Essays on Healthcare Operations: Impacts of Focused Operations, Competition, Quality and Cost Efficiency of Hospitals

Abstract

A wide range of operations management initiatives are currently being investigated and pursued in U.S. hospitals by both practitioners and academics (Kc and Terwiesch). Even as healthcare providers are being forced to drive down costs, maintaining acceptable levels of quality, while retaining cost efficiency continues to be a major challenge. The objective of this three-essay dissertation is to investigate the impacts of a focused factory approach to healthcare operations, the role of competition as a driver to adopting focused factory approach in healthcare on quality and cost efficiency of large U.S. hospitals, and provide insights on current practices and their efficacy. The first essay investigates the impact of operational focus on quality of care in U.S hospitals, and the determinants of adopting focused operations. The relationship between increasing competition among hospitals and quality performance, and the degree of influence of regional competition on a hospital’s decision to implement a focused factory concept are examined in depth. The concept of a hospital as a ‘focused factory’ has drawn attention in recent years in healthcare management (Herzlinger, Huckman and Zinner, McDermott and Stock). The concept of a focused factory was first articulated in the seminal work of Skinner , in which it was argued that by reducing complexity, manufacturing plants can concentrate on a smaller number of tasks and be more effective and efficient. Specifically, it was argued that a “focused factory does a better job because repetition and concentration in one area allow its workforce and managers to become effective and experienced in the tasks required for success. A focused factory is more manageable and controllable than unfocused plants. Its problems are demanding but limited in scope”. A few studies have portrayed the impacts of the focused factory approach in healthcare environments, and they have reported that hospitals with more focused operations show improved operational performance (Clark and Huckman, Hyer et al., Kc and Terwiesch, McDermott and Stock). It is becoming apparent that hospitals benefit from economies of scale as they focus on fewer services, despite having to give up the advantages from economies of scope as they provide a narrower range of services. It has also been observed that hospitals increasingly do tend to have more focused operations (Eastaugh, Goldberger and Nallamothu). While the focused factory concept in healthcare has begun to be investigated in recent years, existing studies typically focus on just one or a small number of performance outcomes. In our study, we provide a more nuanced understanding of the effects of focused operations on a broader spectrum of quality variables. This allows us to test in which specific area of quality performance the focused factory approach is most effective. In addition, while outcomes of the focused factory have received research attention, the antecedents of the focused factory approach in a healthcare environment have been studied to a much lesser extent. Another area that is related to hospital performance is competition. The impact of competition on hospital performance has long been a point of discussion in medical and healthcare economics literature (Ginzberg, Miller, Mukamel et al., Porter and Teisberg, Rivers and Glover, Zwanziger and Melnick). The majority of past studies has focused on the impact of competition on cost, but not sufficiently on quality of care. As the object of competition shifts from price to non-price aspects (e.g. service availability, quality), we observe a nascent literature on competition in healthcare and its impact on quality performance. However, the results so far have not been consistent. For instance, Gaynor and Town ( find an association between competition and quality. In contrast, Ginzberg (1996) argues that the healthcare marketplace is different than other service industries, so that competition cannot necessarily be a driving force of quality improvement. Mukamel et al. (2001) do not find a significant association between hospital competition and risk-adjusted mortality. While the literature on focused factory in healthcare has demonstrated consistent results on improved quality of care, the impact of competition on quality is still not clear. Accordingly, in this essay, we explore competitive environment as a driving force of focused operations. Specifically, we test whether the focused factory approach is being used as a response to local competition. If so, it may serve to explain the increasing trend (Eastaugh, 2014) towards adoption of focused factory approach in healthcare. Using the Industrial Organization (IO) framework as the theoretical lens, we posit that a hospital’s decision to adopt focused operations is a part of its competitive response to regional competition. The main data source for this first study is the Statewide Planning and Research Cooperative System (SPARCS) from the State of New York. We merge SPARCS inpatient discharge data with cost reports data collected by Centers for Medicare and Medicaid Services (CMS) for the time period of 2009 through 2014. Over 170 hospitals in New York State are included in the resulting data set. The results of our longitudinal analyses show that focus in hospitals does help to improve the quality of care. Additionally, we find that competitive intensity is a strong antecedent of a hospital’s tendency to implement a focused factory concept. This essay makes several contributions to the literature. First, several focus and quality variables are tested to analyze the relationship between focus and quality in much more nuanced manner than in previous studies. Specifically, with two focus variables and three quality variables, we determine which dimension of the focused factory concept affects which specific aspect of hospital quality performance. Second, we investigate the relationship between the degree of regional hospital competition and the likelihood of implementing focused operations. The results show that competition has a significant influence on the movement toward a focused factory approach. This study serves to validate the tenets of the Industrial Organization (IO) framework. The study also provides managerial implications for augmenting the effects of focused operations on cost and quality outcomes. The second essay explores the impact of hospital profile features on cost efficiency, and investigates specific relationships between cost efficiency and quality of care. In today’s healthcare industry, increasing expenses such as supply cost or administrative cost are subjecting hospitals to severe financial pressures (Himmelstein et al., 2014). With these internal and external pressures, hospitals are hard pressed to find ways to achieve both cost-efficiency and quality service. Despite these well-known concerns, there is, as yet, only limited research on these relationships. Hospital operations are known to be very expensive and, typically, administrative costs alone take up a quarter of total hospital expenditures (Himmelstein et al., 2014). In addition, increasing supply and wage costs add up to make hospital operations financially challenging. In other words, hospitals need to maximize their outputs within budgets to stay cost efficient. This raises the basic question: how does a hospital provide high level of service quality while remaining cost-efficient? There are a number of studies on service quality and cost efficiency in operations management (OM) literature. Due to the growth and importance of service operations, many academic works on service quality have appeared in the literature. However, the majority of this research has focused on specific concepts and practices, and their impacts on operational performance based on narrowly defined problems, with an insufficient body of research as yet on the relationships and trade-offs between cost efficiency and service quality. This second essay empirically addresses the following research questions: 1) How do teaching status and regional location affect the cost efficiency of hospitals? 2) What is the relationship between cost efficiency and service quality for hospitals? Is there a tradeoff? We first test if teaching affiliation and regional environment influence hospital cost efficiency, based on the data from New York State. Moreover, we examine if service quality and cost efficiency show trade-off or improve together in several conditions. To conduct the empirical analyses, Statewide Planning and Research Cooperative System (SPARCS) data is again utilized. The dataset provides detailed admission information at the patient level for hospitals in New York State. In addition, cost data and administrative information for hospitals from was collected from Centers for Medicare & Medicaid Services (CMS). Service quality data was collected separately from New York State Health Department data archive. This essay offers several new findings. First, it finds that teaching hospitals and urban hospitals are less cost efficient than non-teaching hospitals and rural hospitals. This finding suggests that teaching affiliation and the region in which a hospital locates do have relationship with cost efficiency. In addition, it reveals that urban-teaching hospitals may attract many patients with generally bigger size and cutting-edge technologies, but they fail to achieve cost efficiency with their operations. Second, the two-stage analyses show that it is possible to improve both cost efficiency and quality of care performance. The results also reveal that rural location without teaching affiliation appears to be the most favorable setting to improve both performances together. The third essay provides a state-of-the-art survey of the literature on quality of care and cost efficiency of hospitals, given the fragmented nature of the studies conducted so far. Based on a critical appraisal of past literature, this essay attempts to clarify and identify the major gaps for future research. This review also integrates disparate studies in the fields of Operations Management, Economics and Medicine and suggests how future research can contribute to Healthcare Operations Management. This review concludes with how the future research in Healthcare Operations Management should be redirected to serve both researchers and practitioners.