Journal of Operations Management xxx (2016) 1e9

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Journal of Operations Management

journal homepage: www.elsevier.com/locate/jom

Seeing the forest for the trees: Institutional environment impacts on

reimbursement processes and healthcare operations
Seung Jun Lee a, James D. Abbey b, *, Gregory R. Heim b, Duane C. Abbey c
a
School of Global Innovation & Leadership, Lucas College and Graduate School of Business, San Jos
e State University, One Washington Square, San Jose, CA
95192-0164, United States
b
Department of Information & Operations Management, Mays Business School at Texas A&M University, 320 Wehner Building j 4217 TAMU, College
Station, TX 77843-4217, United States
c
Abbey & Abbey Consultants, Inc., P.O. Box 2330, Ames, IA 50010-2330, United States

a r t i c l e i n f o a b s t r a c t

Article history: Healthcare reimbursement processes perform an annual multi-trillion dollar task to remunerate
Received 24 February 2015 healthcare organizations, physicians, and patients. Healthcare reimbursement entails coding, billing, and
Received in revised form payment processes based on care provided to patients. As this research note highlights, though often
6 August 2016
implicitly assumed to be independent of care delivery processes, reimbursement processes are distinctly
Accepted 5 September 2016
Available online xxx
connected to the efcacy of care delivery. Prior research tends to examine neither antecedents nor
Accepted by: Mikko Ketokivi consequences of healthcare reimbursement processes and their operational implications, even though
these issues can lead to unproductive externalities affecting healthcare systems and patients. Most extant
Keywords:
literature tends to focus on medical task environments, with far less attention given to how institutional
Healthcare environment structures reimbursement and thus drives stakeholder incentives and behaviors. Because of
Coding a wide diversity of institutional environments, reimbursement processes differ on a nation-by-nation
Billing basis, and within nations on a state, province, city, or even within-city basis. The varied and complex
Payment reimbursement processes drive divergent stakeholder incentives, varying use of healthcare protocols and
Reimbursement processes, and differing patient outcomes. Even within a single reimbursement regime, a multitude of
Institutional environment reimbursement policies, required processes, and payer institutions creates operational complexity for
physicians and their professional staff, which ultimately affects patient care delivery processes and
outcomes. The task environment focus of extant healthcare OM research suggests a need to understand
institutional environment antecedents, natures, and impacts of reimbursement processes. This research
note illustrates the seemingly simple structural nature of reimbursement processes, yet also reminds
researchers how diverse institutional environments, built to accomplish different healthcare aims, can
lead to similar levels of enormous process complexity. The research note further motivates how such
phenomena may affect research ndings and the quest for operational solutions to healthcare dilemmas.
By focusing on healthcare reimbursement and its operational implications, the note provides useful
insights for continued studies of healthcare operations.
2016 Elsevier B.V. All rights reserved.

We really do believe much harder times are coming from a 1. Introduction

reimbursement standpoint. -Daniel Morissette, Stanford
Health Care CFO (Ellison, 2015)
* Corresponding author.
E-mail addresses: seungjun.lee@sjsu.edu (S.J. Lee), jabbey@mays.tamu.edu
(J.D. Abbey), gheim@mays.tamu.edu (G.R. Heim), duane@aaciweb.com (D.C. Abbey).
Healthcare reimbursement processes include coding, billing,
and payment processes related to care provided to patients. Though
these processes are known to have massive economic impacts on
national economies and businesses (Baker and Rosnick, 2005; Brill,
2015), the processes also generate many operations management
challenges. Healthcare providers, involved in $3 trillion of annual
nancial ows in the U.S. alone, face salient operating challenges
arising from regulatory and market pressures (World Bank, 2014;
Brill, 2015). As the scope and costs of regulated healthcare tasks

http://dx.doi.org/10.1016/j.jom.2016.09.001
0272-6963/ 2016 Elsevier B.V. All rights reserved.

Please cite this article in press as: Lee, S.J., et al., Seeing the forest for the trees: Institutional environment impacts on reimbursement processes
and healthcare operations, Journal of Operations Management (2016), http://dx.doi.org/10.1016/j.jom.2016.09.001
2 S.J. Lee et al. / Journal of Operations Management xxx (2016) 1e9
grow, reimbursement processes must evolve and adapt to facilitate
a necessary triple aim: enable efcient care provider processes,
deliver effective care for patients, and ensure the nancial health
and institutional missions of healthcare institutions (Porter and
Lee, 2013).
While scholars and practitioners hold a consensus that health-
care reimbursement systems often have complex structures (ISM,
2002; Rouse and Serban, 2014), empirical studies seem to omit
their implicationsdthat is, how institutional environments drive
reimbursement policy, reimbursable care processes, and care out-
comes. The institutional environments that drive complex reim-
bursement processes lead to nancial, operational, and care
delivery issues (Kaplan and Porter, 2011). For example, in 2013,
10.1% or $36 billion worth of U.S. Medicare payments to care pro-
viders were incorrect (Adamy, 2014). Complex reimbursement
processes failed to prevent over $90 billion of annual fraud, abuse,
and related nancial issues (Goldman, 2012; Murphy, 2015;
O'Keeffe, 2016). Reimbursement process problems also delay
diagnostic tests and treatments, causing care delivery conse-
quences (AP, 2016; Sachdev, 2016). Avoiding such issues is impor-
tant for all parties involved in healthcare consumption, provision,
and nancial ows.
1.1. Complex regulatory institutional environments
As in any multi-trillion dollar industry, healthcare providers
must conform their processes to the regulations and policies of
institutions having power over the providers in both care provision
and reimbursement (Hillman and Dalziel, 2003; Hussey et al.,
2009). Operationally, healthcare providers face ever-expanding
sets of medical procedures and required information processes,
which increase reimbursement processing tasks and variability,
potentially harming care quality and increasing costs (Tucker et al.,
2007). Frequently changing reimbursement policies also introduce
new and constantly evolving stakeholder incentives and operating
conditions that can cause failures of healthcare operations (Peck,
2015).
To ensure regulatory compliance and provider protability,
revenue managers increasingly must intervene in physician pro-
cesses. The interventions include revenue managers suggesting
adjustments to physician treatment decisionsdtreatments
impacting care provisiondas a means to reduce risk, lessen audit
likelihood, and increase overall reimbursements (Porter and
Kaplan, 2015). In cases where payers do not reimburse care pro-
viders promptly, care delivery can be delayed signicantly or
completely interrupted while waiting for approvals (Lawrence,
2016). In extreme cases, if payers and providers cannot agree on
appropriate care, patient coverage may be terminated mid-
treatment, even after a patient already has paid for coverage
(Sachdev, 2016). Despite the impacts of institutional environment
upon reimbursement and care processes of healthcare organiza-
tions, operations, and stakeholders, the extant literature often as-
sumes that reimbursement processes exhibit little consequential
effect.
1.2. Overview of reimbursement process and impacts
While nancial ows are fundamental supply chain processes
(Chopra and Meindl, 2007), an extensive review of extant literature
reveals healthcare OM studies rarely examine reimbursement (Lee,
2016). In this review of healthcare operations management and
information systems papers in leading journals, only ten papers out
of 48 even mention reimbursement, and only a few studies focus on
reimbursement as a salient driver of operational outcomes. Many
diverse healthcare reimbursement systems exist across the globe,
Please cite this article in press as: Lee, S.J., et al., Seeing the forest for the trees: Institutional environment impacts on reimbursement processes
and healthcare operations, Journal of Operations Management (2016), http://dx.doi.org/10.1016/j.jom.2016.09.001
yet most papers refer only to one U.S. system for inpatients (O'Neill
and Hartz, 2012; Powell et al., 2012). In general, extant literature
refers to reimbursement as an empirical control rather than a focal
operational construct.
In contrast to academic priors and research practices, healthcare
administrators and policy makers tout reimbursement processes as
salient causes of wasteful expenditures and poor operational per-
formance (O'Malley et al., 2005). As an illustration, consider the
similar impacts yet divergent research between clinical factors and
reimbursement factors. Clinical task environment factors, such as
diagnostic and prescription errors, cost billions of dollars annually
(Kohn et al., 1999) and cause injuries and deaths (Landro, 2013),
prompting much task-oriented OM research on care delivery and
technology. In comparison, institutional environment drives pro-
cess quirks related to coding, billing, and payment documentation;
these reimbursement factors drive signicant operational problems
that directly and indirectly affect patient care (Kaplan and Porter,
2011). Among their effects, 30% of medical billing claims contain
errors (Silver-Greenberg, 2011), and the reimbursement policies
can prompt doctors to withhold treatments, which can lead to
deaths (Allen and Levy, 2009). Further, such policies enable many
billions of dollars of unwarranted claims (O'Keeffe, 2016). Relatedly,
medical researchers suggest reimbursement factors are salient
drivers of medical errors (McMains, 2016). Even though overall
impacts are similar, the literature's focus on clinical task environ-
ment brings to mind the idiom that, to date, the research cannot
see the forest for the treesda focus on details has led research to
ignore bigger-picture aspects of regulatory and reimbursement
impacts on healthcare operations.
In light of these issues, advancing research on institutional an-
tecedents and operational consequences of healthcare reimburse-
ment is of societal importance (Porter and Lee, 2013). Both for-
prot and not-for-prot healthcare providers live by the adage of
no money, no missiondsustainable care provision (i.e., mission)
occurs only when both operational processes and nancial ows
(i.e., money) are in place (Chase, 2016). To achieve these triple aims,
researchers can address the scope and complexity of reimburse-
ment processes, identify key antecedents of reimbursement pro-
cess impacts on care delivery, and determine how the OM
community can approach reimbursement topics. This research note
contributes academically by explicating reimbursement processes
and associated impacts on operations via conceptual frameworks
that detail ows of services and nancial transactions within
healthcare systemsda necessary step before developing detailed
empirical research (Rouse and Serban, 2014). This note also serves
to remind researchers that operations are always embedded in
institutional environments. In the case of healthcare OM, institu-
tional environment, acting through reimbursement processes, may
help or hinder the task environments and interventions upon
which researchers focus.
The coming sections use illustrative examples to show how even
a simple medical procedure can yield complex reimbursement
processes and unexpected care outcomes. The discussions then
illustrate how the complexities in reimbursements arise and
consider how such phenomena may affect operational solutions to
healthcare dilemmas.
2. Why are reimbursement processes interesting, impactful,
and important?
Many OM readers may be unfamiliar with reimbursement
processes, even for relatively simple medical procedures. Hence,
this section uses a simple framework to describe how care provi-
sion interfaces to reimbursement processes. The framework shows
how the seeming structural simplicity, when implemented in
 S.J. Lee et al. / Journal of Operations Management xxx (2016) 1e9 3

different institutional environments, embodies similar enormous
levels of managerial complexity. Using a common real-world
example for a laceration treatment procedure, the framework
provides insights into how reimbursement processes affect patient
care provision decisions, operations outcomes, and nancial
performance.
2.1. The complex is actually quite simple: triadic model of
healthcare reimbursement
At a high level, healthcare delivery can be reduced into a simple
set of triadic process ows involving patient, care providers, and
third party payers (TPPs). The upper part of Fig. 1 shows a simple
triadic model of the healthcare delivery system in terms of ows of
care and reimbursement processes. The rst set of ows occurs
between patient and care provider. A patient presents herself for
care, and care provision takes place. A patient also may need to
make payments directly to a care provider; doing so may remove
the TPP from the gure, or the payments may be reimbursed by a
TPP directly to a patient. For example, in China, hospital patients
must make a monetary deposit before treatment covering the cost
for the treatment; after treatment, a hospital will refund excess
deposit amounts, while a government healthcare program will later
refund to the patient a percentage of the treatment cost paid (Guo
et al., 2016). In contrast, a U.S. patient typically presents, receives
treatment, and only after treatment pays a co-payment and bill, as
determined by insurance contracts between a patient and TPPs.
A second set of ows occurs between care provider and third
party payer(s). While Fig. 1 only shows one TPP, in many patient
treatment cases, multiple TPPs will need to coordinate reim-
bursement. For example, a U.S. patient may use a primary TPP (e.g.,
Medicare) as well as a supplementary TPP (e.g., Humana). TPP
subrogation occurs when one TPP takes over a portion of a payment
obligation from another TPP; subrogation requires one or more
additional TPPs at the right side of Fig. 1 (CMS, 2015c). In contrast,
in China, a patient is covered by one of three government health-
care plans. Thus, depending on the operant set of care providers
and TPP insurance contracts, care provision and reimbursement
processes along the triadic structure may differ substantially.
Indeed, institutional environment leads to dramatic triadic differ-
ences across the globedin the U.S., subrogation among payers is
common (e.g., among CMS and supplemental insurers), whereas in
China, patients often do not trust private TPPs and usually rely on
the government programs.
2.2. What seems simple is actually complex: institutional
environment impact
Next, consider the dyadic reimbursement processes at the right
side of Fig. 1. The processes involve three basic stepsdcoding,

Fig. 1. A triadic view of the healthcare delivery system.

Please cite this article in press as: Lee, S.J., et al., Seeing the forest for the trees: Institutional environment impacts on reimbursement processes
and healthcare operations, Journal of Operations Management (2016), http://dx.doi.org/10.1016/j.jom.2016.09.001
4 S.J. Lee et al. / Journal of Operations Management xxx (2016) 1e9
billing, and paymentdstarting with the development of clinical
documentation by physicians who participate in care provision
during an encounter. An encounter refers to direct contact between
a patient and an authorized care provider (e.g., a physician) for
patient diagnoses or treatments (Medicare, 2008). In an encounter,
a care provider evaluates a patient's medical issues and provides
care. The physician then creates documentation regarding the na-
ture of care. This documentation ows to reimbursement
personnel, who evaluate and translate the physician's notes into a
billing claim.
The lower part of Fig. 1 provides details of the reimbursement
process. In the rst stepdthe coding processda physician, or other
licensed care provider, les a patient's medical record for services
provided and items supplied for the patient's treatment. The phy-
sician's documentation moves to professional coding staff, who
identify a set of appropriate codes (i.e., alphanumeric strings)
representing the care and facilitating material inputs. The second
step is the billing process. One treatment may require several codes
in a billing package. The coder assembles the set of codes into a
claimdfor the portfolio of delivered servicesdto collect payment
for the billing package. In the third step, the payment process en-
tails ling a claim to a payer. Eventuallydbarring denials or other
issues discussed belowdthe provider receives nal payment.
While again supercially simple, the institutional environment
affects these process steps in a manner that can alter physician
treatment choices, create operational complexity, and generate
revenue management uncertaintydthe motivation for the coming
sections. Institutional environment plays a critical role in deter-
mining exactly how the involved coding process steps play out in
practice (Powell et al., 2012). Politics and bureaucratic policy dif-
ferences among and within countries can lead to starkly different
outcomes. We illustrate these consequences of institutional envi-
ronment and the subsequent realization via reimbursement pro-
cesses next.
2.3. Reimbursement complexity affects treatment processes: A
laceration example
Many individuals across the globe experience a lacerationda
wound from splitting or tearing of skin. Over six million laceration
treatments occur in U.S. inpatient emergency departments each
year at a cost of well over $3 billion (Quinn et al., 2014). Fig. 2
outlines the laceration treatment process, including care provi-
sion (upper row, left box) and reimbursement (all other cells)
involved in a patient encounter. Though the treatment process for
laceration is straightforward, the complexity of a resulting reim-
bursement process can be signicant (Barton, 2010). Here, we
illustrate how different institutional environments and subsequent
reimbursement processes (i.e., U.S. vs. China) dramatically affect a
patient's treatment process.
Institutional Environment: U.S. In this example, suppose David,
a 66-year-old professor, has severe lacerations on his hand from
working on a lawn mower. David has access to Medicareda
governmental TPPdand a university healthcare private insurance
planda supplemental TPP. Thus, David can visit a preferred pro-
vider hospital for laceration treatment (Phase 1). As the lacerations
are signicant, David also met with a specialist physician several
times (Phase 2), followed by rehabilitation via home health agency
nursing care visits (Phase 3).
In Fig. 2, the reimbursement process ow includes Steps 1e7.
While David receives treatment (Phases 1e3), the care provider's
billing system proceeds from an initial presentation stage (Step 1)
to care provision (Step 2) to a post-discharge stage (Step 3).
Although the laceration treatment is fairly simple in each Phase,
each treatment Phase may require use of unique sets of billing
Please cite this article in press as: Lee, S.J., et al., Seeing the forest for the trees: Institutional environment impacts on reimbursement processes
and healthcare operations, Journal of Operations Management (2016), http://dx.doi.org/10.1016/j.jom.2016.09.001
systems and coding systems. Each Phase generates TPP documen-
tation and billing constraints for the order and timing of treatment
procedures. The process also involves various stakeholders
throughout the treatment and reimbursement processes, which
can lead to communication challenges (e.g., during translation of
physician notes into billing codes). Based on a triage decision for
inpatient or outpatient care, and the possibility of post-discharge
home health agency care, various payment systems can interact
and intensify process complexity.
The post-treatment reimbursement process (Steps 4 to 7) in-
herits outcomes from Steps 1 to 3 that amplify reimbursement
complexity. Much like a bullwhip effect in inventory systems, dis-
torted information and treatment documentation issues during a
care provider's billing process can lead to increased claim vari-
ability for providers and TPPs (Powell et al., 2012). This claim
variability can amplify the complexity of the post-treatment
reimbursement process by increasing the chance for denials of
billing claims at various stages (CMS, 2015a). If denials do not occur,
TPPs need to complete the payment process (Step 4 and Step 5).
Yet even after Step 5, a TPP (e.g., CMS) can still dispute care
provision decisions, such as the decision to treat David on an
inpatient basis (higher cost via Medicare Part A) or outpatient basis
(lower cost via Medicare Part B) (CMS, 2015a). To improve efciency
and prevent fraud and abuse (Step 6), CMS and other TPPs often
audit care providers. In 2010, CMS moved to use of Recovery Audit
Contractors (RACs) to audit care providers (AAPS, 2000; RAC, 2014).
RAC auditing rms collect fees based on claim amounts recovered
via audits (RAC, 2014). A major issue RACs investigate is the location
of service delivery, as TPPs pays far more for inpatient than
outpatient treatment (CMS, 2013). If RACs report that, in retrospect,
a care provider used excessive inpatient claims to increase charges
and reimbursement claims, a TPP will issue nes, denials, and re-
coupments of claims. A survey of 2489 U.S. hospitals found
increasing frequency and dollar amounts in RAC audits leading to
over $3 billion of recoupments and denials in a single quarter of
2014 (AHA, 2014). Due to the monetary sums involved, care pro-
viders often respond to RAC ndings (Step 7).
Together, the complexity and uncertainty involved in docu-
mentation of care provision, related billing processes, and multi-
year audits all impact reimbursements. As in this laceration
example, the most common form of claim denial reported was
inappropriate use of inpatient care when outpatient care may have
been sufcient (AHA, 2014). In effect, RAC auditors have authority
to second-guess a physician's choices about care delivery, providing
a means to deny and recoup previous reimbursements from CMS.
For each case a RAC auditor asserts to be in error, the care provider
must at least reimburse CMS the difference between outpatient and
inpatient billings (restarting Step 4 in Fig. 2), which can cost mil-
lions of dollars for a small-to-mid-sized hospital system (AHA,
2014). This situation illustrates how care provider managers oper-
ate under long-term nancial uncertainty, since previous TPP
payments are at risk of audit for multiple years (CMS, 2015a). Un-
like in other industries, where a revenue management cycle n-
ishes after bill processing and payment, healthcare systems face
uncertainty from auditing processes that occur years later to adjust
and deny claims. In creating such uncertainty, institutional envi-
ronment threatens the care provider's solvency and ability to
perform the care provision mission.
Moreover, these audit risks also have policy implications for care
providers deciding when to use certain medical treatments (U.S.
Cong, 2015). Both audits and care provider responses have the
potential to signicantly impact patient care. As the example il-
lustrates, this situation has potential to create a serious operating
incentive mismatch, since patient care quality is not part of the
incentive structure for RAC auditors (CMS, 2013). When a TPP uses
 S.J. Lee et al. / Journal of Operations Management xxx (2016) 1e9 5

Fig. 2. Case example of Medicare patient: life cycle of a laceration case.

RAC auditors to ne a hospital system and deny claims, patient care
quality may decline if care providers subsequently reduce audit risk
by enforcing changes to inpatient care (AHA, 2014). The AHA (2014)
also notes that risk of audit penalties and denials may override the
risks to patient health and diminish care quality. Hence, due to such
audit risks, institutional environment inuences both process and
performance of the care provision mission.
The reimbursement process will be even more complex if a care
provider decides to challenge denials. After a RAC audit denies or
recoups a claim, a provider may challenge RAC ndings. In this case,
the reimbursement process may take years to nalize and involve
high legal costs (Griswold, 2014). If the RAC and care provider
cannot agree to mandatory dispute resolution, the provider faces
immediate nes, interest charges, and non-compliance penalties
(CMS, 2015a). Appealing RAC decisions is a prolonged task that
continues to worsen e 85% of hospitals report delays of at least 120
days (AHA, 2014). To lessen this backlog, CMS offered $1.3 billion to
nearly two thousand hospitals to drop appeals regarding inpatient
versus outpatient reimbursement audits (CMS, 2015b). Anecdotally,
hospitals with less developed operations and revenue management
processes appear to accept such offers, while hospitals having
mature processes are inclined to continue disputes due to high
likelihood of winning (Chase, 2016). In short, institutional envi-
ronment mechanisms, intended to ensure provider legitimacy, may
harm the care provision mission by altering care decisions and
reducing provider solvency.
Unfortunately, the effects of such processes are not isolated to
providers and TPPs. Patients are affected. David may receive a

Please cite this article in press as: Lee, S.J., et al., Seeing the forest for the trees: Institutional environment impacts on reimbursement processes
and healthcare operations, Journal of Operations Management (2016), http://dx.doi.org/10.1016/j.jom.2016.09.001
6 S.J. Lee et al. / Journal of Operations Management xxx (2016) 1e9
supplemental bill after an extended time once the care provider
and TPPs nally determine their contractual obligations. Such
events impact patients emotional and physical constitutions and
their solvency (Himmelstein et al., 2009). Again, patients are
affected in very different ways across different institutional envi-
ronments. Thus, we next briey contrast the U.S. experience of
David with potential experiences in China.
Institutional Environment: China (PRC) If David were in China
and needed the same laceration treatment, the situation would be
different. China uses three government TPP programs (i.e., Urban
Employed; Urban Unemployed; and Rural Farmer) (Dong, 2009;
Meng et al., 2015). Each program is administered at a province,
city, or county (within-city) level, thus there are many differences
in covered treatments and reimbursements from one administra-
tive area to another (i.e., 2852 Urban Employed, 333 Urban Un-
employed, and 333 Rural Farmer schemes) (Meng et al., 2015).
David's treatment thus depends on which plan he qualies for,
which city and county he lives in, whether he is treated outside his
home city, and local economic conditions, which enable broad or
less broad lists of covered treatment processes.
The institutional environments of China's administrative dis-
tricts, as well as local payment and reimbursement processes, also
affect stakeholder behaviors quite differently versus elsewhere.
Prior to treatment, patients in China must pay fully for their hos-
pital expenses. As a professor, David has a salary and access to
credit, and thus will be able to make the required monetary de-
posits. As an urban employed citizen, David likely will be reim-
bursed for 70%e90% of treatment costs. Depending on his own
treatment decisions, David may very well experience a treatment
process similar to his U.S. counterpart. In other words, though the
institutional environment differences are stark, the care outcomes
may be quite similar.
In contrast, if David were a rural farmer, he may be able to afford
initial diagnosis costs (e.g., on the order of $1-$3). However, due to
reimbursement incentives aimed to convince farmers to use rural
doctors, and distrust of rural doctors, farmer David likely would not
be able to afford costs of treatment at an urban hospital, which are
reimbursed for out-of-city farmers at a lower rate. This reim-
bursement scheme thus results in patients choosing to turn down
or discontinue treatments mid-course, return home, and perform
self-care (Guo et al., 2016). In this instance, full visibility of price
and reimbursement leads to treatment challenges for underserved
populations. Conversely, in the U.S., Emergency Medical Treatment
& Labor Act (EMTALA) policies would require the farmer David to
be treated, irrespective of ability to pay, after which the U.S.
reimbursement process would start. In this instance, the stark
institutional environment differences may indeed lead to vastly
divergent care outcomes.
2.4. Summary notes: institutional environment and reimbursement
complexity
Institutional environment has profound effects on healthcare
task execution, the mission of operational care provision, and a care
provider's nancial solvency. This section provided a brief overview
of how a simple medical procedure can have far-reaching opera-
tional and reimbursement revenue consequences for care providers
and TPPs. The example highlights the complex nature of reim-
bursement processes and their impacts on the lifecycle of patient
care decisions. The example also illustrates how national and local
institutional environment impacts the effectiveness of the task
environment in which medical professionals treat patients. Reim-
bursement processes can both enable and impede care delivery
across different regions and populations. Patient care outcomes
thus can be affected by bureaucratic policy, regional economic
Please cite this article in press as: Lee, S.J., et al., Seeing the forest for the trees: Institutional environment impacts on reimbursement processes
and healthcare operations, Journal of Operations Management (2016), http://dx.doi.org/10.1016/j.jom.2016.09.001
differences, manager efforts to comply with policies, and how in-
dividual stakeholders (e.g., physicians, hospital managers, TPP
managers, and patients) respond to the policies.
3. How does complexity arise in reimbursement and care
delivery processes?
Institutional environment drives complexity in reimbursement,
and thus in care delivery, through a wide variety of mechanisms.
Researchers must remember that physicians and their institution
staff are the operational agents that ultimately ensure, or fail to
ensure, that medical treatments delivered to patients will comply
with a patient's allowed treatments, as determined through one or
more TPP contracts. Doing so involves work tasks, which are
innately affected by the extent and variability of task steps. Time
used by physicians to ensure reimbursement accuracy is explicitly
time taken away from patient-centered care delivery
effortsdconstraints of reimbursement lead to a less-optimal sys-
tem, from the perspective of serving patient needs. Inspired by
work of Bozarth et al. (2009), we developed an inventory of reim-
bursement process complexity dimensions that may affect
healthcare delivery in an onerous manner. Table 1 presents salient
sources of detail complexity and dynamic complexity, which are
manifested during discussions about and actual execution of
healthcare treatments. We do not claim these dimensions are the
only reasonable dimensions that arise in practice, but rather pre-
sent this list as a means to inspire continued research.
Beyond identifying several reimbursement task characteristics
that can affect and mediate the medical treatment process, Table 1
also allows a researcher to envision the wide breadth of institu-
tional agents that can play a role in causing such complexity. Bu-
reaucracy ultimately originates many of these dimensions. For
example, bureaucratic negotiations that result in different care
coverage and reimbursement programs for rural versus urban cit-
izens create a multiplicity of tasks for professional reimbursement
staff to process. Some of the aspects of complexity arise from the
fact that treatment processes often involve multiple stakeholders.
For example, the number and variety of physicians in a care delivery
team will multiply the number and types of interacting reim-
bursement decisions that must be made. The effect of multiple
stakeholders will cascade through billing via increased numbers of
steps to complete, each of which ultimately embodies a certain
level of uncertainty as to whether a reimbursement claim was
processed successfully. Finally, regulatory policies and systems
created as means to ensure compliance objectives (e.g. detailed
illness classications and treatment code set systems) lead to more
things to know and more things to do for healthcare personnel and
professional coding staff. Whatever the institutional environment
mechanisms from which they arise, as shown earlier, these
complexity dimensions have the potential to proactively affect ef-
cacy of care delivery.
4. Implications for OM researchers
As institutional environments generate many of the reim-
bursement process drivers of operational complexity in healthcare
operations, multiple natural questions arise regarding these
potentially confounding factors. This section discusses these sig-
nicant challenges.
OM Solutions to Institutional Environment Reimbursement
Problems? Having read the above, readers may question whether it
is even possible for operations managers to put in place actionable
responses to such diverse and constantly changing institutional
environments. Yet, managers face this task every day. Clearly, a
healthcare operations manager's task is to respond to government
 S.J. Lee et al. / Journal of Operations Management xxx (2016) 1e9 7

Table 1
Sources and symptoms of detail and dynamic complexity in healthcare reimbursement systems.

Detail complexity Dynamic complexity

Sources Category Symptoms Category Symptoms

Coding Breadth of disease classications
Size and expansion of code set
systems
Number and variety of providers in
care delivery team
Billing Number of steps within claims
development procedures
Payment Extent of authority of Recovery Audit
Contractor to dispute a specic claim
Count of rules/regulations pertaining
to a healthcare reimbursement
Existence of multi-level payers (i.e.
subrogation) for a patient
A number of separate reporting
systems
 Inaccurate compliance between
care provider IT system and
coding system
 Increasing overhead cost for
adapting new code classication
 Increasing overhead cost for
understanding code set systems
 Inaccurate compliance between
physicians and coders
 Delays and inaccuracies of coding
data transfer between care
providers
 Inaccurate billing
 Delays in ling claims
 Inefcient coding and billing
feedback processes
 Care providers can be penalized by
RACs
 Increasing additional tasks for care
providers
 Care providers can be penalized by
RACs
 Delays in nalizing reimbursement
processes
 Increasing additional tasks for care
providers
 Increasing payment uncertainties
 Reimbursement processes may not
be nalized in a timely manner
 Redundant payment adjudication
processes
 Reimbursement processes may not
be nalized in a timely manner
 Delay in claims adjudication
 Risk of fraudulent transaction
Missing care information within the
medical records of a patient
Ambiguity in code set denitions
Geographical difference in access to
care
Uncertainty of formatting of bills
Specic requirements maintained by
different TPPs for billing processes
Timing of payment
Subrogation among TPPs
 Delays and inaccuracies of coding
data transfer between stakeholders
 Care providers can be penalized by
RACs
 Inaccurate claims
 Inefcient coding and billing
feedback processes
 Coding errors due to different
payment systems between rural
vs. non-rural providers
 Redundant reimbursement
processes at different sites
 Inadequate provider claims
 Inefcient coding and billing
feedback processes
 Care providers can be penalized by
RACs
 Inaccurate bills and claims
 Inefcient coding and billing
feedback processes
 Risk of fraudulent transactions
 Reimbursement processes may not
be nalized in a timely manner
 Redundant payment adjudication
processes
 Inaccurate claims

and TPP reimbursement policy, putting in place sustainable sys-
tems that can achieve effective care provision (i.e., mission) facili-
tated by both efcient operational process ows (i.e., task
environment) and nancial ows (i.e., monetary payments and
reimbursements). The skills of analytical researchers may be of
much use to solve questions of system design for optimal strategic
response to reimbursement policy (Green, 2012). Yet whether
analytical or empirical, investigations into healthcare operation
interventions should be holistic in nature, considering the triple-
aim of effective care provision, efcient process operation, and
nancial solvency objectives. Failure to consider these three aims
together may have potentially unexpected impacts, as a task
environment intervention that inadvertently complicates reim-
bursement may harm the provider's ability to achieve the ultimate
care delivery mission in a sustainable manner.
Independent of whether it is possible for local operations man-
agers to congure a system-wide operational solution to a problem
born from institutional environment, such systems often will be
fairly local in nature. The implicitly regional impacts (e.g., state-level
U.S. Medicaid; county-level Chinese coverage) of reimbursement
policies upon care delivery prompts questions about the extent to
which empirical research might reasonably claim to exhibit gener-
alizability. With medical task environment explicitly interrelated
with local reimbursement institutional environment, demonstrating
broad generalizability of ndings may prove exceedingly difcult.
Empirical Adjustments for Institutional Environment Reim-
bursement Factors Given the innately local nature of a medical
treatment process (i.e., task environment) and constraints that
reimbursement policies may generate, biasing impacts of reim-
bursement processes are a distinct possibility. Treatment task en-
vironments are embedded within hospital departments and
hospitals, which are embedded within local reimbursement
schemes and systems. Thus, econometric adjustments and multi-
level empirical modeling approaches clearly may be necessary to
ensure empirical parameter estimates and ndings are robust.
Further, in light of the above, endogeneity of healthcare stake-
holder behaviors should be carefully addressed in healthcare
research. Multiple research papers appear to dismiss data on
reimbursement processes, omitting reimbursement as irrelevant
for treatment decisions or questions of healthcare technology
impact. Empirical research within an institutional environment
(i.e., TPPs, government agencies) needs to assess impacts of
healthcare interventions on nancial metrics of institutional suc-
cess (e.g., audits, billing errors, recoupments, revenue per treat-
ment). In a somewhat counter-intuitive fashion, the
reimbursement process commonly drives the treatment task
environment, expanding the potential usefulness of healthcare
technology, rather than simply serving as an administrative process
independent from and responding to treatments having already
taken place.

Please cite this article in press as: Lee, S.J., et al., Seeing the forest for the trees: Institutional environment impacts on reimbursement processes
and healthcare operations, Journal of Operations Management (2016), http://dx.doi.org/10.1016/j.jom.2016.09.001
8 S.J. Lee et al. / Journal of Operations Management xxx (2016) 1e9
5. Conclusion
This research note highlights healthcare delivery and reim-
bursement processes that are yet to be examined in detail by OM
healthcare scholars. To illustrate fundamentals of reimbursement
processes, the manuscript develops conceptual frameworks and
uses the frameworks to highlight the high complexity of reim-
bursement processes. This note uses an illustrative care provision
example along with adjoining reimbursement process models. The
contribution of the paper stems from demonstrating the counter-
intuitive reality that, in contrast to typical literature assumptions,
institutional environments and embedded reimbursement pro-
cesses drive the healthcare task environment. Thus, even though
some researchers have done so in the past, this note highlights that
researchers should not claim reimbursement has minimal impact
on healthcare operations (Porter and Kaplan, 2015). Rather, we
provide evidence that institutional environment, as reected in
reimbursement policies and processes, structure much of what
takes place in healthcare operations. As such, reimbursement
should be embraced, not dismissed, by OM literature.
Even with increasing legislative pressures and mounting frus-
trations of the general public with healthcare reimbursement
problems, there is a scarcity of research that connects reimburse-
ment processes to care provision and operational outcomes, or to
the institutional environment antecedents that lead to reimburse-
ment policies and bureaucracies. At least to some degree, the lack of
research appears to be partly driven by a lack of appropriate
theoretical foundations. Ideally, based on this manuscript, re-
searchers will be inspired to make substantial new contributions by
extending research interests in healthcare OM topics to reim-
bursement processes. If research continues to ignore the role of
reimbursement processes and the resultant nancial decisions of
healthcare revenue managers and physicians, which explicitly and
directly affect the care delivery task environment and care delivery
outcomes, scholars may not account for all factors that enable high
quality healthcare servicedan omission bias.
As highlighted throughout this research note, modern health-
care continues to increase in complexity, even for simple care de-
livery procedures. This increasing complexity offers a signicant
opening for our eld to provide rst steps toward improved process
understanding (Kaplan and Porter, 2011; Porter and Lee, 2013).
Based on our review of related literature, reimbursement research
should gain increased attention and become an increasingly
important problem domain for many reasons, including the sheer
scope of healthcare reimbursement expenditures as the single most
dominant driver of GDP in many economies, and the dramatic
institutional differences in reimbursement policies and impacts
across economies (Christensen et al., 2008). Even though health-
care laws hold promise to increase care access and streamline
reimbursement (HHS, 2015), recent reimbursement trends suggest
managers must continue to adapt and consider rapidly evolving
technology choices as well as nd ways to consolidate for opera-
tional and reimbursement economies of scale (Weldon, 2014). As
Weldon (2014) notes, ongoing changes in reimbursement will
cause unforeseen issues. As a result, empirical healthcare OM re-
searchers have a rare occasion to be among the rst to examine
institutional antecedents of healthcare reimbursement processes
and solve related operational issues.
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