A Route to Decomplexifying Hospitals

Hospitals are some of the most managerially intractable institutions in the annals of capitalism.

This is the stark conclusion that Clayton Christensen, Grossman and Hwang draw in their seminal book ‘The Innovator’s Prescription’.

Few doctors and hospital managers would disagree, if anything, that today the trend is towards larger and more complex hospitals, which does little to improve managerial (in)tractability. This leaves us with a challenge: How does one make hospitals manageable again while still maintaining or even improving the value of hospital services?

One of the factors that make hospitals managerially intractable is the vast scope of services they provide under a single organisational umbrella. A fully comprehensive teaching hospital does everything that is not offered by a primary care physician – from wisdom tooth extraction and short-stay observation of frail elderly patients to multiple trauma and organ transplantations. Hospitals have evolved over the past century to become the ‘home of the specialist clinician’, while specialties have mushroomed in the wake of technological advances.

From a strategic perspective, this is problematic. Organisations that provide an extensive range of services often struggle to be good at any one of them. This begs the question: Which of the hospital services share a sufficient number of tangible and intangible resources so that they are best offered together, under the same organisational structure, and which might instead be separated out and run better as “focused factories”, to use the jargon of manufacturing? Surprisingly, this is not a question that is much discussed in the hospital industry. In fact, the current trend goes in the opposite direction, towards consolidation as the knee-jerk mechanism to help financially struggling hospitals.

A critical argument against disaggregation is the loss of scale. If services (for example, elective orthopaedic surgeries or planned colorectal procedures) are spun out as “focused factories”, this reduces the hospital’s overall scale. It is well‑known that patient volume in a hospital service is associated with better quality and reduced costs per patient in that service. However, it is unclear how volume changes in one service affect the quality and costs of the other services in the same hospital. That matters if one wants to understand the consequences of disaggregating service lines. Will pulling out one service reduce quality and increase costs in the other services in the hospital, for instance, as a consequence of a loss of multi-disciplinary teamwork and shared resources? Or will it allow the hospital to improve quality and reduce the costs in the other services, for example, as a consequence of greater prioritisation and focus on these remaining services?

In the recent Management Science paper ‘Economies of Scale and Scope in Hospitals: An Empirical Study of Volume Spillovers, Freeman, Savva and Scholtes investigate this question from a cost perspective. Specifically, they study volume‑cost spillover effects between elective and emergency admissions and across specialties, using condition-level data comprising all acute hospital trusts in England over ten years.

The study offers three findings.

First, the data provides evidence that reduced elective volume of a hospital is associated with a reduction in emergency care costs. This suggests that pulling out elective procedures will not make a hospital’s emergency services more expensive but may, instead, make them more cost-efficient.

Second, there is no evidence in the data of significant volume-cost spillover effects across specialties for elective admissions, which suggests that elective services can be pulled out specialty by specialty, without harming the financial viability of the remaining elective specialties.

Third, focusing on emergency admissions, the data provides evidence that reduced emergency activity in one specialty is associated with higher costs of emergency care in other specialties. This finding suggests that, from a financial perspective, emergency services, as a whole, should not be disaggregated.

The study uses the data to model the effects of strategic transformations within hospitals, and between hospitals within the same regional health economy. Focusing on St. George’s Hospital in London as an illustrative case, the authors estimate the impact of increasing total admission volume in three different ways: (a) through an expansion of both emergency and elective services; or (b) through a focused expansion of elective services; or (c) concentrating primarily on emergency services only. The study shows that, contrary to received wisdom, the focused emergency growth strategy leads to the highest cost savings and that managers may actually harm their hospitals financially if they focus on growing high-margin elective activity. The latter is short-sighted because it does not account for the volume-cost spillover effects – costs of emergency care increase as elective care volume grows. It is precisely such unintended consequences that make hospitals “managerially intractable”.

The study also has implications for the organisation of regional hospital systems. From a cost perspective, the results suggest that elective services could be pulled out of the hospital and instead offered by regional “focused hospitals”. The larger volume of the focused hospitals should improve productivity for the re-routed elective services and, at the same time, reduce the costs of emergency services which will be treated at hospitals that no longer have to balance offering elective and emergency treatments simultaneously.

The authors illustrate the inter-hospital implications of their findings through a second case study, asking what the cost implications would have been over the ten years of their data if any two hospital trusts in London had agreed to redistribute their elective services so that there is no duplication of elective specialties between the two hospitals. The simulated redistribution was done between hospital trusts of similar size to minimise the disruption and need for additional capacity investment. The scale and scope model suggests that over the ten years of data, such a redistribution would have reduced elective care costs by 3.6% (from £11.2bn to £10.8bn) per annum, with no negative implications on emergency costs. This hypothetical case study illustrates that even bilateral reorganisation of hospital services between two neighbouring hospitals can result in substantial cost savings.

Clinical leaders will rightly argue that the main limitation of this paper is that it addresses only the cost implications of hospital reorganisation. However, an earlier paper in Management Science (Kuntz et al (2019)) studied quality implications of very similar reorganisations in the context of German data, and the results and recommendations of these two papers are well aligned. There appears to be no cost‑quality trade-off in the proposals to separate elective services (particularly for non-complex patients) out of general hospitals and offer them in “focused factories”, either as a stand-alone or at an arm’s-length separation from emergency services within hospital trusts. The key insight of these papers is that such reorganisations will not only benefit the quality and cost of the separated elective services – an argument that has been made before – but that it will also increase quality and reduce the cost of the remaining services in the hospitals.

Read the full article at: https://doi.org/10.1287/mnsc.2019.3572.

 

References

Christensen Clayton M., Grossman Jerome H. and Hwang Jason, “The Innovator's Prescription: A Disruptive Solution for Health” (2009) Harvard Business School.

Freeman, M., Savva, N. and Scholtes, S., Economies of Scale and Scope in Hospitals: An Empirical Study of Volume Spillovers (2021) Management Science, 67(2): 673–697.

Kuntz, L., Scholtes, S. and Sülz, S., “Separate and concentrate: accounting for patient complexity in general hospitals (2019) Management Science, 65(6): 2445-2945.

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