Understanding hospitals’ size, technology, and operating expenses
In the capital-intensive hospital industry, economies of scale offer a competitive advantage by spreading out the high fixed costs, providing for higher margins.
Nov. 26 2019, Updated 10:36 p.m. ET
Hospital size and operating expenses
In the capital-intensive hospital industry, economies of scale offer a competitive advantage by spreading out their high fixed costs, providing for higher margins.
The number of beds in a hospital measures hospital size. Sizes can change due to organic growth or mergers or alliances with other hospital systems. Bigger hospitals have greater market power and therefore higher profits, owing to economies of scale. Hospitals can use their size to influence purchasing decisions for supplies and hiring. Analyzing the five big hospital networks in the U.S.—HCA Holdings (HCA), Tenet HealthCare (THC), Community Health Systems (CYH), LifePoint Hospitals, Inc. (LPNT), and Universal Health Services (UHS)—has shown that average operating expenses per bed are highest for the smallest hospitals.
Hospital size and technology
As hospitals become larger and more profitable, they’re able to afford high-cost technology, relevant software and hardware, and skilled personnel to operate the technology and hardware.
According to a survey of 900 large general hospitals conducted by the American Hospital Association (the AHA) in 2005, technology investments are expensive. The median annual capital investment is $7,00,000 and the average operating expenses are $1.7 million. As capital investments are a major hindrance, smaller hospitals are reluctant to adopt these technologies. The survey concludes that about 19% of total hospitals with bed counts of less than 50 and 10% of hospitals with bed counts between 50 and 99 weren’t inclined to adopt new technology. On the other hand, all hospitals with bed counts of more than 300 were willing to use medical information technology.
Specialty hospitals that provide specialized services for tuberculosis, cancer, heart disease, and other such diseases have to equip themselves with relevant technology like PET-CT scanners or cardiac intensive-care units. So hospitals have to invest in relevant technology irrespective of their size.
