The Cost, Quality and Spillover Effects of Specialization Strategies in Hospitals – An Analysis of the Patient's Value Chain

High-powered reimbursement systems such as capped budgets or prospective payment systems offer powerful incentives to hospitals to reduce their expenses, particularly in high cost areas such as operating rooms (ORs). Specialization is one prominent response strategy to such pressures. This study aims to explore how isolated specialization-based cost-reduction strategies in high cost areas affect the entire value chain. Our proxy for the follow-up costs of a patient’s case – and therefore of the value chain as a whole – is the probability of a patient experiencing a complication in the post anesthesia care unit (PACU). We focus on a specialization strategy that may result in individual (isolated) and/or organizational learning effects in the OR and/or lower costs from economies of scale. We found that this economic response strategy and short-term quality offered our hospital strategic complements, as specialization increased quality by reducing the probability of complications in the PACU, thus lowering follow-up costs. Notably, this finding held for both specialized and other types of surgery, which suggests the presence of spillover or organizational learning effects, thus confirming a decrease in overall costs by reducing overall follow-up costs. Thus, we find no evidence that specialization-based cost-reduction strategies threaten the overall development of value chain costs