Performance measurement in Dutch hospitals:
Balancing cost reductions with better quality
Name: Tamara Obradović Student number: 10718052 Date: 26 June 2018 (Final version)
BSc Accountancy and Control Amsterdam Business School
Supervisor: mw. N. (Nan) Jiang MSc Word count: 5,242
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Statement of originality
This document is written by Student Tamara Obradović who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
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Abstract
Along with rising costs, the Dutch hospital sector faces financial, technological and demographical challenges. Within a system of performance funding, the hospitals are forced to reduce costs and improve quality by mandated competition. This thesis provides an evaluation of budgetary control, balanced scorecard and benchmarking as performance measurement systems. The resulting
recommendation is for Dutch hospitals to apply benchmarking, as it allows the hospitals to position themselves compared to other actors within the sector.
Samenvatting
Naast toenemende kosten, wordt de Nederlandse ziekenhuissector geconfronteerd met financiële, technologische en demografische uitdagingen. In een systeem van prestatiebekostiging worden ziekenhuizen gedwongen kosten te verlagen en kwaliteit te verbeteren door gereguleerde competitie. Deze scriptie geeft een evaluatie van budgetary control, balanced scorecard en benchmarking als systemen voor prestatiemeting. De daaruit volgende aanbeveling voor Nederlandse ziekenhuizen is om benchmarking toe te passen, aangezien het ziekenhuizen de mogelijkheid biedt om zichzelf te positioneren ten opzichte van andere deelnemers in de sector.
4 Table of contents Statement of originality 2 Abstract 3 Samenvatting 3 Table of contents 4 1. Introduction 5
2. Dutch hospital sector 6
3. Theoretical framework 9
3.1 Agency theory 9
3.2 Performance measures 11
3.3 Performance measurement systems 14
3.3.1 Budgetary control 15
3.3.2 Balanced scorecard 16
3.3.3 Benchmarking 18
4. Analysis 18
4.1 Relevant performance measures in Dutch hospitals 19 4.2 Evaluation of performance measurement systems 20
5. Conclusion 21
5 1 Introduction
Health Consumer Powerhouse Ltd (HCP) has recently published their European Health Consumer Index (EHCI) report for 2017, which evaluates and compares European health care systems annually. The Dutch hospital system has scored highest compared to other European countries, based on a consumer point of view.
Although the score indicates a well performing system, the Dutch hospital sector is also faced by financial, technological and demographical challenges. The costs are among the highest compared to other European countries and expected to rise even further (OECD, 2016). An increasing number of elderly patients, people living with at least one chronic condition, and improving technology are factors contributing to these costs.
Within the Netherlands, a performance funding system is applied since 2013, wherein insurers and hospital negotiate prices, quality and quantity of health care in a market of managed competition. Governmental authorities are responsible for overseeing the delivery of quality products and accessibility to health care. This system pushes hospitals to lower costs and improve quality at the same time, to be able to compete in this sector.
Two agency problems arise for the hospitals in this setting: with stakeholders and medical professionals. It is in the hospital’s interest to mitigate the effects through performance
measurement.
The purpose of this paper is to evaluate which performance measurement system is most useful in balancing cost reductions with better quality for Dutch hospitals. This is determined by an evaluation of performance measurement systems that are considered relevant based on prior
literature. Budgetary control, balanced scorecard and benchmarking all have a different focus and are therefore picked for this purpose. Evaluation is based on the system’s implementation of performance measures that inform the hospital about the efforts exerted by medical professionals.
6 Also, these performance measures relate to the main interests of the stakeholders, which in turn should align with the hospital’s objectives.
To provide an answer to this question, the remainder of this thesis is structured as follows. The second section describes the hospital system in the Netherlands, more specifically the
regulatory aspect. In the third section relevant economic theory is covered. Also, what is understood by performance measurement and performance measurement systems is defined. Then the fourth section evaluates the relevant performance measurement systems, including: budgetary control, balanced scorecard and benchmarking. Lastly, the fifth section emphasizes, concludes and provides an answer to the research question.
2 The Dutch hospital system
Within the Netherlands, access to health care is an important policy objective regulated by the Dutch government. To provide an overview of the context, a brief overview is given of the main changes that have been made in the Dutch funding system of health in the past.
In 1988 functional budgeting has been introduced. Under this system, hospitals received a fixed budget based on several parameters (e.g. inhabitants in the area of the hospital, number of admitted patients). Hospitals would declare provided care at nationally determined prices. In case of deficits, insurers would pay that amount to the hospital afterwards. If the hospital declared costs below the budget, it would pay back the remaining amount to the insurers (Dutch Hospital Association).
The switch to a system with diagnostis treatment combinations (DTCs) was introduced in 2005. This change is major because it forms the basis of the current system. A DTC is a merged sequency of medical activities, related to a specific treatment in a medical discipline (Westerdijk et al., 2012). Every DTC is labeled and used for future consults. The shortcoming of this system is that
7 future consults cannot always be categorised into existing DTCs because of specific characteristics, making it hard to determine the costs of provided care.
Hospital costs are covered by a performance funding system since 2013. A distincion in financing can be made for curative care and long-term care. Curative care is manadatory for all Dutch citizens and includes basic benefits mainly related to directly curing the patient (Kroneman et al., 2016). It is implemented trough managed competition. Long-term care is for people who need supervision 24 hours a day. This includes mostly domestic care, which is not relevant here and will therefore not further be discussed.
All Dutch citizens are obliged to apply for a health care insurance, which allows them to receive curative care, but they can freely choose their health insurer. Most insurers provide a fixed basic care coverage package and enable the insured people to buy extra coverage for additional services (e.g. dental care). Insurers are obliged to provide care to anyone who has applied and to negotiate contracts with care providers.
Under the current performance funding system, insurers and hospitals have to make agreements on price, quantity and quality of health care. Based on the established agreement, a fixed amount is provided by the contracted insurer to the hospital for every patient that has received care (Dutch Hospital Association; Government of the Netherlands, 2018). Performance funding forces the hospitals to deliver quality at a low price, otherwise insurers will not be willing to make agreements with them to cover the costs. Under these negotiations, fixed or maximum annual lump sum payments are established. This gives both hospitals and insurers a certainty about their
revenues and expenses, but it might not function as intended. Because hospitals are limited to the negotiated payments, this method sets a certain ‘budget’. Hospitals might be navigating towards meeting the negotiated payments because they do not want to or cannot afford to be held
responsible for excessive costs. Hence this method does not necessarily have to be efficient and can also be at the cost of quality.
8 Pushing hospitals to work efficiently is generally seen as a benefit because the competition between care providers should result in the delivery of good products and services. If delivery of products at competitive prices is expected, succesfull managed competition should lead to small price variations between hospital products. The contrary is true, according to Douven et al.’s (2018) analaysis of publicly available price information of hospital products. They found large price variations between hospitals for similar products.
The previous is a brief explanation of how the managed competition that applies for curative care works. Although the objective is to encourage competition, authorities are responsible to oversee that quality and accessibility of health care are maintained. The Dutch Health Care Authority (NZa) is the supervisory body for the health care sector. Besides overseeing whether negotiated prices are fair, it sets maximum prices for cases where negotiations cannot lead to desirable outcomes. For example for emergency care because it is unplannable.
The governmental Healthcare Quality Institute is responsible for providing information on the quality of care. Every care provider is obliged to report information about its performance, price and waiting times by law. Requiring this information shows that the Dutch government perceives these variables to be adequate for measuring quality in health care. The information is publicly available so stakeholders can freely have an insight in and a comparison of care providers.
Supervision of authorities is limited though. Bodies with the right to intervene will only do so in extreme cases and when there is an enduring malfunctioning (Speklé & Verbeeten, 2014). Also, it is not their responsibility to focus on efficiency and effectiveness of organizational functioning, resulting in hospital’s freedom to determine how to measure their performances.
The financing complexity of the hospitals is somewhat ambiguous. As public organisations they are not allowed to make profits that are not devoted to pretermined goals. At the same time, under the current performance funding system, hospitals themselves are responsible for the excess costs if they provide care at cost above the negotiated agreements. This results in the difficulty to
9 manage costs for hospitals. Along with this financial challenge, the Dutch hospital sector is faced by technological and demographical challenges. While managed competition pushes hospitals to decrease costs; an increasing number of elderly patients, people living with at least one chronic condition, and improving technology increase costs. In order to compete within the industry, hospitals must meet the quality requirements and at the same time manage the challenge of lowering costs.
3 Theoretical framework
This section is devoted to relevant underlying theory. First, I explain agency theory, which illustrates the importance of a well-designed performance measurement system. Subsequently, I describe different sorts of performance measures and performance measurement systems. In light of this, New Public Management is explained, which points out the necessity and development of performance measurement in the public sector.
3.1 Agency theory
Economic theories have largely been reviewed and applied because they allow us to make predictions about decision-influencing benefits of contracting on forward-looking performance measures (Farrell et al., 2008). However, these theories do not explain if or how these contracts affect the decisions for the long-term. Identifying the usefulness of agency theory for the Dutch hospital sector requires understanding the settings for which agency can be theoretically supporting (Eisenhardt, 1989). Agency is a universal concept that is important in all cases of contractual arrangements, moral hazard, information flows in general equilibrium context or of financial intermediaries in monetary models (Ross, 1973).
The agency theory analyses a contract under which a principal engages with an agent to perform services on its behalf (Jensen & Meckling, 1976). Authority for decisions is delegated to
10 the agent and is not always expected to be done at the best interest of the other party. This problem arises because of the assumption of utility maximization by both principal and agent. The occurring agency costs differ depending on the contractual relationship. In this specific case it is relevant to point out two agency relationships.
First, the one between the stakeholders (principal) and the hospital (agent). Because hospitals have many stakeholders (e.g. government, insurers, patients) there is not only one
principal and agency costs differ for every relationship. The hospital sector is very complex because hospitals have to take into account interests of all these parties in the decision-making processes. However, the main interests of the stakeholders are similar: the hospital’s delivery of high quality care at low cost. Although the government encourages competition, it also intervenes with
regulations so the negotiated contracts are not entirely established in a market process. Also, the established quality requirements reduce the potential to misreport financial performance because they result in low information asymmetry (Greenwood et al., 2017).
Second, the one between the hospital (principal) and the medical professional (agent). The effort exerted by the employed medical professionals reflects the performance of the hospitals. The service of health care is provided at the moment of interaction between a patient and medical professional, which makes it hard for management to monitor what actually happens there (Pettersen, 1995). The medical professional’s expertise and competece, medical judgement and accepted medical practices are all of importance in performing clinical procedures. This information assymmetry is central to the agency problem. Thus, it is important that the quality requirements set by the government are communicated clearly to the medical professionals. Because the information about performance on these requirements is publicly accessible, all stakeholders will involve this in the decisions they have to make concerning their relationship with the hospital. The contracts between the hospital and insurer determine how much money is at the hospital’s disposal, which in
11 turn determines the care the hospital is able to provide. Because of this, it is crucial to eliminate the negative effects of this agency problem to the best possible extent.
3.2 Performance measures
Performance measurement is the process of quantifying efficiency and effectiveness of an action (Neely et al., 1995). Herein a performance measure being a metric to perform this. A broader definition has been proposed by Kollberg et al. (2005), namely as performance measurement being “the process of collecting, computing and presenting quantified constructs for the managerial purposes of following up, monitoring, and improving organizational performance”. Thus, the information provided by performance measures is a quantification of organizational activity and is crucial for management’s decision making. People are self-interested but constrained by bounded-rationality, so even if one intends to make the right choices, there is the burden of cognitive limitation (Groot & Selto, 2013). Therefore the establishment of clear performance measures
supports management by providing relevant information about actions and associated outcomes that can be expected.
In order to compare which performance measurement system is most useful in balancing cost reductions with better quality, it is important to define specific performance measures related to these outcomes on organizational level. Medical professionals should be motivated to perform well on the measures because it directly reflects the performance of the hospital. Because the Dutch government has established a set of rules for the quality of the provided care, it is in de hospital’s direct interest to increase performance on these metrics (Ittner et al., 1997). This information is viewed by patients choosing their hospitals and by insurers negotiating contracts. Thus I expect performance, price and waiting times to be incorporated performance measures in the performance measurement system.
12 When multiple performance measures are applied, the weighting of these measures is an important aspect that has to be considered (Ittner et al., 2003). The weight placed on a measure determines its correlation with the outcome of the performance measurement system. Thus it determines to which degree it influences decisions made based on the outcome. The complex part of weighting the measures is that performance on one metric is not supposed to be at the cost of the performance on another metric. Performance on the individual metric should individually be contributing to the organizational value, and should be complementary to the other metrics. Other relevant aspects in judging performance measures are their noisiness and goal
congruence. Preferably, a measure is noiseless and perfectly congruent (Feltham & Xie, 1994). The former relates to the precision of the measure, which is determined by it being influenced by
uncertain and uncontrollable events. The latter explains the degree to which is measured what you actually intend to measure.
There are different types of performance measures. Fitzgerald et al. (1991; in Neely et al., 1995) state that there are performance measures related to results (competitiveness, financial performance) and to the determinants of the results (quality, flexibility, resource utilization and innovation). Here, I make the following distinctions: subjective versus objective and financial versus non-financial.
Subjective measures are based on personal opinions and experiences. They are generally relative, qualitative and more likely to be used than absolute, quantitative, objective measures (Vij & Bedi, 2016). Objective measures often fail to indicate managerial effort and imperfectly measure performance (Woods, 2012). Imperfect measures are not responding to managers’ actions, not in line with organizational objectives, noisy, incomplete, and manipulable. Then again, subjective measures are often less accurate and reliable, resulting in managers ignoring performance measures originally planned to use. The focus should be on objective measures, because these are easier to
13 quantify and thus clearer to evaluate in a performance measurement system. Within objective
measures, we can make a distinction between financial and non-financial measures.
Financial measures can be categorized into market-based (e.g. stock market information) and accounting measures (e.g. financial ratios). Because accounting measures are based on historic and measurable information, those are mostly backwards looking. Future consequences of current actions are reflected by market-based measures, what makes those more congruent and noisy than accounting measures. Therefore these measures lay more risk on managers. Price is an example of a market-based financial measure. Feltham & Xie (1994) illustrate that if price is solely used, it will result in a loss of efficiency. Accounting measures on the contrary, are relatively less congruent, but therefore also more often criticised. Managers basing their decisions solely on financial measures have been criticized to encourage an increase of short-term results by sacrificing long-term performance (Ittner et al., 2003; Dikolli, 2001; Farrell et al., 2008).
Non-financial measures are more often used in predicting future performances, and can therefore complement accounting measures. They are perceived to be more cognitively valuable because they are more meaningful and understandable than financial measures (Ittner et al., 2003). Farrell et al. (2008) confirms that non-financial performance measures such as quality are believed to be forward-looking indicators with a decision-influencing effect. Also, these measures are
expected to be more informative in a regulatory setting (Ittner et al., 1997). These are all reasons for the non-financial measures to be more heavily weighted than the financial measures. But in the weighting decision, it is also relevant to include that the use of non-financial measures does increases the noise in financial performance measures (Ittner et al., 1997). Other possible difficulties with non-financial measures are their ambiguity and manipulability.
Instead of using subjective performance measures, subjectivity can be used to weight performance measures in incentive contracts. Introducing it can improve contracts by mitigating problems of rewarding through formulas or by reducing risk (Bol, 2011; Gibbs et al., 2004). It is
14 especially relevant for complex situations including multiple tasks and decision-making. However, if the evaluator is experienced to be unfair and unbiased, subjectivity can result in substantial risk. For the application of performance contracting, Speklé & Verbeeten (2014) state the following requirements: (1) unambiguous organizational objectives, (2) the ability to select undistorted performance measures, and (3) that efforts can be translated into results, and outcomes of activities can be predicted by organizational actors.
3.3 Performance measurement systems
There has been a focus on a reformation of the public sector since the 1980s, which is referred to as New Public Management (Hood, 1995). It has particularly been viewed in the area of health care because of the huge costs in this sector (Greenwood et al., 2017). The adoption of performance measurement systems is central to this philosophy that strives to change old bureaucratic administrations into efficient and effective organisations (Arnaboldi & Azzone, 2010). The
implementation of a performance measurement system is much more common in the private sector because there is a clear goal to make profits and provide financial returns. Public sector
organisations differ in the way that they are not profit maximising, have little potential to generate income, and are struggling to measure performance easily (Boland & Fowler, 2000).
Performance measurement systems can be implemented for different purposes. A classic distinction can be made for decision-facilitating and decision-influencing roles (Speklé &
Verbeeten, 2014). Actions of managers and managerial decision-making are categorized under the decision-facilitating role. The decision-influencing role is concerned with incetives and how to motivate employees, which relates to the agency problem here.
In the previous section, relevant characterics of performance measures are covered. These should all be considered in deciding on which performance measures to pick, and which trade-offs
15 to make. The usefulness of a performance measurement system is based on its implementation of the picked relevant measures.
In a well performing performance measurement system, all objectives are communicated clearly to the employees. The employees’ input is not directly observable, thus they cannot be compensated directly for the effort they actually exert. As described before, implementing
performance measures in incentive contracts may serve as a solution to this problem. It is desirable to mitigate the consequences of the agency problem through the performance measurement system. For this purpose, the following three tools with different focusses are evaluated here: budgetary control, balanced scorecard and benchmarking.
3.3.1 Budgetary control
Using budgets for planning and control is an old tool within management accounting and control. Budgeting allows performing variance analysis by comparing it to actuals. In order to perform variance analysis, performance measures need to be quantified. Outcomes can be viewed to
evaluate performance and differences can be regarded as under- or overspending (Pettersen, 2001). Variances can provide useful information about managing internal processes. Hence this
information can be used for future purposes to improve efficiency.
Budgetary control can be motivating because the budget can be seen as a norm (Demski & Feltham, 1978). Deviating from this norm would encourage the undertaking of actions towards improving actuals towards this norm. If incentive contracts are applied in budgetary control, compensations are based on budgeted versus actual performances (Demski & Feltham, 1978).
Pettersen (1995) illustrates that accounting information only has a small impact on budgeting decisions in hospitals. Budgetary information is namely largely based on negotiations instead of output measures as control tools.
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3.3.2 Balanced scorecard
Like other public sector organisations, hospitals can have very diverse natures. A solution to this problem may be the application of a multidiverse performance measurement system, like the balanced scorecard.
This widely known performance measurement framework is comprised by Kaplan and Norton (1992). The tool should allow managers to look at organizations from the following four different perspectives:
(1) Customer perspective: How do customers see us? (2) Internal business perspective: What must we excel at?
(3) Innovation and learning perspective: Can we continue to improve and create value? (4) Financial perspective: How do we look to our shareholders?
Financial measures are useful in telling results of actions already taken, complemented by the three operational measures that drive future financial performance (Kaplan & Norton, 1992). No measure is individually enough to reflect a clear performance objective, thus all four components need to be evaluated.
Kaplan & Norton (1996) argue that only focussing on the distinction between financial and non-financial measures is not enough because the same limitations may arise as by solely using financial measures. For example by not providing enough information about future performance or not being related to strategic objectives. Instead, an organisations should implement a balanced scorecard in every specific business unit, identifying every unit’s own unique strategy.
Developing the first three perspective in the right way should result in the following of the fourth, related to financial success (Aidemark, 2001). Innovation and learning leads to better expertise and capabilities among employees. Consequently, internal business will improve, leading to better customer relations. Customer relationships are key to financial performance. Aidemark (2001) also points out that balanced scorecards may reduce goal-incongruence and ambiguity of
17 performance evaluation when the four perspectives are considered as important as financial
performance in health care organisations. This conclusion was drawn based on experiences from Jönköping County Council; where 3 hospitals, 31 health centres and 35 dental service clinics are based. There, medical professionals looked at an implementation of the balanced scorecard compared to traditional financial performance measurement.
Neely et al. (1995) note that the balanced scorecard does not contain a competitor
perspective, which should provide an answer to the fundamental question what the competitors are doing. Although this is a multi-dimensional tool, it can be seen as a serious flaw that this external perspective is not included.
Another flaw that has been shown is manager’s failure to practically act upon the model. Lipe and Salterio (2000) examined whether mangers utilize the information gained from the implementation of dierse measures. Their experiment shows that the implementation of unique measures has no impact on managers’ decisions because they only look at the commonly implemented measures across units. Because the unique measures are mosly leading and
non-financial, not evaluating these removes the specific usefulness of this model. The implementation of specific balanced scorecards for every business unit is an important benefit of the tool. Thus if managers ignore the unique measures, the benefits will not outweight the costs of this model.
Ittner et al. (2003) found that subjectivity in weighting performance measures in the balanced scorecard resulted in supervisors ignoring crucial and leading measures. Instead, several other measures that were not even invluded in the framework formed a strong base of performance evaluation. This confirms the possibility of a failing implementation of the framework by managers.
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3.3.3 Benchmarking
Private organisations are focussed on value creation and profits, which makes it is easier for those to set targets than it is for public organisations. Benchmarking can be a solution to this problem, although it might be hard to compare firms with different structures (Arnaboldi & Azzone, 2010). Benchmarking has an external focus, unlike most traditional performance measurement systems. The tool is useful for organisations with the objective to pursue the best practices in the sector (Elnathan et al., 1996).
Spendolini (1992) provides a model for the implementation of benchmarking with the following steps (in Elnathan et al., 1996):
(1) Decide which activities and functions will be benchmarked (2) Create a benchmarking team
(3) Identify benchmarking partners
(4) Do extensive analysis of organization on activites; identify and analyze data on inputs, outputs, flows and costs
(5) Take action
The amount of reliable information that is publicly available determines the extent to which comparison is possible, and thus the usefulness of this performance measurement tool.
Benchmarking allows an organization to look critically at itself and to seek out for the best practices (Dorsch & Yasin, 1998). Comparing practices to those of other organizations can result in finding solutions to eliminate the organizational shortcomings.
4 Analysis
In this section, I first determine which performance measures are relevant for the hospitals based on the setting in the Netherlands. Next, I evaluate the usefulness of budgetary control, balanced
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4.1 Relevant performance measures in Dutch hospitals
In selecting the performance measures, those that are related to the medical professional
contributing to the objective of the hospital should be picked. A performance measure is considered relevant for Dutch hospitals if it serves the purpose of reducing costs, improving quality or even both.
EHCI used six sub-categories for their 2017 index, including (1) patient rights, information and e-Health, (2) accessibility (waiting times), (3) outcomes, (4) range and reach of services, (5) prevention, and (6) pharmaceuticals.
The starting point here is that; price, waiting times and performance have to be included. As stated before, performance on the governement’s quality requirements is of great importance because all stakeholders view those.
Long waiting times reflect dissatisfaction among patients because they are not experiencing the expected benefits of the treatments (OECD, 2016). The measure shows how effective
organizational interaction is. According to OECD/EU (2016), the average waiting time for patients in the Netherlands was around 40 days in 2014/2015, which is among the lowest rates compared to other European countries. This measure must be maintained as low as possible to able to compete with other hospitals. Subjectivity is relevant in the weighting of the performance measure ‘waiting times’. Eventhough this measure is desired to be kept as low as possible, it may not be at the cost of time devoted to a patient’s diagnosis. An accurate diagnosis is of great importance for the delivery of high quality care, so it is very important that the treatment is determined carefully for the specific patient. Medical professionals have to use their medical judgements for this purpose.
Avoidable mortality is another widely used measure to approach the effectiveness of the hospital, including: (1) preventable death, which is a broad term referring to all kinds of cases that could have been avoided by public health interventions, and (2) amenable death, which could have
20 been avoided by optimal quality of the provided care, determined by medical knowledge and
technology (OECD, 2016).
For the purpose of lowering the costs, price is relevant. In providing better quality; waiting times, avoidable mortality and performance should be viewed. Within these measures, there is a complementary effect too. Improving quality by these measures can improve efficiency and effectiveness of internal processes, which in turn can contribute to lowering costs. These measures are all of great importance to the performance of Dutch hospitals. Therefore the most informative performance measurement system would be one that evaluates all of the above.
4.2 Evaluation of performance measurement systems
First, budgetary control is evaluated. Although the functional budgetting system was abolished in 2005, the current performance funding system shows a similar characteristic. Established annual lump sum payments can be considered as ‘budgets’ because they determine the money that is at the hospitals disposal to provide care. Therefore, for the sake of performance evaluation budgetary control can be a useful tool. Using this method is informative because it allows the hospitals to predict costs. Providing a starting point to negotiate contracts with insurers and to not be hindered in providing care because of inadequate contracts. A disadvantage is that this tool’s only focus is on financials. This does not provide enough information to tackle the agency problem. Also, because only financial information is implemented, subjectivity is ignored.
Second, the balanced scorecard is evaluated. Eventhough this is a fairly diverse system; a disadvantage is the lacking external component. The insurers are willing to negotiate contracts based on and compared to what other hospitals offer. If the hospital itself does not know what the competitors are doing, it is impossible to determine its own position within the sector. The tool is relatively costly to implement because every business unit implements its own balanced scorecard. Also, subjectivity in weighting of performance measures in incentive contracts fails to work based
21 on prior literature. If subjectivity cannot be used, the agency problem will be hard to tackle. Then again, if the effects of the agency problem cannot be mitigated, it is impossible to see whether each business unit acts upon the performance measurement system. These are all factors contributing to the likelihood of the tool to fail.
Third, benchmarking is evaluated. The usefulness of the tool is based on information that is available. Unlike the balanced scorecard, this tool has a strong external focus. Because of the high transparancy of the Dutch health care sector, information on every performance measure is publicly available. A possible disadvantage is that it is hard to compare organisations with different
structures. Because the main actors are public hospitals, having similar structures, this is not expected to be a barrier here.
5 Conclusion
The evaluation of the performance measurement systems cannot result in one superior tool that excels because it has not been tested in practice. Eventually, both internal and external influences determine the quality, quantity and price of the care that hospitals are able to provide. Though, I can make a general recommendation based on the gathered information.
I believe that benchmarking is most likely to provide information for the purpose of lowering costs and improving quality. Ultimately, the care that hospital is able to provide depends on the contracts that are negotiated with insurers. And these contracts are established based on a hospital’s performance compared to that of other hospitals. Also, patients will compare hospitals when they decide which care provider to select. If everyone can position the hospital within the sector, it should be able to do so by itself too. The transparancy of the market facilitated by the government provides a convenient setting to apply this performance measurement system. Public information on every performance measure, makes it possible to benchmark these measures.
22 Because budgetary control only implements financial information, this tool is very limited. Both non-financial and subjective measures are ignored while those are highly relevant for public hospitals. Next, the balanced scorecard is definitely a useful tool because it incorporates different perspectives, allowing all sorts of performance measures to be implemented. Though, the lacking external perspective is a serious deficit. Previous literature also shows that subjectivity in weighting performance measures fails to work in the balanced scorecard, while this subjectivity is of
importance to meet the interests of the stakeholders.
A limitation is that all conclusions are drawn based on previous literature and theoretic information. Quantifying and testing the specific performance measures should be done to
experiment how implementation of the performance measurement systems works in practice. Only based on actual implementation can be concluded whether desired objectives can be achieved.
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