2004 Proceedings of the Midwest Business Economics Association 93 Identifying Latent Outcome Measures in Inpatient Physical Therapy Donna Neufelder, St. Mary’s Rehabilitation Institute Janet Raisor, St. Mary’s Rehabilitation Institute Mohammed Khayum, University of Southern Indiana Daniel Friesner, Gonzaga University ABSTRACT Like all health care practitioners, physical and occupational therapists provide services to their patients that are intended to increase patient health and well-being. But because patient health and well-being are inherently latent, therapists are often forced to utilize indirect methods for measuring the effectiveness of their practices. These indirect methods usually involve gathering data on multiple indicators of therapy effectiveness. The problem with this approach is that there are usually multiple indicators for each latent phenomenon, and each of those indicators may give contradictory findings. As a result, the exact relationship between each indicator and the underlying phenomenon is often unclear. In this paper, we apply factor analysis to data on inpatient physical therapy following total knee replacement surgery (TKR) at a Midwestern rehabilitation institute. Our goal is to not only determine how many different latent measures of patient well-being are inherent in this type of therapy, but also to identify which (and how much) each of the empirical indicators commonly used to measure patient progress contribute to each of these underlying factors. The results of our analysis indicate that there are two underlying rehabilitation factors. One of these underlying measures is explained primarily by the flexion measures taken by the staff, while the other latent factor is explained by the remaining empirical indicators. Thus, it appears that patient progress in post-TKR therapy is really a two-fold phenomenon. As such, process improvement initiatives intended to quantify and increase the quality of care provided to patients must be adapted to take this finding into account. INTRODUCTION Like all health care practitioners, physical and occupational therapists provide services to their patients that are intended to increase patient health and well being. But because patient health and well-being are inherently latent, therapists are often forced to utilize indirect methods for measuring the effectiveness of their practices. These indirect methods usually involve gathering data on multiple indicators of therapy effectiveness. The indicators are then aggregated in some fashion (whether implicitly or explicitly) and used to make inferences about the practice’s effectiveness. While using empirical indicators to document practice effectiveness is very common in health care, there are several problems with this approach. First, because patient health and well being is such a broad definition, it is unclear as to exactly how many distinct, latent aspects of patient well being actually exist in rehabilitation therapy. For example, it may be the case that patient well- being is a single phenomenon. Alternatively, many studies (for example, Stanley and Cheek, 2003; Mossberg and McFarland, 2001; Weale, et al 2001; Rissanen et al 2000) assume that patient well-being can be decomposed into to multiple, distinct aspects, including (but certainly not limited to) physical well-being and mental well-being. The appropriateness of this assumption certainly depends on the type and severity of medical treatment. Physical and occupational rehabilitation, for example, is both corporeal and psychological in nature (for example, Jerosch and Floren, 2000; Jackson et al, 1998), implying that decomposing patient well-being into multiple factors is appropriate. However, there is little consensus in the literature about the appropriate number of latent factors to be analyzed (Stanley and