USING

TO CURE

Healthcare

Problems

Kershaw, R. (2000). Using TOC to cure healthcare problems.

Management Accounting Quarterly, 1 (3) pp. 1-7. (AR50534)

TOC
B Y R U S S K E R S H AW

SPRING 2000

AT A TIME WHEN PROFITABILITY IN THE HEALTHCARE FIELD IS

DEPENDENT ON COST MANAGEMENT, EFFICIENCY IN OPERATIONS, OR
ON INCREASING PATIENT VOLUME,THE THEORY OF CONSTRAINTS
(
) CAN BE APPLIED TO REACH THESE GOALS.

TOC

n the current managed care environment,

providers can be profitable only when reimbursements exceed their costs. If the
amount of revenue per patient is fixed and
declining, healthcare providers need to
reduce costs or increase patient volume if
they want to maintain or increase profits. That is
why managed care has provided healthcare organizations with a strong incentive for managing costs and
improving the efficiency of their operations.
Theory of constraints can help. Now applied
almost exclusively in a manufacturing setting, TOC
is one method used to increase volume and profitability and may well be applied to the healthcare
industry as illustrated below.1
A constraint is anything internal or external to the
manufacturing process that limits a plants ability to
generate throughput, the rate at which the production system generates money through the sale of
products. By identifying and managing constraints,
TOC maximizes throughput,2 which usually is
defined as net revenue less direct material costs.
Often, the constraint or bottleneck is internal to the
production process, such as when a particular
machine or operation determines plant capacity. By
focusing improvement efforts on the bottleneck
machine or operation, the plants throughput capacity can be increased. Under TOC, direct labor is considered to be a fixed cost.
A P P LY I N G TO C
SETTING

TO A

H E A LT H C A R E

The TOC process can be applied to any business

organization that has maximizing profits as its goal.3
(See sidebar, TOC Overview, p. 26, for a quick
look at the theory of constraints.) Therefore, the
TOC approach should be applicable to nonmanufacturing settings such as healthcare because many
healthcare providers are profit-seeking organizations.
In fact, much of the TOC terminology used in the
manufacturing environment can be easily translated

or converted to fit a healthcare setting. For instance,

the definition of throughput can be modified slightly to reimbursement rate less the cost of drugs and medical
supplies for the number of patients seen and treated. Similarly, in a healthcare setting the constraint could be a
certain step or procedure in the patient treatment
process.
One obvious difference between the production
and healthcare settings is that, unlike in manufacturing, the unit of output for healthcare providers is a
human being. As a result, the application of TOC
techniques to healthcare situations may provide
additional challenges. For example, a higher level of
sensitivity to patient satisfaction and perceptions of
quality is required because healthcare providers are
processing. When attempting to relieve a healthcare constraint, providers do not want the patient to
feel rushed or perceive that lower-quality healthcare
will be administered.
Table 1 compares and contrasts how the basic
steps of the TOC process for managing constraints
might be implemented in both a manufacturing and
healthcare environment. Identifying the
constraint(s) in either setting requires that the constraint(s) be classified as internal or external.4
External constraint. An external constraint occurs
when market demand or material suppliers limit the
companys ability to generate throughput. In manufacturing, this situation would occur when product
demand is less than capacity or when there is not an
adequate supply of material to meet demand.
Healthcare providers would be externally constrained if their capacity to treat patients exceeded
patient volume or if the availability of drugs and
medical supplies were restricted. If external constraints do not exist, then the organization is constrained internally.
Internal constraint. In a manufacturing environ-

ment, an internal constraint occurs when product

MANAGEMENT accounting quarterly

Table 1. TOC IMPLEMENTATION IN MANUFACTURING AND HEALTHCARE SETTINGS

MANUFACTURING
Is there sufficient demand for product?
Adequate raw material supply
Does demand exceed capacity for
machine or process?
Purchase material based on constraints
capacity
Schedule unconstrained processes
based on constraints capacity

HEALTHCARE
STEP 1
Identify the
constraint(s)

STEP 2
Let
constraint(s)
set the pace

Is there sufficient patient volume?

Availability of drugs/medical supplies
Does patient volume exceed capacity
for treatment or patient type?
Purchase drugs/supplies based on
constraints capacity
Schedule patients based on
constraints capacity

Reduce setup time

Reduce preparation time

Move work to unconstrained machine

or process

Move part of treatment to

unconstrained resources

Eliminate or reduce machine downtime

Only schedule work that contributes to
throughput
Modify process to increase capacity of
machine

STEP 3
Focus
improvement
efforts on
constraint(s)

Eliminate or reduce time constrained

resource is not used
Move other treatments to
unconstrained resources

Schedule overtime

Modify treatment procedures to

increase capacity

Acquire additional equipment

Increase hours of operation

Hire additional staff
STEP 4
Start over

demand exceeds the capacity for a particular

machine or production process. A healthcare
provider is internally constrained if patient volume
is greater than the capacity of a procedure in the
patient treatment process.
If an internal constraint is identified, the constraint should be allowed to set the pace for the production or treatment process. The idea here is that
increasing the output of an unconstrained resource
will not increase throughput because the systems
throughput is determined by the constraint. In fact,
increasing the output of unconstrained machines in
a production setting can result in excess work-inprocess inventory, which can reduce efficiency at the
constraint. As a result, raw material should be purchased, and unconstrained machines should be
scheduled based on the capacity of the constrained
operation. Likewise, healthcare providers should
purchase drugs and other medical supplies and
schedule patients based on the capacity of the constrained procedure or treatment. Scheduling more
patients than can be processed by the constraint will

SPRING 2000

only result in treatment delays and excessive waiting time for patients, which, in the long run, will
negatively impact the healthcare provider.
Key step in TOC process. The key step in the TOC
process of managing constraints involves expanding
the constraints capacity in order to increase
throughput. In manufacturing situations the goal is
to reduce or eliminate nonproductive time at the
constrained machine or operation. This step is
accomplished by:
Reducing setup time,
Eliminating downtime due to lack of parts,
Employee breaks and shift changes, and
Having the constraint only process good parts for
which there is sales demand.
Application to healthcare. These techniques for

increasing the available productive time at the constraint(s) also can be used by healthcare providers.
Nonproductive time at a constrained step in the
treatment process can be decreased by reducing

preparation time, ensuring that appropriate supplies

and information are available and easily accessible,
and performing only the appropriate procedures. In
addition, throughput can be increased in either a
production or healthcare setting by moving some
work from the constraint to an unconstrained
resource, hiring more people, or acquiring additional
equipment.
THE XYZ ONCOLOGY CLINIC

An outpatient cancer treatment or oncology clinic

that administers chemotherapy to patients provides
a good case study for examining the application of
TOC to a healthcare setting. Because the XYZ
oncology clinic administers essentially one type of
treatment to its patients, illustrating the use of TOC
principles is simplified. Patients come to the clinic
on an outpatient basis to receive chemotherapy
treatment, which may be drugs or medication, for a
variety of cancer-related conditions.
The prescribed medication is usually administered over a carefully timed series of treatments.
The XYZ clinic serves approximately 600 patients,
but it has been experiencing a growing demand for
chemotherapy services that is expected to continue
for the foreseeable future. The clinic operates week-

Figure 1. XYZ ONCOLOGY CLINICS TREATMENT PROCESS

Check in with receptionist

Waiting room
Go to lab for blood tests

Waiting room
Go to exam room for
pretreatment process

See doctor (exam room)

Waiting room
Go to treatment room for
chemotherapy

Go back to receptionist
for follow-up appointment

days from 8 a.m. to 5 p.m. Because of growing

demand, the clinics office manager has found it
increasingly difficult to schedule the required number of treatments on a daily basis.
In addition, the rising demand has led to an
increasing number of patient complaints because of
excessive waiting time. This situation not only presents a medical problem due to the time-sensitive
nature of many treatment regimens, but it also provides a potentially serious business problem. If
patient satisfaction continues to deteriorate, the clinic will develop a poor reputation, and patients will
ultimately choose a different medical group for their
cancer treatment. On the other hand, the situation
provides the clinic with a financial opportunity. If
the clinic can identify ways to increase its ability to
administer chemotherapy on a daily basis, it can
improve patient throughput and profitability.
Clinics treatment process. After checking in with
the receptionist and sitting in the waiting room,
patients first go to the lab for various blood tests.
Patients are then routed to an exam room where a
pretreatment process is conducted by one of the
clinics licensed practical nurses (LPNs). This
process consists of taking vital signs (weight, blood
pressure, and temperature) and doing an initial
problem assessment. A doctor then meets with each
patient to review the treatment plan and discuss
any problems since the previous appointment. The
patient next moves to the chemotherapy chairs in
the treatment room to receive his or her scheduled
treatment or returns to the waiting room until a
chair becomes available. Two highly trained registered nurses (RNs) administer chemotherapy, based
on orders issued by the doctor, in eight treatment
chairs with each nurse covering four chairs. The
RNs perform the following activities for each
patient while he or she is in the treatment chairs:
Establish intravenous access, administer prescribed
medication, and perform posttreatment education.
In addition, the nurses handle any problems that
arise during the treatment process. Due to the
potent nature of many chemotherapy drugs, undesirable side effects that cause disruptions in the
treatment process are common. The amount of
time a patient spends in a treatment chair may vary
between one and five hours but averages 2.5 hours.
After treatment is administered, patients return to
the receptionist to schedule their next appointment
(See Figure 1.)

MANAGEMENT accounting quarterly

TOC OVERVIEW
A P P LY I N G TO C

To address the problems associated with growing

demand, the doctors, office manager, and staff for
the XYZ oncology clinic examined various alternatives for increasing their ability to deliver
chemotherapy. As the organization had recently
expanded its practice by establishing treatment clinics in other geographic areas, its ability to expand
the XYZ clinic was severely limited. The groups
current financial status precluded significant capital
expenditures to expand the XYZ clinics physical
facilities in the short term. As a result, the clinics
options for expanding its patient capacity were limited to determining more effective ways of using
existing space and equipment.
Initially, the office manager and staff attempted to
identify the constraint(s) in the treatment process by
carefully examining the flow of patients at the clinic
(see Figure 1). Specifically, they compared their current patient volume to the capacity of resources at
each step in the treatment process. Through this
analysis, the clinics office manager and staff determined that they had sufficient resources to handle
the check-in process, perform lab tests, and perform
the pretreatment process. The unavailability of
treatment chairs was found to be the primary cause
for patient wait time. In effect, excessive work-inprocess inventory (preprocessed patients) was building up in front of the chemotherapy treatment
chairs.
Implementing TOC. Once the clinics office manager

and staff had identified the treatment chairs as the

clinics constraint, they implemented TOC in two
steps. As discussed previously, the constraint(s)
should initially be allowed to set the pace for the
entire system. As a result, the office manager first
modified the patient scheduling process based on
the capacity of the eight treatment chairs. The main
purpose of this action was to reduce the excessive
waiting time and improve customer satisfaction.
This action did reduce waiting time and patient
complaints.
Because most treatment regimens require a
series of carefully scheduled individual treatments,
however, the office manager had limited scheduling flexibility. This resulted in treatments scheduled outside the clinics normal hours of operation.
Consequently, the RNs and other staff were
required to work an increasing number of hours
each week.

SPRING 2000

The main idea in TOC is that any production system has at least
one constraint that will limit its throughput and ability to generate profits.1 As throughput for the entire manufacturing process
is determined by the capacity of constrained resources, these
constraints must be managed. Here is the basic four-step TOC
process for managing constraints:2

STEP 1
Identify the systems
constraint(s)

STEP 4
Return to Step 1

STEP 2
Let the constraint(s) set
the pace for the system

STEP 3
Focus improvement
efforts on the constraint(s)
The first step, identifying the constraint(s) in the production
system, may not be easy in a manufacturing environment
because work-in-process inventories can disguise the constrained resources. In general, a resource (for example, a
machine, process, or person) is considered to be a constraint if
the demand on that resource exceeds its capacity.
In the next step, once a constraint is identified, it should be
allowed to set the pace for the entire production system. Problems throughout the system can arise if more demand is placed
on the system than the constrained resource can handle. For
instance, releasing more material to the production process than
the constrained resource can handle will only result in excess
work-in-process inventory. Step 3 involves focusing improvement efforts on the constraint. Attempts should be made to
increase the constraints capacity. This will improve the plants
ability to generate throughput. One way of relieving a manufacturing constraint is to develop methods for increasing the productive use of the constrained resource, for example, by
reducing setup time, increasing preventative maintenance, and
having operators take breaks while the machine is
running.
Finally, if improvement efforts successfully relieve an identified constraint to the point where it is no longer a constraint,
another resource will become the constraint. At this point, the
process begins all over again.
1 M. Swain and J. Bell, The Theory of Constraints and Throughput Accounting, in
Management Accounting: A Strategic Focus, S. Ansari, ed., Irwin/McGraw-Hill,
New York, 1998.
2 E. Noreen, D. Smith, and T. Mackey, The Theory of Constraints and Its Implications
for Management Accounting, North River Press, Great Barrington, Mass., 1995.

Relieving the constraint. In the short run, this solution was workable, but it was not sustainable in the
long run due to growing demand and potential
employee morale problems. The office manager and
staff then focused their efforts on relieving the
constraint. They carefully examined the general
patient flow, particularly the treatment chair process,
for opportunities to increase their capacity to administer chemotherapy. The analysis determined that
the 2.5 hour average treatment time consisted of the
following:

Establish intravenous access

Administer prescribed drugs
Perform posttreatment education
Total

.25 hours
2.00 hours
.25 hours
2.50 hours

First, the office manager suggested that the average treatment time could be reduced by approximately 15 minutes if posttreatment education were
performed while the drugs were being dispensed.
Posttreatment education basically involves discussing
with the patient possible side effects of the treatment and how he or she should deal with them. This
time is also used to visit with the patient in order
to relieve stress and provide emotional support. The
RNs were adamant that this portion of the treatment
process was an important aspect of patient care that
could not be compromised. Consultations with the
clinics doctors indicated that performing posttreatment education during the final 15 minutes of
chemotherapy did not affect patient care negatively.
Second, the office manager and staff investigated
ways of reducing the time required to establish
intravenous access. This part of the process involves
locating an appropriate site on the patients arm or
hand for the insertion of a small plastic tube that
delivers the prescribed medication. The difficulty of
this task varies from patient to patient and often
requires a high level of skill to accomplish. Patients
would bring the treatment orders issued by the doctor with them when they moved to the chemotherapy treatment chairs. The RNs would review these
orders and physically deliver them to the groups
pharmacist in order to get the specific chemotherapy
medication required. Once intravenous access was
established, treatment was often delayed for five to
10 minutes while the pharmacist prepared the
required medication.
To reduce or eliminate this wait time, the office
manager and staff modified the medication orderrouting process. They changed to a multipart form

for doctors orders with one copy accompanying the

patient to the treatment chairs. An LPN delivered
another copy to the pharmacist as soon as the doctor
was finished with the patient. This procedure
reduced the amount of time patients spent in a
treatment chair waiting for medication delivery.
The RNs also suggested that the preparation time
for administering chemotherapy could be reduced
further if intravenous access were established prior
to the patient arriving at the treatment chair. If this
part of the process could be done while the patient
was at the lab for blood tests or during the pretreatment process, chemotherapy could begin as soon as
the patient reached the chairs. As this part of the
process required a certain level of skill, it was determined that the lab technicians were better trained
to perform this task. As a result, the clinic initiated a
plan to have the lab technicians establish intravenous access while patients were having blood
tests done.
Initially, the lab technicians only did this procedure for the more routine patients, and the RNs
continued to handle the more difficult cases. Eventually, through training provided by the RNs and
additional experience, the lab technicians were
expected to establish intravenous access for most, if
not all, patients.
Process of administering prescribed medication.

Third, the office manager and RNs examined the

process of administering the prescribed medication
to identify any efficiency improvement opportunities. Because time requirements were primarily
determined by the volume and flow rate of the particular chemotherapy being delivered, the possibilities for time reductions were limited. The RNs,
however, noted that time was wasted looking for
equipment and supplies when patients experienced
undesirable side effects during the treatment
process. As a result, the RNs organized mobile supply caddies that contained the equipment and supplies for handling the usual problems encountered
by patients. These caddies could be moved easily
from chair to chair and virtually eliminated the time
spent searching for appropriate equipment and
supplies.
Examining other ways to increase available treatment time. Finally, the office manager and staff

investigated other opportunities for increasing the

available treatment time in the chemotherapy chairs.

MANAGEMENT accounting quarterly

Table 2. XYZ ONCOLOGY CLINICS IMPROVEMENT EFFORTS

CHANGES TO CHEMOTHERAPY PROCESS
Do posttreatment education during the tail end of
treatment
Modify medication order routing process
Establish intravenous access at lab
Organize mobile supply caddies
Do initial treatment education at alternative time and
place
Put lab results printer in treatment room

The RNs pointed out that patients receiving

chemotherapy treatment for the first time (three to
four per week) required significant pretreatment
education. This education often took an hour or
more and was conducted by the RNs while the
patient sat in a treatment chair awaiting treatment.
It was determined that an additional five to six
hours of treatment time per week could be made
available if this training could be done at an different time or place. The clinic was considering various
options for this pretreatment education, including
conducting regular training classes for all new
patients from all the groups treatment clinics.
The office manager noted that often the treatment chairs were used for providing blood transfusions to patients (nine to 10 per week). If this
procedure, which required three to four hours of
chair time per patient, could be performed in an
alternative place, about 30 extra hours of chemotherapy treatment time per week could be made available. Various alternatives were being considered,
including sending blood transfusion patients to the
groups other clinics that had excess treatment chair
capacity. Last, some patients receiving less intensive
chemotherapy did not meet with a doctor prior to
their treatment. These patients visited the lab, went
through the pretreatment process, and proceeded to
the treatment chairs. The RNs were required to
review the lab results prior to beginning treatment
and had to physically go to the lab to get the results.
To improve efficiency, a printer was located in the
treatment room to print patients lab results as soon
as they were available.
TO C H E L P S C U R E H E A LT H C A R E
PROBLEMS

Prior to the changes in the clinics chemotherapy

delivery process, it was able to treat on average 24 to
25 patients per day. After modifying the treatment

SPRING 2000

process (see Table 2), it increased its treatment

capacity by 20% to 25% to an average of 30 patients
per day. The clinic reduced the average treatment
time from 2.5 hours to about two hours and expected this time to be even shorter as the lab technicians
established intravenous access for more and more
patients. The number of available treatment hours
was also expected to increase when the clinic finalized alternative procedures for initial treatment
training and blood transfusions. Based on these
additional process improvements, the clinics office
manager estimated that the clinic would be able to
provide chemotherapy treatment to 35 to 40 patients
per day, which represents a 40% to 67% increase in
the clinics treatment capacity.
The XYZ oncology clinic case demonstrates how
TOC can be applied in a healthcare setting to
increase patient volume. This is an important issue
for many healthcare providers who are faced with
fixed or declining revenues due to reduced fee-forservice and capitation reimbursement systems. In
the short run, TOC application can increase a
providers capacity to treat patients and increase
throughput. In the long run, the use of TOC can
enhance the quality of a healthcare providers services and improve customer satisfaction. This case
study also highlights how TOC concepts need to be
modified from a manufacturing orientation to fit
healthcare settings. The clinics RNs showed that
when trying to increase the capacity of a constraint in
a healthcare situation, a higher level of sensitivity to
patient satisfaction and perceptions of quality is
required. In general, TOC represents a significant
contribution to improving the efficiency of healthcare organizations, which can lead to increased shortand long-term profitability.
Russ Kershaw, Ph.D., is an assistant professor of accounting at Butler University in Indianapolis, Ind. He can be
reached at (317) 940-9841 or rkershaw@butler.edu.
1 E. Noreen, D. Smith, and T. Mackey, The Theory of Constraints and Its Implications for Management Accounting, North
River Press, Great Barrington, Mass., 1995.
2 E. Goldratt and J. Cox, The Goal: A Process of Ongoing
Improvement, North River Press, Great Barrington, Mass.,
1992.
3 J. Ruhl, An Introduction to the Theory of Constraints,
Journal of Cost Management, Summer 1996, pp. 43-48.
4 B. Atwater and M.L. Gagne, The Theory of Constraints
versus Contribution Margin Analysis for Product Mix Decisions, Journal of Cost Management, January/February 1997,
pp. 6-15.