ORGANIZATIONAL DIVERSIFICATION IN THE AMERICAN HOSPITAL

This paper outlines a conceptual framework of organizational diversifi cation and assesses the state of empirical research on hospital organi zational 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 or ganizations do not fit into existing frameworks based on horizontal in tegration, vertical integration, or diversification. Empirical researc h has primarily focused on horizontal integration, and cause-effect re lationships are often obscured by models that depart from economic the ory and lack controls for self-selection bias. Recent empirical studie s indicate that hospital mergers had moderate, rather than dramatic, e ffects on the rate of change in operating costs, staffing, and scale. Mergers rarely resulted in hospital closure, but were as likely to res ult in acute care consolidation and restructuring as in conversion to nonacute inpatient uses. While administrative costs were higher in for -profit than non-profit system hospitals, total costs were similar. Sy stem hospitals had lower marginal and average costs per stay than inde pendent hospitals. Hospital vertical integration into subacute care wa s largely an artifact of the governmental uniform pricing system, whic h encouraged vertical integration. Hospitals that shared governance or financial risks with physicians outperformed those with high levels o f 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 i mproved short-term financial performance over unrelated diversificatio n, although long-term performance was similar.