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Provider insights

Service-line strategies for US hospitals

Filed under: Corporate finance, Hospitals, Strategy

The full-service, general hospital— still the mainstay of US acute-care delivery—is under attack. Immense clinical complexity; the advent of performance transparency for evaluating quality, service, and costs; and growing competitive intensity are challenging the notion that any hospital can excel across a broad spectrum of clinical service lines.1 Consider a US hospital of average size, with roughly 160 staffed beds and a mean daily patient census of about 100. On any given day, it might admit only a handful of patients with similar conditions. Contrast this with the current crop of sophisticated, focused, multispecialty institutes for heart, cancer, or neurological care: they treat up to several hundred patients each day. “Pure play” specialty hospitals and outpatient centers with low-cost structures, limited complexity, and focused, high-quality service are also emerging. Competitors like these are raising the performance bar for general acute-care hospitals and, in some cases, posing serious questions about their sustainability.

While traditional general hospitals are unlikely to disappear anytime soon, a new approach—a commitment to clinical service lines as an organizing paradigm, much as many corporations organize themselves by business unit—is becoming a necessity for many such organizations.2 Specializing in a few service lines allows hospitals to build a critical mass of patients in select areas and to enjoy economies of skill and scale. In our experience, hospitals that make the leap to a service-line orientation become more productive, improve their quality of care, recruit physicians more effectively, and build market share. By developing a focused service-line strategy, hospitals can also limit their investment in nonpriority areas, with savings to be found in areas ranging from marketing to new technologies. Some hospitals may even choose to take facilities off-line if they are unlikely to reach minimum effective scale in any individual service or combination of service areas.

The transition to service lines is about much more than introducing a new vocabulary or high-level concepts into business planning and strategy. Full implementation of a service-line approach requires real changes in organizational structure, incentive plans, physician relationships, and business development, as well as in many support functions, including IT and human resources. To make wise decisions about which service lines to emphasize, hospitals must have a deep understanding of their own economics and competitive environments.

Furthermore, running a hospital with a service-line orientation requires new approaches for recruiting the clinical staff, for aligning its interests with those of the hospital, and for measuring success. Hospitals that succeed—whether or not they are nonprofit institutions—can reap tremendous quality, cost, and service benefits and avoid turning themselves into specialty hospitals, closing their emergency rooms, or lowering the level of care they offer their communities. They will become far more effective competitors as well.

This originally appeared in McKinsey Quarterly

  1. For more on the traditional strengths of US hospitals and the modern challenges they face, see Kurt D. Grote, Edward H. Levine, and Paul D. Mango, “US hospitals for the 21st century,”, August 2006.
  2. For more on organizing by service lines, as well as other potential solutions for US hospitals, read Kurt D. Grote, Paul D. Mango, and Saumya S. Sutaria, “Transforming US hospitals,”, February 2007.

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