Description
Pervasive organizational change in the U.S. hospital industry began in the mid-1970s. Since then, it has spread to every corner of the industry, affecting every hospital, large and small. The explosion of organizational change is caused primarily by increased competition and uncertainty in the economic conditions confronting hospitals. More important, it also reflects a fundamental shift in the institutional environment surrounding and supporting health care practices and management.
MCR&R 56:3 (September 1999) Lee, Alexander / Consequences of Organizational Change
Review Articles
Consequences of Organizational
Change in U.S. Hospitals
Shoou-Yih D. Lee
University of Illinois at Chicago
Jeffrey A. Alexander
University of Michigan
Organizational change has become commonplace among U.S. hospitals. Empirical
investigations of the consequences of organizational change, however, are relatively
scarce, and findings of existing studies are inconsistent. In this article, the authors
review the rationale and performance implications of hospital organizational change in
three areas: (1) the development of newmulti-institutional arrangements, (2) change in
traditional ownership and management configurations, and (3) diversification in organ-
izational products/services and consolidation of organizational scale. Empirical research
on hospital change published between 1980 and 1999 in the health services research,
social science, and business literatures is reviewed to highlight the potential pitfalls that
hospitals may encounter in their effort to remain viable. The article also summarizes the
strengths and weaknesses of current hospital change research and provides specific sug-
gestions for future research in this area.
It is certainly not news that organizational change is becoming the norm
rather than the exception among U.S. hospitals. The widespread adoption of
organizational change reflects a common belief among organizational practi-
The authors would like to thank Stephen Mick, Jane Banaszak-Holl, and two anonymous review-
ers for their constructive comments on earlier drafts of the article. Address correspondence to
Shoou-Yih D. Lee, Ph.D., Department of Sociology (M/C 312), University of Illinois at Chicago,
1007 West Harrison Street, Chicago, IL 60607-7140; phone: (312) 413-2909; fax: (312) 996-5104; e-
mail: [email protected]. This article, submitted to Medical Care Research and Reviewon June 10, 1998,
was revised and accepted for publication on April 17, 1999.
Medical Care Research and Review, Vol. 56 No. 3, (September 1999) 227-276
© 1999 Sage Publications, Inc.
227
tioners that change is adaptive andbeneficial tohospitals. Anecdotal evidence
supporting the value of organizational change abounds in trade magazines.
Yet, systematic empirical investigations of the consequences of organizational
change are surprisingly scarce in the health services literature (Topping and
Hernandez 1991). Findings fromthe fewexistingstudies are frequentlyincon-
sistent, providing no clear guidelines to assist hospitals struggling to survive
in an increasingly competitive and uncertain environment. Organizational
change, thus, remains a pervasive yet understudied phenomenon in the hos-
pital industry.
ORGANIZATIONAL CHALLENGES IN
A CHANGING HEALTH CARE ENVIRONMENT
Pervasive organizational change in the U.S. hospital industry began in the
mid-1970s. Since then, it has spread to every corner of the industry, affecting
every hospital, large and small. The explosion of organizational change is
caused primarily by increased competition and uncertainty in the economic
conditions confronting hospitals. More important, it also reflects a fundamen-
tal shift in the institutional environment surrounding and supporting health
care practices and management (Alexander and D’Aunno 1990; Scott 1993).
Several developments have occurred in the health care environment, chal-
lenging hospital survival and encouraging hospitals to experiment with vari-
ous types of organizational change. Foremost has been a shift in the role of the
federal government. Once a builder of hospitals and a purchaser of medical
services, the federal government inthe 1980s begantoassume the role of regu-
lator (Fennell and Alexander 1993; Scott and Lammers 1985). This shift has
made the federal government a driving force for change in the hospital indus-
try. It has radically altered the structure of local markets and forced hospitals
to modify their behavior and structure (Bigelow and Mahon 1989). The intro-
duction of Medicare’s prospective payment system (PPS) in October 1983, in
particular, marked the federal government’s role as a change agent.
Unlike previous cost containment efforts, Medicare PPS radically trans-
formed the hospital payment system, and therefore the incentives, by setting
predetermined, fixed payment levels for 468 diagnosis-related groups of con-
ditions for Medicare patients (Office of Technology Assessment 1985). Under
this payment system, hospitals must absorb any cost beyond the price limit
and are at financial risk for the services they deliver. Since Medicare patients
constitute, on average, 40 percent of all inpatients, the payment change has
had a dramatic impact on hospital operations. It effectively eliminates a guar-
anteed flow of resources to hospitals and requires them to contain costs and
228 MCR&R 56:3 (September 1999)
provide services as efficiently as possible. Since the implementation of PPS,
hospital admissions and inpatient days have decreased and the average
length of stay andoccupancy rate have droppedrapidly, especially in the first
3 years of the program (Coulam and Gaumer 1991; Dobson and Hoy 1988;
Guterman et al. 1988; Kauer, Silvers, and Teplensky 1995). This reduced
demandfor hospital services has significantly decreasedhospital margins. By
1989, 57 percent of hospitals were losing money on Medicare patients (Russell
1989). Declines inprofit margins, furthermore, have diminishedthe credit rat-
ings of hospitals and limited their access to capital markets (Shortell, Morri-
son, and Friedman 1992).
PPS legislation has also produced a number of side effects (Shortell, Morri-
son, and Friedman 1992). First, to prevent cost shifting, many private insurers
have implementedtheir ownprospective payment programs, further limiting
resources for hospital operations (Feinglass and Holloway 1991; Kauer,
Silvers, and Teplensky 1995; Shortell, Morrison, and Friedman 1992). Second,
private companies andpublic insurance programs have increasingly adopted
managed care plans (e.g., health maintenance organizations [HMOs], pre-
ferred provider organizations [PPOs]) to arrest the rapid increase in health
costs (Miller and Luft 1993). These plans exercise strict control over hospitali-
zation, which, coupled with strict government regulations, has led to over-
capacity in hospitals and forced them to compete fiercely for diminishing
resources and patients (Cerne and Montague 1994; Mezey and Lawrence
1995). Furthermore, the health care environment is complicated by social
trends such as aging of the population, changes in disease patterns (e.g.,
chronic diseases, the AIDS epidemic), growthof uninsuredpopulations, tech-
nological advances, increasedpatient expectations, andprivatizationandcor-
poratization of health care (Alexander and D’Aunno 1990; Fennell and
Alexander 1993; Shortell, Morrison, and Friedman 1992; Starr 1982; Stevens
1989). These forces increasingly press hospitals to expand their scope of activ-
ity while conserving resources.
In the face of these social, political, and economic changes, many
hospitals—public, nonprofit, andfor-profit—have reconsideredtheir mission
andmodifiedtheir structures. Theyhave come torealize that simplyconform-
ingtoprofessional norms andpractices nolonger guarantees survival. Corpo-
rate planning and strategy have become standard “institutional” practices of
hospital management, andmanyhospitals have restructuredtomimic the fea-
tures of U.S. mainstream economic enterprises (Alexander and D’Aunno
1990; Mick 1990b; Scott 1993; Starr 1982). The consequences of these changes,
however, remain unclear.
Lee, Alexander / Consequences of Organizational Change 229
NEW CONTRIBUTION
This article provides a critical review of existing literature and suggests
useful directions for research on outcomes of organizational change in hospi-
tals. Although recent political, economic, demographic, and technological
developments have threatened to reduce hospitals to the margin of the U.S.
health care system (Ginzberg 1995; Robinson 1994), the hospitals remain
important health care providers and play a key role in facilitating the integra-
tionof healthservices across the spectrumof care (Shortell, Gillies, andDevers
1995). With few exceptions (see, e.g., the study by Ginsberg and Buchholtz
[1990], which examines ownership change in HMOs), hospitals overwhelm-
ingly constitute the samples of existing studies that examine the outcomes of
organizational change in the health care sector.
Inthis article, we extendprior reviews onhospitals’ strategic decisionmak-
ing (e.g., Bigelowand Mahon 1989; Topping and Hernandez 1991) to focus on
the rationale andperformance implications of organizational change inhospi-
tals andto highlight the potential pitfalls that hospitals may encounter intheir
struggle to remain viable. Furthermore, the article summarizes both the
strengths and weaknesses of current research and provides specific sugges-
tions for future research in this area.
1
CRITERIA OF REVIEW
The article focuses on organizational change that occurs in hospital owner-
ship, authority structure, administrative arrangements, operational capacity,
products/service areas, and scope and composition of services. These struc-
tural elements are at the root of hospitals’ decision making and performance;
they shape the behavior and interpersonal relationships of hospital constitu-
encies and define the boundaries of hospital activity (Mintzberg 1979). Fol-
lowing Fennell and Alexander (1993), we classified organizational change in
hospitals into three categories: (1) the development of newmulti-institutional
arrangements, (2) change in traditional ownership and management configu-
rations, and (3) diversification in organizational products/services and con-
solidation of organizational scale. In addition to these three categories that
define the scope of our review, we used two criteria in the selection of articles
for review. First, all articles were empirical studies usingeither a qualitative or
quantitative researchapproach. Second, all studies addressedthe relationship
between an organizational change or changes and their outcomes in hospital
settings. Studies of other health care organizations (e.g., nursing homes,
HMOs) were excluded for the purpose of this review.
230 MCR&R 56:3 (September 1999)
On the basis of these criteria, we searched articles published between 1980
and 1999 in health services research, social science, and business journals
using the following databases: (1) Medline—containing citations to the bio-
medical literature; (2) Wilson’s Social Science—a citation and abstract data-
base indexing more than 350 key English-language journals in the social sci-
ences; (3) PsychInfo—indexing more than 1,300 journals and dissertations in
medicine, psychiatry, nursing, sociology, andeducation; (4) ABI/Inform—an
index of more than 1,000 U.S. and international publications on business and
management; and (5) ArticlesFirst—an index to more than 12,500 journals
from general-interest publications. In addition, we were able to identify sev-
eral forthcoming and under-review articles through the assistance of
researchers familiar with relevant research topics (e.g., merger).
2
The following sections explain the characteristics and rationale of the three
categories of organizational change anddiscuss their implications for hospital
performance. After reviewing empirical findings regarding the outcomes of
organizational change in hospitals, we summarize the limitations of current
studies and provide suggestions for future research. Finally, we conclude the
article with specific research questions for further examination.
MULTI-INSTITUTIONAL ARRANGEMENTS
Tightened government regulation and intense market competition have
increasingly subjectedhospitals’ performance andsurvival to the influence of
external resources and constraints. There are two basic ways for hospitals to
manage suchexternal dependence (Kotter 1979). First, a hospital canchoose to
operate in a different domain (e.g., changes froma general acute-care hospital
to a specialty hospital) or diversify into nontraditional businesses (e.g., suba-
cute, long-term care), thus decreasing the dependence on environmental ele-
ments in the original, acute-care market (Clement 1988).
3
Alternatively, a hos-
pital can engage in boundary-spanning activities and establish linkages with
key organizational actors in its domain (Fennell and Alexander 1987). Such
interorganizational relations buffer the hospital from environmental threats
and create a countervailing power that grants the hospital some measure of
control over its environment (Miner, Amburgey, and Stearns 1990; Provan
1984).
Several types of interorganizational relations have beenexploredby hospi-
tals: networking between rural and urban hospitals (Grim 1986), sharing
medical services (Simmons 1989), pooling resources through hospital federa-
tions (D’Aunno and Zuckerman 1987a, 1987b), creating local strategic alli-
ances or consortia for joint activities among member hospitals (Clement et al.
Lee, Alexander / Consequences of Organizational Change 231
1997; Christianson et al. 1990), and affiliating with multihospital systems
(MHSs) (ErmanandGabel 1984; MorriseyandAlexander 1987b; Shortell 1988;
Zuckerman 1979). Among these multi-institutional arrangements, MHS
affiliation represents the most prevalent strategy. Recent data indicate that
approximately 50 percent of community hospitals (2,524) were members of an
MHS in 1991 (Succi 1996). We review two common forms of multi-
institutional arrangements—MHS affiliation and local hospital alliances and
consortia. The research design andfindings of studies examining outcomes of
these two organizational changes are summarized in Table 1.
MHS AFFILIATION
MHS affiliation is a formal affiliation between a hospital and a corporate
entity that owns, leases, or sponsors two or more hospitals (American Hospi-
tal Association [AHA] 1983). Unification of hospitals under corporate man-
agement mayincrease the reputationandpolitical power of member hospitals
and protects them from environmental pressures (Dranove and Shanley
1995). The corporate headquarters determine general policies andbear shared
administrative responsibilities, thus allowing member hospitals to focus on
daily operations andperformance (Succi 1996). Efficiency andproductivity of
member hospitals may increase through economies of scale (e.g., joint pur-
chasing), shared services and personnel (e.g., high-tech diagnostic services,
data processing, reimbursement specialists), and improved access to capital
and management techniques (Ermann and Gabel 1984; Zuckerman 1979).
Despite the touted advantages associated with multihospital arrange-
ments, research evidence has been decidedly mixed (Ermann and Gabel 1984;
Shortell 1988). Other than improvedaccess to capital markets andgreater effi-
ciency in hospital staffing (Cleverley 1992; Levitz and Brooke 1985; Watt et al.
1986), many empirical studies have been unable to demonstrate substantial
advantages of systems over freestanding hospitals (Becker and Sloan 1985;
Berry, Tucker, andSeavey 1987). While some studies showedgreater leverage
andhigher profitability among systemhospitals, particularly those ownedby
for-profit (FP) systems (Coyne 1985a; Renn et al. 1985), others showed evi-
dence of higher costs in systemhospitals, whether measured on a per diemor
per case basis (Cleverley 1992; Coyne 1982; Watt et al. 1986).
An example of financial analysis was conducted by Levitz and Brooke
(1985). Using a total of 36 financial indicators, the study compared perfor-
mance of system and freestanding hospitals in liquidity, capital structure,
financial activity, depreciation, profitability, costs, andproductivity. Findings
232 MCR&R 56:3 (September 1999)
(text continues on p. 241)
TABLE 1 Empirical Studies Examining the Consequences of Multi-Institutional Arrangements in Hospitals
Author(s) Year Sample Design Results
Multihospital systems
Coyne 1982 100 system hospitals from 14 Cross-sectional design; compared In general, results showed
systems, compared with 49 the differences between system that system hospitals
independent hospitals, 1975 and independent hospitals in tended to have higher
cost and productivity, controlled costs than independent
for length of stay (a proxy for hospitals regardless of
case mix and complexity), ownership type; system
hospital size, teaching programs, hospitals also had greater
physician supply, local economy, productivity levels,
and market competition indicated by larger numbers
of admissions per bed.
Long and 1984 226 community hospitals Retrospective case-control design; Results showed that system
Chase closed during 1976-1980, closed hospitals were contrasted hospitals had no better
compared with three groups with other hospitals in terms of chance of surviving than
of hospitals that were hospital and environmental independent hospitals.
independent, system characteristics
affiliated, and merged
Becker and 1985 2,231 community hospitals Cross-sectional design; compared System hospitals did not
Sloan participating in the cost and profit differences between appear to be more efficient
American Hospital system and independent hospitals; than independent hospitals,
Association (AHA) controlled for size, teaching status, but among system hospitals,
Reimbursement Survey case mix, payer mix, wage, county tenure seemed to be
in 1979 per capita income, urban location, correlated with efficiency
and census region and profitability—hospitals
with longer tenure in the
system were more efficient
and profitable.
(continued)
2
3
3
TABLE 1 Continued
Author(s) Year Sample Design Results
Coyne 1985a 4,409 AHA member hospitals, Cross-sectional design; compared System and independent
1981 the differences in assets-to-equity, hospitals had different
return on equity, and operating capital structures and
margin between hospitals with profitability; system
different ownership and system hospitals had both greater
membership; no controls for leverage and higher
hospital and environmental profits, particularly in the
attributes investor-owned (IO) sector.
Coyne 1985b A sample of five IO and nine Compared differences between IO Hospitals in different
not-for-profit (NFP) system and NFP system hospitals using ownership types of
hospitals, 1978-1982 5 years of financial indicators for systems displayed distinct
liquidity, activity, composition, patterns of financial
capital structure, and profitability; performance over time,
no comparison with independent system hospitals in general
hospitals; no controls for hospital showed increasing
and environmental attributes financial strength during
the study period, NFP
system hospitals reduced
liquidity but increased
their productive use of
current assets, IO system
hospitals showed a
significant buildup of cash
reserves and a decreasing
use of credit, the profit
trend remained stable for
NFP system hospitals but
increased for IO system
hospitals, and the leverage
trend was similar.
2
3
4
Levitz and 1985 94 short-term acute-care Cross-sectional design; differences System hospitals had a
Brooke hospitals in Iowa, 1981 between system and independent greater degree of debt
hospitals were compared using leverage, higher costs per
t-tests case, and a higher markup
and revenues from patient
services; no differences
were observed in liquidity,
total profitability, asset
turnover, productivity.
Renn et al. 1985 A random sample of 561 Cross-sectional design; controlled Effects of system affiliation
community hospitals, 1980 for contract management, tenure on hospital performance
in system, case and payer mix, varied by the system’s
competition and regulation, wage ownership type; due to
index, geographic location, their pricing strategies
hospital size, occupancy, and (higher charges per
medical teaching patient), IO system
hospitals were more
profitable than independent
NFP hospitals, the
comparison group; since
FP hospitals behaved
similarly to IO system
hospitals and limited
differences were found
between independent NFP
hospitals and hospitals in
an NFP system, the system
effects might be largely
explained by ownership
difference.
(continued)
2
3
5
TABLE 1 Continued
Author(s) Year Sample Design Results
Watt et al. 1986 80 matched pairs of IO chain Matched nonequivalent control Total charges and net
and NFP hospitals in 8 states, group design; hospitals were revenues per case were
1978-1980 matched on location, size, higher in IO system
services, and average length hospitals, mainly due to
of stay; controlled for case mix higher charges for ancillary
services; there was no
difference in patient-care
costs, but the administra-
tive overhead costs for IO
system hospitals was
higher; IO system hospitals
were more profitable, had
funded more capital
through debts, and had
higher capital costs; higher
profits in IO system
hospitals were generated
by more aggressive pricing
practices rather than
greater efficiency.
Berry, 1987 Small rural hospitals; 194 Cross-sectional design; different System hospitals were more
Tucker, and system managed, 235 system, organizational arrangements likely to be accredited by
Seavey and 311 independent and were used to predict occupancy, the Joint Commission on
self-managed, before 1983 quality of care, service range, Accreditation of Hospitals
and resource efficiency; no ( JCAH); system hospitals
controls were used when did not perform better
comparing hospitals with than independent rural
different management structures hospitals; system hospitals,
in fact, had higher costs,
displaying higher expenses
per patient day.
2
3
6
Mullner et al. 1989 161 rural community hospitals Matched case-control study design Affiliating with systems
that were closed during significantly decreased
1980-1987, matched with a the risk of rural hospital
control group of 482 rural closure.
hospitals that remained open.
Manheim, 1989 Short-term acute-care hospitals Cross-sectional design; acquired Acquired hospitals had
Shortell, acquired by the Hospital hospitals were compared with higher expenses but lower
and McFall Corporation of America competing hospitals in the same full-time equivalent (FTE)
(HCA) during 1979-1982 market or hospitals matched on staffing levels than
bed size and location to control comparison hospitals due
for geographic factors; controlled to higher expenditure
for service mix, hospital output, growth and less FTE
competition, and area prices growth; further analyses
indicated that higher
expenses might be caused
by the acquisition process,
while the decrease in FTEs
was a system characteristic
independent of the
acquisition; profitability
increased over time since
acquisition.
Cleverley 1992 5,722 hospitals with complete Compared the median values of Compared with independent
Medicare Cost Report data selected financial indicators hospitals, system hospitals,
in 1986-1989 among IO system hospitals, NFP especially IO ones, had a
system hospitals, and all other higher return on equity,
independent hospitals; no higher costs per case
controls for hospital and mix–adjusted discharge,
environmental attributes higher profits through
more aggressive pricing
strategies, greater capital
(continued)
2
3
7
TABLE 1 Continued
Author(s) Year Sample Design Results
investment, and they
served fewer Medicaid
patients.
Halpern, 1992 A panel of 2,705 rural hospitals Longitudinal design; controlled for System affiliation with IO
Alexander, during 1983-1988 various hospital attributes systems significantly
and Fennell reduced survival of rural
hospitals; affiliation with
NFP system or contract
management by systems
did not affect hospital
survival; larger system
hospitals had higher
` survival chances.
Dranove 1995 Hospitals owned by local Cross-sectional design; System hospitals were no
and Shanley systems in California characteristics and performance better able to exploit scale
metropolitan area, 1989 of system hospitals were economies than were
compared to a randomly independent hospitals;
selected group of independent system hospitals were
hospitals in the same standard more homogeneous in
metropolitan statistical areas service mix and financial
(SMSAs); controlled for size, profile; the level of
charity, Medicaid, and ownership homogeneity was
positively related to price-
cost margins and profits.
Alexander, 1996 All rural community Pooled cross-sectional time-series Affiliation with a system
D’Aunno, hospitals during 1984-1991 design; adjusted for auto- did not affect closure but
and Succi correlation among repeated significantly increased the
observations; controlled for size, likelihood of conversion
2
3
8
ownership, performance, market to a nonhospital facility.
conditions, and time trend.
Succi, Lee, 1996 All rural community hospitals Pooled cross-sectional time-series Affiliation with a system
and during 1984-1991 design; adjusted for auto- had no impact on rural
Alexander correlation; controlled for size, hospital closure.
ownership, performance, market
conditions, and time trend
Succi 1996 All community hospitals Pooled cross-sectional time-series Hospitals benefited
during 1984-1991 design; examined the moderately from affiliating
contingencies associated with with a system, but the
system affiliation; adjusted for improvement in
autocorrelation; controlled for performance was greater
hospital size, age, ownership, when hospitals operated
market conditions, and time in an uncertain or
trend competitive market;
improvement was reduced
when the hospital joined
a system with incompatible
ownership.
Menke 1997 2,200 hospitals with complete Cross-sectional design; used a System and independent
organizational and financial two-stage estimation model to hospitals had different cost
data in 1990 minimize selection bias; functions, suggesting
controlled for labor costs, case hospital selection into
mix, hospital mortality rate, payer systems; the costs of
mix, service range, medical school system hospitals were
affiliation, ownership, physician lower than those of
supply, hospital competition, independent hospitals,
urban location, and geographic but there were no
region statistically significant
differences in costs by
ownership among system
(continued)
2
3
9
TABLE 1 Continued
Author(s) Year Sample Design Results
hospitals; economies of
scale and scope occurred at
all volumes for system
hospitals.
Strategic alliances and networks
Clement 1997 Close to 2,500 short-term, Cross-sectional design; controlled Membership in a strategic
et al. acute- care, nonfederal urban for environmental (% elderly alliance was positively
hospitals with complete population, Medicare wage index, associated with net patient
financial data for the fiscal unemployment) and hospital revenues but had no
year between 10/1/94 and (occupancy, staffed bed size, significant relationship
9/30/95 number of services, teaching with cash flow or
status, ownership) characteristics expenses; these results
might be attributable to
membership in multi-
hospital systems.
Chan, 1999 335 rural hospitals Longitudinal design; controlled Size of the consortium
Feldman, participating in 85 consortia for consortium (degree of showed a curvilinear
and during 1988-1992 formalization, resource disparity relationship with member
Manning among members) and hospital hospitals’ cost, revenue,
and market (number of affiliated and profitability; member
consortia, bed size, ownership, hospitals benefited from
multihospital system (MHS) the increase in consortium
affiliation, Medicare payment size, but the benefit
status, patient mix, local decreased as the
economy, census region, time) consortium became too
` conditions large.
2
4
0
showedthat systemhospitals hadbetter access to debt capital andmore effec-
tive pricing policies than did independent hospitals (similar findings were
obtained in Watt et al. 1986 and Cleverley 1992). But limited differences were
found among measures of liquidity, receivables management, asset activity,
productivity of human resources (including management), and efficient use
of plant and equipment assets. Although the study was comprehensive in its
comparison, its cross-sectional design and its limited sample (94 acute-care
hospitals in Iowa in 1981) constrained the generalizability of the findings. In
addition, the study employed simple t-test comparisons, thus failing to con-
trol for potential confounding effects of organizational and environmental
characteristics.
A more sophisticated financial analysis was conducted by Renn et al.
(1985). The study investigated the financial differences among hospitals with
five types of ownership and system affiliation arrangements—system-
affiliated investor-owned (IO), independent IO, system-affiliated not-for-
profit (NFP), independent NFP, and government ownership. Of particular
interest is the result that effects of system affiliation varied by the system’s
ownership type. Because of their higher pricing strategies, IO system hospi-
tals were more profitable than independent NFP hospitals, the comparison
group. However, the studyalso foundthat independent FPhospitals behaved
similarly to hospitals ownedby IOsystems andthat there were limiteddiffer-
ences between independent NFP hospitals and hospitals in an NFP system.
These results raise the question of whether performance discrepancies were
caused by ownership type (IO vs. NFP) or system membership.
4
Similarly,
Becker and Sloan (1985) and Berry, Tucker, and Seavey (1987) found that sys-
tem hospitals did not perform better than independent hospitals. In fact, sys-
temhospitals displayedhigher expenses per patient day, thus appearing to be
less efficient in resource utilization (Berry, Tucker, and Seavey 1987).
Higher expenses may be associated with hospitals in IO systems specifi-
cally. Manheim, Shortell, and McFall (1989) found that, relative to competing
hospitals in the same market, hospitals acquired by the Hospital Corporation
of America (HCA) between 1977 and 1983 had greater expenses but lower
full-time equivalent staffing. Lower staffing ratios seemed to be an attribute
among all subsidiary hospitals, independent of the acquisition process, and
the increase in expenditures was largely due to activities initiated by the IO
systemto “turn around” recently acquired hospitals. The latter finding in par-
ticular supported Becker and Sloan’s (1985) conclusions that system effects
might vary by a hospital’s tenure in the system and that assessments need to
focus on long-term implications for hospital performance.
Local systems, or systems comprising three or more community hospitals
in the same geographic market, may be more able to realize scale economies
Lee, Alexander / Consequences of Organizational Change 241
because proximity makes it easier to pool clinical and managerial resources
andto improve efficiency through administrative coordination (Luke, Ozcan,
and Olden 1995). This proposition was tested by Dranove and Shanley (1995)
in a study of system hospitals in six California metropolitan areas. Results,
however, indicated no significant advantages of system hospitals to exploit
scale economies relative to independent hospitals. Contrary to many prior
studies, the study found that system hospitals had higher price-cost margins
and profits and that such financial advantages were associated with systems’
superior marketingstrategies inpromotingthe consistencyof their products.
The inconsistent effects in the literature of MHS affiliation may be partly
explainedbyfailure toconsider organizational, economic, andenvironmental
contingencies present at the time of affiliation (Smith and Piland 1990). In
other words, advantages or disadvantages of MHS affiliation are not univer-
sal but are sensitive to, for instance, characteristics of the affiliated system
(e.g., FP vs. NFP ownership of the system),
5
conditions in the member hospi-
tal’s local market that are conducive to the collective action of systems (e.g.,
uncertainty, scarce resources), and the level of compatibility between the
member hospital and the system (Succi 1996). A second problem is that
researchrarely has takeninto account the possibility of systematic selectionof
hospitals into systems (Alexander and Morrisey 1988). Menke (1997), for
example, showed that the cost functions for system and independent hospi-
tals were different and that pooling them could significantly bias the estima-
tion of costs in system hospitals. Controlling for the selection effects with a
two-stage estimation model, she found that, contrary to most previous stud-
ies, system hospitals were more efficient and had lower costs than independ-
ent hospitals.
Another problem of most existing studies is their focus on the short-term
impact of MHS affiliation on hospitals. For example, fewstudies examine sur-
vival or other long-range outcomes when comparing system hospitals with
independent hospitals. Moreover, findings of these studies are conflicting
because of different researchdesigns anda general failure to take into account
the possibility that effects of systemaffiliation may vary across historical peri-
ods (Menke 1997). For example, Mullner et al. (1989) showed a negative rela-
tionship between system membership and closure risk among rural commu-
nity hospitals during the period of 1980-1987. On the other hand, Long and
Chase (1984) found no such relationship in a group of hospitals that closed
from1976 to 1980, andneither didAlexander andassociates in their studies of
all rural hospitals in the post-PPS period (Alexander, D’Aunno, and Succi
1996; Succi, Lee, and Alexander 1997).
One interesting study on the consequences of system affiliation was con-
ducted by Halpern, Alexander, and Fennell (1992). Two features differentiate
242 MCR&R 56:3 (September 1999)
the study from others. First, the study investigated the long-term survival
effect of system affiliation in a panel of hospitals during a 5-year period
(1983-1987). Second, relationships between system affiliation and hospital
survival were explored in various organizational contexts and during differ-
ent time periods. Results indicated that (1) affiliation with IO systems signifi-
cantly increased the risk of hospital closure, whereas affiliation with NFP sys-
tems had no effect on closure; (2) among hospitals affiliating with IOsystems,
larger hospitals and hospitals with private NFP ownership were at a greater
disadvantage than smaller hospitals and hospitals with government or IO
ownership; and (3) although differences were not statistically significant,
affiliationoccurringbefore PPSseemedtoimprove hospital survival, whereas
affiliation subsequent to PPS displayed no difference in hospital survival.
As this study demonstrates, systemaffiliationcanhave significant implica-
tions for hospital outcomes, but the influence shouldbe consideredin specific
organizational and environmental contexts. There may also be long-termand
time-varying effects of system affiliation. This remains an area in need of fur-
ther investigation.
LOCAL HOSPITAL ALLIANCES AND CONSORTIA
The potential for achieving operating, purchasing, and market economies
has motivated hospitals to join systems. But operating under formally struc-
tured interorganizational arrangements also decreases hospitals’ autonomy
andflexibility (Luke, Begun, andPointer 1989). The desire for autonomy, cou-
pledwith financial losses of systems andthe concern of communities that sys-
tem affiliation may reduce hospital sensitivity to local needs, has diminished
the frequency of system affiliation since the late 1980s. As an alternative,
loosely coupled interorganizational forms have arisen. Prominent among
themare local hospital alliances andconsortia. These two arrangements allow
hospitals to obtain the benefits of collective action while maintaining greater
control over policy, strategy, and operational decision making (Christianson
et al. 1990; Clement et al. 1997).
Due perhaps to the recent emergence of local hospital alliances andconsor-
tia, the impact of these two organizational changes has yet to be widely inves-
tigated. In fact, we were able to identify only two empirical studies. The first,
Clement et al. (1997), examined the association of alliance membership with
hospital financial performance. Results indicated that (1) alliance member-
ship was positively related to net patient revenues but unrelated to cash flow
or expenses; (2) with one exception where higher net revenues were observed
inalliances withtwoequal owners, the structure of alliances was uncorrelated
with hospital financial performance; and (3) tenure in alliances showed no
Lee, Alexander / Consequences of Organizational Change 243
association with hospital performance. Interestingly, the study also found
similar results amonghospitals that were members of local MHSs. Because the
study did not distinguish alliances from systems and did not control sepa-
rately for systemeffects, it is unclear whether the findings were attributable to
membership in local systems or alliances.
The second study examined factors associated with effective rural hospital
consortia in terms of their ability to improve members’ financial performance
(Chan, Feldman, and Manning forthcoming). Comparisons were made
among members of hospital consortia and demonstrated a curvilinear rela-
tionshipbetween size of the consortiumandmember hospitals’ cost, revenue,
andprofitability. Member hospitals benefitedfromthe increase inconsortium
size, but the benefit decreasedas the consortiumbecame larger. Since no com-
parisons were conducted with hospitals outside consortia, it is unclear if con-
sortium hospitals enjoy any advantage or disadvantage over nonconsortium
hospitals. However, an important implication of the study is that characteris-
tics of consortia, suchas size, mayconstitute important contexts that shape the
performance of member hospitals.
OWNERSHIP AND MANAGEMENT
RECONFIGURATION
Recent changes in hospital ownership and management patterns have
transformed the traditional operation of freestanding, nonprofit community
hospitals (Fennell and Alexander 1993). Four facets of ownership and man-
agement reconfiguration were identifiedfromthe literature: (1) consolidation
of hospital facilities through mergers; (2) emergence of hospital corporate
restructuring; (3) expansion of private, contractual management among non-
profit hospitals; and, because of these changes as well as increased environ-
mental pressures, (4) increase in the frequency of top management succes-
sion among hospitals. Table 2 summarizes studies examiningthese four types
of organizational change in hospitals.
MERGERS
Increasing market share, exploiting scale economies, and eliminating com-
petitors toimprove patient volume andprofitabilityare primaryreasons cited
for hospital mergers (Bogue et al. 1995; Dranove 1998; Greene 1990; Lynk
1995). Mergers may reduce costs andimprove patient volumes by eliminating
excess beds, removing duplicate health services, and consolidating adminis-
trative and support services. An early case study by Briggs, Frommelt, and
244 MCR&R 56:3 (September 1999)
(text continues on p. 251)
TABLE 2 Empirical Studies Examining the Consequences of Ownership and Management Reconfiguration in
Hospitals
Author(s) Year Sample Design Results
Mergers
Briggs, 1981 Two hospital merger cases Case study Improvement was seen in
Frommelt, occurred in 1966 and 1971 several areas after the
and Roth merger: broadened medical
care programs, upgraded
management and physical
facilities, increased
revenues, stronger capital
structures, better debt-
equity conditions and
enhanced public
perception; however,
operating costs were higher
due to service expansion
and staff and facility
upgrading.
Mullner 1987 152 hospitals experiencing Pre-post nonexperimental design; Hospitals involved in merger
and merger or consolidation financial conditions were or consolidation were
Andersen during 1980-1985 compared before and after better than the industry
merger or consolidation; no averages; the general
control group was used financial effects of merger
or consolidation were
small.
Greene 1990 36 acute-care hospitals Pre-post nonexperimental design; Most hospitals improved
merging into 18 facilities financial and operational their profitability by
from 1985 to 1987 performance was compared reducing expenses,
before and after merger; no increasing gross and net
comparison group; no control patient revenues, and
for hospital and environmental boosting ancillary services
(continued)
2
4
5
TABLE 2 Continued
Author(s) Year Sample Design Results
conditions markup rates.
Bogue et al. 1995 60 hospital mergers during Use of secondary data and survey Of acquired hospitals, 40.7%
1983-1988 to compare the level of similarity converted to nonacute
between merger entities and inpatient care (e.g.,
examine the market condition psychiatric and substance
prior to merger; followed how abuse services,
acquired hospitals were used after rehabilitation, and long-
merger term care); acquired
hospitals were closed in
17% of the merger events.
Lynk 1995 2 sets: (1) 2 merging hospitals Simulated potential reduction in Merger generally reduced
with 4 campuses in 1991- excess capacity and overstaffing the variability of random
1992; (2) all acute-care after merger based on data patient demand and the
hospitals in 1990 collected from the four merging cost of staffing for peak
hospital facilities; tested if excess patient loads; consolidation
capacity varied by hospital size efficiency varied by
hospital scale, with more
benefit accrued to mergers
of smaller-sized hospitals.
Alexander, 1996 92 hospital mergers during Multiple time-series design; Mergers resulted in
Halpern, 1982-1989 operating characteristics of improved operating
and Lee merging hospitals were efficiency—measured by
compared with a randomly occupancy and expenses
selected group of nonmerging per adjusted admission—
hospitals relative to nonmerging
hospitals; improvement
was particularly salient in
later periods characterized
by increased pressures
from prospective payment
system (PPS) and hospital
2
4
6
competition.
Connor et al. 1997 3,500 short-term general 122 mergers between 1986 and Mergers resulted in average
hospitals, including 122 1994 constituted the study group, price reductions at about
mergers, between 1986 and compared with nonmerger 7%; price reductions were
1994 hospitals during the same period; less in markets with higher
changes in hospital costs and market concentration but
prices from 1986 to 1994 were greater in areas with higher
compared by type of market, HMO penetration; price
hospital, and merger reductions were higher for
low-occupancy hospitals,
nonteaching hospitals,
nonsystem hospitals,
similar-sized hospitals, and
hospitals with greater pre-
merger service duplication.
Guo and 1998 5,518 hospitals between 1989 Used t tests to examine if mergers In low HMO penetration
Bazzoli and 1993 resulted in hospitals charging markets, no significant
higher prices and if merged difference in the change of
hospitals generated greater prices was found between
cost savings than nonmerged merged and nonmerged
hospitals; no controls for hospital hospitals; when HMO
and market differences penetration was high,
merged hospitals had a
smaller price increase than
nonmerged hospitals,
resulting in substantial
cost savings to consumers.
Corporate Restructuring
Alexander, 1988 3,189 community hospitals Posttest-only design with non- Hospital boards under
Morlock, responding to the American equivalent comparison groups; corporate restructuring
and Gifford Hospital Association (AHA) controlled for size, regional conformed more to the
Governing Board Survey, location, multihospital system “corporate” model found
(continued)
2
4
7
TABLE 2 Continued
Author(s) Year Sample Design Results
1985 (MHS) membership, teaching in the business/industrial
status, rural location, and sector and less to the
ownership traditional “philanthropic”
model among health
organizations.
Clement, 1993b 57 not-for-profit (NFP) Cross-sectional design; examined Restructuring had no
D’Aunno, Virginian hospital firms whether the total margin of the relationship with
and Poyzer in 1989 corporate restructuring was performance of the
associated with restructuring and hospital firm; neither were
the size and number of the number and size of
subsidiaries; controlled for market nonhospital subsidiaries
competition, hospital staffing, related to the hospital
payer mix, and proportion of the firm’s financial
hospital’s inpatient volume performance.
Lee and 1999 The population of Panel design; changes in hospitals Corporate restructuring had
Alexander community hospitals were followed from 1981 to 1994; no impact on hospital
operating in 1981 hospital survival was considered survival.
as a function of seven
organizational changes
(ownership change, specialty
change, MHS affiliation, corporate
restructuring, addition of a long-
term care unit, downsizing, and CEO
succession) and the characteristics
of hospitals and environments
Contract Management
Biggs, 1980 32 NFP hospitals under Cross-sectional design; matching No significant differences
Kralewski, contract management with was used to control for the were found between
and Brown 32 matched self-managed confounding effects of bed contract-managed and
hospitals capacity, geographic location, self-managed hospitals in
2
4
8
control type, teaching status, governance structure,
population base, and per capita quality, costs of care, and
income occupancy rates; contract-
managed hospitals had a
broader range of services
and younger and more
educated administrators.
Wheeler, 1982 10 hospitals contract managed Pre-post nonexperimental design; Contract management
Zuckerman, by a MHS no comparison group was significantly enhanced the
and employed; change in performance profitability of the study
Aderholdt was examined on the basis of 11 hospitals; management
financial indicators related to contracts reversed the
profitability, liquidity, and capital trend of operating losses
structure and reestablished the
hospitals’ financial
viability; liquidity and
capital structure showed
improvement but the
change was not significant.
Kralewski 1984 20 matched pairs of NFP Pre-post quasi-experimental design Contract management
et al. community hospitals; each with a matched group of self- increased the markup
pair consisted of a hospital managed hospitals; performance ratio, net profit, and
under management contract was compared before and after return-on-assets ratio in
and a self-managed hospital contract management and contract-managed
between contract and self- hospitals relative to their
managed hospitals matches; contract
management did not
improve the hospital’s
productive efficiency.
Rundall 1984 10 public hospitals contract Pre-post quasi-experimental Privately managed public
and managed by an investor- design; each matched pair of hospitals were more
Lambert owned (IO) firm during hospitals was followed during a cost-efficient than self-
1972-1980, matched with 10 3-year period to see the change managed ones; they had
self-managed public following private management lower rates of increase in
(continued)
2
4
9
hospitals total expenses, payroll
expenses, and expenses
per patient day.
Alexander 1985 Samples of acute-care public Cross-sectional design; hospitals Mixed results were found in
and Rundall hospitals under contract management in operating efficiency;
1981 were compared to self- contract-managed hospitals
managed hospitals and those had lower payroll
entering contract management in expenses and higher
1981-1982; controlled for hospital operating revenue but
and environmental conditions showed greater expenses
per patient day.
CEO Succession
Alexander 1996 All rural community hospitals Pooled cross-section time-series CEO succession significantly
and Lee from 1984 to 1991 design; controlled for hospital increased the risk of clo-
sure
performance and organizational among rural hospitals; this
and market characteristics; significant effect existed
adjusted for autocorrelation despite the variation in
CEO tenure.
Lee and 1999 The population of community Panel design; changes in hospitals CEO successions were
Alexander hospitals operating in 1981 were followed from 1981 to 1994; associated with a higher
hospital survival was considered risk of hospital closure.
as a function of seven
organizational changes (ownership
change, specialty change, MHS
affiliation, corporate restructuring,
addition of a long-term care unit,
downsizing, and CEO succession)
TABLE 2 Continued
Author(s) Year Sample Design Results
2
5
0
Roth(1981) showedimprovedmedical care programs andupgradedmanage-
ment and physical facilities after merger. Lynk (1995) further demonstrated
that mergers might create economic efficiencies at the departmental level, by
improving hospitals’ ability to manage uncertain demand for clinical services
with less excess staff, thereby reducing costs even if the merger involves only
partial consolidation. More recently, using a national merger sample during
1982-1989, Alexander, Halpern, and Lee (1996) observed improved operating
efficiency in terms of higher occupancy and lower expenses per adjusted
admission in the postmerger period.
Improved economic efficiencies from merger, however, are not universal
and may be sensitive to characteristics of the merging hospitals and market
conditions. Connor et al. (1997), for example, foundthat price reductions after
merger were higher for low-occupancy, nonteaching, nonsystem, similar-size
hospitals and hospitals with greater premerger service duplication. Further-
more, Lynk (1995) showedthat more benefits were associatedwithmergers of
smaller hospitals, and although scale economies exist, they are substantial
only for small hospitals (Dranove 1998). Consistent patterns also exist with
respect to the contingent effects of market conditions. Several studies have
shown that improved efficiency and potential cost savings to consumers are
particularly salient in markets with tight price controls and strong competi-
tion (Alexander, Halpern, and Lee 1996; Connor et al. 1997; Guo and Bazzoli
1998).
Although greater economic efficiencies are likely after mergers, particu-
larly among small hospitals and among hospitals operating in highly com-
petitive markets, they do not necessarily translate into higher hospital profits
(Greene 1990; Mullner and Andersen 1987). Instead, some hospitals may
experience financial downturns as a result of merger (Greene 1990). Moreo-
ver, because of the incompatibility of organizational cultures and elimination
of jobs and services, mergers are likely to decrease employee morale and pro-
ductivity and strain physician and community relations (Greene 1990). In
many cases, the dominant partner in a merger either dramatically transforms
or shuts down the acquired hospital (Bogue et al. 1995).
CORPORATE RESTRUCTURING
Corporate restructuring involves the segmentation of assets or functions of
the hospital into separate corporations (Alexander, Morlock, and Gifford
1988). Corporate restructuring arises as hospitals respond to increased con-
straints of cost shifting, lower occupancy rates, decline in philanthropic giv-
ing, increased competition, shrinking capital markets, and a general shift to a
more “business-like” orientation in the health care sector (Gerber 1983; Hoch
Lee, Alexander / Consequences of Organizational Change 251
1984; Starr 1982). Potential benefits of corporate restructuring include
increasedmanagement efficiency, removal of activities that wouldjeopardize
the tax-exempt status of the hospital, creation of a shieldfromstate regulation
for activities not directly related to inpatient services, avoidance of state
certificate-of-need regulations, more favorable treatment by third-party pay-
ers, reduced legal liability, and increased flexibility for diversification in the
face of an increasingly competitive health care market (Gerber 1983; Hoch
1984).
Despite the frequency of corporate restructuring—an estimated 1,000 hos-
pitals underwent corporate restructuring between 1979 and 1985—empirical
research on the consequences of this change is unusually rare (Alexander and
Orlikoff 1987; Fennell andAlexander 1993). We couldidentifyonlythree stud-
ies onthis topic, anddespite secondary, structural reorganizations inthe after-
math of corporate restructuring, evidence does not suggest any advantages of
the strategy. Alexander, Morlock, and Gifford (1988) found that restructured
hospitals tended to develop corporate-style boards with a business orienta-
tion. Both Clement, D’Aunno, and Poyzer (1993b) and Lee and Alexander
(1999) found no significant relationship between corporate restructuring and
the financial performance or survival of hospitals. Beyondthese initial exami-
nations, whether and how corporate restructuring itself or the structural
changes engendered by restructuring (e.g., diversification) affect the short-
term or long-term performance of hospitals remain unclear.
CONTRACT MANAGEMENT
Contract management describes a situation whereby an external organiza-
tion is contracted to assume responsibility for day-to-day management of the
hospital (Fottler et al. 1982; Richards 1982; Wheeler, Zuckerman, and Ader-
holdt 1982). While complete ownership resulting from mergers or system
acquisition may require significant organizational commitments and internal
changes to realize the advantages of cooperative action, contract-managed
hospitals enjoy many of the operational benefits of participation in an inte-
grated system without sacrificing organizational autonomy and independ-
ence (Alexander andRundall 1985; Fottler et al. 1982). The benefits include, for
example, improved access to management expertise, specialized administra-
tive services, joint purchasing, and capital markets (Biggs, Kralewski, and
Brown 1980; Brown and Morey 1976; Richards 1982; Wheeler, Zuckerman,
and Aderholdt 1982).
An average of 14 percent of community hospitals were contract managed
for some time between 1980 and 1988 (Lee and Alexander 1998). The popular-
ity of contract management has also attracted considerable research effort,
252 MCR&R 56:3 (September 1999)
and the literature contains many empirical studies assessing the performance
of contract-managed hospitals. In general, contract management has been
shown to significantly affect the operation of hospitals, although a clear pat-
tern of results is yet to emerge.
An early study by Biggs, Kralewski, and Brown (1980) found that com-
pared with self-managed hospitals, hospitals under management contracts
offered a broader range of services; had younger, more highly educated
administrators; and showed lower costs per patient day due to lower
employee-to-bed and payroll-to-total expense ratios and shorter lengths of
stay. The study, however, lacked precontract data and therefore failed to
examine changes resulting from the introduction of contract management.
The problem of precontract comparison was considered specifically by
Wheeler, Zuckerman, and Aderholdt (1982). In this study, performance
improvement was determined by the change between two periods: 3 years
before and 3 years after the management contract. Results showed that con-
tract management significantly improved hospital profitability but increased
profitability was associated with higher pricing strategies rather than
improved operational efficiency. Similar findings were obtained by
Kralewski et al. (1984), who found higher markup ratios, net profits, and
return-on-assets ratios in contract-managed hospitals relative to their self-
managed matches. No improvement was observed in production efficiency.
Efficiency, however, may be more likely to improve in public hospitals
under private management. Rundall and Lambert (1984), for example,
showed that public hospitals contract managed by private firms were more
cost-efficient than their self-managed counterparts. They displayed lower
rates of increase in total expenses, payroll expenses, and expenses per patient
day during a 3-year period. These findings, again, illustrate that the advan-
tage of a strategy may be specific to the organizational context of the focal
hospital.
It is worth noting that no evidence has linked contract management to
long-term outcomes of hospitals. Moreover, existing studies were conducted
primarily in the 1970s or the early 1980s. It is unclear if the positive effects of
contract management, if any, still holdinrecent years whengovernment regu-
lations have become more stringent and hospitals are experiencing greater
competitive pressures. Morrisey and Alexander (1987a) pointed out that,
from the management firm’s perspective, management contracts might be
undesirable because the firm cannot exercise enough control over operations
of the managed hospital. These constraints may be intensified in an increas-
ingly uncertain andcompetitive environment andmay limit the management
firm’s ability to extricate distressed hospitals from financial or operational
predicaments.
Lee, Alexander / Consequences of Organizational Change 253
TOP MANAGEMENT SUCCESSION
The succession of top management has become common in hospitals dur-
ing the last two decades. The average tenure of CEOs among community hos-
pitals was only 5.6 years during 1980-1988; the turnover rate increased dra-
matically in 1983 and reached its peak of 22.6 percent in 1987 (Lee and
Alexander 1998). This pattern seems consistent with management literature
that considers CEOsuccession a “turnaround” strategy, especially for organi-
zations experiencing strategic stagnation or severe financial distress (Wier-
sema and Bantel 1993). It is assumed that newCEOs have less commitment to
existing strategies. They can introduce newperspectives and frames of action
and, therefore, can initiate strategies to improve the adaptability and survival
of the organization (Finkelstein and Hambrick 1990; Miller 1991, 1993; Tush-
man and Romanelli 1985).
By contrast, some literature on the hospital industry has expressedconcern
about the potential negative consequences associated with CEO succession
such as the disruption of standard routines and command (Jacobs and Fraser
1987; Sabatino 1987). These discussions, however, tend to be primarily pre-
scriptive. Few studies have examined empirically the organizational conse-
quences of CEOsuccessioninhospitals. One studycorrelatedCEOsuccession
with closure of rural hospitals over the period from 1984 to 1991 (Alexander
and Lee 1996). Controlling for hospital performance, CEO tenure, and
other organizational and market characteristics, change in the top manage-
ment position significantly increased the risk of hospital closure. Lee and
Alexander (1999) extendedthe analysis to the population of U.S. community
hospitals during 1981-1994 and showed a similar, negative relationship
between CEO succession and hospital survival. Further research is needed
to investigate if such effects hold under different environmental (e.g., stable
vs. uncertain environments) and organizational (e.g., large vs. small hospi-
tals) conditions.
SERVICE DIVERSIFICATION AND
OPERATIONAL REDUCTION
The growth and expansion of acute-care hospitals after World War II to the
1970s set the stage for severe overbedding in the hospital industry (Mick
1990b; Stevens 1989). Oversupply of acute, inpatient beds—intensified by
regulatory reforms under prospective payment, the emergence of alternative
health care organizations, reduced resources for hospital inpatient care, and
increasedprice-basedcompetition—has forcedhospitals tomodifytheir func-
tions and scale of operations (Robinson 1994). Two changes are often
254 MCR&R 56:3 (September 1999)
employed by hospitals in response to these pressures: service diversification
and reduction of operational capacity. Table 3 contains summaries of empiri-
cal research investigating the outcomes associated with these two types of
organizational change in hospitals.
SERVICE DIVERSIFICATION
Diversification, or hospital entry into nonacute-care lines of business,
allows a hospital to mitigate the impact of operating in a declining acute-care
market and to avoid overdependence on a single line of services or products
(Clement 1988). Additional benefits may include economies of scale; decrease
in debt financing costs; creation of multiple revenue sources; diffusion of risk
in uncertain environments; and expansion of opportunities in growing, prof-
itable markets (Alexander 1990; Clement 1988; Rumelt 1982). If successfully
diversified, a hospital is expected to have lower costs, higher profits, and
lower total risks.
However, empirical evidence regarding the consequences of service diver-
sification has thus far been mixed. An early study by Eastaugh (1984) showed
a statistically significant relationship between diversification and higher
operating ratios in 62 New York hospitals during 1974-1979. On the other
hand, using data from California nonprofit hospitals before PPS, Clement
(1987) found that diversified hospitals had no better return-on-asset ratios
and, contrary to expectation, experienced greater financial risk than their
counterparts. Similar negative or nonsignificant findings were obtained in
Mullner (1990) andEastaugh(1992). Mullner (1990) foundthat the presence of
a nursinghome or other long-termcare units significantlyincreasedthe riskof
closure among rural community hospitals. Eastaugh (1992), in contrast to his
earlier findings, foundthat hospitals specializing in fewer product lines expe-
rienced fewer profit declines and that excess diversification led to a rapid
decline in profitability.
A more detailed analysis examining the relationship between types of
diversified services and financial performance was conducted by Clement,
D’Aunno, and Poyzer (1993a). Results indicated that provision of services
related to acute care significantly improved profitability, while unrelated
diversification tended to result in poor financial performance. The findings,
however, were limited to the subsidiaries of hospitals. It remains unclear if
similar improvement applies to the entire hospital. Furthermore, financial
benefits—or risks—fromdiversification usually take time to realize (Clement
1988). Such long-term effects will require longitudinal data to evaluate. Lee
and Alexander (1999) provided an example of such longitudinal research.
Using data on community hospitals from 1981 to 1994, they investigated
Lee, Alexander / Consequences of Organizational Change 255
and the characteristics of hospitals
and environments
TABLE 3 Empirical Studies Examining the Consequences of Diversification and Operational Reduction in
Hospitals
Author(s) Year Sample Design Results
Diversification
Eastaugh 1984 62 New York hospitals during Pooled time-series design; Diversification yielded
1974-1979 examined the simultaneous better financial position,
relationship between financial measured by operating
performance and diversification; ratio; better operating ratio
controlled for reduction in the provided hospitals the
market supply of hospital beds, wherewithal to diversify.
percentage of Medicare enrollees,
percentage of non-white
population, and time trend
Clement 1987 California short-term general Pooled cross-sectional time-series Diversification (related or
NFP hospitals, 1978-1983 design; controlled for competition, unrelated) did not affect
payer mix, community the hospital’s return on
characteristics, physician staffing, assets; contrary to
and hospital size; failed to account expectation, diversification
for autocorrelation among repeated increased the financial risk
observations of hospitals; there was no
difference in the effects of
related versus unrelated
diversification on hospital
financial outcomes.
Mullner 1990 Rural community hospitals Matched case-control design Among all service and
closed during 1980-1987, facility variables examined,
matched with a group of the presence of a skill
hospitals that remained open nursing or other long-term
care unit significantly
2
5
6
increased the risk of
hospital closure.
Eastaugh 1992 232 short-term, acute-care, Survey design; CEOs of the Hospitals specializing in
nongovernment hospitals hospitals were surveyed about fewer product lines
with more than 75 beds in their hospitals’ strategies, financial experienced less decline
1998 performance, and the change in profitability; excess
thereof between 1986 and 1990 diversification led to the
most rapid declines in
profitability.
Clement, 1993a 162 subsidiaries of hospitals Cross-sectional design; examined Subsidiaries producing
D’Aunno, operating in Virginia, 1987 type of diversification and health or related products
and Poyzer financial performance among tended to be more
subsidiaries of acute-care hospitals; profitable than other
no controls were used; the study subsidiaries; subsidiaries
differentiated various types of that existed longer or
diversification and conditions that were NFP units of NFP
potentially affect performance of hospitals were also more
subsidiary units profitable.
Lee and 1999 The population of community Panel design; changes in hospitals Addition of a long-term care
Alexander hospitals operating in 1981 were followed from 1981 to 1994; unit had no impact on
hospital survival was considered as
hospital survival.
a function of seven organizational
changes (ownership change,
specialty change, MHS affiliation,
corporate restructuring, addition of
a long-term care unit, downsizing,
(continued)
2
5
7
and CEO succession) and the
characteristics of hospitals and
environments
Operational Reduction
Mick and 1996 A national sample of 797 Posttest-only design with Contrary to expectations,
Wise rural community hospitals nonequivalent comparison groups; downsizing did not have
surveyed in 1989 controlled for market and hospital any significant impact on
characteristics hospital financial
performance.
Woodard, 1999 A 596-bed academic medical Case study, examining the Financial performance of
Fottler, and center in the southeastern restructuring, job redesign, and the medical center was
Kilpatrick United States downsizing processes of the improved due to
medical center between 1993 restructuring; jobs were
and 1997 consolidated and work
flows redesigned; good
communication was the
key to the success; despite
this, some employees
experienced low morale
and distrust.
Lee and 1999 The population of community Panel design; changes in hospitals Downsizing showed a
Alexander hospitals operating in 1981 were followed from 1981 to 1994; positive relationship with
hospital survival was considered risks of hospital closure.
as a function of seven
organizational changes (ownership
change, specialty change, MHS
affiliation, corporate restructuring,
addition of a long-term care unit,
downsizing, and CEO succession)
and the characteristics of hospitals
TABLE 3 Continued
Author(s) Year Sample Design Results
2
5
8
whether adding a long-termcare unit to a hospital’s existing acute-care facili-
ties improved hospital survival. No significant effect was found. However,
given the variety of diversification undertaken by hospitals, it remains
unclear what kind of service change is most beneficial for hospitals. Further-
more, it may be that advantages are associated not with a specific diversifi-
cation activity but the extent of resulting differentiation between the focal
hospital and its competitors in the local market (Succi, Lee, and Alexander
1997).
OPERATIONAL REDUCTION
Facingerodingpatient volumes andfinancial margins, hospitals are down-
sizing and/or eliminating unprofitable services at an unprecedented rate
(Cerne and Montague 1994; Doherty, O’Donovan, and O’Donovan 1986).
More excess beds are expected to be cut in the near future. On the basis of a
hospital occupancy rate of 67 percent and assuming HMO use rates, the
Washington-based AmHS Institute estimated that the nation had 447,545
excess hospital beds, the equivalent of 2,983 hospitals averaging 150 beds
(cited in Cerne and Montague 1994). For individual hospitals, reduction of
existing, redundant capacityis expectedtoreduce costs, toincrease efficiency,
and to enhance the hospital’s competitive position (Cascio 1993; Doherty,
O’Donovan, and O’Donovan 1986; Freeman and Cameron 1993). Reduction
may also release resources for expanding into more profitable markets (Alex-
ander 1990).
Despite its frequency, operational reductionis surprisingly underresearched.
Theoretical andprescriptive discussions abound, but little empirical evidence
exists that allows hospital decisionmakers to gauge the impact of suchchange
on their organizations. Arecent case study of a medical center indicated posi-
tive financial outcomes associated with downsizing (Woodard, Fottler, and
Kilpatrick 1999). Yet, in a survey of a national sample of rural hospitals, Mick
and Wise (1996) found no relationship between downsizing and hospital
financial well-being, whether measured at one time or as change over time.
Thus, the true benefits of operational reduction remain unclear.
Worse yet, risks may arise if the elimination of beds and services threatens
the scale economies or efficiencies necessary for hospital survival, or if it
undermines the configuration or mix of existing facilities, eroding the hospi-
tal’s mission and service quality (Collins and Noble 1992). Lee and Alexander
(1999), for example, found a positive relationship between downsizing—meas-
uredby the reduction of more than 15 percent of full-time equivalent employ-
ees or hospital beds in a 1-year period—andrisk of hospital closure. This find-
ing and the above considerations caution against a sweeping application of
Lee, Alexander / Consequences of Organizational Change 259
operational reduction, at least in some hospitals, and require careful identifi-
cation of the organizational or environmental conditions for successful
reduction.
SUMMARY OF EMPIRICAL FINDINGS
AND SUGGESTION FOR RESEARCH
While most literature assumes that organizational change results in posi-
tive outcomes, empirical findings reviewed here are by no means consistent
withthis expectation. Only limitedevidence suggests that hospitals that mod-
ify their structures outperform those that do not with respect to a variety of
financial andoperational indicators. Scott (1990) made similar observations in
his review of technical innovations in medical care organizations. He con-
cluded that “such an association [between innovation and positive perfor-
mance] seems unwarranted in medical care organizations, where new tech-
nologies and treatments may be underevaluated, oversold, or too quickly
promulgated, or where benefits are likely to be overestimated and costs
underestimated” (p. 187). One can apply similar explanations to the lack of
clear relationships between organizational change and hospital performance
and warn against the danger of “overchange.” But it may be equally danger-
ous to simply disregard any value of organizational change and encourage
hospitals to maintain the status quo in an increasingly uncertain health care
environment. The solution, instead, maylie somewhere betweenthe extremes
and will require examining factors that contribute to the success or failure of
organizational change in hospitals—Does organizational change benefit one
type of hospitals more than others? Does the type of organizational change
matter? What environmental conditions increase the likelihoodthat organiza-
tional change among hospitals will result in positive outcomes? Answers to
these questions require research with improved study designs, which may be
informed from the problems and weaknesses of existing research.
Tables 1-3 summarize the designs of the studies reviewed in this article.
Several problems canbe identifiedfromthose studies that mayaccount for the
mixed findings regarding the relationship of organizational change and hos-
pital outcomes: (1) use of cross-sectional designs, (2) neglect of self-selection,
(3) inconsistent conceptualization of organizational change or strategy, (4)
limited samples of hospitals, (5) failure to consider contingencies of organiza-
tional change, (6) use of short-term performance indicators, and (7) lack of
comparative analysis of organizational change. As we will note, manyof these
problems are interrelated.
260 MCR&R 56:3 (September 1999)
CROSS-SECTIONAL VERSUS
LONGITUDINAL DESIGNS
Many of the studies reviewed employed a cross-sectional design, in which
all measurements were specified at one point in time. This design severely
constrains the ability to establish causality between organizational change
and hospital performance and, worse yet, might produce biased results. The
Biggs, Kralewski, and Brown (1980) study illustrates these shortcomings. The
study found no significant difference between contract-managed and self-
managed hospitals in quality, cost of care, and occupancy. However, these
findings are problematic because cross-sectional data do not permit assess-
ment of performance trends inhospitals. It is possible, for example, that hospi-
tals’ entry into management contracts was precipitated by low performance
levels. Thus, contract management might have improved the performance of
hospitals to the level of their self-managed counterparts, resulting in no per-
formance differences between the two groups.
The limitations of cross-sectional design are further exemplified by the
issue of opportunity cost in strategic management (Shortell and Zajac 1990).
MHS affiliation, for example, may be risky owing to incompatible organiza-
tional cultures, resistance from the community, reorganization pressures
from the system headquarters, and the negative feelings among employees
of the affiliating hospital (Lee and Alexander 1998). The question, however,
must be considered relative to other available options: going it alone, doing
nothing, or joining a corporate multihospital entity. MHS affiliation may
appear risky when the comparison involves cross-sectional measurement of
performance betweensystemandfreestandinghospitals. But, whenlongitu-
dinal data are used to allow assessment of performance change before and
after system affiliation, joining a system may stand out as a relatively low-
risk decision.
In contrast to cross-sectional designs, longitudinal studies employing a
relativelylongtime frame permit explorationof the dynamics betweenorgan-
izational change and hospital outcomes. For example, with lagged change
variables, the researcher can determine if organizational change precedes
improvement or deterioration of performance, thus enhancing causal infer-
ences regarding the effects of change on hospitals. It is also possible to exam-
ine whether advantages—or disadvantages—of organizational change vary
over time or are specific to particular time periods (e.g., before or after PPS),
thus improving our understanding of the interactive effect of organizational
change and significant policy events on hospitals.
Lee, Alexander / Consequences of Organizational Change 261
SELF-SELECTION
The example of Biggs, Kralewski, andBrown(1980) alsopoints toanimpor-
tant issue of self-selection in studies that compare outcomes of organizational
change among different groups of hospitals. The problem stems from the
observation that hospitals may not randomly engage in organizational
change; those entering contract management, for example, may differ funda-
mentally from self-managed hospitals in terms of management skills, cost
structures, and financial performance. In particular, self-selection may occur
whenthe change is interorganizational, involvingdecisions of the focal hospi-
tal as well as one or more partner organizations. Acase inpoint is MHS affilia-
tion. While hospitals may be generally attracted to systems’ greater political
clout and easier access to capital and managerial resources, system acquisi-
tions are more likely in favorable markets, among hospitals with weak and
inefficient management, and when the system and the hospital share compa-
rable missions (Alexander and Morrisey 1988).
Failure to account for self-selection may bias research findings or lead to
erroneous conclusions, attributingthe observeddifferences, or lackthereof, in
hospital outcomes to organizational change rather than more properly to
inherent discrepancies in hospital structure andbehavior. Dranove andShan-
ley’s (1995) studyof systemacquisitionillustrates sucha potential error. Inthe
study, the researchers found a higher level of price-cost margins and profits
among systemhospitals and attributed such financial advantages to systems’
superior marketingstrategies anda more homogeneous mixof services. How-
ever, as Snail andRobinson(1998) pointedout, the findings maybe due tosys-
tems’ selection of newmembers based on their structural similarities to exist-
ing member hospitals, therefore allowing the implementation of a particular
style of management and production processes.
Measures to control for selection effects have been widely discussed in the
social sciences literature (e.g., Dubin and Rivers 1989; Heckman 1979; Lee
1982). One commonapproachis toemploytwo-stage sample selectionmodels
to estimate separately the determinants of organizational change andhospital
performance. This produces unbiased estimates of the effects of organiza-
tional change on hospital performance (for empirical applications, see Succi
[1996] andMenke [1997]). Alternatively, one canfocus specificallyonwhether
organizational change improves, or worsens, the performance of hospitals
over time. This approach requires the use of longitudinal data that allow the
monitoring of change in organizational structure or strategy in association
with over-time differences in hospital outcomes (see, e.g., Alexander, Halp-
ern, and Lee 1996). The disadvantage of this alternative is that findings may
262 MCR&R 56:3 (September 1999)
have limited generalizability and apply only to the subgroup of hospitals
experiencing the change of interest.
CONCEPTUALIZATION OF
ORGANIZATIONAL CHANGE
Existingstudies diverge intheir examinationof the state (e.g., hospital own-
ership of a skilled nursing facility) versus change (e.g., acquisition of a skilled
nursing facility) in hospital structure or activity. These two measurements of
organizational change differ on one important dimension: time. Time is an
essential element in the measurement of change, defined as a shift from one
state toanother inhospital structure or behavior at one periodof the hospital’s
history. In constructing the measure, one knows when a change occurred and
cansubsequentlyexamine howit might affect the performance of the hospital,
and the length of time for the effect to take place. The study of a state, on the
other hand, focuses on the static profile of hospitals and does not capture the
dynamic relationship between hospital change and performance. One way to
address this limitation, as illustratedby Clement et al. (1997), is to incorporate
a variable indicating the length of time—that is, tenure—a hospital has
engaged in a change. Adrawback with this approach, however, is that tenure
may be endogenous, influenced by the degree to which the hospital has bene-
fited from the strategy and therefore by the hospital’s performance. In other
words, hospitals with poor experience with a strategy may drop it early in the
game, thus producing a false impression that longer tenure leads to higher
performance.
LIMITED SAMPLES
With fewexceptions, the reviewed studies were based on small, purposive
samples of hospitals, or hospitals located in one particular geographic area
(e.g., a state). For example, Levitz and Brooke (1985) and Manheim, Shortell,
and McFall (1989) studied, respectively, short-termacute-care hospitals oper-
ated in Iowa and hospitals acquired by HCA. Both studies found that system
affiliation significantly increased hospital expenses and costs. The results,
however, may be specific to Iowa or to that particular FPsystemandhave lim-
ited generalizability across geographic areas and multihospital systems.
Future research needs to use larger samples and samples representative of
the nation’s hospitals to produce results with broad generalizability. Diverse
samples will also allow better controls for market conditions and organiza-
tional characteristics of study hospitals andprovide opportunities to examine
Lee, Alexander / Consequences of Organizational Change 263
if the type of organizational change beneficial for hospitals differs by hospital
characteristics (e.g., size, ownership) andlocal market situations (e.g., compe-
tition, physician supply, population composition).
CONTINGENCIES OF ORGANIZATIONAL CHANGE
Organizational change is assumed to improve the fit of hospital structures
andpractices toenvironmental requirements. However, inmost of the studies
reviewed, effects of organizational change were determinedbycomparingthe
performance of hospitals that experienced change with those that did not.
This approach assumes uniform impact of organizational change and over-
looks contingencies that mayaffect the benefits or risks associatedwithorgan-
izational change. Twostudies that specificallyincorporate this perspective are
Halpern, Alexander, and Fennell (1992) and Succi (1996). The former focused
on the joint effects of MHS affiliation andhospital characteristics on rural hos-
pital survival; the latter examinedthe environmental contingencies associated
with system affiliation and their interactive impact on hospital financial and
operational performance. Their findings suggested that the value of MHS
affiliation varied as a function of the hospital’s size, ownership of the system,
and the level of market competition and uncertainty. Thus, the utility of
organizational change may be specific to hospitals’ particular organizational
andenvironmental milieus. Ignoringsuchcontingencies mayleadtoinappro-
priate adaptive responses for significant subgroups of hospitals (Smith and
Piland 1990).
To illustrate, consider hospital scale. Scale constitutes an important context
inthe evaluationof organizational change, particularlyinviewof the frequent
downsizing and merger activities among hospitals. Downsizing may be a
beneficial strategyfor larger hospitals because theyhave more slackresources
(see, e.g., Woodard, Fottler, and Kilpatrick 1999). Smaller hospitals, on the
other hand, may lack the scale economies to absorb such reduction; instead of
reducingexcess capacity, the cut mayhurt the “muscles andbones” of the hos-
pital (Lee and Alexander 1999). On the other hand, studies have pointed that
efficiency gains of mergers also vary by hospital scale, with more benefit
accruing to mergers of smaller-size hospitals (Dranove 1998; Lynk 1995).
Organizational changes, moreover, are not equivalent. For example, they
vary in terms of the problems they are designedto address andmay affect dif-
ferent structures of a hospital. More important, change comes with a price tag
and the cost that a hospital has to pay may depend on how the change affects
the hospital’s structure (Fennell andAlexander 1993; Miller andFriesen1984).
Conversion of hospital ownership through merger and acquisition,
264 MCR&R 56:3 (September 1999)
elimination of traditional hospital services, and diversification into
nonacute-care areas, for example, affect a hospital’s mission, authority struc-
ture, technology, andmarket strategy. If adoptedinappropriately, these dras-
tic modifications may disrupt existing technical capabilities or core compe-
tence and pose a potential threat to the viability of the hospital. By contrast,
reducing hospital beds to increase efficiency or creating a corporate holding
company to protect the hospital’s clinical operation fromgovernment regula-
tions may be implemented relatively gradually and thus may be effective
when the environment requires minor reconfiguration of hospital structures.
Attention to these distinctions and to the degree of fit of organizational
changes indifferent types of hospitals andenvironments is neededtoimprove
our understanding of the impact of organizational change in hospitals.
MEASURES OF ORGANIZATIONAL OUTCOME
Inthe main, the researchreviewedinthis article uses accounting andfinan-
cial indicators as measures of the success or failure of organizational change.
These measures emphasize short-term effects of organizational change and
are based on a limited, if not erroneous, assumption of rational action—
namely, organizational change is the outcome of deliberate decisions to
improve hospital efficiency and effectiveness (Mohr 1992). Hospitals, how-
ever, may change to imitate “model” hospitals in the local market or to mirror
the dominant corporate practices in the industry. They may do so to select the
“right” form of structure to increase their legitimacy and survival, notwith-
standingthe efficiencyor effectiveness implications of suchpractices (DiMag-
gio and Powell 1983).
The preference for financial indicators over long-term outcomes such as
survival may reflect a concern among investigators that survival may not be
sensitive enough as a dependent variable. Hospitals were once “protectively
cultured” (Brown 1964); their survival was underwritten by society through
tax exemptions, direct subsidies, and exclusion frommost federal labor regu-
lation (Somers 1969). Thus, ineffectiveness had to be substantial before a hos-
pital failed. Because such protections no longer exist, the viability of hospitals
is increasingly threatened by concerns of escalating health care costs and the
resulting cost-control efforts of public and private third-party payers.
Between1976 and1994, more than1,200 of the nation’s hospitals closed(AHA
1991; Lowe 1994), suggesting the appropriateness and importance of examin-
ing hospital survival or failure as an outcome of organizational change.
Moreover, using survival as an outcome offers several advantages. First, in
an industry where so few output measures have been operationalized and
Lee, Alexander / Consequences of Organizational Change 265
standardized (Donabedian 1980), survival is perhaps the most appropriate
measure of socioeconomic acceptability (Cannedy, Pointer, and Ruchlin
1973). It transcends the financial viability of hospitals and is equally valid for
hospitals with different profit orientations and accounting criteria. Financial
indicators, such as profitability, sales volume, and market share, are sensitive
to the time span of the study (Coyne 1985b; Hannan and Freeman 1989;
Mitchell andSingh 1993). Ahospital, for example, may adapt in accordance to
its long-term goals at the expense of short-term adjustments. Consequently,
results maydiffer accordingto the lengthof time the hospital’s performance is
followed. This is a particular problem in longitudinal research (Greenhalgh
1983).
COMPARISON OF ORGANIZATIONAL CHANGES
Finally, the reviewed research has generally overlooked the comparative
advantages or disadvantages of different organizational changes among hos-
pitals. One exception is Mick et al. (1994). They examined multiple changes
among rural hospitals and provided the opportunity to compare the perfor-
mance consequences of different organizational changes (see Table 4). In their
study, however, consequences of these different organizational changes were
assessedinseparate models. Thus, hospital changes were assumedto be inde-
pendent, at least as far as their effects on hospitals are concerned.
This assumption is problematic for at least two reasons. First, organiza-
tional changes may be implemented simultaneously to achieve a preset, stra-
tegic goal. This is evident in a study by Lee and Alexander (1998), showing
that hospitals tend to experience high CEO turnover at the time of system
affiliation, possibly as a consequence of the system’s intention to bring the
hospital management in line with its corporate policies. To the extent that
organizational changes are not undertaken independently, findings regard-
ing a given change may be biased because of inappropriate controls for the
effects of other, simultaneous changes. Second, different organizational
changes may yield similar benefits but differ in terms of the costs involved.
The contrast between MHS affiliation and contract management provides an
example. Although MHS affiliation increases hospitals’ access to managerial
expertise, similar advantages may be offered to independent hospitals
through management contracts with private vendors or hospital associations
(Manheim, Shortell, and McFall 1989). The threat to hospital autonomy and
the resistance fromcommunity groups and employees, however, may render
MHS affiliation unfavorable as compared to contract management with
respect to hospital performance and survivability.
266 MCR&R 56:3 (September 1999)
and environments
TABLE 4 Empirical Studies Comparing the Consequences of Different Organizational Changes in Hospitals
Author(s) Year Sample Design Results
Mick et al. 1994 A national sample of 797 rural Posttest-only design with non- No consistent relation
community hospitals equivalent comparison groups; between changes and
surveyed in 1989 performance consequences of 13 positive financial
strategic changes were examined; performance (total margin
controls used to adjust for the and current ratio) was
confounding effects of hospital found; significant
and environmental attributes associations between
changes and performance
were more often negative
than positive.
Lee and 1999 The population of community Panel design; changes in hospitals Three organizational
Alexander hospitals operating in 1981 were followed from 1981 to 1994; changes were found to be
hospital survival was considered as associated with hospital
a function of seven organizational closure; specialty change
changes (ownership changes, was related to lower risk
specialty change, multihospital of closure; downsizing
system [MHS] affiliation, and CEO succession
corporate restructuring, addition were associated with
of a long-term care unit, higher risk of closure.
2
6
7
Solutions to these problems require simultaneous comparison of multiple
organizational changes. An attempt was made by Lee and Alexander (1999), in
which the researchers compared the relative impact of seven organizational
changes—ownership change, specialty change, MHS affiliation, corporate
restructuring, addition of a long-term care unit, downsizing, and CEO succes-
sion—on hospital survival in the same models. Of the seven organizational
changes examined, three were found to be significantly associated with hospi-
tal closure, suggesting differential consequences of organizational changes
undertaken by hospitals.
Information on multiple organizational changes is also needed to explore
issues suchas towhat extent organizational changes are orchestratedandcon-
certedbyhospitals andwhether there exists a joint, synergistic effect of a set of
deliberate changes undertaken by hospitals. Examining these questions will
require a comprehensive collection of changes in hospitals and analytical
techniques (e.g., taxonomy construction) currently uncommon in health serv-
ices research.
CONCLUSION
Recent social, political, and economic changes have threatened the domi-
nant position of hospitals in the health delivery system. As health care reform
and market competition escalate, the health care system is likely to witness
more organizational changes amonghospitals andother healthcare organiza-
tions as they scramble to ensure their survival and seek to demonstrate their
ability to operate according to the latest business strategies (Alexander and
D’Aunno 1990; Mick 1990b; Mohr 1992; Stevens 1989).
This article reviewed existing empirical studies that examined the conse-
quences of organizational change in hospitals. The review revealed both lim-
ited and inconsistent findings in the current literature, suggesting that we are
a long way from understanding the implications of organizational change
(Fennell and Alexander 1993; Mick 1990a; Topping and Hernandez 1991).
Specifically, anumber of questions remaintobe exploredinfuture research:
• What is gained and lost by hospitals engaging in various organizational
changes? Do organizational changes improve or reduce not only the short-term
performance of hospitals but also their long-term viability?
• What organizational and environmental factors determine the success or failure
of organizational change in hospitals? In other words, when and under what or-
ganizational and environmental conditions can organizational change increase
or reduce the performance and long-term viability of hospitals?
268 MCR&R 56:3 (September 1999)
• What differences should a hospital expect when it chooses one type of organiza-
tional change over another? Howdoes the interaction between type of organiza-
tional change and the hospital’s specific strategic context affect hospital per-
formance? Howdoes a hospital increase the fit between its strategic choice of or-
ganizational change andthe environmental conditions under whichit operates?
• How can hospitals better handle the increased complexity of organizational
change? Is there a way to classify organizational change and guide hospitals in
their selection of change that strategically fits their organizational and environ-
mental conditions?
• How do different processes of change (e.g., incremental, piecemeal adjustment
versus dramatic, wholesale shift) affect hospitals? Do processes of change vary
within or across types of organizational change? Howdo processes and types of
organizational change affect hospital performance differentially?
• Does the temporal pattern of organizational change make any difference in hos-
pital performance? For example, are changes occurring simultaneously more
disruptive and harmful than changes taking place in staged fashion during an
extended time period?
• To what extent do simultaneous or stagedorganizational changes reflect a delib-
erate action by the hospital? Does the joint, synergistic effect of changes matter
more than the impact of independent organizational change?
Considering the rapid changes in the hospital industry, the survival game
that hospitals are competing in today is much like the croquet game in Alice in
Wonderland. In the game, every element is in a state of motion—technology,
suppliers, customers, employees, corporate structure, government relations—
and none can be counted on to remain stable for very long (Barnett and Han-
sen 1996). To gain a foothold, hospitals probably have to “run at least twice as
fast” as their competitors by breaking from their old frames of thinking and
fundamentally reconstructing their organizational structures. However
bounded the above questions may be, answers to themwill provide better in-
formation for decision makers of hospitals to develop effective adaptation
plans in an increasingly competitive and uncertain environment.
NOTES
1. Snail andRobinson(1998) provideda similar reviewonhospital diversificationfrom
an economic perspective.
2. We are grateful for one anonymous reviewer’s calling our attention to an article
overlooked in our search.
3. Diversification will be reviewed in a later section.
4. A similar lack of differentiation between ownership and system effects occurred in
Watt et al. (1986).
Lee, Alexander / Consequences of Organizational Change 269
5. Several studies have also indicated different patterns of effects by the ownership
type of the system (Cleverley 1992; Coyne 1985a, 1985b; Halpern, Alexander, and
Fennell 1992; Renn et al. 1985). The findings, however, are not consistent across
studies (for a counterexample, see Menke 1997).
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doc_201093151.pdf
Pervasive organizational change in the U.S. hospital industry began in the mid-1970s. Since then, it has spread to every corner of the industry, affecting every hospital, large and small. The explosion of organizational change is caused primarily by increased competition and uncertainty in the economic conditions confronting hospitals. More important, it also reflects a fundamental shift in the institutional environment surrounding and supporting health care practices and management.
MCR&R 56:3 (September 1999) Lee, Alexander / Consequences of Organizational Change
Review Articles
Consequences of Organizational
Change in U.S. Hospitals
Shoou-Yih D. Lee
University of Illinois at Chicago
Jeffrey A. Alexander
University of Michigan
Organizational change has become commonplace among U.S. hospitals. Empirical
investigations of the consequences of organizational change, however, are relatively
scarce, and findings of existing studies are inconsistent. In this article, the authors
review the rationale and performance implications of hospital organizational change in
three areas: (1) the development of newmulti-institutional arrangements, (2) change in
traditional ownership and management configurations, and (3) diversification in organ-
izational products/services and consolidation of organizational scale. Empirical research
on hospital change published between 1980 and 1999 in the health services research,
social science, and business literatures is reviewed to highlight the potential pitfalls that
hospitals may encounter in their effort to remain viable. The article also summarizes the
strengths and weaknesses of current hospital change research and provides specific sug-
gestions for future research in this area.
It is certainly not news that organizational change is becoming the norm
rather than the exception among U.S. hospitals. The widespread adoption of
organizational change reflects a common belief among organizational practi-
The authors would like to thank Stephen Mick, Jane Banaszak-Holl, and two anonymous review-
ers for their constructive comments on earlier drafts of the article. Address correspondence to
Shoou-Yih D. Lee, Ph.D., Department of Sociology (M/C 312), University of Illinois at Chicago,
1007 West Harrison Street, Chicago, IL 60607-7140; phone: (312) 413-2909; fax: (312) 996-5104; e-
mail: [email protected]. This article, submitted to Medical Care Research and Reviewon June 10, 1998,
was revised and accepted for publication on April 17, 1999.
Medical Care Research and Review, Vol. 56 No. 3, (September 1999) 227-276
© 1999 Sage Publications, Inc.
227
tioners that change is adaptive andbeneficial tohospitals. Anecdotal evidence
supporting the value of organizational change abounds in trade magazines.
Yet, systematic empirical investigations of the consequences of organizational
change are surprisingly scarce in the health services literature (Topping and
Hernandez 1991). Findings fromthe fewexistingstudies are frequentlyincon-
sistent, providing no clear guidelines to assist hospitals struggling to survive
in an increasingly competitive and uncertain environment. Organizational
change, thus, remains a pervasive yet understudied phenomenon in the hos-
pital industry.
ORGANIZATIONAL CHALLENGES IN
A CHANGING HEALTH CARE ENVIRONMENT
Pervasive organizational change in the U.S. hospital industry began in the
mid-1970s. Since then, it has spread to every corner of the industry, affecting
every hospital, large and small. The explosion of organizational change is
caused primarily by increased competition and uncertainty in the economic
conditions confronting hospitals. More important, it also reflects a fundamen-
tal shift in the institutional environment surrounding and supporting health
care practices and management (Alexander and D’Aunno 1990; Scott 1993).
Several developments have occurred in the health care environment, chal-
lenging hospital survival and encouraging hospitals to experiment with vari-
ous types of organizational change. Foremost has been a shift in the role of the
federal government. Once a builder of hospitals and a purchaser of medical
services, the federal government inthe 1980s begantoassume the role of regu-
lator (Fennell and Alexander 1993; Scott and Lammers 1985). This shift has
made the federal government a driving force for change in the hospital indus-
try. It has radically altered the structure of local markets and forced hospitals
to modify their behavior and structure (Bigelow and Mahon 1989). The intro-
duction of Medicare’s prospective payment system (PPS) in October 1983, in
particular, marked the federal government’s role as a change agent.
Unlike previous cost containment efforts, Medicare PPS radically trans-
formed the hospital payment system, and therefore the incentives, by setting
predetermined, fixed payment levels for 468 diagnosis-related groups of con-
ditions for Medicare patients (Office of Technology Assessment 1985). Under
this payment system, hospitals must absorb any cost beyond the price limit
and are at financial risk for the services they deliver. Since Medicare patients
constitute, on average, 40 percent of all inpatients, the payment change has
had a dramatic impact on hospital operations. It effectively eliminates a guar-
anteed flow of resources to hospitals and requires them to contain costs and
228 MCR&R 56:3 (September 1999)
provide services as efficiently as possible. Since the implementation of PPS,
hospital admissions and inpatient days have decreased and the average
length of stay andoccupancy rate have droppedrapidly, especially in the first
3 years of the program (Coulam and Gaumer 1991; Dobson and Hoy 1988;
Guterman et al. 1988; Kauer, Silvers, and Teplensky 1995). This reduced
demandfor hospital services has significantly decreasedhospital margins. By
1989, 57 percent of hospitals were losing money on Medicare patients (Russell
1989). Declines inprofit margins, furthermore, have diminishedthe credit rat-
ings of hospitals and limited their access to capital markets (Shortell, Morri-
son, and Friedman 1992).
PPS legislation has also produced a number of side effects (Shortell, Morri-
son, and Friedman 1992). First, to prevent cost shifting, many private insurers
have implementedtheir ownprospective payment programs, further limiting
resources for hospital operations (Feinglass and Holloway 1991; Kauer,
Silvers, and Teplensky 1995; Shortell, Morrison, and Friedman 1992). Second,
private companies andpublic insurance programs have increasingly adopted
managed care plans (e.g., health maintenance organizations [HMOs], pre-
ferred provider organizations [PPOs]) to arrest the rapid increase in health
costs (Miller and Luft 1993). These plans exercise strict control over hospitali-
zation, which, coupled with strict government regulations, has led to over-
capacity in hospitals and forced them to compete fiercely for diminishing
resources and patients (Cerne and Montague 1994; Mezey and Lawrence
1995). Furthermore, the health care environment is complicated by social
trends such as aging of the population, changes in disease patterns (e.g.,
chronic diseases, the AIDS epidemic), growthof uninsuredpopulations, tech-
nological advances, increasedpatient expectations, andprivatizationandcor-
poratization of health care (Alexander and D’Aunno 1990; Fennell and
Alexander 1993; Shortell, Morrison, and Friedman 1992; Starr 1982; Stevens
1989). These forces increasingly press hospitals to expand their scope of activ-
ity while conserving resources.
In the face of these social, political, and economic changes, many
hospitals—public, nonprofit, andfor-profit—have reconsideredtheir mission
andmodifiedtheir structures. Theyhave come torealize that simplyconform-
ingtoprofessional norms andpractices nolonger guarantees survival. Corpo-
rate planning and strategy have become standard “institutional” practices of
hospital management, andmanyhospitals have restructuredtomimic the fea-
tures of U.S. mainstream economic enterprises (Alexander and D’Aunno
1990; Mick 1990b; Scott 1993; Starr 1982). The consequences of these changes,
however, remain unclear.
Lee, Alexander / Consequences of Organizational Change 229
NEW CONTRIBUTION
This article provides a critical review of existing literature and suggests
useful directions for research on outcomes of organizational change in hospi-
tals. Although recent political, economic, demographic, and technological
developments have threatened to reduce hospitals to the margin of the U.S.
health care system (Ginzberg 1995; Robinson 1994), the hospitals remain
important health care providers and play a key role in facilitating the integra-
tionof healthservices across the spectrumof care (Shortell, Gillies, andDevers
1995). With few exceptions (see, e.g., the study by Ginsberg and Buchholtz
[1990], which examines ownership change in HMOs), hospitals overwhelm-
ingly constitute the samples of existing studies that examine the outcomes of
organizational change in the health care sector.
Inthis article, we extendprior reviews onhospitals’ strategic decisionmak-
ing (e.g., Bigelowand Mahon 1989; Topping and Hernandez 1991) to focus on
the rationale andperformance implications of organizational change inhospi-
tals andto highlight the potential pitfalls that hospitals may encounter intheir
struggle to remain viable. Furthermore, the article summarizes both the
strengths and weaknesses of current research and provides specific sugges-
tions for future research in this area.
1
CRITERIA OF REVIEW
The article focuses on organizational change that occurs in hospital owner-
ship, authority structure, administrative arrangements, operational capacity,
products/service areas, and scope and composition of services. These struc-
tural elements are at the root of hospitals’ decision making and performance;
they shape the behavior and interpersonal relationships of hospital constitu-
encies and define the boundaries of hospital activity (Mintzberg 1979). Fol-
lowing Fennell and Alexander (1993), we classified organizational change in
hospitals into three categories: (1) the development of newmulti-institutional
arrangements, (2) change in traditional ownership and management configu-
rations, and (3) diversification in organizational products/services and con-
solidation of organizational scale. In addition to these three categories that
define the scope of our review, we used two criteria in the selection of articles
for review. First, all articles were empirical studies usingeither a qualitative or
quantitative researchapproach. Second, all studies addressedthe relationship
between an organizational change or changes and their outcomes in hospital
settings. Studies of other health care organizations (e.g., nursing homes,
HMOs) were excluded for the purpose of this review.
230 MCR&R 56:3 (September 1999)
On the basis of these criteria, we searched articles published between 1980
and 1999 in health services research, social science, and business journals
using the following databases: (1) Medline—containing citations to the bio-
medical literature; (2) Wilson’s Social Science—a citation and abstract data-
base indexing more than 350 key English-language journals in the social sci-
ences; (3) PsychInfo—indexing more than 1,300 journals and dissertations in
medicine, psychiatry, nursing, sociology, andeducation; (4) ABI/Inform—an
index of more than 1,000 U.S. and international publications on business and
management; and (5) ArticlesFirst—an index to more than 12,500 journals
from general-interest publications. In addition, we were able to identify sev-
eral forthcoming and under-review articles through the assistance of
researchers familiar with relevant research topics (e.g., merger).
2
The following sections explain the characteristics and rationale of the three
categories of organizational change anddiscuss their implications for hospital
performance. After reviewing empirical findings regarding the outcomes of
organizational change in hospitals, we summarize the limitations of current
studies and provide suggestions for future research. Finally, we conclude the
article with specific research questions for further examination.
MULTI-INSTITUTIONAL ARRANGEMENTS
Tightened government regulation and intense market competition have
increasingly subjectedhospitals’ performance andsurvival to the influence of
external resources and constraints. There are two basic ways for hospitals to
manage suchexternal dependence (Kotter 1979). First, a hospital canchoose to
operate in a different domain (e.g., changes froma general acute-care hospital
to a specialty hospital) or diversify into nontraditional businesses (e.g., suba-
cute, long-term care), thus decreasing the dependence on environmental ele-
ments in the original, acute-care market (Clement 1988).
3
Alternatively, a hos-
pital can engage in boundary-spanning activities and establish linkages with
key organizational actors in its domain (Fennell and Alexander 1987). Such
interorganizational relations buffer the hospital from environmental threats
and create a countervailing power that grants the hospital some measure of
control over its environment (Miner, Amburgey, and Stearns 1990; Provan
1984).
Several types of interorganizational relations have beenexploredby hospi-
tals: networking between rural and urban hospitals (Grim 1986), sharing
medical services (Simmons 1989), pooling resources through hospital federa-
tions (D’Aunno and Zuckerman 1987a, 1987b), creating local strategic alli-
ances or consortia for joint activities among member hospitals (Clement et al.
Lee, Alexander / Consequences of Organizational Change 231
1997; Christianson et al. 1990), and affiliating with multihospital systems
(MHSs) (ErmanandGabel 1984; MorriseyandAlexander 1987b; Shortell 1988;
Zuckerman 1979). Among these multi-institutional arrangements, MHS
affiliation represents the most prevalent strategy. Recent data indicate that
approximately 50 percent of community hospitals (2,524) were members of an
MHS in 1991 (Succi 1996). We review two common forms of multi-
institutional arrangements—MHS affiliation and local hospital alliances and
consortia. The research design andfindings of studies examining outcomes of
these two organizational changes are summarized in Table 1.
MHS AFFILIATION
MHS affiliation is a formal affiliation between a hospital and a corporate
entity that owns, leases, or sponsors two or more hospitals (American Hospi-
tal Association [AHA] 1983). Unification of hospitals under corporate man-
agement mayincrease the reputationandpolitical power of member hospitals
and protects them from environmental pressures (Dranove and Shanley
1995). The corporate headquarters determine general policies andbear shared
administrative responsibilities, thus allowing member hospitals to focus on
daily operations andperformance (Succi 1996). Efficiency andproductivity of
member hospitals may increase through economies of scale (e.g., joint pur-
chasing), shared services and personnel (e.g., high-tech diagnostic services,
data processing, reimbursement specialists), and improved access to capital
and management techniques (Ermann and Gabel 1984; Zuckerman 1979).
Despite the touted advantages associated with multihospital arrange-
ments, research evidence has been decidedly mixed (Ermann and Gabel 1984;
Shortell 1988). Other than improvedaccess to capital markets andgreater effi-
ciency in hospital staffing (Cleverley 1992; Levitz and Brooke 1985; Watt et al.
1986), many empirical studies have been unable to demonstrate substantial
advantages of systems over freestanding hospitals (Becker and Sloan 1985;
Berry, Tucker, andSeavey 1987). While some studies showedgreater leverage
andhigher profitability among systemhospitals, particularly those ownedby
for-profit (FP) systems (Coyne 1985a; Renn et al. 1985), others showed evi-
dence of higher costs in systemhospitals, whether measured on a per diemor
per case basis (Cleverley 1992; Coyne 1982; Watt et al. 1986).
An example of financial analysis was conducted by Levitz and Brooke
(1985). Using a total of 36 financial indicators, the study compared perfor-
mance of system and freestanding hospitals in liquidity, capital structure,
financial activity, depreciation, profitability, costs, andproductivity. Findings
232 MCR&R 56:3 (September 1999)
(text continues on p. 241)
TABLE 1 Empirical Studies Examining the Consequences of Multi-Institutional Arrangements in Hospitals
Author(s) Year Sample Design Results
Multihospital systems
Coyne 1982 100 system hospitals from 14 Cross-sectional design; compared In general, results showed
systems, compared with 49 the differences between system that system hospitals
independent hospitals, 1975 and independent hospitals in tended to have higher
cost and productivity, controlled costs than independent
for length of stay (a proxy for hospitals regardless of
case mix and complexity), ownership type; system
hospital size, teaching programs, hospitals also had greater
physician supply, local economy, productivity levels,
and market competition indicated by larger numbers
of admissions per bed.
Long and 1984 226 community hospitals Retrospective case-control design; Results showed that system
Chase closed during 1976-1980, closed hospitals were contrasted hospitals had no better
compared with three groups with other hospitals in terms of chance of surviving than
of hospitals that were hospital and environmental independent hospitals.
independent, system characteristics
affiliated, and merged
Becker and 1985 2,231 community hospitals Cross-sectional design; compared System hospitals did not
Sloan participating in the cost and profit differences between appear to be more efficient
American Hospital system and independent hospitals; than independent hospitals,
Association (AHA) controlled for size, teaching status, but among system hospitals,
Reimbursement Survey case mix, payer mix, wage, county tenure seemed to be
in 1979 per capita income, urban location, correlated with efficiency
and census region and profitability—hospitals
with longer tenure in the
system were more efficient
and profitable.
(continued)
2
3
3
TABLE 1 Continued
Author(s) Year Sample Design Results
Coyne 1985a 4,409 AHA member hospitals, Cross-sectional design; compared System and independent
1981 the differences in assets-to-equity, hospitals had different
return on equity, and operating capital structures and
margin between hospitals with profitability; system
different ownership and system hospitals had both greater
membership; no controls for leverage and higher
hospital and environmental profits, particularly in the
attributes investor-owned (IO) sector.
Coyne 1985b A sample of five IO and nine Compared differences between IO Hospitals in different
not-for-profit (NFP) system and NFP system hospitals using ownership types of
hospitals, 1978-1982 5 years of financial indicators for systems displayed distinct
liquidity, activity, composition, patterns of financial
capital structure, and profitability; performance over time,
no comparison with independent system hospitals in general
hospitals; no controls for hospital showed increasing
and environmental attributes financial strength during
the study period, NFP
system hospitals reduced
liquidity but increased
their productive use of
current assets, IO system
hospitals showed a
significant buildup of cash
reserves and a decreasing
use of credit, the profit
trend remained stable for
NFP system hospitals but
increased for IO system
hospitals, and the leverage
trend was similar.
2
3
4
Levitz and 1985 94 short-term acute-care Cross-sectional design; differences System hospitals had a
Brooke hospitals in Iowa, 1981 between system and independent greater degree of debt
hospitals were compared using leverage, higher costs per
t-tests case, and a higher markup
and revenues from patient
services; no differences
were observed in liquidity,
total profitability, asset
turnover, productivity.
Renn et al. 1985 A random sample of 561 Cross-sectional design; controlled Effects of system affiliation
community hospitals, 1980 for contract management, tenure on hospital performance
in system, case and payer mix, varied by the system’s
competition and regulation, wage ownership type; due to
index, geographic location, their pricing strategies
hospital size, occupancy, and (higher charges per
medical teaching patient), IO system
hospitals were more
profitable than independent
NFP hospitals, the
comparison group; since
FP hospitals behaved
similarly to IO system
hospitals and limited
differences were found
between independent NFP
hospitals and hospitals in
an NFP system, the system
effects might be largely
explained by ownership
difference.
(continued)
2
3
5
TABLE 1 Continued
Author(s) Year Sample Design Results
Watt et al. 1986 80 matched pairs of IO chain Matched nonequivalent control Total charges and net
and NFP hospitals in 8 states, group design; hospitals were revenues per case were
1978-1980 matched on location, size, higher in IO system
services, and average length hospitals, mainly due to
of stay; controlled for case mix higher charges for ancillary
services; there was no
difference in patient-care
costs, but the administra-
tive overhead costs for IO
system hospitals was
higher; IO system hospitals
were more profitable, had
funded more capital
through debts, and had
higher capital costs; higher
profits in IO system
hospitals were generated
by more aggressive pricing
practices rather than
greater efficiency.
Berry, 1987 Small rural hospitals; 194 Cross-sectional design; different System hospitals were more
Tucker, and system managed, 235 system, organizational arrangements likely to be accredited by
Seavey and 311 independent and were used to predict occupancy, the Joint Commission on
self-managed, before 1983 quality of care, service range, Accreditation of Hospitals
and resource efficiency; no ( JCAH); system hospitals
controls were used when did not perform better
comparing hospitals with than independent rural
different management structures hospitals; system hospitals,
in fact, had higher costs,
displaying higher expenses
per patient day.
2
3
6
Mullner et al. 1989 161 rural community hospitals Matched case-control study design Affiliating with systems
that were closed during significantly decreased
1980-1987, matched with a the risk of rural hospital
control group of 482 rural closure.
hospitals that remained open.
Manheim, 1989 Short-term acute-care hospitals Cross-sectional design; acquired Acquired hospitals had
Shortell, acquired by the Hospital hospitals were compared with higher expenses but lower
and McFall Corporation of America competing hospitals in the same full-time equivalent (FTE)
(HCA) during 1979-1982 market or hospitals matched on staffing levels than
bed size and location to control comparison hospitals due
for geographic factors; controlled to higher expenditure
for service mix, hospital output, growth and less FTE
competition, and area prices growth; further analyses
indicated that higher
expenses might be caused
by the acquisition process,
while the decrease in FTEs
was a system characteristic
independent of the
acquisition; profitability
increased over time since
acquisition.
Cleverley 1992 5,722 hospitals with complete Compared the median values of Compared with independent
Medicare Cost Report data selected financial indicators hospitals, system hospitals,
in 1986-1989 among IO system hospitals, NFP especially IO ones, had a
system hospitals, and all other higher return on equity,
independent hospitals; no higher costs per case
controls for hospital and mix–adjusted discharge,
environmental attributes higher profits through
more aggressive pricing
strategies, greater capital
(continued)
2
3
7
TABLE 1 Continued
Author(s) Year Sample Design Results
investment, and they
served fewer Medicaid
patients.
Halpern, 1992 A panel of 2,705 rural hospitals Longitudinal design; controlled for System affiliation with IO
Alexander, during 1983-1988 various hospital attributes systems significantly
and Fennell reduced survival of rural
hospitals; affiliation with
NFP system or contract
management by systems
did not affect hospital
survival; larger system
hospitals had higher
` survival chances.
Dranove 1995 Hospitals owned by local Cross-sectional design; System hospitals were no
and Shanley systems in California characteristics and performance better able to exploit scale
metropolitan area, 1989 of system hospitals were economies than were
compared to a randomly independent hospitals;
selected group of independent system hospitals were
hospitals in the same standard more homogeneous in
metropolitan statistical areas service mix and financial
(SMSAs); controlled for size, profile; the level of
charity, Medicaid, and ownership homogeneity was
positively related to price-
cost margins and profits.
Alexander, 1996 All rural community Pooled cross-sectional time-series Affiliation with a system
D’Aunno, hospitals during 1984-1991 design; adjusted for auto- did not affect closure but
and Succi correlation among repeated significantly increased the
observations; controlled for size, likelihood of conversion
2
3
8
ownership, performance, market to a nonhospital facility.
conditions, and time trend.
Succi, Lee, 1996 All rural community hospitals Pooled cross-sectional time-series Affiliation with a system
and during 1984-1991 design; adjusted for auto- had no impact on rural
Alexander correlation; controlled for size, hospital closure.
ownership, performance, market
conditions, and time trend
Succi 1996 All community hospitals Pooled cross-sectional time-series Hospitals benefited
during 1984-1991 design; examined the moderately from affiliating
contingencies associated with with a system, but the
system affiliation; adjusted for improvement in
autocorrelation; controlled for performance was greater
hospital size, age, ownership, when hospitals operated
market conditions, and time in an uncertain or
trend competitive market;
improvement was reduced
when the hospital joined
a system with incompatible
ownership.
Menke 1997 2,200 hospitals with complete Cross-sectional design; used a System and independent
organizational and financial two-stage estimation model to hospitals had different cost
data in 1990 minimize selection bias; functions, suggesting
controlled for labor costs, case hospital selection into
mix, hospital mortality rate, payer systems; the costs of
mix, service range, medical school system hospitals were
affiliation, ownership, physician lower than those of
supply, hospital competition, independent hospitals,
urban location, and geographic but there were no
region statistically significant
differences in costs by
ownership among system
(continued)
2
3
9
TABLE 1 Continued
Author(s) Year Sample Design Results
hospitals; economies of
scale and scope occurred at
all volumes for system
hospitals.
Strategic alliances and networks
Clement 1997 Close to 2,500 short-term, Cross-sectional design; controlled Membership in a strategic
et al. acute- care, nonfederal urban for environmental (% elderly alliance was positively
hospitals with complete population, Medicare wage index, associated with net patient
financial data for the fiscal unemployment) and hospital revenues but had no
year between 10/1/94 and (occupancy, staffed bed size, significant relationship
9/30/95 number of services, teaching with cash flow or
status, ownership) characteristics expenses; these results
might be attributable to
membership in multi-
hospital systems.
Chan, 1999 335 rural hospitals Longitudinal design; controlled Size of the consortium
Feldman, participating in 85 consortia for consortium (degree of showed a curvilinear
and during 1988-1992 formalization, resource disparity relationship with member
Manning among members) and hospital hospitals’ cost, revenue,
and market (number of affiliated and profitability; member
consortia, bed size, ownership, hospitals benefited from
multihospital system (MHS) the increase in consortium
affiliation, Medicare payment size, but the benefit
status, patient mix, local decreased as the
economy, census region, time) consortium became too
` conditions large.
2
4
0
showedthat systemhospitals hadbetter access to debt capital andmore effec-
tive pricing policies than did independent hospitals (similar findings were
obtained in Watt et al. 1986 and Cleverley 1992). But limited differences were
found among measures of liquidity, receivables management, asset activity,
productivity of human resources (including management), and efficient use
of plant and equipment assets. Although the study was comprehensive in its
comparison, its cross-sectional design and its limited sample (94 acute-care
hospitals in Iowa in 1981) constrained the generalizability of the findings. In
addition, the study employed simple t-test comparisons, thus failing to con-
trol for potential confounding effects of organizational and environmental
characteristics.
A more sophisticated financial analysis was conducted by Renn et al.
(1985). The study investigated the financial differences among hospitals with
five types of ownership and system affiliation arrangements—system-
affiliated investor-owned (IO), independent IO, system-affiliated not-for-
profit (NFP), independent NFP, and government ownership. Of particular
interest is the result that effects of system affiliation varied by the system’s
ownership type. Because of their higher pricing strategies, IO system hospi-
tals were more profitable than independent NFP hospitals, the comparison
group. However, the studyalso foundthat independent FPhospitals behaved
similarly to hospitals ownedby IOsystems andthat there were limiteddiffer-
ences between independent NFP hospitals and hospitals in an NFP system.
These results raise the question of whether performance discrepancies were
caused by ownership type (IO vs. NFP) or system membership.
4
Similarly,
Becker and Sloan (1985) and Berry, Tucker, and Seavey (1987) found that sys-
tem hospitals did not perform better than independent hospitals. In fact, sys-
temhospitals displayedhigher expenses per patient day, thus appearing to be
less efficient in resource utilization (Berry, Tucker, and Seavey 1987).
Higher expenses may be associated with hospitals in IO systems specifi-
cally. Manheim, Shortell, and McFall (1989) found that, relative to competing
hospitals in the same market, hospitals acquired by the Hospital Corporation
of America (HCA) between 1977 and 1983 had greater expenses but lower
full-time equivalent staffing. Lower staffing ratios seemed to be an attribute
among all subsidiary hospitals, independent of the acquisition process, and
the increase in expenditures was largely due to activities initiated by the IO
systemto “turn around” recently acquired hospitals. The latter finding in par-
ticular supported Becker and Sloan’s (1985) conclusions that system effects
might vary by a hospital’s tenure in the system and that assessments need to
focus on long-term implications for hospital performance.
Local systems, or systems comprising three or more community hospitals
in the same geographic market, may be more able to realize scale economies
Lee, Alexander / Consequences of Organizational Change 241
because proximity makes it easier to pool clinical and managerial resources
andto improve efficiency through administrative coordination (Luke, Ozcan,
and Olden 1995). This proposition was tested by Dranove and Shanley (1995)
in a study of system hospitals in six California metropolitan areas. Results,
however, indicated no significant advantages of system hospitals to exploit
scale economies relative to independent hospitals. Contrary to many prior
studies, the study found that system hospitals had higher price-cost margins
and profits and that such financial advantages were associated with systems’
superior marketingstrategies inpromotingthe consistencyof their products.
The inconsistent effects in the literature of MHS affiliation may be partly
explainedbyfailure toconsider organizational, economic, andenvironmental
contingencies present at the time of affiliation (Smith and Piland 1990). In
other words, advantages or disadvantages of MHS affiliation are not univer-
sal but are sensitive to, for instance, characteristics of the affiliated system
(e.g., FP vs. NFP ownership of the system),
5
conditions in the member hospi-
tal’s local market that are conducive to the collective action of systems (e.g.,
uncertainty, scarce resources), and the level of compatibility between the
member hospital and the system (Succi 1996). A second problem is that
researchrarely has takeninto account the possibility of systematic selectionof
hospitals into systems (Alexander and Morrisey 1988). Menke (1997), for
example, showed that the cost functions for system and independent hospi-
tals were different and that pooling them could significantly bias the estima-
tion of costs in system hospitals. Controlling for the selection effects with a
two-stage estimation model, she found that, contrary to most previous stud-
ies, system hospitals were more efficient and had lower costs than independ-
ent hospitals.
Another problem of most existing studies is their focus on the short-term
impact of MHS affiliation on hospitals. For example, fewstudies examine sur-
vival or other long-range outcomes when comparing system hospitals with
independent hospitals. Moreover, findings of these studies are conflicting
because of different researchdesigns anda general failure to take into account
the possibility that effects of systemaffiliation may vary across historical peri-
ods (Menke 1997). For example, Mullner et al. (1989) showed a negative rela-
tionship between system membership and closure risk among rural commu-
nity hospitals during the period of 1980-1987. On the other hand, Long and
Chase (1984) found no such relationship in a group of hospitals that closed
from1976 to 1980, andneither didAlexander andassociates in their studies of
all rural hospitals in the post-PPS period (Alexander, D’Aunno, and Succi
1996; Succi, Lee, and Alexander 1997).
One interesting study on the consequences of system affiliation was con-
ducted by Halpern, Alexander, and Fennell (1992). Two features differentiate
242 MCR&R 56:3 (September 1999)
the study from others. First, the study investigated the long-term survival
effect of system affiliation in a panel of hospitals during a 5-year period
(1983-1987). Second, relationships between system affiliation and hospital
survival were explored in various organizational contexts and during differ-
ent time periods. Results indicated that (1) affiliation with IO systems signifi-
cantly increased the risk of hospital closure, whereas affiliation with NFP sys-
tems had no effect on closure; (2) among hospitals affiliating with IOsystems,
larger hospitals and hospitals with private NFP ownership were at a greater
disadvantage than smaller hospitals and hospitals with government or IO
ownership; and (3) although differences were not statistically significant,
affiliationoccurringbefore PPSseemedtoimprove hospital survival, whereas
affiliation subsequent to PPS displayed no difference in hospital survival.
As this study demonstrates, systemaffiliationcanhave significant implica-
tions for hospital outcomes, but the influence shouldbe consideredin specific
organizational and environmental contexts. There may also be long-termand
time-varying effects of system affiliation. This remains an area in need of fur-
ther investigation.
LOCAL HOSPITAL ALLIANCES AND CONSORTIA
The potential for achieving operating, purchasing, and market economies
has motivated hospitals to join systems. But operating under formally struc-
tured interorganizational arrangements also decreases hospitals’ autonomy
andflexibility (Luke, Begun, andPointer 1989). The desire for autonomy, cou-
pledwith financial losses of systems andthe concern of communities that sys-
tem affiliation may reduce hospital sensitivity to local needs, has diminished
the frequency of system affiliation since the late 1980s. As an alternative,
loosely coupled interorganizational forms have arisen. Prominent among
themare local hospital alliances andconsortia. These two arrangements allow
hospitals to obtain the benefits of collective action while maintaining greater
control over policy, strategy, and operational decision making (Christianson
et al. 1990; Clement et al. 1997).
Due perhaps to the recent emergence of local hospital alliances andconsor-
tia, the impact of these two organizational changes has yet to be widely inves-
tigated. In fact, we were able to identify only two empirical studies. The first,
Clement et al. (1997), examined the association of alliance membership with
hospital financial performance. Results indicated that (1) alliance member-
ship was positively related to net patient revenues but unrelated to cash flow
or expenses; (2) with one exception where higher net revenues were observed
inalliances withtwoequal owners, the structure of alliances was uncorrelated
with hospital financial performance; and (3) tenure in alliances showed no
Lee, Alexander / Consequences of Organizational Change 243
association with hospital performance. Interestingly, the study also found
similar results amonghospitals that were members of local MHSs. Because the
study did not distinguish alliances from systems and did not control sepa-
rately for systemeffects, it is unclear whether the findings were attributable to
membership in local systems or alliances.
The second study examined factors associated with effective rural hospital
consortia in terms of their ability to improve members’ financial performance
(Chan, Feldman, and Manning forthcoming). Comparisons were made
among members of hospital consortia and demonstrated a curvilinear rela-
tionshipbetween size of the consortiumandmember hospitals’ cost, revenue,
andprofitability. Member hospitals benefitedfromthe increase inconsortium
size, but the benefit decreasedas the consortiumbecame larger. Since no com-
parisons were conducted with hospitals outside consortia, it is unclear if con-
sortium hospitals enjoy any advantage or disadvantage over nonconsortium
hospitals. However, an important implication of the study is that characteris-
tics of consortia, suchas size, mayconstitute important contexts that shape the
performance of member hospitals.
OWNERSHIP AND MANAGEMENT
RECONFIGURATION
Recent changes in hospital ownership and management patterns have
transformed the traditional operation of freestanding, nonprofit community
hospitals (Fennell and Alexander 1993). Four facets of ownership and man-
agement reconfiguration were identifiedfromthe literature: (1) consolidation
of hospital facilities through mergers; (2) emergence of hospital corporate
restructuring; (3) expansion of private, contractual management among non-
profit hospitals; and, because of these changes as well as increased environ-
mental pressures, (4) increase in the frequency of top management succes-
sion among hospitals. Table 2 summarizes studies examiningthese four types
of organizational change in hospitals.
MERGERS
Increasing market share, exploiting scale economies, and eliminating com-
petitors toimprove patient volume andprofitabilityare primaryreasons cited
for hospital mergers (Bogue et al. 1995; Dranove 1998; Greene 1990; Lynk
1995). Mergers may reduce costs andimprove patient volumes by eliminating
excess beds, removing duplicate health services, and consolidating adminis-
trative and support services. An early case study by Briggs, Frommelt, and
244 MCR&R 56:3 (September 1999)
(text continues on p. 251)
TABLE 2 Empirical Studies Examining the Consequences of Ownership and Management Reconfiguration in
Hospitals
Author(s) Year Sample Design Results
Mergers
Briggs, 1981 Two hospital merger cases Case study Improvement was seen in
Frommelt, occurred in 1966 and 1971 several areas after the
and Roth merger: broadened medical
care programs, upgraded
management and physical
facilities, increased
revenues, stronger capital
structures, better debt-
equity conditions and
enhanced public
perception; however,
operating costs were higher
due to service expansion
and staff and facility
upgrading.
Mullner 1987 152 hospitals experiencing Pre-post nonexperimental design; Hospitals involved in merger
and merger or consolidation financial conditions were or consolidation were
Andersen during 1980-1985 compared before and after better than the industry
merger or consolidation; no averages; the general
control group was used financial effects of merger
or consolidation were
small.
Greene 1990 36 acute-care hospitals Pre-post nonexperimental design; Most hospitals improved
merging into 18 facilities financial and operational their profitability by
from 1985 to 1987 performance was compared reducing expenses,
before and after merger; no increasing gross and net
comparison group; no control patient revenues, and
for hospital and environmental boosting ancillary services
(continued)
2
4
5
TABLE 2 Continued
Author(s) Year Sample Design Results
conditions markup rates.
Bogue et al. 1995 60 hospital mergers during Use of secondary data and survey Of acquired hospitals, 40.7%
1983-1988 to compare the level of similarity converted to nonacute
between merger entities and inpatient care (e.g.,
examine the market condition psychiatric and substance
prior to merger; followed how abuse services,
acquired hospitals were used after rehabilitation, and long-
merger term care); acquired
hospitals were closed in
17% of the merger events.
Lynk 1995 2 sets: (1) 2 merging hospitals Simulated potential reduction in Merger generally reduced
with 4 campuses in 1991- excess capacity and overstaffing the variability of random
1992; (2) all acute-care after merger based on data patient demand and the
hospitals in 1990 collected from the four merging cost of staffing for peak
hospital facilities; tested if excess patient loads; consolidation
capacity varied by hospital size efficiency varied by
hospital scale, with more
benefit accrued to mergers
of smaller-sized hospitals.
Alexander, 1996 92 hospital mergers during Multiple time-series design; Mergers resulted in
Halpern, 1982-1989 operating characteristics of improved operating
and Lee merging hospitals were efficiency—measured by
compared with a randomly occupancy and expenses
selected group of nonmerging per adjusted admission—
hospitals relative to nonmerging
hospitals; improvement
was particularly salient in
later periods characterized
by increased pressures
from prospective payment
system (PPS) and hospital
2
4
6
competition.
Connor et al. 1997 3,500 short-term general 122 mergers between 1986 and Mergers resulted in average
hospitals, including 122 1994 constituted the study group, price reductions at about
mergers, between 1986 and compared with nonmerger 7%; price reductions were
1994 hospitals during the same period; less in markets with higher
changes in hospital costs and market concentration but
prices from 1986 to 1994 were greater in areas with higher
compared by type of market, HMO penetration; price
hospital, and merger reductions were higher for
low-occupancy hospitals,
nonteaching hospitals,
nonsystem hospitals,
similar-sized hospitals, and
hospitals with greater pre-
merger service duplication.
Guo and 1998 5,518 hospitals between 1989 Used t tests to examine if mergers In low HMO penetration
Bazzoli and 1993 resulted in hospitals charging markets, no significant
higher prices and if merged difference in the change of
hospitals generated greater prices was found between
cost savings than nonmerged merged and nonmerged
hospitals; no controls for hospital hospitals; when HMO
and market differences penetration was high,
merged hospitals had a
smaller price increase than
nonmerged hospitals,
resulting in substantial
cost savings to consumers.
Corporate Restructuring
Alexander, 1988 3,189 community hospitals Posttest-only design with non- Hospital boards under
Morlock, responding to the American equivalent comparison groups; corporate restructuring
and Gifford Hospital Association (AHA) controlled for size, regional conformed more to the
Governing Board Survey, location, multihospital system “corporate” model found
(continued)
2
4
7
TABLE 2 Continued
Author(s) Year Sample Design Results
1985 (MHS) membership, teaching in the business/industrial
status, rural location, and sector and less to the
ownership traditional “philanthropic”
model among health
organizations.
Clement, 1993b 57 not-for-profit (NFP) Cross-sectional design; examined Restructuring had no
D’Aunno, Virginian hospital firms whether the total margin of the relationship with
and Poyzer in 1989 corporate restructuring was performance of the
associated with restructuring and hospital firm; neither were
the size and number of the number and size of
subsidiaries; controlled for market nonhospital subsidiaries
competition, hospital staffing, related to the hospital
payer mix, and proportion of the firm’s financial
hospital’s inpatient volume performance.
Lee and 1999 The population of Panel design; changes in hospitals Corporate restructuring had
Alexander community hospitals were followed from 1981 to 1994; no impact on hospital
operating in 1981 hospital survival was considered survival.
as a function of seven
organizational changes
(ownership change, specialty
change, MHS affiliation, corporate
restructuring, addition of a long-
term care unit, downsizing, and CEO
succession) and the characteristics
of hospitals and environments
Contract Management
Biggs, 1980 32 NFP hospitals under Cross-sectional design; matching No significant differences
Kralewski, contract management with was used to control for the were found between
and Brown 32 matched self-managed confounding effects of bed contract-managed and
hospitals capacity, geographic location, self-managed hospitals in
2
4
8
control type, teaching status, governance structure,
population base, and per capita quality, costs of care, and
income occupancy rates; contract-
managed hospitals had a
broader range of services
and younger and more
educated administrators.
Wheeler, 1982 10 hospitals contract managed Pre-post nonexperimental design; Contract management
Zuckerman, by a MHS no comparison group was significantly enhanced the
and employed; change in performance profitability of the study
Aderholdt was examined on the basis of 11 hospitals; management
financial indicators related to contracts reversed the
profitability, liquidity, and capital trend of operating losses
structure and reestablished the
hospitals’ financial
viability; liquidity and
capital structure showed
improvement but the
change was not significant.
Kralewski 1984 20 matched pairs of NFP Pre-post quasi-experimental design Contract management
et al. community hospitals; each with a matched group of self- increased the markup
pair consisted of a hospital managed hospitals; performance ratio, net profit, and
under management contract was compared before and after return-on-assets ratio in
and a self-managed hospital contract management and contract-managed
between contract and self- hospitals relative to their
managed hospitals matches; contract
management did not
improve the hospital’s
productive efficiency.
Rundall 1984 10 public hospitals contract Pre-post quasi-experimental Privately managed public
and managed by an investor- design; each matched pair of hospitals were more
Lambert owned (IO) firm during hospitals was followed during a cost-efficient than self-
1972-1980, matched with 10 3-year period to see the change managed ones; they had
self-managed public following private management lower rates of increase in
(continued)
2
4
9
hospitals total expenses, payroll
expenses, and expenses
per patient day.
Alexander 1985 Samples of acute-care public Cross-sectional design; hospitals Mixed results were found in
and Rundall hospitals under contract management in operating efficiency;
1981 were compared to self- contract-managed hospitals
managed hospitals and those had lower payroll
entering contract management in expenses and higher
1981-1982; controlled for hospital operating revenue but
and environmental conditions showed greater expenses
per patient day.
CEO Succession
Alexander 1996 All rural community hospitals Pooled cross-section time-series CEO succession significantly
and Lee from 1984 to 1991 design; controlled for hospital increased the risk of clo-
sure
performance and organizational among rural hospitals; this
and market characteristics; significant effect existed
adjusted for autocorrelation despite the variation in
CEO tenure.
Lee and 1999 The population of community Panel design; changes in hospitals CEO successions were
Alexander hospitals operating in 1981 were followed from 1981 to 1994; associated with a higher
hospital survival was considered risk of hospital closure.
as a function of seven
organizational changes (ownership
change, specialty change, MHS
affiliation, corporate restructuring,
addition of a long-term care unit,
downsizing, and CEO succession)
TABLE 2 Continued
Author(s) Year Sample Design Results
2
5
0
Roth(1981) showedimprovedmedical care programs andupgradedmanage-
ment and physical facilities after merger. Lynk (1995) further demonstrated
that mergers might create economic efficiencies at the departmental level, by
improving hospitals’ ability to manage uncertain demand for clinical services
with less excess staff, thereby reducing costs even if the merger involves only
partial consolidation. More recently, using a national merger sample during
1982-1989, Alexander, Halpern, and Lee (1996) observed improved operating
efficiency in terms of higher occupancy and lower expenses per adjusted
admission in the postmerger period.
Improved economic efficiencies from merger, however, are not universal
and may be sensitive to characteristics of the merging hospitals and market
conditions. Connor et al. (1997), for example, foundthat price reductions after
merger were higher for low-occupancy, nonteaching, nonsystem, similar-size
hospitals and hospitals with greater premerger service duplication. Further-
more, Lynk (1995) showedthat more benefits were associatedwithmergers of
smaller hospitals, and although scale economies exist, they are substantial
only for small hospitals (Dranove 1998). Consistent patterns also exist with
respect to the contingent effects of market conditions. Several studies have
shown that improved efficiency and potential cost savings to consumers are
particularly salient in markets with tight price controls and strong competi-
tion (Alexander, Halpern, and Lee 1996; Connor et al. 1997; Guo and Bazzoli
1998).
Although greater economic efficiencies are likely after mergers, particu-
larly among small hospitals and among hospitals operating in highly com-
petitive markets, they do not necessarily translate into higher hospital profits
(Greene 1990; Mullner and Andersen 1987). Instead, some hospitals may
experience financial downturns as a result of merger (Greene 1990). Moreo-
ver, because of the incompatibility of organizational cultures and elimination
of jobs and services, mergers are likely to decrease employee morale and pro-
ductivity and strain physician and community relations (Greene 1990). In
many cases, the dominant partner in a merger either dramatically transforms
or shuts down the acquired hospital (Bogue et al. 1995).
CORPORATE RESTRUCTURING
Corporate restructuring involves the segmentation of assets or functions of
the hospital into separate corporations (Alexander, Morlock, and Gifford
1988). Corporate restructuring arises as hospitals respond to increased con-
straints of cost shifting, lower occupancy rates, decline in philanthropic giv-
ing, increased competition, shrinking capital markets, and a general shift to a
more “business-like” orientation in the health care sector (Gerber 1983; Hoch
Lee, Alexander / Consequences of Organizational Change 251
1984; Starr 1982). Potential benefits of corporate restructuring include
increasedmanagement efficiency, removal of activities that wouldjeopardize
the tax-exempt status of the hospital, creation of a shieldfromstate regulation
for activities not directly related to inpatient services, avoidance of state
certificate-of-need regulations, more favorable treatment by third-party pay-
ers, reduced legal liability, and increased flexibility for diversification in the
face of an increasingly competitive health care market (Gerber 1983; Hoch
1984).
Despite the frequency of corporate restructuring—an estimated 1,000 hos-
pitals underwent corporate restructuring between 1979 and 1985—empirical
research on the consequences of this change is unusually rare (Alexander and
Orlikoff 1987; Fennell andAlexander 1993). We couldidentifyonlythree stud-
ies onthis topic, anddespite secondary, structural reorganizations inthe after-
math of corporate restructuring, evidence does not suggest any advantages of
the strategy. Alexander, Morlock, and Gifford (1988) found that restructured
hospitals tended to develop corporate-style boards with a business orienta-
tion. Both Clement, D’Aunno, and Poyzer (1993b) and Lee and Alexander
(1999) found no significant relationship between corporate restructuring and
the financial performance or survival of hospitals. Beyondthese initial exami-
nations, whether and how corporate restructuring itself or the structural
changes engendered by restructuring (e.g., diversification) affect the short-
term or long-term performance of hospitals remain unclear.
CONTRACT MANAGEMENT
Contract management describes a situation whereby an external organiza-
tion is contracted to assume responsibility for day-to-day management of the
hospital (Fottler et al. 1982; Richards 1982; Wheeler, Zuckerman, and Ader-
holdt 1982). While complete ownership resulting from mergers or system
acquisition may require significant organizational commitments and internal
changes to realize the advantages of cooperative action, contract-managed
hospitals enjoy many of the operational benefits of participation in an inte-
grated system without sacrificing organizational autonomy and independ-
ence (Alexander andRundall 1985; Fottler et al. 1982). The benefits include, for
example, improved access to management expertise, specialized administra-
tive services, joint purchasing, and capital markets (Biggs, Kralewski, and
Brown 1980; Brown and Morey 1976; Richards 1982; Wheeler, Zuckerman,
and Aderholdt 1982).
An average of 14 percent of community hospitals were contract managed
for some time between 1980 and 1988 (Lee and Alexander 1998). The popular-
ity of contract management has also attracted considerable research effort,
252 MCR&R 56:3 (September 1999)
and the literature contains many empirical studies assessing the performance
of contract-managed hospitals. In general, contract management has been
shown to significantly affect the operation of hospitals, although a clear pat-
tern of results is yet to emerge.
An early study by Biggs, Kralewski, and Brown (1980) found that com-
pared with self-managed hospitals, hospitals under management contracts
offered a broader range of services; had younger, more highly educated
administrators; and showed lower costs per patient day due to lower
employee-to-bed and payroll-to-total expense ratios and shorter lengths of
stay. The study, however, lacked precontract data and therefore failed to
examine changes resulting from the introduction of contract management.
The problem of precontract comparison was considered specifically by
Wheeler, Zuckerman, and Aderholdt (1982). In this study, performance
improvement was determined by the change between two periods: 3 years
before and 3 years after the management contract. Results showed that con-
tract management significantly improved hospital profitability but increased
profitability was associated with higher pricing strategies rather than
improved operational efficiency. Similar findings were obtained by
Kralewski et al. (1984), who found higher markup ratios, net profits, and
return-on-assets ratios in contract-managed hospitals relative to their self-
managed matches. No improvement was observed in production efficiency.
Efficiency, however, may be more likely to improve in public hospitals
under private management. Rundall and Lambert (1984), for example,
showed that public hospitals contract managed by private firms were more
cost-efficient than their self-managed counterparts. They displayed lower
rates of increase in total expenses, payroll expenses, and expenses per patient
day during a 3-year period. These findings, again, illustrate that the advan-
tage of a strategy may be specific to the organizational context of the focal
hospital.
It is worth noting that no evidence has linked contract management to
long-term outcomes of hospitals. Moreover, existing studies were conducted
primarily in the 1970s or the early 1980s. It is unclear if the positive effects of
contract management, if any, still holdinrecent years whengovernment regu-
lations have become more stringent and hospitals are experiencing greater
competitive pressures. Morrisey and Alexander (1987a) pointed out that,
from the management firm’s perspective, management contracts might be
undesirable because the firm cannot exercise enough control over operations
of the managed hospital. These constraints may be intensified in an increas-
ingly uncertain andcompetitive environment andmay limit the management
firm’s ability to extricate distressed hospitals from financial or operational
predicaments.
Lee, Alexander / Consequences of Organizational Change 253
TOP MANAGEMENT SUCCESSION
The succession of top management has become common in hospitals dur-
ing the last two decades. The average tenure of CEOs among community hos-
pitals was only 5.6 years during 1980-1988; the turnover rate increased dra-
matically in 1983 and reached its peak of 22.6 percent in 1987 (Lee and
Alexander 1998). This pattern seems consistent with management literature
that considers CEOsuccession a “turnaround” strategy, especially for organi-
zations experiencing strategic stagnation or severe financial distress (Wier-
sema and Bantel 1993). It is assumed that newCEOs have less commitment to
existing strategies. They can introduce newperspectives and frames of action
and, therefore, can initiate strategies to improve the adaptability and survival
of the organization (Finkelstein and Hambrick 1990; Miller 1991, 1993; Tush-
man and Romanelli 1985).
By contrast, some literature on the hospital industry has expressedconcern
about the potential negative consequences associated with CEO succession
such as the disruption of standard routines and command (Jacobs and Fraser
1987; Sabatino 1987). These discussions, however, tend to be primarily pre-
scriptive. Few studies have examined empirically the organizational conse-
quences of CEOsuccessioninhospitals. One studycorrelatedCEOsuccession
with closure of rural hospitals over the period from 1984 to 1991 (Alexander
and Lee 1996). Controlling for hospital performance, CEO tenure, and
other organizational and market characteristics, change in the top manage-
ment position significantly increased the risk of hospital closure. Lee and
Alexander (1999) extendedthe analysis to the population of U.S. community
hospitals during 1981-1994 and showed a similar, negative relationship
between CEO succession and hospital survival. Further research is needed
to investigate if such effects hold under different environmental (e.g., stable
vs. uncertain environments) and organizational (e.g., large vs. small hospi-
tals) conditions.
SERVICE DIVERSIFICATION AND
OPERATIONAL REDUCTION
The growth and expansion of acute-care hospitals after World War II to the
1970s set the stage for severe overbedding in the hospital industry (Mick
1990b; Stevens 1989). Oversupply of acute, inpatient beds—intensified by
regulatory reforms under prospective payment, the emergence of alternative
health care organizations, reduced resources for hospital inpatient care, and
increasedprice-basedcompetition—has forcedhospitals tomodifytheir func-
tions and scale of operations (Robinson 1994). Two changes are often
254 MCR&R 56:3 (September 1999)
employed by hospitals in response to these pressures: service diversification
and reduction of operational capacity. Table 3 contains summaries of empiri-
cal research investigating the outcomes associated with these two types of
organizational change in hospitals.
SERVICE DIVERSIFICATION
Diversification, or hospital entry into nonacute-care lines of business,
allows a hospital to mitigate the impact of operating in a declining acute-care
market and to avoid overdependence on a single line of services or products
(Clement 1988). Additional benefits may include economies of scale; decrease
in debt financing costs; creation of multiple revenue sources; diffusion of risk
in uncertain environments; and expansion of opportunities in growing, prof-
itable markets (Alexander 1990; Clement 1988; Rumelt 1982). If successfully
diversified, a hospital is expected to have lower costs, higher profits, and
lower total risks.
However, empirical evidence regarding the consequences of service diver-
sification has thus far been mixed. An early study by Eastaugh (1984) showed
a statistically significant relationship between diversification and higher
operating ratios in 62 New York hospitals during 1974-1979. On the other
hand, using data from California nonprofit hospitals before PPS, Clement
(1987) found that diversified hospitals had no better return-on-asset ratios
and, contrary to expectation, experienced greater financial risk than their
counterparts. Similar negative or nonsignificant findings were obtained in
Mullner (1990) andEastaugh(1992). Mullner (1990) foundthat the presence of
a nursinghome or other long-termcare units significantlyincreasedthe riskof
closure among rural community hospitals. Eastaugh (1992), in contrast to his
earlier findings, foundthat hospitals specializing in fewer product lines expe-
rienced fewer profit declines and that excess diversification led to a rapid
decline in profitability.
A more detailed analysis examining the relationship between types of
diversified services and financial performance was conducted by Clement,
D’Aunno, and Poyzer (1993a). Results indicated that provision of services
related to acute care significantly improved profitability, while unrelated
diversification tended to result in poor financial performance. The findings,
however, were limited to the subsidiaries of hospitals. It remains unclear if
similar improvement applies to the entire hospital. Furthermore, financial
benefits—or risks—fromdiversification usually take time to realize (Clement
1988). Such long-term effects will require longitudinal data to evaluate. Lee
and Alexander (1999) provided an example of such longitudinal research.
Using data on community hospitals from 1981 to 1994, they investigated
Lee, Alexander / Consequences of Organizational Change 255
and the characteristics of hospitals
and environments
TABLE 3 Empirical Studies Examining the Consequences of Diversification and Operational Reduction in
Hospitals
Author(s) Year Sample Design Results
Diversification
Eastaugh 1984 62 New York hospitals during Pooled time-series design; Diversification yielded
1974-1979 examined the simultaneous better financial position,
relationship between financial measured by operating
performance and diversification; ratio; better operating ratio
controlled for reduction in the provided hospitals the
market supply of hospital beds, wherewithal to diversify.
percentage of Medicare enrollees,
percentage of non-white
population, and time trend
Clement 1987 California short-term general Pooled cross-sectional time-series Diversification (related or
NFP hospitals, 1978-1983 design; controlled for competition, unrelated) did not affect
payer mix, community the hospital’s return on
characteristics, physician staffing, assets; contrary to
and hospital size; failed to account expectation, diversification
for autocorrelation among repeated increased the financial risk
observations of hospitals; there was no
difference in the effects of
related versus unrelated
diversification on hospital
financial outcomes.
Mullner 1990 Rural community hospitals Matched case-control design Among all service and
closed during 1980-1987, facility variables examined,
matched with a group of the presence of a skill
hospitals that remained open nursing or other long-term
care unit significantly
2
5
6
increased the risk of
hospital closure.
Eastaugh 1992 232 short-term, acute-care, Survey design; CEOs of the Hospitals specializing in
nongovernment hospitals hospitals were surveyed about fewer product lines
with more than 75 beds in their hospitals’ strategies, financial experienced less decline
1998 performance, and the change in profitability; excess
thereof between 1986 and 1990 diversification led to the
most rapid declines in
profitability.
Clement, 1993a 162 subsidiaries of hospitals Cross-sectional design; examined Subsidiaries producing
D’Aunno, operating in Virginia, 1987 type of diversification and health or related products
and Poyzer financial performance among tended to be more
subsidiaries of acute-care hospitals; profitable than other
no controls were used; the study subsidiaries; subsidiaries
differentiated various types of that existed longer or
diversification and conditions that were NFP units of NFP
potentially affect performance of hospitals were also more
subsidiary units profitable.
Lee and 1999 The population of community Panel design; changes in hospitals Addition of a long-term care
Alexander hospitals operating in 1981 were followed from 1981 to 1994; unit had no impact on
hospital survival was considered as
hospital survival.
a function of seven organizational
changes (ownership change,
specialty change, MHS affiliation,
corporate restructuring, addition of
a long-term care unit, downsizing,
(continued)
2
5
7
and CEO succession) and the
characteristics of hospitals and
environments
Operational Reduction
Mick and 1996 A national sample of 797 Posttest-only design with Contrary to expectations,
Wise rural community hospitals nonequivalent comparison groups; downsizing did not have
surveyed in 1989 controlled for market and hospital any significant impact on
characteristics hospital financial
performance.
Woodard, 1999 A 596-bed academic medical Case study, examining the Financial performance of
Fottler, and center in the southeastern restructuring, job redesign, and the medical center was
Kilpatrick United States downsizing processes of the improved due to
medical center between 1993 restructuring; jobs were
and 1997 consolidated and work
flows redesigned; good
communication was the
key to the success; despite
this, some employees
experienced low morale
and distrust.
Lee and 1999 The population of community Panel design; changes in hospitals Downsizing showed a
Alexander hospitals operating in 1981 were followed from 1981 to 1994; positive relationship with
hospital survival was considered risks of hospital closure.
as a function of seven
organizational changes (ownership
change, specialty change, MHS
affiliation, corporate restructuring,
addition of a long-term care unit,
downsizing, and CEO succession)
and the characteristics of hospitals
TABLE 3 Continued
Author(s) Year Sample Design Results
2
5
8
whether adding a long-termcare unit to a hospital’s existing acute-care facili-
ties improved hospital survival. No significant effect was found. However,
given the variety of diversification undertaken by hospitals, it remains
unclear what kind of service change is most beneficial for hospitals. Further-
more, it may be that advantages are associated not with a specific diversifi-
cation activity but the extent of resulting differentiation between the focal
hospital and its competitors in the local market (Succi, Lee, and Alexander
1997).
OPERATIONAL REDUCTION
Facingerodingpatient volumes andfinancial margins, hospitals are down-
sizing and/or eliminating unprofitable services at an unprecedented rate
(Cerne and Montague 1994; Doherty, O’Donovan, and O’Donovan 1986).
More excess beds are expected to be cut in the near future. On the basis of a
hospital occupancy rate of 67 percent and assuming HMO use rates, the
Washington-based AmHS Institute estimated that the nation had 447,545
excess hospital beds, the equivalent of 2,983 hospitals averaging 150 beds
(cited in Cerne and Montague 1994). For individual hospitals, reduction of
existing, redundant capacityis expectedtoreduce costs, toincrease efficiency,
and to enhance the hospital’s competitive position (Cascio 1993; Doherty,
O’Donovan, and O’Donovan 1986; Freeman and Cameron 1993). Reduction
may also release resources for expanding into more profitable markets (Alex-
ander 1990).
Despite its frequency, operational reductionis surprisingly underresearched.
Theoretical andprescriptive discussions abound, but little empirical evidence
exists that allows hospital decisionmakers to gauge the impact of suchchange
on their organizations. Arecent case study of a medical center indicated posi-
tive financial outcomes associated with downsizing (Woodard, Fottler, and
Kilpatrick 1999). Yet, in a survey of a national sample of rural hospitals, Mick
and Wise (1996) found no relationship between downsizing and hospital
financial well-being, whether measured at one time or as change over time.
Thus, the true benefits of operational reduction remain unclear.
Worse yet, risks may arise if the elimination of beds and services threatens
the scale economies or efficiencies necessary for hospital survival, or if it
undermines the configuration or mix of existing facilities, eroding the hospi-
tal’s mission and service quality (Collins and Noble 1992). Lee and Alexander
(1999), for example, found a positive relationship between downsizing—meas-
uredby the reduction of more than 15 percent of full-time equivalent employ-
ees or hospital beds in a 1-year period—andrisk of hospital closure. This find-
ing and the above considerations caution against a sweeping application of
Lee, Alexander / Consequences of Organizational Change 259
operational reduction, at least in some hospitals, and require careful identifi-
cation of the organizational or environmental conditions for successful
reduction.
SUMMARY OF EMPIRICAL FINDINGS
AND SUGGESTION FOR RESEARCH
While most literature assumes that organizational change results in posi-
tive outcomes, empirical findings reviewed here are by no means consistent
withthis expectation. Only limitedevidence suggests that hospitals that mod-
ify their structures outperform those that do not with respect to a variety of
financial andoperational indicators. Scott (1990) made similar observations in
his review of technical innovations in medical care organizations. He con-
cluded that “such an association [between innovation and positive perfor-
mance] seems unwarranted in medical care organizations, where new tech-
nologies and treatments may be underevaluated, oversold, or too quickly
promulgated, or where benefits are likely to be overestimated and costs
underestimated” (p. 187). One can apply similar explanations to the lack of
clear relationships between organizational change and hospital performance
and warn against the danger of “overchange.” But it may be equally danger-
ous to simply disregard any value of organizational change and encourage
hospitals to maintain the status quo in an increasingly uncertain health care
environment. The solution, instead, maylie somewhere betweenthe extremes
and will require examining factors that contribute to the success or failure of
organizational change in hospitals—Does organizational change benefit one
type of hospitals more than others? Does the type of organizational change
matter? What environmental conditions increase the likelihoodthat organiza-
tional change among hospitals will result in positive outcomes? Answers to
these questions require research with improved study designs, which may be
informed from the problems and weaknesses of existing research.
Tables 1-3 summarize the designs of the studies reviewed in this article.
Several problems canbe identifiedfromthose studies that mayaccount for the
mixed findings regarding the relationship of organizational change and hos-
pital outcomes: (1) use of cross-sectional designs, (2) neglect of self-selection,
(3) inconsistent conceptualization of organizational change or strategy, (4)
limited samples of hospitals, (5) failure to consider contingencies of organiza-
tional change, (6) use of short-term performance indicators, and (7) lack of
comparative analysis of organizational change. As we will note, manyof these
problems are interrelated.
260 MCR&R 56:3 (September 1999)
CROSS-SECTIONAL VERSUS
LONGITUDINAL DESIGNS
Many of the studies reviewed employed a cross-sectional design, in which
all measurements were specified at one point in time. This design severely
constrains the ability to establish causality between organizational change
and hospital performance and, worse yet, might produce biased results. The
Biggs, Kralewski, and Brown (1980) study illustrates these shortcomings. The
study found no significant difference between contract-managed and self-
managed hospitals in quality, cost of care, and occupancy. However, these
findings are problematic because cross-sectional data do not permit assess-
ment of performance trends inhospitals. It is possible, for example, that hospi-
tals’ entry into management contracts was precipitated by low performance
levels. Thus, contract management might have improved the performance of
hospitals to the level of their self-managed counterparts, resulting in no per-
formance differences between the two groups.
The limitations of cross-sectional design are further exemplified by the
issue of opportunity cost in strategic management (Shortell and Zajac 1990).
MHS affiliation, for example, may be risky owing to incompatible organiza-
tional cultures, resistance from the community, reorganization pressures
from the system headquarters, and the negative feelings among employees
of the affiliating hospital (Lee and Alexander 1998). The question, however,
must be considered relative to other available options: going it alone, doing
nothing, or joining a corporate multihospital entity. MHS affiliation may
appear risky when the comparison involves cross-sectional measurement of
performance betweensystemandfreestandinghospitals. But, whenlongitu-
dinal data are used to allow assessment of performance change before and
after system affiliation, joining a system may stand out as a relatively low-
risk decision.
In contrast to cross-sectional designs, longitudinal studies employing a
relativelylongtime frame permit explorationof the dynamics betweenorgan-
izational change and hospital outcomes. For example, with lagged change
variables, the researcher can determine if organizational change precedes
improvement or deterioration of performance, thus enhancing causal infer-
ences regarding the effects of change on hospitals. It is also possible to exam-
ine whether advantages—or disadvantages—of organizational change vary
over time or are specific to particular time periods (e.g., before or after PPS),
thus improving our understanding of the interactive effect of organizational
change and significant policy events on hospitals.
Lee, Alexander / Consequences of Organizational Change 261
SELF-SELECTION
The example of Biggs, Kralewski, andBrown(1980) alsopoints toanimpor-
tant issue of self-selection in studies that compare outcomes of organizational
change among different groups of hospitals. The problem stems from the
observation that hospitals may not randomly engage in organizational
change; those entering contract management, for example, may differ funda-
mentally from self-managed hospitals in terms of management skills, cost
structures, and financial performance. In particular, self-selection may occur
whenthe change is interorganizational, involvingdecisions of the focal hospi-
tal as well as one or more partner organizations. Acase inpoint is MHS affilia-
tion. While hospitals may be generally attracted to systems’ greater political
clout and easier access to capital and managerial resources, system acquisi-
tions are more likely in favorable markets, among hospitals with weak and
inefficient management, and when the system and the hospital share compa-
rable missions (Alexander and Morrisey 1988).
Failure to account for self-selection may bias research findings or lead to
erroneous conclusions, attributingthe observeddifferences, or lackthereof, in
hospital outcomes to organizational change rather than more properly to
inherent discrepancies in hospital structure andbehavior. Dranove andShan-
ley’s (1995) studyof systemacquisitionillustrates sucha potential error. Inthe
study, the researchers found a higher level of price-cost margins and profits
among systemhospitals and attributed such financial advantages to systems’
superior marketingstrategies anda more homogeneous mixof services. How-
ever, as Snail andRobinson(1998) pointedout, the findings maybe due tosys-
tems’ selection of newmembers based on their structural similarities to exist-
ing member hospitals, therefore allowing the implementation of a particular
style of management and production processes.
Measures to control for selection effects have been widely discussed in the
social sciences literature (e.g., Dubin and Rivers 1989; Heckman 1979; Lee
1982). One commonapproachis toemploytwo-stage sample selectionmodels
to estimate separately the determinants of organizational change andhospital
performance. This produces unbiased estimates of the effects of organiza-
tional change on hospital performance (for empirical applications, see Succi
[1996] andMenke [1997]). Alternatively, one canfocus specificallyonwhether
organizational change improves, or worsens, the performance of hospitals
over time. This approach requires the use of longitudinal data that allow the
monitoring of change in organizational structure or strategy in association
with over-time differences in hospital outcomes (see, e.g., Alexander, Halp-
ern, and Lee 1996). The disadvantage of this alternative is that findings may
262 MCR&R 56:3 (September 1999)
have limited generalizability and apply only to the subgroup of hospitals
experiencing the change of interest.
CONCEPTUALIZATION OF
ORGANIZATIONAL CHANGE
Existingstudies diverge intheir examinationof the state (e.g., hospital own-
ership of a skilled nursing facility) versus change (e.g., acquisition of a skilled
nursing facility) in hospital structure or activity. These two measurements of
organizational change differ on one important dimension: time. Time is an
essential element in the measurement of change, defined as a shift from one
state toanother inhospital structure or behavior at one periodof the hospital’s
history. In constructing the measure, one knows when a change occurred and
cansubsequentlyexamine howit might affect the performance of the hospital,
and the length of time for the effect to take place. The study of a state, on the
other hand, focuses on the static profile of hospitals and does not capture the
dynamic relationship between hospital change and performance. One way to
address this limitation, as illustratedby Clement et al. (1997), is to incorporate
a variable indicating the length of time—that is, tenure—a hospital has
engaged in a change. Adrawback with this approach, however, is that tenure
may be endogenous, influenced by the degree to which the hospital has bene-
fited from the strategy and therefore by the hospital’s performance. In other
words, hospitals with poor experience with a strategy may drop it early in the
game, thus producing a false impression that longer tenure leads to higher
performance.
LIMITED SAMPLES
With fewexceptions, the reviewed studies were based on small, purposive
samples of hospitals, or hospitals located in one particular geographic area
(e.g., a state). For example, Levitz and Brooke (1985) and Manheim, Shortell,
and McFall (1989) studied, respectively, short-termacute-care hospitals oper-
ated in Iowa and hospitals acquired by HCA. Both studies found that system
affiliation significantly increased hospital expenses and costs. The results,
however, may be specific to Iowa or to that particular FPsystemandhave lim-
ited generalizability across geographic areas and multihospital systems.
Future research needs to use larger samples and samples representative of
the nation’s hospitals to produce results with broad generalizability. Diverse
samples will also allow better controls for market conditions and organiza-
tional characteristics of study hospitals andprovide opportunities to examine
Lee, Alexander / Consequences of Organizational Change 263
if the type of organizational change beneficial for hospitals differs by hospital
characteristics (e.g., size, ownership) andlocal market situations (e.g., compe-
tition, physician supply, population composition).
CONTINGENCIES OF ORGANIZATIONAL CHANGE
Organizational change is assumed to improve the fit of hospital structures
andpractices toenvironmental requirements. However, inmost of the studies
reviewed, effects of organizational change were determinedbycomparingthe
performance of hospitals that experienced change with those that did not.
This approach assumes uniform impact of organizational change and over-
looks contingencies that mayaffect the benefits or risks associatedwithorgan-
izational change. Twostudies that specificallyincorporate this perspective are
Halpern, Alexander, and Fennell (1992) and Succi (1996). The former focused
on the joint effects of MHS affiliation andhospital characteristics on rural hos-
pital survival; the latter examinedthe environmental contingencies associated
with system affiliation and their interactive impact on hospital financial and
operational performance. Their findings suggested that the value of MHS
affiliation varied as a function of the hospital’s size, ownership of the system,
and the level of market competition and uncertainty. Thus, the utility of
organizational change may be specific to hospitals’ particular organizational
andenvironmental milieus. Ignoringsuchcontingencies mayleadtoinappro-
priate adaptive responses for significant subgroups of hospitals (Smith and
Piland 1990).
To illustrate, consider hospital scale. Scale constitutes an important context
inthe evaluationof organizational change, particularlyinviewof the frequent
downsizing and merger activities among hospitals. Downsizing may be a
beneficial strategyfor larger hospitals because theyhave more slackresources
(see, e.g., Woodard, Fottler, and Kilpatrick 1999). Smaller hospitals, on the
other hand, may lack the scale economies to absorb such reduction; instead of
reducingexcess capacity, the cut mayhurt the “muscles andbones” of the hos-
pital (Lee and Alexander 1999). On the other hand, studies have pointed that
efficiency gains of mergers also vary by hospital scale, with more benefit
accruing to mergers of smaller-size hospitals (Dranove 1998; Lynk 1995).
Organizational changes, moreover, are not equivalent. For example, they
vary in terms of the problems they are designedto address andmay affect dif-
ferent structures of a hospital. More important, change comes with a price tag
and the cost that a hospital has to pay may depend on how the change affects
the hospital’s structure (Fennell andAlexander 1993; Miller andFriesen1984).
Conversion of hospital ownership through merger and acquisition,
264 MCR&R 56:3 (September 1999)
elimination of traditional hospital services, and diversification into
nonacute-care areas, for example, affect a hospital’s mission, authority struc-
ture, technology, andmarket strategy. If adoptedinappropriately, these dras-
tic modifications may disrupt existing technical capabilities or core compe-
tence and pose a potential threat to the viability of the hospital. By contrast,
reducing hospital beds to increase efficiency or creating a corporate holding
company to protect the hospital’s clinical operation fromgovernment regula-
tions may be implemented relatively gradually and thus may be effective
when the environment requires minor reconfiguration of hospital structures.
Attention to these distinctions and to the degree of fit of organizational
changes indifferent types of hospitals andenvironments is neededtoimprove
our understanding of the impact of organizational change in hospitals.
MEASURES OF ORGANIZATIONAL OUTCOME
Inthe main, the researchreviewedinthis article uses accounting andfinan-
cial indicators as measures of the success or failure of organizational change.
These measures emphasize short-term effects of organizational change and
are based on a limited, if not erroneous, assumption of rational action—
namely, organizational change is the outcome of deliberate decisions to
improve hospital efficiency and effectiveness (Mohr 1992). Hospitals, how-
ever, may change to imitate “model” hospitals in the local market or to mirror
the dominant corporate practices in the industry. They may do so to select the
“right” form of structure to increase their legitimacy and survival, notwith-
standingthe efficiencyor effectiveness implications of suchpractices (DiMag-
gio and Powell 1983).
The preference for financial indicators over long-term outcomes such as
survival may reflect a concern among investigators that survival may not be
sensitive enough as a dependent variable. Hospitals were once “protectively
cultured” (Brown 1964); their survival was underwritten by society through
tax exemptions, direct subsidies, and exclusion frommost federal labor regu-
lation (Somers 1969). Thus, ineffectiveness had to be substantial before a hos-
pital failed. Because such protections no longer exist, the viability of hospitals
is increasingly threatened by concerns of escalating health care costs and the
resulting cost-control efforts of public and private third-party payers.
Between1976 and1994, more than1,200 of the nation’s hospitals closed(AHA
1991; Lowe 1994), suggesting the appropriateness and importance of examin-
ing hospital survival or failure as an outcome of organizational change.
Moreover, using survival as an outcome offers several advantages. First, in
an industry where so few output measures have been operationalized and
Lee, Alexander / Consequences of Organizational Change 265
standardized (Donabedian 1980), survival is perhaps the most appropriate
measure of socioeconomic acceptability (Cannedy, Pointer, and Ruchlin
1973). It transcends the financial viability of hospitals and is equally valid for
hospitals with different profit orientations and accounting criteria. Financial
indicators, such as profitability, sales volume, and market share, are sensitive
to the time span of the study (Coyne 1985b; Hannan and Freeman 1989;
Mitchell andSingh 1993). Ahospital, for example, may adapt in accordance to
its long-term goals at the expense of short-term adjustments. Consequently,
results maydiffer accordingto the lengthof time the hospital’s performance is
followed. This is a particular problem in longitudinal research (Greenhalgh
1983).
COMPARISON OF ORGANIZATIONAL CHANGES
Finally, the reviewed research has generally overlooked the comparative
advantages or disadvantages of different organizational changes among hos-
pitals. One exception is Mick et al. (1994). They examined multiple changes
among rural hospitals and provided the opportunity to compare the perfor-
mance consequences of different organizational changes (see Table 4). In their
study, however, consequences of these different organizational changes were
assessedinseparate models. Thus, hospital changes were assumedto be inde-
pendent, at least as far as their effects on hospitals are concerned.
This assumption is problematic for at least two reasons. First, organiza-
tional changes may be implemented simultaneously to achieve a preset, stra-
tegic goal. This is evident in a study by Lee and Alexander (1998), showing
that hospitals tend to experience high CEO turnover at the time of system
affiliation, possibly as a consequence of the system’s intention to bring the
hospital management in line with its corporate policies. To the extent that
organizational changes are not undertaken independently, findings regard-
ing a given change may be biased because of inappropriate controls for the
effects of other, simultaneous changes. Second, different organizational
changes may yield similar benefits but differ in terms of the costs involved.
The contrast between MHS affiliation and contract management provides an
example. Although MHS affiliation increases hospitals’ access to managerial
expertise, similar advantages may be offered to independent hospitals
through management contracts with private vendors or hospital associations
(Manheim, Shortell, and McFall 1989). The threat to hospital autonomy and
the resistance fromcommunity groups and employees, however, may render
MHS affiliation unfavorable as compared to contract management with
respect to hospital performance and survivability.
266 MCR&R 56:3 (September 1999)
and environments
TABLE 4 Empirical Studies Comparing the Consequences of Different Organizational Changes in Hospitals
Author(s) Year Sample Design Results
Mick et al. 1994 A national sample of 797 rural Posttest-only design with non- No consistent relation
community hospitals equivalent comparison groups; between changes and
surveyed in 1989 performance consequences of 13 positive financial
strategic changes were examined; performance (total margin
controls used to adjust for the and current ratio) was
confounding effects of hospital found; significant
and environmental attributes associations between
changes and performance
were more often negative
than positive.
Lee and 1999 The population of community Panel design; changes in hospitals Three organizational
Alexander hospitals operating in 1981 were followed from 1981 to 1994; changes were found to be
hospital survival was considered as associated with hospital
a function of seven organizational closure; specialty change
changes (ownership changes, was related to lower risk
specialty change, multihospital of closure; downsizing
system [MHS] affiliation, and CEO succession
corporate restructuring, addition were associated with
of a long-term care unit, higher risk of closure.
2
6
7
Solutions to these problems require simultaneous comparison of multiple
organizational changes. An attempt was made by Lee and Alexander (1999), in
which the researchers compared the relative impact of seven organizational
changes—ownership change, specialty change, MHS affiliation, corporate
restructuring, addition of a long-term care unit, downsizing, and CEO succes-
sion—on hospital survival in the same models. Of the seven organizational
changes examined, three were found to be significantly associated with hospi-
tal closure, suggesting differential consequences of organizational changes
undertaken by hospitals.
Information on multiple organizational changes is also needed to explore
issues suchas towhat extent organizational changes are orchestratedandcon-
certedbyhospitals andwhether there exists a joint, synergistic effect of a set of
deliberate changes undertaken by hospitals. Examining these questions will
require a comprehensive collection of changes in hospitals and analytical
techniques (e.g., taxonomy construction) currently uncommon in health serv-
ices research.
CONCLUSION
Recent social, political, and economic changes have threatened the domi-
nant position of hospitals in the health delivery system. As health care reform
and market competition escalate, the health care system is likely to witness
more organizational changes amonghospitals andother healthcare organiza-
tions as they scramble to ensure their survival and seek to demonstrate their
ability to operate according to the latest business strategies (Alexander and
D’Aunno 1990; Mick 1990b; Mohr 1992; Stevens 1989).
This article reviewed existing empirical studies that examined the conse-
quences of organizational change in hospitals. The review revealed both lim-
ited and inconsistent findings in the current literature, suggesting that we are
a long way from understanding the implications of organizational change
(Fennell and Alexander 1993; Mick 1990a; Topping and Hernandez 1991).
Specifically, anumber of questions remaintobe exploredinfuture research:
• What is gained and lost by hospitals engaging in various organizational
changes? Do organizational changes improve or reduce not only the short-term
performance of hospitals but also their long-term viability?
• What organizational and environmental factors determine the success or failure
of organizational change in hospitals? In other words, when and under what or-
ganizational and environmental conditions can organizational change increase
or reduce the performance and long-term viability of hospitals?
268 MCR&R 56:3 (September 1999)
• What differences should a hospital expect when it chooses one type of organiza-
tional change over another? Howdoes the interaction between type of organiza-
tional change and the hospital’s specific strategic context affect hospital per-
formance? Howdoes a hospital increase the fit between its strategic choice of or-
ganizational change andthe environmental conditions under whichit operates?
• How can hospitals better handle the increased complexity of organizational
change? Is there a way to classify organizational change and guide hospitals in
their selection of change that strategically fits their organizational and environ-
mental conditions?
• How do different processes of change (e.g., incremental, piecemeal adjustment
versus dramatic, wholesale shift) affect hospitals? Do processes of change vary
within or across types of organizational change? Howdo processes and types of
organizational change affect hospital performance differentially?
• Does the temporal pattern of organizational change make any difference in hos-
pital performance? For example, are changes occurring simultaneously more
disruptive and harmful than changes taking place in staged fashion during an
extended time period?
• To what extent do simultaneous or stagedorganizational changes reflect a delib-
erate action by the hospital? Does the joint, synergistic effect of changes matter
more than the impact of independent organizational change?
Considering the rapid changes in the hospital industry, the survival game
that hospitals are competing in today is much like the croquet game in Alice in
Wonderland. In the game, every element is in a state of motion—technology,
suppliers, customers, employees, corporate structure, government relations—
and none can be counted on to remain stable for very long (Barnett and Han-
sen 1996). To gain a foothold, hospitals probably have to “run at least twice as
fast” as their competitors by breaking from their old frames of thinking and
fundamentally reconstructing their organizational structures. However
bounded the above questions may be, answers to themwill provide better in-
formation for decision makers of hospitals to develop effective adaptation
plans in an increasingly competitive and uncertain environment.
NOTES
1. Snail andRobinson(1998) provideda similar reviewonhospital diversificationfrom
an economic perspective.
2. We are grateful for one anonymous reviewer’s calling our attention to an article
overlooked in our search.
3. Diversification will be reviewed in a later section.
4. A similar lack of differentiation between ownership and system effects occurred in
Watt et al. (1986).
Lee, Alexander / Consequences of Organizational Change 269
5. Several studies have also indicated different patterns of effects by the ownership
type of the system (Cleverley 1992; Coyne 1985a, 1985b; Halpern, Alexander, and
Fennell 1992; Renn et al. 1985). The findings, however, are not consistent across
studies (for a counterexample, see Menke 1997).
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