Hospital service duplication: evidence on the medical arms race

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.

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.

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.

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.

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.