Diversification in Response to Market Reform

Rational expectations dictate that firms respond to shifts in the hospital payment system as a result of health sector reform. To determine the impact of system reform on levels of hospital diversification and operating ratio for 88 teaching hospitals and 88 community hospitals during the period 2005 – 2010. The 44 teaching hospitals are matched with 44 other teaching hospitals experiencing the same market position in 2005, but having different levels of diversification. Likewise, 44 non-teaching community hospitals are matched with 44 other community hospitals in 2005, having varying manager preferences for service-line diversification 2006-2010. Diversification and operating ratio are modeled in a two-stage least squares (TSLS) framework as being jointly dependent. Institutional diversification is found to yield better financial position, and the better operating profits provide 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. An institution life cycle hypothesis is advanced to explain hospital behavior: boom and bust, diversification and divestiture, occasionally leading to closure or merger. Management’s attitude concerning risk and reward is considered.