Specialization and competition in healthcare delivery networks

Hospital networks, which offer multiple services at multiple locations, are investigating strategies to fight the growing competition from specialty hospitals. Specialty hospitals focus on a selective range of profitable services, have better control over costs, and deliver higher (perceived) quality. A hospital network too can create specialized facilities; however, this may lead to the loss of sales from services that it no longer offers. Using a spatial model, we study when it is profitable for the network to specialize, and how to determine which facilities provide the greatest value through specialization. We find that a hospital network, when facing specialized competitors, can often improve its overall profitability by specializing some of its facilities; and that among its different facilities, the network's best choice for specialization is the facility that is closest to the competitor, and thus most directly affected. Interestingly, we find that the value of specialization is contingent upon the competitive pressure that the specialized competitor exerts on the network. Specializing one facility yields the greatest benefits for the network when the competitor is located at the fringe of the market, thus presenting a reduced threat to the hospital network. On the other hand, if the specialized competitor is located at the core of the network's customer base, we find that the attractiveness of specializing one facility is much smaller and that the hospital network might fare better with a strategy based on diversification, i.e., offering a full-menu of services at every facility.