Local hospital systems: forerunners of regional systems?

SUMMARY Over the past several decades, the hospital industry has been undergoing a major organizational change that has until now been little examined. Local hospital systems (LHSs) are combinations of two or more hospitals that are in the same company and located in or around the same metropolitan areas in this country. This article presents the first detailed examination of the 402 such systems that have been identified to date. LHSs offer great potential for achieving the cost, quality, and access benefits that are often attributable to regional systems. The degree to which LHSs have attained some basic structural features expected of regional systems are examined. Differences are compared within ownership categories. Issues and challenges facing leaders in the field, should they hope to achieve the potential of regional systems, are discussed. The urge to develop rational systems, whether it is considered demonic or divine, will not rest until the whole has assumed an almost crystalline perfection of form wedded to function. However, we should never become so enamored of these creations of the mind that we are unable to stand back and say: Will they work, and at what price! (Donabedian 1972) In response to powerful environmental forces that have pervaded the health care industry over the past 25 years, many hospitals have found safe haven in local hospital systems, referred to in this study as LHSs. These offer the advantages not only of increased scale, but often of dominant or at least powerful strategic positions relative to local competitors. Even systems formed in earlier eras now provide an important defense against looming threats and uncertainties in local hospital markets. The spatial clustering of hospitals at the local market level contrasts dramatically with the strategy that in the early 1980s appeared to be reshaping health care delivery. At the beginning of the last decade, nationally distributed multihospital systems (MHSs) such as the Hospital Corporation of America and Humana, were thought to offer the ideal model for assuring hospital survival. These large, horizontally expanded MHSs provided a powerful defense against the increasingly threatening environments facing hospitals. In but a single decade, however, the strategic advantages of the sprawling national companies appear to have been overtaken by those of the smaller, locally integrated hospital systems. Indeed, many of the larger systems themselves are giving priority to the building of LHSs, though smaller nonprofit hospitals have tended to be the most active in this area (Anderson 1992; Johnson 1987; Higgins 1986; Luke and Begun 1988; Shahoda 1986; Shortell 1988). From the perspective of participating hospitals, LHS's offer obvious strategic advantages. But their creation also consolidates local markets, is potentially anticompetitive, and thereby, may threaten a policy option in which competition is seen as a solution to the hospital cost problem. Unfortunately, efforts to control hospital costs through competition have produced uneven results. The evidence indicates, for example, that while changes in payment mechanisms may have altered patterns of practice (see Lave and Frank 1990), the intensification of competition has had little effect on costs and may even have contributed to increases in costs (see Farley 1985; Joskow 1980; Melnick and Zwanziger 1988; Robinson and Luft 1987). Nevertheless, if further formation of LHSs is to be encouraged, it would be important to demonstrate that their benefits to the community far outweigh possible consequences for competition. Other than to provide strategic advantages to member hospitals, what recommends the formation of LHSs? The answer to this is found in the concept of regional systems, the arguments for which are both numerous and long-standing (see Ginzberg 1977). In theory, regional systems offer the potential not only for improving the quality of care, but possibly more important, for rationalizing the organization and delivery of health care locally. …