MULTI-YEAR ANALYSES OF THE RECIPROCAL RELATIONSHIP BETWEEN HOSPITAL DIVERSIFICATION AND PROFITABILITY

Zeina  E. CHEBAR0

This study represents an effort to enhance the literature on the factors that influence hospital diversification and profitability. The theory development and model specifications focused upon the influence of profitability,  Medicare and  MediCal  dependency on the extent of diversification, as well as the impact of the extent of hospital diversification efforts on profitability.

The findings suggest that profitability had a positive effect on diversification (significant for 1986, and expected relationship 1983 and 1988). The results also indicate that Medicare (during 1986) and MediCal (during 1983 and 1986) dependency could have an impact on hospital diversification efforts.

The results of the study should be of interest to policymakers. This is because they showed that their regulatory measures (Medicare PPS and MediCal selective contracting) might have an effect on the hospital strategic decisions regarding which services to offer away from heavily regulated services. Thus, reducing the expected savings and cost control efforts of these two programs. Furthermore, the results showed that Medicare and MediCal dependency had a significant negative relationship with hospital profitability for all the study years. This raises the question of potential access problem for their beneficiary. This is because hospitals will attempt to reduce the admission of Medicare and MediCal patients by offering services not needed by these patients, or needed by these patients, but not covered by those two programs.

The results of the study should also be of interest to hospital administrators because they showed that higher level of profitability is needed for them to afford the capital and human resources needed to diversify. The study also showed that the regulatory pressures of Medicare and MediCal had a consistent negative impact on profitability. Furthermore, the study showed that hospital profitability could be affected by case-mix, length of stay, occupancy, and staffing levels.

However, this study did not prove that hospital diversification affects profitability. This could suggest to the hospital administrators that if they diversified it would not improve their profitability. This result confirms Clement's (1987) study regarding the impact of diversification on profitability (study years 1978‑1983). The study years for this dissertation extended far beyond Clement's research (from 1983 through 1988) and took account of the lagged effect of diversification on profitability and still the results were not significant. Maybe diversification is actually oversold to hospital administrators as a strategy option to improve profitability.