Hospital specialization and cost efficiency: benefits of trimming product lines.

Trends in hospital specialization are studied using multiple regression analysis for the period 1983-1990. The observed 26.9 percent rise in specialization was associated with a 6.9 percent decline in unit cost per admission. Specialization is also associated with improved quality of care. Specialization has been highest in competitive West Coast markets and lowest in the rate-regulated states (New York and Massachusetts). Hospitals have less incentive to contain costs by decreasing the array of services offered in stringent rate-setting states. The term "underspecialization" is advanced to capture the inability of some hospitals to selectively prune out product lines in order to specialize. Such hospitals spread resources so thin that many good departments suffer. Unit cost per case (DRG-adjusted) is higher in the less specialized hospitals.