Organizational diversification in the American hospital

This paper outlines a conceptual framework of organizational diversification and assesses the state of empirical research on hospital organizational change. The literature on economic organization of hospitals, one of the most developed branches of health services research, still has only weak ties to economic theory. Evolving physician-hospital organizations do not fit into existing frameworks based on horizontal integration, vertical integration, or diversification. Empirical research has primarily focused on horizontal integration, and cause-effect relationships are often obscured by models that depart from economic theory and lack controls for self-selection bias. Recent empirical studies indicate that hospital mergers had moderate, rather than dramatic, effects on the rate of change in operating costs, staffing, and scale. Mergers rarely resulted in hospital closure, but were as likely to result in acute care consolidation and restructuring as in conversion to non-acute inpatient uses. While administrative costs were higher in for-profit than non-profit system hospitals, total costs were similar. System hospitals had lower marginal and average costs per stay than independent hospitals. Hospital vertical integration into subacute care was largely an artifact of the governmental uniform pricing system, which encouraged vertical integration. Hospitals that shared governance or financial risks with physicians outperformed those with high levels of physician governance and financial integration (e.g. stock ownership). Formal physician-hospital organizational arrangements often served to coordinate managed care contracting or to forge links with primary care group practices. Hospital diversification into related services improved short-term financial performance over unrelated diversification, although long-term performance was similar.