Hospital costs and specialization: benefits of trimming product lines.

Trends in hospital specialization were studied using multiple regression analysis for the period 1991-2000. The observed 30.6 percent rise in specialization was associated with a 8.2 percent decline in unit cost per admission. Specialization was 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 (adjusted by diagnosis-related group) is higher in the less specialized hospitals.