Differentiation and specialization in the California hospital industry 1983 to 1988

This article examines changes in the service mix of California hospitals as part of their response to shifts in the system of reimbursement between 1983 and 1988. The Hospital Discharge Data Set and the Annual Hospital Disclosure Report produced by California Office of Statewide Health Planning and Development were used in this study. Characteristics of inpatient hospital services in California before and after the introduction of new reimbursement mechanisms (including the Medicare Prospective Payment System [PPS] and the growth of selective contracting plans) were compared. The factors that influence two measures of hospital service mix, one focusing on specialization and the other on differentiation, were studied. The factors included hospital characteristics and changes in hospital reimbursement. Variables describing a hospital's service mix and the level in its market were constructed from data in the annual discharge abstracts. Data pertaining to average hospital costs and reimbursements under the Medicare PPS were drawn from a file containing a 20% sample of hospital stay records for the year of PPS. Other hospital data, such as ownership and bed size, were taken from the California Annual Disclosure Report data set. The results indicate that completion among hospitals tended to increase differentiation whereas higher financial PPS pressure is associated with increased specialization. Hospitals tend to adopt some high visibility services offered by their competitors while filling market niches selectively overall. It also appears that the cost savings expected for specialization may prevail only for narrowly defined services. Study of subsequent data sets should show whether the cost containment strategies used by the hospitals to achieve these results have been maintained over a period of sustained financial pressure.