managementtools

2. Spreadsheets

3. Access and otherdatabases

Phase III

"Processes and Variance"

Leaders

Phase IV

"Institutionalize Quality"

Innovators

1. Quality-of-care analysis—detailed quality visibilityin context of cost

2. Cost-of-care analysis—detailed cost and resource utilization; process analysis in context of quality

3. “What if” analysis—quality-cost modeling and predictability

4. Quality optimization—prioritization and allocationof resources to maximize quality improvement projects’ ROI

Source: PSCI, Inc.

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6 AUGUST 2011 healthcare financial management

strategy to improve hospital margins throughmarket share and increased revenue, or a lowercost structure with a patient-centric approach.National initiatives are considered the minimumrequirement rather than the winning formula.This team strives to identify best processes andlooks for variances against “gold standards.”

In Phase IV, quality teams identify problems at anearly stage before they affect key performanceindicators or the composite quality score.Planning, analysis, risk management, andprocess development occupy 80 percent of thetime, and individuals describe their job as “cre-ating value.” They deliver value by modeling qual-ity and cost for a competitive hospital system thatfactors patient risk and physician integrationacross the care continuum. The entire organiza-tion is poised to become an accountable careorganization (ACO) and is a leader in quality ini-tiatives throughout the care continuum. Theorganization uses scenarios to accurately predictquality, risks, and financial impact.

Quality professionals do not just “recognize” theimportance of patient needs, as in Phase III.Patient needs are an integral part of the qualityequation, including risks, flexibility, cost-to-serve, and several other factors.

The quality team is a business partner with physicians, finance, clinicians, and operations.The team and individuals are considered the key architect of the hospital quality-of-care value chain. When the executive team begins toclaim quality as a key to market advantage andbusiness success, the ultimate goal is dynamicalignment of quality strategies with system business strategies.

In Phase IV, the CQO has a direct impact on prof-itability and has strategic value similar to that ofthe CFO. The charter is to make quality excel-lence a vital part of the hospital system’s DNA.The CQO works with executive leadership to linkquality objectives and goals to support hospitalsystem strategic plans. By this time, the CFO is achampion of CQO activities and supports efforts

to correlate cost and quality metrics with clinicaland financial success.

Every department has quality-related goals andperformance metrics that support the compositequality score. Measureable, tangible goals formthe basis for compensation as the entire leader-ship team becomes accountable.

The quality team can now correlate quality of careand cost of care and quantify the financial impactof quality improvement projects. The team showsmargin contributions at a granular level, by facil-ity, DRG, physician, and other dimensions.Metrics are tightly linked to improvements inoutcomes, process variance, patient safety, med-ication, environment, and satisfaction.

The most sophisticated decision support analysistools show quality within a financial context. They“drill down” to discover trends and offer statisti-cally significant information to support dialoguewith physicians for effective change manage-ment. Scenarios, predictive analysis, and opti-mization tools pave the way for order setstandardization, resource allocation, and processredesign.

Phase IV hospitals are pioneers in process matu-rity and “system-thinking” and closely alignquality processes with financial goals. Not sur-prisingly, few hospitals are even in the earlieststages of Phase IV. These few hospitals have con-sistent operating margins between 13 and 15 per-cent. Overall patient satisfaction scores are 8points higher than those of Phase I hospitals,while 30-day mortality and 30-day readmissionrates are 11 percent and 8 percent higher, respec-tively. Phase IV operating revenue per bed is typi-cally 30 percent higher than the peer average.

Observations and RecommendationsResearch shows that healthcare providers have along journey to drive quality-of-care improve-ments into positive hospital financial perform-ance. Most large hospital systems fall withinPhase II of the quality evolutionary continuum.Small, single-facility hospitals are typically not

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About the authors

Steve Dobbs is an adviser, PSCI Solutions, Allen, Texas,and former CEO, Hillcrest Medical Center, Tulsa, Okla.

Jay Reddy is founder and CEO, PSCI Solutions,Allen, Texas, and a member of HFMA’s Lone Star Chapter(jreddy@pscisolutions.com).

PATIENT SATISFACTION AND CLINICAL OUTCOME SCORES: VALUE AND IMPACT TO HOSPITAL

Source: PSCI, Inc.

well funded and fall in Phase I. A significant per-centage of innovative hospital systems fall in themiddle of Phase III, and very few hospitals areeven in the early stages of Phase IV.

A good indicator of an organization’s qualitymaturity is the quantitative tools it uses for meas-urement, decision support, planning, changemanagement, and predictive analysis. Investingin analytical tools demonstrates which organiza-tions are institutionalizing best processes andpractices. Investing in decision-support systemsfollows a leadership vision, process engineering,and organizational commitment to a long-term,holistic approach to financial improvement bydelivering high quality to patients.

By 2013, Phase IV innovative quality leaders willhave made investments in people, processes, andtechnologies to support strategic quality transfor-mation. They will emerge as market leaders andleverage turmoil in the market. At that time,mature Phase III and Phase IV hospitals will winthe ACO market battles. Most quality leaders will use their quality advantage to acquire and

consolidate underperforming hospital systems. Aconsolidation and integration strategy leveragingtechnology-enabled infrastructure could helphospitals that are lower on the quality continuum“leapfrog” from Phase I or II to Phase III quickly.

Determining how far a hospital system hasevolved in terms of quality ultimately requiresquality leaders to prepare with analytical toolsand capabilities to achieve market advantage.

FEATURE STORY

PSCI Solutions, Inc.(469) 519-1043info@pscisolutions.comwww.PSCIsolutions.com

Reprinted from the August 2011 issue of hfmmagazine. Copyright 2011 by Healthcare Financial Management Association, Two Westbrook Corporate Center, Suite 700, Westchester, IL 60154. For more information, call 1-800-252-HFMA or visit www.hfma.org.