Strategic management in local hospital markets: service duplication or service differentiation.

BACKGROUND: The purpose of this study is to assess the influences of market structure on hospitals' strategic decision to duplicate or differentiate services and to assess the relationship of duplication and differentiation to hospital performance. This study is different from previous research because it examines how a hospital decides which services to be duplicated or differentiated in a dyadic relationship embedded in a complex competitive network. METHODS: We use Linear Structural Equations (LISREL) to simultaneously estimate the relationships among market structure, duplicated and differentiated services, and performance. All non-federal, general acute hospitals in urban counties in the United States with more than one hospital are included in the sample (n = 1726). Forty-two high-tech services are selected for the study. Data are compiled from the American Hospital Association Annual Survey of Hospitals, Area Resource File, and CMS cost report files. State data from HealthLeaders-InterStudy for 2015 are also used. RESULTS: The findings provide support that hospitals duplicate and differentiate services relative to rivals in a local market. Size asymmetry between hospitals is related to both service duplication (negatively) and service differentiation (positively). With greater size asymmetry, a hospital utilizes its valuable resources for its own advantage to thwart competition from rivals by differentiating more high-tech services and reducing service duplication. Geographic distance is positively related to service duplication, with duplication increasing as distance between hospitals increases. Market competition is associated with lower service duplication. Both service differentiation and service duplication are associated with lower market share, higher costs, and lower profits. CONCLUSIONS: The findings underscore the role of market structure as a check and balance on the provision of high-tech services. Hospital management should consider cutting back some services that are oversupplied and/or unprofitable and analyze the supply and demand in the market to avoid overdoing both service duplication and service differentiation.

Strategic Differentiation of High-Tech Services in Local Hospital Markets.

This study assesses organizational and market factors related to high-tech service differentiation in local hospital markets. The sample includes 1704 nonfederal, general acute hospitals in urban counties in the United States. We relate organizational and market factors in 2011 to service differentiation in 2013, using ordinary least squares regression. Data are compiled from the American Hospital Association Annual Survey of Hospitals, Area Resource File, and Centers for Medicare and Medicaid Services. Results show that hospitals differentiate more services relative to market rivals if they are larger than the rival and if the hospitals are further apart geographically. Hospitals differentiate more services if they are large, teaching, and nonprofit or public and if they face more market competition. Hospitals differentiate fewer services from rivals if they belong to multihospital systems. The findings underscore the pressures that urban hospitals face to offer high-tech services despite the potential of high-tech services to drive hospital costs upward.

Determinants of Community-Related Expenses of US Tax-Exempt Hospitals, 2013.

CONTEXT: Tax-exempt hospitals in the United States are required to report community benefit expenses on their federal tax forms. Two categories of expenses critical to the public health mission of hospitals are the "community health improvement" and "community-building" expense categories. The community health improvement expenses formally qualify as a community benefit, whereas community-building expenses do not. Increasing both types of spending would be consistent with the growing evidence on the effects of social determinants on population health. OBJECTIVE: To identify characteristics associated with the level of community health improvement and community-building expenses reported by tax-exempt hospitals. DESIGN: The general acute care hospital is the unit of analysis. We utilize secondary data for all US general acute care hospitals that filed their own Internal Revenue Service Form 990 Schedule H for 2013 (n = 1508). We apply linear regression analysis to an explanatory model with 8 independent variables. MEASURES: The primary dependent variables are percentage of operating expenses devoted to community health improvement and to community building. The independent variables include 4 hospital-level measures, 3 county-level measures, and a measure of state requirements for community benefit. RESULTS: The level of community health improvement expenses is positively associated with bed size, system membership, profit margin, and urban location. In states where tax-exempt hospitals are required to demonstrate community benefit to the state, there is lower community health improvement spending. Teaching hospitals also demonstrate lower community health improvement spending. Results for community-building expenses mirror those for community health improvement except that teaching hospital status and per capita income lose significance and hospital competition gains significance in the negative direction. CONCLUSIONS: Leaders among tax-exempt hospitals in community-related spending are hospitals that are larger, more profitable, members of systems, and located in urban areas and in states that do not have community benefit requirements.

The proliferation of elective services in U.S. urban hospitals.

BACKGROUND: Although adding convenience for both patients and providers, the proliferation of elective services and equipment in U.S. general hospitals contributes to higher costs and raises concerns about quality and overuse. PURPOSES: We assess the relationship of two forces-health system membership and market competition-with the diffusion of elective services and equipment. METHODOLOGY/APPROACH: The sample consists of all urban U.S. nonfederal general acute hospitals in 2010 (n = 2,467). Elective equipment and services are defined by 25 services offered by less than 33% of urban general hospitals. We relate the number of elective services to environmental and organizational conditions, adopting a contingency theory perspective. Ordinary least squares regression is used to estimate the associations among the key variables. FINDINGS: Market competition is positively associated with numbers of elective services. The effect of health system membership varies by system type, with the most developed integrated systems showing a positive relationship with the quantity of elective services, relative to freestanding hospitals. Members of less-developed integrated systems, however, have fewer elective services than freestanding hospitals. PRACTICE IMPLICATIONS: The evidence on market competition is consistent with a medical arms race scenario in which hospitals pursue elective services and equipment to compete with each other. Membership in highly integrated systems does not act as a constraint on the pursuit of elective services and equipment but instead may independently promote it. It may be unrealistic to expect hospitals to resist offering elective services in the face of competitive and organizational considerations that encourage proliferation.

Service duplication within urban hospital clusters.

BACKGROUND: Approximately 80% of multihospital system member hospitals in U.S. urban areas are clustered with other same-system member hospitals located in the same market area. A key argument for clustering is the potential for reducing service duplication across cluster members. PURPOSE: The aim of this study is to examine the effects of characteristics of hospital clusters on service duplication within 339 hospital clusters in U.S. metropolitan statistical areas and adjacent counties in 2002. METHODOLOGY/APPROACH: Ordinary least squares regression is used to estimate the relationship between cluster characteristics in 1998 and duplicated services per cluster member in 2002. FINDINGS: Duplication is higher in hospitals clusters with higher case mix index and higher bed size range. Duplication is lower in hospital clusters with more members, for-profit ownership, and more geographic dispersion. PRACTICE IMPLICATIONS: Increases in the size of hospital clusters allow more opportunities for service rationalization. For-profit clusters may be innovators in rationalization activity, and they should be studied in this regard. Clusters with a higher case mix, lower geographic dispersion, and hub-and-spoke design (with high bed-size range) may find service reallocation less feasible.

Better to receive than to give? Interorganizational service arrangements and hospital performance.

BACKGROUND: The literature points to possible efficiencies in local-hospital-system performance, but little is known about the internal dynamics that might contribute to this. Study of the service arrangements that nearby same-system hospitals have with one another should provide clues into how system efficiencies might be attained. PURPOSES: The purpose of this research was to better understand the financial and operational effects of service sharing and receiving arrangements among nearby hospitals belonging to the same systems. METHODOLOGY/APPROACH: Data are compiled for the 1,227 U.S. urban acute care hospitals that belong to multihospital systems. A longitudinal structural equation model is employed-environmental pressures and organizational characteristics in 1997 are associated with service sharing and receiving arrangements in 2000; service sharing and receiving arrangements are then associated with performance in 2003. Service sharing and receiving are measured by counts of services focal hospitals report that are not duplicated by other-system hospitals within the same county. Linear Structural Relations (LISREL) is used to estimate the model. FINDINGS: In general, market competition from managed care and hospitals influences hospitals to exchange services. For individual hospitals, service sharing has no effects on operational efficiency and financial performance. Service receiving, however, is related to greater efficiencies and higher profits. PRACTICE IMPLICATIONS: The findings underscore the asymmetrical relationships that exist among local-system hospitals. Individual hospitals benefit from service receiving arrangements but not from sharing arrangements-it is better to receive than to give. To the extent that individual hospitals independently determine service capacities, systems may not be able to effectively rationalize service offerings.

Hospital service duplication: evidence on the medical arms race.

BACKGROUND: Hospital administrators face challenging decisions about whether to maintain, cut, or add services in response to changes in consumer demand or managed-care pressures. The challenge is heightened for services that are also offered by other hospitals in the local community. PURPOSES: This study provides evidence on the financial effects of providing services that are also provided by other hospitals in the same county. Its purpose is to help guide administrators and policy makers in assessing the wisdom of service duplication at the local level. METHODOLOGY/APPROACH: The unit of analysis is the individual hospital. The study reports data from the 2,204 general acute care hospitals located in counties with more than one hospital. A longitudinal path model is constructed for the years 1998, 2000, and 2002, with environmental and organizational factors from 1998 affecting service duplication in 2000, which in turn affects financial performance in 2002. Maximum likelihood estimation in linear structural relations is used to evaluate the path model and its coefficients. FINDINGS: Hospital competition is associated with higher levels of duplication of inpatient, ancillary, and high-tech services. Duplication of inpatient services is associated with higher costs but also with higher operating margin. Duplication of ancillary services is associated with higher return on assets. Duplicated high-tech services are financial losers for hospitals. Higher levels of duplicated high-tech services are associated with higher cost per day, higher cost per discharge, and lower operating margin. PRACTICE IMPLICATIONS: From the standpoint of financial impact on the hospital, administrators should reexamine the costs and benefits of offering high-tech services that are offered by other providers in the local area. The higher costs may not be offset by revenues. Duplicated ancillary and inpatient services, on the other hand, produce some positive financial returns.

Applying clinical significance methodology to alcoholism treatment trials: determining recovery outcome status with individual- and population-based measures.

BACKGROUND: The current analysis applies clinical significance methodology to alcoholism treatment outcome research using data available from Project MATCH. Because of its high internal validity and its inclusion of multiple measures assessing multiple outcome dimensions, MATCH was considered an ideal study to explore the utility of this methodology. METHODS: Data reported here are from a total of 1,726 participants enrolled in either aftercare (n = 774) or outpatient (n = 952) arms of the study. First, a cutoff score was determined differentiating functional versus dysfunctional status on three outcome measures: percent days abstinent (PDA), mean drinks per drinking day (DDD) and negative consequences of alcohol use. Second, the reliable change in pre- to post-treatment scores on these three measures was calculated. RESULTS: The results reported herein support the importance of distinguishing between statistical and clinical significance of outcomes. During three months post-treatment, approximately one-half of the treated patients were "recovered" (i.e., both functional and reliably changed) with respect to both PDA (i.e., 51%) and negative consequences of drinking (i.e., 47%); however, only about one-third of individuals remained recovered throughout the full one-year follow-up period (i.e., 33% on PDA and 35% on negative consequences). These individual-based change outcomes compared similarly to a population-based indicator of heavy drinking. Alternatively, only about one-quarter of participants were recovered using two distinct criteria for mean DDD (i.e., 23-29%), and even fewer participants remained recovered on mean DDD over the full one-year follow-up period (i.e., about 14-18%). CONCLUSIONS: Based on study limitations, more work is required to make clinical significance methodology practically useful to alcoholism treatment trials including more precise definitions of functional status and relative change as well as better interpretation of the inter-relationship between multiple measures assessing multiple outcome domains.

Helpful or harmful? The impact of strategic change on the performance of U.S. urban hospitals.

OBJECTIVE: To contribute to the debate as to whether strategic change helps or harms organizations by empirically examining how strategic change influences performance change in urban hospitals. DATA SOURCES: AHA Annual Survey (1994 and 1996), Health Care Financing Administration's Medicare Cost Reports (1994 and 1996) and Medicare HMO Files (1994), U.S. Bureau of the Census' County Business Patterns Files (1994), and Area Resources File (1994). STUDY DESIGN: This work employed a longitudinal approach using a panel design to study the effect of environmental and organizational characteristics on urban hospital strategic behavior and performance. A path analytic model was used to examine the simultaneous effects of environmental and organizational characteristics (1994) on strategic behavior (change in strategies to enhance HMO business and change in strategies to control costs 1994-96), as well as the effects of all of these variables on change in urban hospital performance (change in market share, change in operational efficiency, change in financial performance 1994-96). PRINCIPAL FINDINGS: (1) Environmental context exerts a greater influence on urban hospitals' HMO business enhancement strategies, whereas organizational characteristics have more influence on cost-control strategies. (2) Between the two strategies, HMO business enhancement and cost control, strategic change to enhance business with HMOs is much more complex. (3) Strategic change observed across the 1994 to 1996 time period can be either helpful or harmful to urban hospitals. A strategic change that contributes positively to one type of performance can negatively impact the other. CONCLUSIONS: Although differences of opinion persist in the strategic change debate, results of this study indicate that strategic change can be helpful or harmful to urban hospitals, and its consequences are far more complex than previously thought. Strategic rationality has its own limitations and cannot always be relied on to yield expected results. Hospital strategic changes require coordination to achieve greater performance results.