Impact of competition on process of care and resource investments

• Published date: 01 January 2018
• Date: 01 January 2018
• DOI: http://doi.org/10.1016/j.jom.2017.12.002

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Journal of Operations Management

journal homepage: www.elsevier.com/locate/jom

Impact of competition on process of care and resource investments

Deepa Wani

a,∗

, Manoj Malhotra

b

, Sriram Venkataraman

c

a

University of Texas at San Antonio, USA

b

Case Western Reserve University, USA

c

University of South Carolina, USA

ARTICLE INFO

Handling editor: Mikko Ketokivi

Keywords:

Competition

Investments

Hospitals

Health information technologies

Registered nurses

Process of care

ABSTRACT

Although competition is generally believed to improve quality, its impact on the Process of Care (PoC)—which

measures the timeliness and effectiveness of care—is less clear. Moreover, hospital executives in more compe-

titive hospital markets are faced with several competing priorities. Our study seeks to examine two factors within

this context: (1) how competition directly impacts PoC, and (2) in a financially constrained environment, how

competition affects investments in resources such as nurses and technology that can potentially improve PoC. We

collect longitudinal data from all acute care hospitals in California over a 7-year period from 2007 to 2013, along

with data from several other sources. Analysis using a mixed-methods approach reveals that both PoC and

investments in nurses and technology are lower in more competitive markets. Because future reimbursements

under the pay-for-performance system will depend on the value of care provided, our results suggest that hos-

pitals should reconsider their short-term actions that seek to increase market share and instead adopt a long-term

view in which investments are made to fundamentally improve the underlying processes and PoC. The findings

presented here thus have major implications for managing hospitals in competitive environments.

1. Introduction

The U.S. healthcare system has evolved over time from a fee-for-

service system, which traditionally focused on paying providers based

on the volume and complexity of services rendered, to a prospective

payment system, which encouraged a reduction in excessive and un-

necessary care by providing a fixed payment for services rendered

(James, 2012), to the most recent pay-for-performance (P4P) system,

which encourages the delivery of efficient and high-quality medical

care. These transitions, however, have forced hospitals to become price-

takers instead of price-setters and have reduced reimbursements for a

majority of hospitals (Werner, 2010; Shen, 2003). They have also put

greater constraints on hospitals’financial resources due to slower rev-

enue growth and a decline in profits (Bazzoli et al., 2008). In an attempt

to gain market share and reduce their local competition, one of the key

mechanisms that hospitals have used in the past to cope with such

changes has been to consolidate through mergers and acquisitions

(Cutler and Morton, 2013). However, the Federal Trade Commis-

sion—the regulatory body overseeing business practices and consumer

protection in the U.S.—has been challenging and winning a number of

recent attempts at consolidation in the healthcare industry by arguing

that such consolidations operate without the checks and balances of a

competitive marketplace (Brill, 2015; New York Times, 2014).

Competition between hospitals may be better for patients as it stimu-

lates innovation, which in turn improves quality (Xu et al., 2015). The

opposing view is that competition may force providers to focus on cost

shifting, which is defined as “payments that fall short of the costs in-

curred by hospitals in the treatment of Medicare beneficiaries, as

measured through negative hospital margins on those patients”

(Robinson, 2011; pg. 1266), under the assumption that hospitals have

unused bargaining power with insurers. In turn, this may end up

eroding quality, increasing costs, and fostering inefficiency in the

system (Porter and Teisberg, 2006). Past research in the economics

literature highlights these conflicting views—that competition either

increases or decreases mortality rates (see Gaynor and Town, 2011 for a

comprehensive review).

Hospitals typically struggle to balance key objectives of providing

effective care, i.e., the extent to which desirable outcomes are achieved

as a result of correct diagnosis and treatment of the patient and gaining

operational efficiency in using their resources (Harris, 1977) possibly

due to limited reimbursements. This struggle is likely to be greater

under competitive conditions, as hospital executives seek ways to dis-

tinguish themselves from their competitors to attract insurers, referring

physicians, and patients. Hospitals may attempt to be distinctive by

offering new procedures, equipment, and services (Devers et al., 2003;

Cutler et al., 2004; Tay, 2003; Wright et al., 2016). These strategies may

https://doi.org/10.1016/j.jom.2017.12.002

Received 6 January 2017; Received in revised form 7 December 2017; Accepted 30 December 2017

∗

Corresponding author.

E-mail addresses: Deepa.wani@utsa.edu (D. Wani), malhotra@case.edu (M. Malhotra), Sriram.venkataraman@moore.sc.edu (S. Venkataraman).

Journal of Operations Management 57 (2018) 23–35

Available online 20 January 2018

0272-6963/ © 2018 Elsevier B.V. All rights reserved.

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