Diversification in the hospital industry

An institution life cycle hypothesis is advanced to explain hospital behavior: boom and bust, diversification and divestiture, occasionally leading to closure or merger. Hospital diversification and its impact on the operating ratio are studied for 172 hospitals during the period 2002-2007. Diversification and operating ratio are modeled in a two-stage least squares (TSLS) framework as being jointly dependant. Institutional diversification is found to yield better financial position, and the better operating profits allow the institution the wherewithal to diversify. The impact of external government planning and hospital competition is also measured. Some services are in a growth phase, like bariatric weight loss surgery and sleep disorder clinics. Management's attitude concerning risk and reward is considered.