A Physician View of Human Capital in Health Care
In a recent article, I discussed Oakeshott’s distinction between formal knowledge and practical knowledge. My friend Bud Hamilton, a professor of management with a research interest in strategic human capital, called my attention to the February 2014 issue of the Journal of Management, which was devoted to the issue of strategic human capital. I discovered:
The primary confusion appears to have arisen from an incomplete and perhaps inaccurate application of individual level theories of human capital, to unit- level concerns for how human capital resources can affect unit level outcomes.
This lack of consensus about what human capital resources are, at what level they exist and to what unit level outcomes they are related creates roadblocks for integrating perspectives across disciplines .
The authors propose a definition of human capital resources as “individual knowledge, skills, abilities, and other characteristics that are accessible for unit-relevant purposes.” The point out that these “KSAO’s” are based upon individuals, but become human capital to the extent they are relevant for achieving economic outcomes. These KSAO’s become human capital resources if they are accessible for unit level performance. In this schema, human capital resources are relevant for “performance parity.” Human capital resources become “strategic human capital resources” when those KSAO’s at either the individual or the unit level are accessible for competitive advantage.
The authors stress that “accessibility” of these individual attributes for accomplishing the purposes of the team is the key notion, but they go on to say:
However, we do not imply that every capacity that is accessible for the unit is understood or even recognized by the managers of that unit to be a valuable resource…Prior scholars have suggested that a classic motivational dilemma exists related to the question of how investments in human capital are made. Many have focused on the distinction between firm-specific and generic human capital and identified a potential unwillingness of firms to invest in specific human capital…
The definitional framework highlights distinctions between individual capacities that directly influence unit level outcomes from unit-level capacities that directly influence unit-level outcomes. Examples of individual level capacities influencing unit relevant outcomes are replete in the stars literature and the CEO literature…Examples of unit level capacities influencing unit relevant outcomes are more common in the human capital resources literature…Human capital resource research that focuses on crossing levels is only starting to appear.
I found several other articles relevant to my primary concern with healthcare systems and the development of functioning teams of clinicians. Not surprisingly, sports teams have been subjected to analysis, since there is often a statistically robust database about individual and team performance. Crocker and Eckhardt examined the relationship between individual performance and “managerial unit-level resources” by looking at Major League Baseball. They note their paper is an explicit attempt to examine how human capital resources at the unit level impact the individual. Their study examined the performance of 452 MLB pitchers who played in the 2012 regular season. Using available statistics, they were able to determine both the pitcher’s individual efficiency and the contribution of his teammates to his success. They also developed a metric to measure the experience of the coaching staff so as to assess the managerial component of the team’s performance. Their analysis showed:
…our multilevel analysis of detailed individual-level and functional unit–level human capital data found that the relationship between individual-level human capital and individual-level performance was positive but strongly dependent on the presence of high-quality functional unit–level human capital resources. Additionally, we found that a high-quality managerial unit can enhance the performance that can be derived from individuals with less abundant knowledge and skills…while higher levels of individual human capital are associated with higher performance when coupled with a knowledgeable and skilled functional unit, such performance benefits substantially reduce when functional human capital at the unit level is low. This suggests that simply hiring or developing human capital at the individual level may not result in higher performance unless such human capital is coupled with a highly capable functional unit…
Campbell and associates also looked at sports teams, but in their study they looked at professional basketball, and specifically examined the performance of players who were traded as an individual compared to those who were traded in a group. They conclude
that employee mobility has a temporary adverse impact on human capital of moving employees consistent with the loss of location-specific and colleague-specific human capital as captured by a decrease in individual performance. Additionally, we show that moving players experience a loss of human capital that is moderated if they move with previous colleagues and thus can maintain the value of some colleague-specific human capital. Contrary to our hypotheses, we do not find that the human capital of incumbent players is significantly affected by inbound mobility events.
These studies, then, suggest individual performance depends on what I would call the ecosystem of the new team. If the new system has a strong team, then strong members “live up to their potential,” while less talented members perform better than would be predicted. They also suggest moving a group of players, rather than individuals, produces better results. Some of this parallels the U. S. Army’s decision to abandon the individual replacement system instituted during WWII with a return to a traditional unit replacement system.
Human capital literature has looked at “productivity stars,” particularly gifted researchers for drug companies, previously. However, Grigoriou and Rothaermel looked at the problem somewhat differently. They note research is very seldom the product of a “lone wolf,” but result from the work of individuals embedded in the social and knowledge networks of their firms. Consequently, they looked at “productivity stars,” those who were outliers in their ability to generate new knowledge or ideas, but also looked at “relational stars,” those who were outliers in their ability not only to generate knowledge, but also to “form, maintain, and effectively manage knowledge relationships within firms.”
A sole focus on star performers and their superior productivity not only advances an impoverished and under-socialized view of human behavior, but also may even be misleading in our quest for the locus of knowledge within firms. First, we neglect to take into consideration the fact that individual creativity has an apparent social side and thus risk overemphasizing the role of the individual while underemphasizing the role of the team and ignoring the systemic aspects that affect firm performance…
In their review of the literature setting up their hypotheses, they note:
To further understand the role of human-capital-based knowledge advantage, therefore, we suggest going beyond simply individual productivity to a set of individual-level social and collaborative skills that have not been considered sufficiently and in combination with human capital in their potential effect on firm-level outcomes. The importance of relational skills by knowledge workers within firms is especially critical to continued innovation, because innovation is conceptualized as a socially intensive process of knowledge recombination and knowledge transformation…
It is important to note that these individual-level relational skills within broader knowledge networks have been studied in the social capital and networks literature. There is research about the effect of an individual’s network position on a host of meaningful individual-level outcomes…[but] we have limited theory and evidence linking individual positions in individual-level networks with firm-level knowledge outcomes. Existing theory and evidence explore the role of individuals that are strong in either human or social capital. Taken together, we have a limited level of understanding on how the development of individual-level social capital and human capital interact to result in firm-level knowledge advantages.
This paper goes on to develop a number of specific arguments about collaboration that seem to me a more scholarly statement of the arguments made by Malcolm Gladwell. Their key conclusion was:
Conceptualizing innovation as a process of recombinant search, we argued for the critical role of two individual types: integrators and connectors. We argued that firms with integrators and connectors in their network enjoy a knowledge advantage when it comes to the quantity and quality of their innovation output.
If, instead of innovation, we substituted “process improvement,” the connection with healthcare becomes evident, but there are important differences. For instance, the individuals they studied were looking for new knowledge that would lead to patents and economic advantage for the firm. In healthcare, we eschew the notion of special knowledge. Individuals or firms that claim special knowledge are generally assumed to be fraudulent. On the other hand, we often claim we are especially skilled at our ability to apply the knowledge that is generally available. Ironically, it is in application that the strength of the team, rather than the individual becomes more important.
Teams and the Process of Medical Care
In traditional human resource terms, the goals are to (1) determine requirements for positions; (2) recruit and select qualified people; (3) train and develop employees to meet future organizational needs; (4) provide adequate rewards to attract and retain top performers.
In the introduction, I quoted the authors as defining human capital resources as those skills available to the unit that are necessary for maintaining performance parity. In medical terms, this means things like meeting CMS “core measures,” or reliably delivering standard health care when the data are clear as to what that is. It also means being able to adapt performance as goals change in response to new information. Clearly, these are all team-based activities. This has led Fried and Fottler to propose the term strategic human capital resource management, an expansion of the traditional concept to include things like team-based decision making, including hiring new team members.
I have argued repeatedly that it is team performance that determines the outcome of most healthcare processes, yet there is almost no discussion about creating robust organizational support for building and sustaining productive teams. Perhaps it is because we don’t have a robust way to measure the contribution of the team apart from the individuals who constitute the team. If strategic human capital is conceived of as something of value if and only if it is unique, there is no reason for a healthcare organization to invest in it. If, on the other hand, it is conceived of as a web of relationships that permit reliable production of clinical services that are safe and effective, then investing in developing and sustaining those webs makes more sense. I think in today’s medical environment, the ability to produce reliable, safe service, will provide competitive advantage.
Putting It All Together
Health care is a people business. In every healthcare organization, the cost of personnel is far and away the greatest expense. So why am I arguing that we aren’t doing enough? Basically I am arguing that we are stuck meeting the lower levels of Maslow’s hierarchy of needs and are not addressing self-actualization, particularly problem solving as it relates to the purpose of a healthcare organization.
I think the primary reason we have these problems stems from a conception of finance, particularly hospital finance. I have been privileged to attend one seminar on the subject, and participated in numerous discussions. One axiom is that hospitals have very high fixed costs. The ratio of fixed to total costs is generally taken as being 70%. In this view, financial success requires high volume in order to spread those fixed costs over as many episodes of care as possible.
It does not take a physician to realize, though, that demand for medical services is seasonal and quite variable. Given the need to economize, how does a hospital or health system maintain its ability to handle surges in demand? The traditional solution is to ask people to work overtime, hire temporary staff, and otherwise “stretch” to cover the surge. This is okay for a day or two, but performance of the staff on safety, competence, and compassion measures will degrade, often quickly.
I believe the resiliency of clinical teams is the key determinant of a hospital or system’s ability to handle surges. Let me give a specific example. I have described elsewhere the results of using data driven management to build stable teams of people to deliver dialysis to patients in my outpatient units. This system was recently challenged when 48 extra patients were transferred into these units over a period of five days. These extra patients represented an increase in demand of about 20%, but the demand was uneven. One unit experienced a 50% increase, while others experienced a minimal impact. Because the teams were functional, this surge was accommodated without clinical harm. However, we did sustain damage to our team resiliency. We have had a couple of nurses decide they could not cope and decide to move on. It has taken six months to begin to get new staff trained to help ease the strain of too many long days working without a break,
Performance on some clinical indicators also took a transient dip, but financial performance was obviously very good—more patients without more staff means the only increase in costs were the truly variable costs. But we have had to hire and train more staff, some of the new staff have not worked out, and those costs are difficult to measure. On balance, I suspect we are really closer to even than cursory examination of our financial statements would indicate. Hospital managers might argue they are under more financial pressure, but I think the analogy is fair as our payer mix is such that we are basically paid only the Medicare rate for our services. We have no ability to increase services to insured patients to capture more dollars, which hospitals try to do regularly.
The notion of resilience has also been explored by Nemeth and associates, who looked at the response of an emergency room staff to a surge in volume.
Standardization and automation are just a few of the current popular notions about how to improve safety and performance in health care. However, resources that appear to be superfluous in normal operations may have latent value that is realized during crises. Combined with economic pressures, initiatives that seek to simplify and lean down organizations actually whittle down reserves, buffers, and other undervalued resources. This makes it difficult for an organization to tap resources to meet new demands when they arrive. Resilience engineering is a new approach to this problem that strives to identify and correctly value behaviors and resources that contribute to a system’s ability to respond to the unexpected. Put another way, efforts to lean down organizations risk suffering from what an economist would term “cost externalization.”
The authors cite an interesting catalog of problems that I often hear in the doctor’s lounge today.
Efforts to improve health care without a basis in science do more damage than good by making systems unable to change in response to circumstances—what Sarter, et al., term “brittle.” For example, Ash, et al., found that health care information technology systems that are intended to reduce errors can also foster them. In another instance, Perry, et al., found that the introduction of tighter procedures that were intended to improve glycemic monitoring ironically had the opposite result. In a further example, efforts to standardize between-shift handoffs clashed with the initiatives that clinicians had developed to cope with the complexity, variety, and uncertainty in their work domain. Such interventions are not benign; instead, they induce unforeseen outcomes. They waste time, attention, and resources that could be spent more productively. They also delay progress toward genuine improvement.
They go on to define three types of response to a surge in demand. The first is characterized as a limited response with rapid recovery. The ER might recruit physicians from other areas to help out. This is precisely what we have done when tornados have caused damage to our city. Several of us who live close to the hospital have gone in and helped assess and treat patient as a supplement to the regular ER staff. While it made for a long night, the ER volumes returned to normal the next day and things went on as usual.
The second is characterized as a matched response with a protracted recovery. This is typical during the flu season, when the sustained demand for services requires extending shifts, working double shifts, and calling back ER physicians who are post call. “After such a surge, it would take days until the staff could return to normal.”
The third type is different demand from usual. Here a different set or scale of resources is required. This type of demand is particularly disruptive and takes time to accomplish. An example would be going “on diversion” for all but the most acute cases. (Or absorbing a large number of dialysis patients in the example above.)
The authors point out that the ER (or any other clinical system) in its normal function is operating at an equipoise inside of three boundaries: acceptable clinical performance, economic failure, and unacceptable workload. The forces being exerted to maintain that equipoise are management pressure for greater economic efficiency (driving away from economic failure,) a gradient toward least effort (driving away from unacceptable workload,) and a gradient for safety and clinical goal achievement (driving away from the failure of clinical performance boundary.)
Effective organizations are constantly looking for signs that specify how the organization actually operates and to use this information to be better calibrated. Studies of high- and low-reliability organizations have documented the problems created when organizations are poorly calibrated with respect to their operating point. Management that correctly understands the operations of any system would also be likely to correctly estimate how well its strategies would work when unforeseen challenges occur.
Back to my example. I saw that it was in the long-term interests of both the unit and the patient to admit the extra patients, but I also knew that it would require structural changes, and these would take time to implement. I alerted all the members of my team as soon as possible about what was occurring and what we needed to do. I also made it clear what we would stop doing on a temporary basis to help reduce workload—we went on diversion for some optional projects. The administrator started trying to hire new staff. Initial efforts to hire staff with dialysis experience was unsuccessful and we ended up having to train a new group of nurses, some of whom did not pan out. Simultaneously I had to meet with corporate administrators and fend off their attempts to drive the economic set point in ways that I was convinced would aggravate the staff shortage for the long term. We also had to meet about expanding facilities, a long-term project, which we have not yet completed.
Because we had a management system based on data, and a cadre of trained and experience staff, we survived the surge, although I can’t say things are “back to normal.” As I like to put it to staff, we are at a “new normal.” We also had a situation where the medical director (me) and the administrator were in the habit of working together, spoke a common language, and had a shared set of priorities that began with taking good care of the patient. All of these intangibles did provide economic advantage in a competitive environment, even though the costs in building the system and the benefits reaped are difficult to quantify. Perhaps what we need most of all is a new accounting system that puts human capital on a par with financial capital and physical assets.
11 September 2014
 In the human capital literature this is referred to as formal and tacit knowledge.
 Ployhart, R. E., Nyberg, A. J., Reilly, G., Maltarich, M. A. Human Capital is Dead: Long Live Human Capital Resources. J Management 2014;40(2):371-398. doi: 10.1177/0149206313512152.
 Ibid., p. 374.
 Crocker, A., Eckardt, R. A Multilevel Investigation of Individual- and Unit-Level Human Capital Complementarities. J Management 2014;40(2):509-530. doi: 10.1177/0149206331511862.
 Campbell, B. A., Saxton, B. M., Banerjee, P. M. Resetting the Shot Clock: The Effect of Comobility on Human Capital. J Management 2014;40(2):531-536. doi: 10.1177/0149206313516679.
 National Guard units, which were and are very geographically based organizations, were federalized at the start of the war. One such unit was Co. A., 116th Inf. Regt., 29th Inf. Div., which included 35 men from the small town of Bedford, Va. 19 were killed in the D-Day landing in Normandy, and 3 more died later in the campaign. At the time, the population of the town was only 3,200.
 Grigoriou, K., Rothaermel, F. T. Structural Microfoundations of Innovation: The Role of Relational Starts. J Management 2014;40(2):586-615. doi: 10.1177/0149206313513612.
 Gladwell, M. The Tipping Point: How Little Things Can Make a Big Difference. (New York: Little, Brown, 2000.)
 Fried, Bruce J., Fottler, M. D. Human Resources in Health Care: Managing For Success, 3rd ed. (2008). Accessed at https://www.ache.org/pubs/Fried%20Sample.pdf 11 August 2014.
 Maslow, A. A Theory of Human Motivation. Psychological Rev 1943;50(4):370-396. He argued for five levels of motivation starting with physiological, then safety, love/belonging, esteem, and self-actualization. Curiously for organizations that deal in caring, most health care organizations I know do a remarkably poor job filling the love/belonging needs. We seem to think if we pay enough, then the individual can do the rest of these things on their own time. Since most employees spend more awake time at work than anywhere else, I think this is likely misguided.
 In my discussions with Bud Hamilton, I mentioned that hospital administrators sometimes thought personnel were a fixed cost rather than a variable cost. He commented that the government was the only place where he had encountered that before. On the other hand, hospitals like mine are the largest employer in town. The trustees and management feel tremendous pressure to maintain employment and avoid layoffs. So maybe they really are “fixed costs.”
 Nemeth, C., Wears, R., Woods, D., Hollnagel, E., Cook, R. Minding the Gaps: Creating Resilience in Health Care. In Henriksen K, Battles JB, Keyes MA, et al., editors. Advances in Patient Safety: New Directions and Alternative Approaches, (Vol. 3: Performance and Tools). Rockville (MD): Agency for Healthcare Research and Quality (US); 2008 Aug. Accessed 12 August 2014 at http://www.ncbi.nlm.nih.gov/books/NBK43670/pdf/advances-nemeth_116.pdf
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