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JM2 7,1

The balanced scorecard in health care: a multilevel latent variable approach

Pietro Giorgio Lovaglio and Giorgio Vittadini
CRISP and Department of Quantitative Methods, University of Bicocca-Milan, Milan, Italy
Abstract
Purpose The purpose of this paper is to propose a practical conceptualization of the balanced scorecard (BSC) to describe the mechanism producing creation of monetary value for hospitals in the territorial context of Lombardy region (Italy). Design/methodology/approach The authors propose a model-building strategy that assigns key indicators to key performance areas, and identies causal relationships between key performance areas. Second, the authors utilize a suitable statistical approach to estimate causal relationships among involved latent variables, taking into account the hierarchical structure of data. Utilizing a suitable data decomposition, the causal model is applied separately to the within data (hospitals) and to the between data (local health agencies). Findings In the measurement model a new latent construct (medical human capital) was found that resumes the amount of formal training and the performance of surgical staff in hospitals. The estimated causal models reect the usual directional assumptions, supposed in a typical BSC causal scheme, with some differences. For local health agencies, fruits (nancial measures) are strongly related to clinical processes (leaves) for which the medical human capital constitutes its unique trunk. However, for hospitals, fruits (nancial measures) are directly linked to clinical processes and Patient Satisfaction. Research limitations/implications The main limitations of this study are the lack of new independent data to validate the obtained causal structures and the limited number of indicators that reect the deciency of available information in regional administrative archives. Originality/value The present study may be useful to guide further efforts which attempt to conceptualize BSC in the health sector. As more information can be made available, other performance indicators can prove to be linked with this structure using the same methodology. Keywords Italy, Balanced scorecard, Health care, Hospitals, Performance criteria, Latent variables, Partial least squares path modeling Paper type Research paper

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Journal of Modelling in Management Vol. 7 No. 1, 2012 pp. 38-58 q Emerald Group Publishing Limited 1746-5664 DOI 10.1108/17465661211208802

1. Introduction Over the last two decades, the literature has identied a number of frameworks aimed at facilitating health structures in both improving quality and in designing and implementing performance measurement systems, such as Continuous Quality Improvement or the Balanced Scorecard (BSC) (Blumenthal, 1996; vretveit and Gustafson, 2003). Kaplan and Nortons (1992) contribution is the proposal of a managerial model, called the BSC, to support the decision-making process in business in order to provide a multidimensional interpretation of economic performance. The BSC is a system of causal relationships among composite indicators (key performance areas (KPA)), which integrate and summarize large amounts of information (key performance indicators (KPI)) into an easily understood single metric. The BSC is typically proposed to assess to what extent

specic areas best contribute to the prospective of the creation of monetary value for statistical units (rms, companies, departments, etc). The conceptual scheme of BSC, which implements a balanced set of different types of indicators, has gained huge popularity as an effective theoretical support tool in decisions regarding the multidimensionality of evaluation processes, the identication of individual and group targets, as well as in the application of strategies concerning operational and organizational activities. Specically, the BSC identies causal relations between principle dimensions of interest (KPA), once they are measured by observable indicators (KPI). A typical BSC has nancial (monetary-physical indicator outputs and their productivity), learning and growth (the quality of human resources, Human Capital), internal processes (the amount, quality and efciency of processes), and Customer KPA. The BSC is typically applied by organizations and industries within the strategic management area. In the last decade however, the BSC approach has also been introduced in the Health sector, under the guidelines of accredited international institutions such as the World Health Organisation (WHO, 2000) and OECD (Hurst, 2000), establishing concrete requirements designed to implement, sustain and improve micro-economic efciency and macro-economic sustainability in national health systems. Baker and Pink (1995) were among the rst to argue that the theory and concepts of the BSC were relevant to hospitals. In their second book on the BSC, Kaplan and Norton (2001) introduced cases demonstrating how the BSC could be implemented in non-prot, governmental and health care organizations. Currently, the basic principles of the BSC are well documented in health care literature (Chow et al., 1998; Oliveira, 2001). The BSC has been widely applied in international health sectors, including hospitals Systems (Zelman et al., 2003; Sahney, 1998; Pink et al., 2001), National Healthcare Systems or Organizations (Inamdar et al., 2002; Northcott and France, 2005). In Italy, the Lombardy region has recently promoted a pilot study (Lauro, 2007), designed to describe the various implementations of the BSC system for the measurement of hospital performance and productivity in the Lombardy Region Health sector. Specically, in 2007, the Lombardy Region Directorate of Health collaborated with a university-based research team in developing a report on the relative performance of individual hospitals, utilizing the BSC framework advocated by Kaplan and Norton. Performance indicators were developed in four KPA: clinical process, patient satisfaction, human capital and nancial performance. Despite the rapidly evolving use of the BSC, the concept of BSC as a strategic management tool has had limited research coverage (Tuomela, 2005) for two main reasons. First, moving from concept to practice has often proved difcult (Chow et al., 1998; Ahn, 2001): the BSC theoretical framework must evolve into a measurement system using explicit objective formulas, which dene causal relationships among the areas analyzed then prescribing the weights to be attached to each KPA (Ittner and Larcker, 1998; Kaplan and Norton, 1992). Second, the lack of literature (government or academic publications) on causal-effect relationships between different types of indicators makes it difcult to conceptualize dynamics and operations. Following the proposals of Kaplan and Norton (1996, 2001), the four KPA have established cause-and-effect relationships in a treelike fashion: cause-and-effect relationships amongst BSC dimensions imply how the fruit (nancial performance) in the tree is related to the leaves (customers), the trunk (processes) and the roots (Human Capital).

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Unfortunately, the heterogeneity of health organizations may hinder reaping the full benet of the BSC approach, suggesting the need for some key modications to take their unique characteristics into account (Zelman et al., 2003). In this perspective, the BSC has been used by many health care organizations in the health care sector, which differ, namely in the units of analysis, purposes, audiences, methods, data, and results. Zelman et al. (2003) found that a variety of health care organizations use BSCs, although the standard BSC is often customized to better reect the industry and organization (e.g. acute care, long-term care, mental health care, managed care, and medical group practice). The authors conclude that the use of the BSC in health care has provided a relevant contribution; however, modication to reect institutional missions and organizational specications is necessary. For example, Shortell and Kaluzny (2006) suggested that hospitals should make the shift to providing both public/community health care and institutional/traditional health care, and that doing so would impel hospitals to evaluate community health status in order to implement quality improvement measures and provide services designed to meet specic community needs. In this perspective, some authors argue that the assumptions of causality relationships between the four KPA in the health care framework remain subjective and may vary in different areas (Ittner and Larcker, 1998; Morard and Stancu, 2005; , 2002; Chow et al., 1998). Various empirical studies found no causality Kanji and Sa between quality and nancial results (Ittner and Larcker, 1998), while others (Kanji and , 2002; Morard and Stancu, 2005) threw doubt upon the causal structure among the Sa KPA areas proposed by Kaplan and Norton (2001). Moreover, another important methodological issue must be underlined. Given that health data typically presents a hierarchical structure (statistical units are nested in gradually more aggregated levels), a methodology aimed at estimating the causal relations between latent variables (LVs) should not ignore the hierarchical structure of the data and thus the correlation between micro-level units (e.g. patients) belonging to the same macro-level unit (e.g. hospital). The purpose of this article is to present a conceptualization of the BSC in describing the mechanism producing creation of (monetary) value for hospitals in a specied territorial context (the Lombardy Region, Italy) utilizing a structural equation modelling framework. As previously discussed, when knowledge is insufcient to build a robust and well-suited model, LVs and causal structures, rather than being only assumed, should be tested by a suitable building strategy. Furthermore, the estimation of the specied structural model must take into account the hierarchical structure of the available data (in our case, hospitals nested in Local Health Agencies). Specically, we propose a model building strategy, which: . assigns (key performance) hospital indicators to each KPA; and . identies the causal relationships between the involved KPA. Second, we utilize an appropriate statistical approach to estimate the causal relationships among the involved KPA in a multilevel perspective: in particular, the adopted structural model was applied separately to Local Health Agency data (structures that purchase and manage health services distributed by hospitals) and to the Hospital data (monitoring the effect of nesting within Local Health Agencies), potentially revealing different causal structures which would have otherwise been masked had the nested structure of the observations been ignored.

2. Methodology: PLSPM In the last decade, leading accounting journals have placed great emphasis on the future directions of management accounting research, including the structures of theoretical modelling and data analysis that can be used (Atkinson et al., 1997; Shields, 1997). To conceptualize health quality systems, the use of structural equation models may overcome some of the limitations imposed by the more traditional statistical techniques used in management accounting (Hulland, 1999; Smith and Langeld-Smith, 2004). Since the KPAs specied in the BSC are unobservable multidimensional constructs (hypothetical or latent constructs) measurable with errors by means of blocks of observed indicators, the most natural methodological context for BSC conceptualization and estimation deals with structural equation models with LVs. In statistical literature, the rst denition of an LV, sharing the factor analysis approach, is supplied by the structural equation models or LInear Structural RELations reskog (1978)), stating that LVs (from here LISREL model, following the approach of Jo are true LVs in the sense that the equations cannot be manipulated so as to be expressed as a function of observed indicators only (Bentler, 1982). A second approach arises in literature, dening an LV as an Unobservable Component Variable (Kmenta, 1991), whose scores are estimated as linear combinations of their observed indicators. In this view, observed indicators appear as causes of an LV, whereas in the LISREL model they are effects of the underlying latent causes. In this LV denition, partial least squares path modelling (PLSPM; Wold, 1982) is the counterpart of the LISREL model. PLSPM is employed for path analysis with components or weighted composites of observed variables: the relationships between manifest and LVs form the outer or measurement model and the relationships between LVs form the inner or structural model. PLSPM denes LVs as latent components or weighted composites of observed variables. Observed indicators may be considered as either the effects of an underlying LV or as the causes dening the weighted composite. Thus, each measurement model may identify either a formative scheme (the manifest variables contribute to the formation of the latent scores, following a principal component analysis (PCA) framework) or a reective scheme (the manifest variables constitute the effects of their LVs, following a factor analysis framework). PLSPM proceeds in two stages (Wold, 1982). In the rst stage, the LV scores are estimated as linear combinations of their own observed indicators by means of a cyclical procedure. After having estimated each LV (h0j) as a linear combination of its observed indicators, using arbitrary weights (w0j), LV scores are estimated iteratively by means of an iterative algorithm with respect to both the inner and outer model. The inner model updates h0j (inner estimate, h 0j ) as a weighted sum of the LVs which, in the structural model, are adjacent to h0j (previously estimated by the same criteria used for h0j). The sum of the adjacent LVs is weighted by the coefcients representing the correlation between the adjacent LVs (factorial scheme) or simply their signs (centroid scheme) or the regression coefcients, following the specied structural model (structural scheme). Differently, in the outer model, the weights dening LV scores are updated depending on the causal links between LVs and their manifest indicators: for reective indicators, weights are obtained by simple regression of each manifest indicator on h1 0j , whereas for formative indicators, the weights are updated by multiple regression of h1 onto the matrix 0j of observed indicators. By iterating the steps of this procedure, the convergence

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of the algorithm presents the nal estimation of the weights dening the LVs scores as linear combinations of their observed indicators. Finally, in the second stage of PLSPM, the parameters of the structural model (links between LVs) and the measurement model (links between observed indicators and LVs) are achieved through simple and multiple regressions, utilizing the latent scores estimated in the rst stage. Thus, the structural model becomes a path analysis model involving linear combinations of observed variables. Since the LVs are given by linear combinations of the observed variables, PLSPM does not suffer from the improper solutions (negative variance or standard errors, factor correlation estimates greater than ^ 1), identication problems and indeterminate factor scores which typically plague the covariance structure approach (Stelzl, 1986; Meredith and Millsap, 1985; Schonemann and Steiger, 1976; Vittadini, 1989). An additional advantage is that PLSPM does not rely on stringent assumptions, such as complex theoretical structures specifying independence of measurement errors and structural errors, which are often violated in non-experimental data (Wold, 1982). In fact, PLSPM requires no distributional assumption, and thus can treat all types of data, as long as the assumption of an underlying continuous distribution is maintained (when working with continuous data or ordinal grades on a 1-10 scale). PLSPM uses resampling methods such as the jackknife and the bootstrap methods (Efron, 1982) to calculate robust standard errors of parameter estimates, test statistics, and to assess the reliability of t indices. It has been utilized with satisfactory results in literature for the strategic management area (Hulland, 1999, for a complete review) as well as in customer satisfaction (Fornell and Bookstein, 1982; Tenenhaus et al., 2005). 3. Structural models: a hierarchical perspective As we have seen, the BSC is a structural model and thus suitable for estimation by PLSPM. However, as previously mentioned, data in the Health sector typically reects a hierarchical structure. Several methods have been proposed in literature to t path n, models allowing multigroup comparisons, such as multilevel factor analysis (Muthe reskog, 1993; Muthe n, 1994; 1991) or multilevel covariance structure analysis (Jo Goldstein and McDonald, 1988). Nonetheless, these methods were all developed from the perspective of covariance structure analysis, hence, reective indicators are typically assumed with factor score indeterminacy remaining problematic. Unfortunately, in the component analysis framework (substituting components for factors), PLSPM is unable to perform multigroup comparison checks for hierarchical data structures, as that would require a single formulation of the models for many groups. More specically, PLSPM ts the same model to I groups separately (i 1, . . . ,I), so that it is not viable for examining hypotheses on parameter stability or models across groups. Hence, PLSPM does not allow the evaluation of the separate contribution of groups or of the contribution of the individual units in each group to the overall variability of the model. Alternatively, a recent technique, multilevel simultaneous component analysis (MSCA) (Timmerman, 2006), was proposed in the context of PCA and thus for a single block of observed variables in the multilevel perspective. MSCA reproduces as much of the overall data variability as possible, obtaining two sets of orthogonal latent scores which underlie a formative set of indicators summarizing the variability between different groups (variability among second level units) and within groups (variability among rst level units in each second level unit). Furthermore, MSCA has the fundamental property

of between-group and within-group components being orthogonal within each group and for all groups. 3.1 Obtaining the MSCA model parameters P Let Y ( iKi J) be the total data matrix containing Ki individual measurements for group i (i 1, . . . ,I) on J variables thatP are centered on the overall mean for variable j across all groups (grand mean), where i Ki is the total number of observations. Each matrix Yi (Ki J), containing the part of Y with data from group i (i 1, . . . ,I) can be decomposed as: Y i Y c;i 1 Ki m iy 0 1

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where miy0 is a (1 J) row vector containing the column means of matrix Yi and Yc,i is the (Ki J) matrix containing only the within-group variation belonging to group i. The I vectors miy0 can be concatenated into a (I J) matrix My. Matrix My now contains the differences between groups. In the case of an equal number of measurement occasions for each group, the Between-group model can be determined by performing a PCA on My. The Within component of MSCA is the basis for a range of methods. These methods differ in the additional constraints on the Within-individual scores, incorporating assumptions on the relationships between the Within-individual variations of different individuals. When no particular constraints are placed on the (covariances of the) Within-individual scores, the P Within-group submodel can be calculated by tting a PCA on Yc, where Yc is a ( iKi J) matrix in which all Yc,i matrices are vertically concatenated (Timmerman, 2006). As proven by Timmerman (2006), MSCAs main property is the orthogonality of the two parts of the model, allowing the component scores and loadings to be separately estimated in both structures by using the My and Yc matrices. 4. PLSPM: a hierarchical perspective As mentioned previously, MSCA has the main property of orthogonality of the two parts of the model. However, this property arises from the fact that, under the aforementioned constraints on the Between and Within component scores (equation (1)), MSCA obtains linear combinations in both structures which are mutually orthogonal in the same dimension and for all dimensions, given that these components are extracted from the mutually orthogonal matrices My and Yc. Unfortunately, PLSPM and MSCA cannot be easily or consistently integrated. First, both techniques have different criteria for extracting linear components: MSCA estimates PCs by maximizing the explained variability in each block, whereas PLS maximizes the regression criteria specied by the structural model. Second, there is no guarantee that the nal latent scores of the PLSPM algorithm in the Within and Between structure will remain orthogonal, as occurs in MSCA. In fact, in the inner model of PLSPM, latent scores are updated based on causal relationships with their adjacent LVs, whereas in the outer model latent scores are updated based on the causal relationships between LVs and their manifest variables (Tenenhaus et al., 2005). To overcome these drawbacks, we follow a strategy that, instead of fully integrating both techniques, selects suggestions provided by MSCA, and then applies PLSPM to the two orthogonal data matrices representing both structures. More specically, starting from (column-wise mean) centered data matrices Yk (referred to the kth block of manifest variables dening the kth LV in the structural model, k 1, . . . ,K), rst, we decompose

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such data matrices in two orthogonal blocks, as suggested in equation (1) to obtain the Between (Mk) and the Within (Yc,k) data matrices. Utilizing this decomposition, we can perform two different PLSPM analyses on two separate sets of matrices to obtain latent scores and parameters (causal links between LV) consistent with the supposed structural model in the two separate domains. More specically, the PLSPM algorithm is applied separately to the Within data structure (using Yc,k matrices related to the K LVs) and to the Between data structure (using Mk matrices), potentially revealing different causal structures which would have otherwise been masked if the nested structure of observations had been ignored. Finally, the PLSPM latent components in the Within and in the Between structure are group centered, following the constraints suggested by MSCA. This guarantees that the PLSPM-latent scores of the Within structure are orthogonal to the PLSPM-latent scores of the Between-structure. Following the strategy of decomposing the data matrix into two orthogonal blocks, taking into account the Between and the Within data structure (equation 1), in a multilevel perspective, we can generalize other statistical models involving latent components (estimated as linear combinations of their observed indicators) in which projections are guided into meaningful directions. In this framework, component scores can be obtained as projections guided into meaningful directions by a matrix of another set of symmetrical variables (e.g. Canonical correlations), by a matrix of response variables (e.g. multivariate regression, redundancy analysis, partial least squares regression, etc.) or by other matrices, specied in a structural model (PLSPM). 5. Model building strategy As explained in Section 1, the BSC proposed should be accompanied by an explorative phase that claries processes and hypotheses used for its development (Akkermans and van Oorschot, 2005) and by a validation phase that conrms the identied structure. In the explorative phase, where it is difcult to build the model on expert knowledge, data structure may contain useful information to underline the relations of the model. Our model building strategy explores two distinct steps. The rst step consists of building the measurement models. Because the constructs are LVs, a rigorous procedure to ensure the psychometric adequacy of the resulting new multi-item measurement scales is required. The challenge is to develop a more robust construct of complex variables through averaging several individual items by selecting a set of items that capture the essence of the construct with the desired reliability and validity. Thus, the rst step in constructing new multi-item measurement scales is to generate or select sets of items that tap into the latent constructs and permit us to accurately assess those constructs from a managerial perspective (Churchill, 1979; Hinkin, 1988). Traditional approaches obtain blocks or clusters of related variables with specic properties (internal consistency), then lump correlated variables together by means of PCA, with or without rotation (e.g. Varimax rotation). Other non-parametric hierarchical or non-hierarchical variable-clustering algorithms exist as well. One popular method is the VARCLUS algorithm, a procedure implemented in SAS (1999), which divides a set of numerical variables into disjointed clusters, maximizing the variance explained by the cluster components (composite variables), summed over all the clusters. The VARCLUS algorithm works by joining variables which either present similarity in the rst principal component scores of the variables in the associated cluster or else demonstrate similarity in the centroid component, i.e. the unweighted averages of the standardized variables.

A recent variable-clustering strategy, Clustering around Latent Variables (CLV) (Vigneau and Qannari, 2003), appears more promising. CLV was proposed as a measurement model building strategy, where LVs are approximated as composite variables (linear aggregation). Like VARCLUS, CLV is characterized by the fact that it attempts to nd homogeneous groups of variables by maximizing a criterion which reects the extent to which the variables in each cluster are related to a specic LV (component) associated with this cluster. CLV functions by grouping the p manifest variables y1,y2, . . . ,yj, . . . ,yp into K groups where each group Gk (k 1, . . . , K) is represented by an LV (component) ck. The groups are determined in order to maximize the sum (across groups and variables belonging to groups) of the covariances between yj and ck, under the constraint ck0 ck 1. The rst step in hierarchical clustering is to consider that each variable forms a group in itself and then proceeds by iteratively merging two variables or two clusters of variables. When the two groups of variables are merged, this results in a decrease of criterion T. The LV in each cluster is set to the standardized rst principal component of the cluster in question. Each variable is assigned to a group if its squared covariance (regardless of whether the correlation is positive or negative) with the latent component of this group is higher than with any other latent component. As a comparative measure of measurement model strategy, we use a criterion which reects how far the reproduced conguration using the constructed blocks is from the P raw data matrix. Specically, M2 ( k SSQ(Yk 2 zk0 ak), k 1, . . . ,4) expresses, in each structure, the sum (over the four blocks) of differences between the data matrices (Yk) and the reproduced uni-dimensional matrices (zkak0 ), given by the product of the rst principal component (zk) and the loading vector (ak, obtained by singular value decomposition). In regard to the structural model, we suppose causality directions reecting directional assumptions, handled in a typical BSC causal scheme: Human Capital ! Processes ! Satisfaction ! Economy. In this framework, we enhanced the causal scheme by allowing each endogenous construct to have more than one exogenous construct. In this phase of the model building strategy, in order to reveal the associations between pairs of LVs, we measure the partial correlation coefcients (and the associated statistical test) for each pair of the rst principal components of each block (used as an estimate of each LV), net of remaining principal components. As the last step, we evaluate the constructed models through the application of a data-driven approach, suggested by Jakobowicz and Derquenne (2007). To build directional causal relationships (which direct the edges) the authors utilize a step-by-step algorithm which selects the best model in terms of predictive power, measured by the mean of the R 2 for the endogenous LVs. However, this approach discovers robust relations between LVs only in a statistical framework: the results must then be investigated by qualied professionals and researchers to evaluate the relevance of the suggested causal relationships and their consistency with the supposed causal scheme. 6. Application In 2007, the Lombardy Directorate of Health promoted a pilot study (Lauro, 2007), with the objective of assessing the impact of Health structure management and policies on business results for health structures in a BSC framework. The health system

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of the Lombardy Region involves four different hierarchical levels, designated to manage and distribute health services to the population: the most aggregated level refers to the local health agency, collecting hospitals, health structures, ambulatory structures, centers for mental health and for elderly patients in the relevant geographical area. In the territorial context of each local health agency, health services are supplied by different public and private health agencies (second level), involving various health structures, such as the Presidium of Health Agency and hospitals (third level). Finally, each Hospital may have one or more Operative unit engaged in distributing health services, incorporating an assortment of medical disciplines in different areas (fourth level). In our application, we have considered Presidiums of Health Agencies (from here, hospitals) as the rst level unit of analysis and Local Health Agencies (ASLs) as the second level. The choice of the rst level is motivated by the consideration that private Health Agencies coincide de facto with private Presidiums (hospitals), and indicators, especially those in the economic and process area, are provided for public structures at this level. The choice of ASLs is motivated by the consideration that they are strategic structures which purchase and manage health services distributed by (private and public) hospitals in a specic territorial context. The present application involves 163 public and private Lombardy Region Hospitals (34 hospitals present missing data for at least one indicator) belonging to 12 ALSs. The primary focus of the 2007 pilot study was to identify available regional information for the implementation of the BSC system in the regional health sector. The available data was collected by obtaining information from Hospital Discharge Records (the only routinely collected administrative source available in the Italian Health sector), from the regional archives, collecting Ofcial Regional Surveys on Patient Satisfaction (mandatory for all regional hospitals), and other various administrative archives present in the Lombardy Region Directorate of Healthcare. Table I shows the list of 25 hospital indicators (key performance index, KPI), arising from the previous pilot study. Each indicator, calculated at Hospital level, refers to the year 2007. The rst column, assigning each available indicator to different KPA areas in the BSC model, was lled in by qualied professionals in the Regional Healthcare Directorate. Patient Satisfaction indicators are mean scores of eight items (on a 0-10 ordinal scale) composing the ofcial Regional Customer Satisfaction Questionnaire. Clinical Process indicators (drawn from regional Hospital Discharge Cards) refer to meaningful dimensions in the quality process, identied in previous specic research studies promoted by the Lombardy Directorate of Healthcare (Healthcare Directorate of Lombardy Region, 2004). Specically, within the Triennial Program for the implementation of an evaluation system of Health structures and management of Health structures, the CRISP Research Centre, in partnership with International Joint Commission, carried out the subproject: Study of Outcomes with the aim of producing health structure performance indicators useful for monitoring the quality of care. The indicators concerning Human Capital and Economic KPA were drawn from available administrative archives of the Healthcare Directorate of the Lombardy Region. In particular, the indicators of the economy KPA were proposed by the International Joint Commission in the subproject Economic Performance (Healthcare Directorate of Lombardy Region, 2004).

Area (KPA) Human Capital

Subarea

Indicator (KPI)

Label RUMD RUFI RUFE QCCU QCIC QCID QOOS QOOR QOPE SATT SSAL OM30 OMIN QTRS QDIV EDGM QRRS QRSO ECMO ICLT PRDG PRND PRNC ISAT ISST

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Staff Training Training Patient Satisfaction Clinical Clinical Clinical Organizational Organizational Organizational Overall Overall Clinical Process Outcome Outcome Quality/outcome

Economy

% doctors on total employees Total days of training per employee Total days of training per sanitary personnel Provided care Clinical information on the health status Clinical information after discharge Quality (room, menu) of hospitality Hospital organization Medical and nurse staff Global satisfaction Satisfaction on the health state Mortality rate within 30 days of demission Intra-hospital mortality rate % transferred patients (towards other hospitals) on total discharges Quality/outcome % discharges against medical advice on total discharges Quality/outcome Length of stay for surgical discharges Quality % surgical interventions without complications on surg. interventions Quality % unscheduled re-admissions in surgical room on total discharges Economic results Gross operating margin Costs incidence % labour cost on total costs Productivity DRG prot per day of hospitalization Productivity Prot per employee Productivity DRG prot per discharge Costs incidence % cost of hotel services on total costs Costs incidence % cost of health services on total costs

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Table I. BSC key performance areas and key performance indicators

7. Results: model building strategy For a better interpretation, we reected indicators that express better performance when the indicator decreases (e.g. costs, discharges against medical advice, mortality rate, percent unscheduled re-admissions, etc). Further, all indicators were normalized on a 0-100 scale (where 100 indicates best performance). We build the measurement model in each block on the entire data matrix (25 indicators) and also on each data matrix representing both structures, by comparing the following approaches: CLV, PCA without rotation and with Varimax rotation, VARCUS based on the rst principal component (VARCUS_PCA) and VARCLUS based on the centroid component. A PCA (and related diagnostics) on the whole data matrices (25 indicators) show that four components are needed into explain approximately 90 percent of the total variance in both structures (89 percent and 95 percent for the Within and the Between structure, respectively). Therefore, we decided to select four components in order to compare the results of different methods. The subset of variables obtained by means of CLV corresponds, in both structures, to the lowest M 2 criterion (M 2 62.89 and M 2 32.15 for the Within and the Between, respectively). VARCUS_PCA also led to satisfactory results

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(M 2 69.34 and M 2 38.25), whereas PCA (M 2 98.73 and M 2 42.50) and PCA with Varimax rotation (M 2 102.89 and M 2 45.11, the same results as VARCLUS with centroid option) led to poorer results. A result in common is that, in both structures, all strategies reject four indicators (ISAT, ISST, PRNC belonging to the Economy KPA as well as RUMD, initially inserted in the Human Capital KPA). Additionally, these indicators present low communalities and, when aggregated in a block (based on the highest loadings) with other indicators, contribute to a decrease in the percentage of explained variance by the rst principal component and the internal consistency of that block (Cronbachs a). Table II shows the structure linking the four components to each indicator (measurement models), using the CLV criterion, for each structure. Additionally, the percentage of total variance of a block, explained by its rst principal component (percent 1PC), Cronbachs a and the AVE (the average variance of the manifest indicators set explained by the construct, Fornell and Larcker, 1981) are simultaneously shown, since these indices permit the investigation of internal consistency (Cortina, 1993). The blocks present satisfactory internal consistency: all Cronbachs a and percentages of variance explained by the rst PC reach values greater than 0.79 and 0.70, respectively. Also mono-factorial validity (when correlations between observed indicators of a block and their LV are higher than correlations with other LVs) and discriminant validity hold (when more variance is shared between an LV and its block of indicators than with other LVs not shown in Table II). If we compare the blocks suggested by CLV (Table II) with those compiled by qualied professionals (rst column of Table I), the most signicant result found is that the original Clinical Process indicators have been separated into two different blocks (KPA) referring to Clinical Process and Human Capital. The estimated Clinical Process block collected, for both structures, ve clinical outcomes (OM30, OMIN, QDIV, QTRS, EDGM), which indirectly measure the quality of clinical processes that potentially trigger adverse events, reecting malpractice (context outcomes). The Human Capital area collected two clinical indicators related to surgical interventions and complications (QRRS, QRSO) and two training indicators. This dimension may reect the quality of medical Human Capital in hospitals, measured by amount of training (RUFI, RUFE), and by clinical performance in high-risk specialties (QRRS, QRSO). As additional aspect of construct validity, we assess discriminant validity, which represents the extent to which measures of a given construct differ from measures of other constructs in the same model. In a PLS context, one criterion for adequate discriminant validity is that a construct should share more variance with its indicators than it shares with other constructs in a given model. To assess discriminant validity, the AVE (the average variance shared between a construct and its indicators) should be greater than the variance shared between the construct and other constructs in the model. This can be demonstrated in Table III, which includes the correlations between different constructs in the lower left off-diagonal elements of the matrices (Between and Within structures), and the square roots of the AVE values calculated for each of the constructs along the diagonals. Since the diagonal elements are greater than the off-diagonal elements in the corresponding rows and columns, Table III demonstrates adequate discriminant validity.

Key area 0.803 0.918 0.804 0.893 0.973 0.851

Label

Indicators

Within structure (hospitals) %1PC alpha AVE Loading

Between structure (Local Health Agencies) %1PC alpha AVE Loading 0.711 0.790 0.687 0.855 0.968 0.854

Human Capital

Patient Satisfaction

Clinical Process

0.766 0.812 0.593 0.702 0.799 0.646

0.862 0.792 0.698 0.735 0.792 0.734

Economy

RUFI RUFE QRRS QRSO QCCU QCIC QCID QOOR QOOS QOPE SATT SSAL OM30 OMIN QTRS QDIV EGDM ECMO ICLT PRDG PRND

Days of training per employee Days of sanitary personnel training % surg. operations without complications % unscheduled surgical re-admissions Satisfaction for provided care Satisfaction for information on health state Satisfaction for information post discharge Satisfaction for hospitality Satisfaction for hospital organization Satisfaction for medical and nurse staff Global satisfaction Satisfaction for health state Mortality rate within 30 days Intra-hospital mortality rate % transferred patients in other hospitals % discharges against medical advice Mean length of stay Gross operating margin % labour cost on total costs DRG prot per day of hospitalization Prot per employee

0.906 0.926 0.864 0.888 0.963 0.976 0.867 0.920 0.909 0.927 0.977 0.829 0.851 0.773 0.798 0.791 0.617 0.770 0.892 0.740 0.805

0.838 0.837 0.776 0.862 0.980 0.976 0.837 0.965 0.963 0.948 0.985 0.706 0.888 0.912 0.732 0.692 0.781 0.860 0.782 0.879 0.901

Note: aAfter the discussion (subsection 7.1), this construct was entitled Medical Care Quality

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Table II. Results of the CLV measurement models building strategy: Between-Within structure

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Constructs 0.897 0.097 0.002 0.051 0.770 0.470 0.404 0.922 0.583 0.804

Medical care quality Clinical Process Patient Satisfaction Economy

Note: Correlations between constructs and root AVE on the diagonal

Table III. Discriminant validity Medical care quality Economy Within structure Clinical Patient process satisfaction 0.829 0.600 0.038 0.496 Medical care quality Between structure Clinical Patient process satisfaction 0.835 0.165 0.740 Economy 0.924 0.010

The most surprising result of the measurement model building strategy is the composition of the Human Capital KPA (Table III) which, in the same block, includes the process indicators related to surgical interventions and complications (QRRS, QRSO) and also training indicators (RUFI, RUFE). Although it is fairly common in structural equation modelling to eliminate indicators with cross loadings (large loading on the wrong LV), this is not the case in the presented application. Both process indicators presented weak correlations with other Clinical Process indicators, reducing mono-factorial validity and discriminant validity. On the contrary, their inclusion in the HC block improves the indices of mono-factorial validity and discriminant validity of this construct. Apart from statistical considerations, the rationale of the combined Human Capital indicators may rest on the conceptual denition of quality of medical care, which remains a remarkably difcult notion to dene. In a classic formulation almost 45 years ago, Donabedian (1966, 1985) asserted that quality of care includes: structure (viewed as the capacity to provide high quality care), process (currently often termed as performance), and clinical outcomes. Structural measures of quality measure the presumed capacity of the practitioner or provider to deliver quality health care, and typically include the characteristics of the resources in the health care system, including individual practitioners, groups of practitioners, organizations and systems of care. For health care professionals, this assessment may include licensure, specialty board certication, and types of training. With regard to process, performance measures are useful only if measured processes can be linked to outcomes that are important to patients. Hence, for a process to be a valid measure of quality, it must be closely related to an outcome that people care about. Specically, continuing attention has been given to the importance of combining structural aspects such as governance and the health care workforce with measures of performance and/or outcomes to assess the quality of care (Donabedian, 1985; Koran, 1975). This consideration was taken into account by the Institute of Medicine which stated in 1990 that quality of care is the degree to which health services for individuals and populations increase the likelihood of desired health outcomes and are consistent with current professional knowledge (IOM, 1990, p. 21). This denition has been widely accepted and has proven to be a robust and useful reference in the formulation of practical approaches to quality assessment and improvement, emphasizing that process of care increases the probability of outcomes that are desirable to the patient, reducing the probability of undesired outcomes. This underlines the responsibility of health professionals to scrupulously revise and improve their approach by responding to both patient feedback and the new developments in medicine and the sciences aimed at generating more effective knowledge processes in providing desirable patient outcomes. With regard to selected process indicators (surgical re-admissions, QRSO and complications, QRRS), both indicators are internationally considered as measures that reect the quality of care in a patient safety perspective (Phillips et al., 2004; IQIP, 2004). Differently, structural measures of quality typically include the characteristics of the resources in the health care system. Hence RUFI and RUFE are measures of the presumed capacity of the practitioner or provider to deliver quality health care. Such considerations, in our opinion, justify the inclusion in the same block of process

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indicators related to surgical interventions and complications (QRRS, QRSO) and training indicators (RUFI, RUFE). Hence, we entitle this construct: Medical Care Quality (MCQ). In contrast, the Clinical process construct of Table II, illustrates Health care performance issues which are not closely related to quality of the care, reecting instead the clinical context in which health care services were delivered. 8. Results: the structural model Once the blocks are constructed in the Between and the Within structures, we build two structural models. Applying the proposed building approach in both structures, we found that the two structural models resulting from the building strategy are different in nature and involve different KPA. Furthermore, these causal structures (associations and causality direction) were conrmed by the data-driven approach, proposed by Jakobowicz and Derquenne (2007). As the last step, we apply PLSPM to estimate the completed structural models in each structure. Throughout the estimation step, we focus on the centroid scheme for the inner estimation steps and on the Reective scheme for the outer estimation of Patient Satisfaction (as Customer Satisfaction indicators are typically reective, see Johnson et al., 2001), utilizing the formative scheme for Economy, MCQ and Clinical Process. Figure 1 shows, for each structure, the estimated PLSPM causal models (signicant relationships among involved LVs) resulting from the building strategy. The signicant relationships are shown together with standardized structural coefcients and robust t-statistics, based on the bootstrap (using 500 replications) standard errors estimation. The signicant relationships in Figure 1 show two different causal structures in the Between and in the Within structure. However, both causality directions reect standard directional assumptions of the typical BSC causal scheme (Kaplan and Norton, 1996), presented in the treelike fashion: Human Capital (Quality of the medical care) ! Processes ! Satisfaction ! Economy. However, when compared with the path proposed by the previously cited authors, some causal links between LVs disappear. More specically, in the Between structure (Local Health Agencies), Economy and Process dimensions are still endogenous LVs. Also MCQ remains an exogenous dimension. Economy has only one explaining LV (Clinical Process).
= 0.600 t = 2.703 Clinical Process = 0.843 t = 5.640 Economy

52

Medical care Quality Between Structure

Patient Satisfaction

= 0.376 t = 5.896 Economy Clinical Process

Figure 1. BSC structural models in both structures (standardized coefcients and robust t-statistics)

= 0.470 t = 6.750 Within Structure

= 0.441 t = 6.913

The causal link (and the direction) between quality of medical care and Clinical Process remains signicant in the model, whereas Patient Satisfaction is not causally linked to any other dimensions. In the Within structure (hospitals), Patient Satisfaction becomes an endogenous dimension, whereas Clinical Process becomes exogenous. Economy has two explaining LVs (Clinical Process and Patient Satisfaction) while Patient Satisfaction has only one (Clinical Process), whereas quality of medical care is not causally linked to any other dimensions. Additionally, the signs of the estimated relationships are in the expected direction. Table IV summarizes the t indices of PLSPM models for the Between and Within structures. Specically, it shows, the R 2 for endogenous LVs and Redundancies that measure the average variance of an indicators set, related to an endogenous LV, explained by the exogenous LVs. The structural equation explaining the target variable (Economy area), shows discrete t (R 2 0.51) for the Within structure and satisfactory t (R 2 0.71) in the Between structure. In contrast, other endogenous LVs (Patient Satisfaction, Clinical Process) are poorly explained by the exogenous LVs (Clinical Process, MCQ), in the Within and Between structure, respectively. 9. Conclusion Frameworks such as the BSC have proved useful as effective strategic tools for linking various performance indicators to the performance management activities/processes of an organization. However, their success depends on an accurate assessment of the relationships between the indicators as well a specic understanding of how these relationships address long-term performance goals. Objective argument and consensus would be facilitated by the development of a methodology to identify the cause and effect relationships between the components in the BSC KPA. This paper has presented a two-step approach that integrates a model building strategy and a PLSPM-based estimation strategy in a hierarchical framework in order to conceptualize the use of the BSC in the health sector. This building strategy has the advantage of being applicable in different kinds of estimation strategies. In fact, it works with latent concepts that have not been previously estimated by any other specic estimation methodology, implementing a more objective approach which utilizes LV scores, as they are linear combinations that maximally reproduce the total variance of their manifest indicators. Alternatively, other PLSPM building methods maximize either communalities or redundancies for each block, or else the R 2 of (a priori established) endogenous LVs. As they use PLSM latent scores, these methods are model-specic (valid only for PLSPM), and strongly depend on the implied estimation method. As far as empirical results are concerned, in the measurement models we found a new latent construct that we entitle MCQ, which summarizes the amount of formal training and the two process measures that reect the performance of surgical staff in
Within model R2 0.509 0.221 Between model R2 0.710 0.360

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Key area Economy Patient Satisfaction Clinical Process Medical Care Quality

Role

F2 0.640 0.522

Role

F2 0.658 0.551 Table IV. Evaluation of the structural model with R 2 and redundancies (F 2)

Endogenous Endogenous Exogenous Not in the model

Endogenous Not in the model Endogenous Exogenous

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terms of unscheduled returns to surgery and the rate of surgery with no complications. At the end of Section 7 we discuss the rationale of this construct. One limitation of the measurement process for this construct is that it simultaneously contains both investment indicators (training) and measures that reect the quality of the care, suggesting that different specications allowing causes and indicators (e.g. as in a reskog and Goldberger, 1975) of a latent construct can be proposed. MIMIC model, Jo Relative to the structural model, the obtained causal paths (different in both levels of the hierarchy) have claried cause-and-effect relationships among BSC dimensions specied by Kaplan and Norton (1996) in the tree metaphor. The estimated models in the empirical application reect the usual directional assumptions, handled and hypothesized in a typical BSC causal scheme; the resulting causal models are relatively close to the authors original proposal, with some signicant differences. For Local Health Agencies (Between structure), fruits (nancial measures) are strongly related to Clinical Processes (leaves) for which the quality of the medical care constitutes its unique trunk (or root). Differently, for hospitals (Within structure), fruits (nancial measures) are directly linked to Clinical Processes and Patient Satisfaction. The contribution of Clinical Process dimension results as being particularly signicant. In addition, Clinical Processes shows a signicant effect on the Patient Satisfaction area. The main difference between the two structures (Between and Within) is expressed as the signicant impact of the quality of the medical care (only for the Between structure) and Patient Satisfaction (only for the Within structure) on the Economy dimension. Qualied professionals (Health Managers and stakeholders of Lombardy Directorate of Health) have deemed that these ndings realistically reect Health care management goals. At the Within level (Hospital) where the patient perspective is predominant, constant improvement of clinical processes and ongoing research towards increasing Patient Satisfaction are indispensable conditions for achieving nancial results. Statistically, since the differences in medical quality among hospitals are quite minimal, whereas the differences in Patient Satisfaction averages becomes more marked, the improvement of clinical processes has a positive impact on Patient Satisfaction, whereas quality of medical care does not have a causal impact on the other dimensions. In contrast, at the Between level (Local Health Agencies), where the employee perspective and internal process are predominant, Local Health Agency strategies are striving to improve nancial results by ensuring adequate stock of MCQ and maximizing the performance of clinical processes. Specically, MCQ constitutes a signicant exogenous dimension, exerting a causal impact on the quality of clinical processes, whereas Patient Satisfaction is not causally linked to other dimensions. Examining the explicative power of the specied models, the target variable R 2 of the Economy dimension, achieves satisfactory results in both structures. Nevertheless, one methodological note of caution must be mentioned concerning the estimated causal structures. As previously mentioned, since the (measurement models) building strategy is largely exploratory and optimizes a statistical criterion the selected models can be considered valid only in terms of statistical validity. This applies to what type of measurement models are adopted (apart from Patient Satisfaction, relationships linking LVs and indicators followed the formative scheme). Moreover, the adoption of formative schemes for Clinical Process and Economy has been guided, not only by statistical indices, but also by remaining consistent with the methodologies presented in this article. In fact, since both the model building strategy (CLV) and the estimation

method (PLSPM) dene and estimate each LV as linear combinations of their observed indicators, they logically assume the indicators to be formative. The present study has three inherent limitations. First, as previously mentioned, an imperative step aimed at identifying a true causal structure in the resulting Within and Between structures requires the implementation of a validation analysis using fresh, independent data. Unfortunately, this step cannot be completed, as the pilot study has not yet planned the validation phase. Moreover, in the Lombardy region, this experimental study has not been replicated using new, recently drawn data. Second, a further limitation in this study is the lack of selected indicators, reecting the lack of available information in regional administrative archives. The limited number of indicators is evidence of a persisting information gap in the Lombardy Health sector, despite its status as being one of most developed health systems in Italy. This may explain the third limitation of this study, regarding the inclusion of QRRS and QRSO in a typical Human Capital KPA. Although Kaplan and Norton (1996) suggest that a typical BSC may employ 20-25 KPI, as in the presented case, the chosen indicators for the HC area fail to cover the complete landscape of the Regional Health system, limiting its capacity to provide a realistic overall picture. This consideration suggests that further research on measuring and modelling Human Capital KPA with additional and more complete indicators should be considered. These limitations notwithstanding, it is our sincere hope that the present study will prove useful in guiding further attempts to conceptualize the BSC in the arena of the Italian Health sector. We trust that as more information is made available, it will provide new, independent data for the validation phase, and eventually furnish a complete set of performance indicators relevant to measuring and improving key Healthcare issues through the application of the BSC method.
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