Management And Accounting Web

Kershaw, R. 2000. Using TOC to ‘cure’ healthcare problems. Management Accounting Quarterly (Spring): 22-28.

Summary by JoAnn Quartararo
Master of Accountancy Program
University of South Florida, Summer 2002

Healthcare Cost Main Page | TOC Main Page

The purpose of this article is to show how the Theory of Constraints (TOC) concept can be used in the healthcare industry to manage costs, improve efficiency in operations, and to increase customer satisfaction. Specifically, this article examines the applicability of TOC to healthcare by walking the reader through a detailed example of a healthcare organization in need of help. However, before doing this, Kershaw helps the reader understand how the manufacturing industry and the healthcare industry are related in terms of TOC.

Brief Introduction to the Healthcare Industry

The healthcare industry is faced with challenges that many other companies don’t face. Unlike most other profit-seeking organizations, healthcare’s revenue per patient is a fixed and declining amount. Providers are reimbursed by insurance companies based on a contracted amount, regardless of the costs associated with the care given. Therefore, these providers must work to drive costs down and increase patient volume in order to compensate for the lack of sufficient revenue. This is where TOC can help.

Applying TOC to a Healthcare Setting

In this section, Kershaw compares manufacturing to healthcare using the ideas and methodology associated with TOC. First, the author provides translations in terminology to healthcare that are commonly used in manufacturing. Throughput can be modified from the standard meaning to "reimbursement rate less the cost of drugs and medical supplies for the number of patients seen and treated." (23) Second, a unit of output in this industry is basically a human being. Third, an example of an external constraint in healthcare terms is when the availability of drugs and medical supplies are restricted. Finally, an example of an internal constraint in this industry where patient volume exceeds the capacity of a procedure in the patient treatment process. (24)

Also, Kershaw lays out a four step process that should be followed to implement TOC effectively, and then relates these steps to the healthcare industry as a whole. (See Exhibits 1 and 2).

Theory of Constraints Four Step Process

Exhibit 2 - TOC Implementation in Manufacturing and Healthcare Settings
Steps Manufacturing Healthcare
1. Identify the constraints. Is there sufficient demand for product? Adequate raw material supply? Does demand exceed capacity for machine or process? Is there sufficient patient volume? Availability of drugs/medical supplies? Does patient volume exceed capacity for treatment or patient type?
2. Let constraints
set the pace.
Purchase material based on constraints' capacity.
Schedule unconstrained processes based on constraints' capacity.
Purchase drugs/supplies based on constraints' capacity.
Schedule patients based on constraints' capacity.
3. Focus improvement efforts on constraints. Reduce setup time. Move work to unconstrained machine or process. Eliminate or reduce machine downtime. Only schedule work that contributes to throughput. Modify process to increase capacity of machine. Schedule overtime. Acquire additional equipment. Reduce preparation time.
Move part of treatment to unconstrained resources.
Eliminate or reduce the time the constrained resource is not used.
Move other treatments to unconstrained resources.
Modify treatment procedures to increase capacity. Increase hours of operation. Hire additional staff.
4. Start over.

The author notes that the key concept or step in using TOC to manage constraints is Step 3. This step is used to expand the constraints’ capacity in order to increase throughput.

The XYZ Oncology Clinic

This section lays the foundation for the TOC example. It describes the clinic’s treatment process and related problems. The basic problem in this company’s treatment process is the amount of time patients spend waiting for the next stage of their appointment. The article states, "If the clinic can identify ways to increase its ability to administer chemotherapy on a daily basis, it can improve patient throughput and profitability." (25)

The basic treatment process is as follows:

1. Check in with receptionist.
2. Go to waiting room.
3. Go to lab for blood tests.
4. Go to waiting room.
5. Go to exam room for pretreatment process.
6. See doctor.
7. Go to waiting room.
8. Go to treatment room for chemotherapy.
9. Go back to receptionist for follow-up appointment.

Due to the nature of treatment and the setup of the clinic’s scheduling, patients may be at the clinic in excess of 2.5 hours.

Applying TOC

After examining the treatment process and its problems, the clinic’s staff looked at the alternatives. First, the XYZ clinic could not expand its facilities since the organization had just expanded into other geographical areas. Second, the clinic lacked the funds to support significant capital expenditures to expand its patient capacity. Therefore, the clinic was left to find ways to work with its existing space and equipment.

The staff members found that the primary cause of patient wait time was the unavailability of treatment chairs. Looked at in other terms, the clinic had excessive work-in-process inventory or "preprocessed patients." (26)

To alleviate the problem, the clinic’s staff tried several approaches using the TOC concepts. They tried modifying patient scheduling and subsequently increasing the staff’s hours to compensate. Although this worked in the short-term, it is not good for employee morale to work an abundance of overtime.

Other methods were looked at and subsequently implemented. First, the timing of post treatment education was changed from after the chemotherapy treatment to during the treatment. This change caused no harm to the patient and decreased patient time in the treatment chair by about .25 hours.

Second, the medication order routing process was modified. They use a multipart form from the doctor where one part goes directly to the pharmacy from the doctor after examination, but before the patient gets into the treatment chair. This change reduces patient time in the treatment chair as well.

Third, the clinic decided to establish intravenous access at the lab while blood is being drawn. This replaces the old method of establishing access while in the treatment chair. This change reduced treatment time by another .25 hours.

Also, the staff organized mobile supply caddies to use in the treatment area. In this way, the staff members didn’t waste time by searching around for often needed supplies.

Finally, the staff decided to perform initial treatment education at an alternative time and place, and put a lab results printer in the treatment room.

TOC Helps Cure Healthcare Problems

The TOC methods helped the XYZ clinic significantly. The clinic saw an increase in treatment capacity by 20% to 25% with the average number of patients per day increasing from 24 or 25 to about 30. In addition, the average amount of treatment time decreased from 2.5 hours to 2 hours or less. Also, with further process improvements, the clinic will see increases in patient volume per day of up to 60% in treatment capacity.


In summary, the Theory of Constraints can help any profit-seeking company reduce costs and improve processes, no matter what the output. TOC must be applied carefully, taking into account the crucial elements involved including customer satisfaction, employee morale, and the nature of the procedures. With the proper implementation, TOC can lead to both short-term and long-term profitability.


Related summaries:

Abernethy, M. A. and P. Brownell. 1999. The role of budgets in organizations facing strategic change: An exploratory study. Accounting, Organizations and Society 24(3): 189-204. (Summary).

Bast, J. L., R. C. Rue and S. A. Wesbury Jr. 1993. Why we spend too much on Health Care and what we can do about it. Heartland Institute. (Summary).

Cohen, F. 2011. Improving processes in your practice: Do the same thing with less, or more with the same thing with lean six sigma and lean principles in your toolbox. Medical Economics (June): 60-62,-67-69. (Note).

Davenport, T. H. and J. Glaser. 2002. Just-in-time delivery comes to knowledge management. Harvard Business Review (July): 107-111. (Summary).

Goldratt, E. M. 1992. From Cost world to throughput world. Advances In Management Accounting (1): 35-53. (Summary).

Goldratt, E. M. and J. Cox. 1986. The Goal: A Process of Ongoing Improvement. New York: North River Press. (Summary).

Goldratt, E. M., E. Schragenheim and C. A. Ptak. 2000. Necessary But Not Sufficient. New York: North River Press. (Summary).

Lyons, B., A. Gumbus and D. E. Bellhouse. 2003. Aligning capital investment decisions with the balanced scorecard. Journal of Cost Management (March/April): 34-38. (Summary).

MacArthur, J. B. and H. A. Stranahan. 1998. Cost driver analysis in hospitals: A simultaneous equations approach. Journal of Management Accounting Research (10): 279-312. (Summary).

McDermott, R. E., K. D. Stocks and J. Ogden. 2000. Code Blue: A Tale of Romance, Murder, Mystery, Intrigue & Managed Care. Syracuse, UT: Traemus Books. (Summary).

Martin, J. R. Not dated. Comparing Dupont's ROI with Goldratt's ROI. Management And Accounting Web.

Martin, J. R. Not dated. Goldratt's dice game or match bowl experiment. Management And Accounting Web.

Ruhl, J. M., B. P. Hartman. 1998. Activity-based costing in the service sector. Advances in Management Accounting (6): 147-161. (Summary).

Sedatole, K. L. 2003. The effect of measurement alternatives on a nonfinancial quality measure's forward-looking properties. The Accounting Review (April): 555-580. (Summary) and (JSTOR link).

West, T. D. and D. A. West. 1997. Applying ABC to healthcare. Management Accounting (February): 22, 24-26, 28-30, 32-33. (Summary).