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Keywords

hospitals, health systems, divestiture, resource configuration, legitimacy, integration

 

Authors

  1. Succi-Lopez, Melissa
  2. Lee, Shoou-Yih D.
  3. Alexander, Jeffrey A.

Abstract

This study examines the determinants of divestiture in health systems. Financial performance is a common indicator of a hospital's value. However, health systems may consider other factors that influence a hospital's value to the system. To enhance our understanding of hospital divestiture, we identify factors that enhance a hospital's value to the system and thus its likelihood of being retained. Our findings support previous studies that financial performance influences divestiture decisions. At the same time, our results identify three other factors influencing divestiture decisions relative resource configuration, legitimacy, and integration.

 

The health care field has experienced intense consolidation over the past decade.1,2 Considerable research has been devoted to examining types of organizational change associated with consolidation, such as closures, conversions, mergers, and the introduction of new organizational forms.3-8 One organizational change that has not been addressed in this literature is divestiture. Divestiture is a strategic action taken by a firm to dispose of a significant portion of its assets through the sale or transfer of assets to another business or, alternatively, the termination of a business.9-11 Historically, divestiture of member hospitals by health systems has been viewed as an action of last resort and is implemented infrequently.11 However, it has received more attention among health systems in recent years.8,12 The increased acceptance of divestiture as a strategy may reflect recent patterns of consolidation in the health care field that require health systems to prune or cut back particular subsidiaries as a means to improve or maintain the financial health and enhance the core business and organizational mission of the system.11

 

The recent interest in divestitures, however, has not coincided with the amount of divestiture research in health care organizations. Specifically, little is known about the factors associated with hospital divestitures in health systems. A much cited factor of divestitures in non-health care industries is poor financial performance of the business unit.9,10 However, focusing on financial performance alone in the hospital sector is problematic for two reasons. First, financial measures of hospital performance tend to be volatile and are influenced by the uncertainty of financial accounting under a complex third-party payment system.13 Second, an affiliated hospital's value to the system may be multidimensional; financial performance is but one aspect of value. Meyer and Zucker,14 in their study of permanently failing organizations, demonstrated convincingly that financial indicators alone were of limited utility in explaining the fate of organizations in industries characterized by strong nonprofit orientation and diverse groups of constituencies. The requirement of hospitals to satisfy the expectations of local communities and to meet the institutional standards of professional associations and accreditation organizations as well as the increased importance that health systems place on clinical and functional integration are factors that define a hospital's value. Thus, divestitures in health systems are likely to reflect a broad set of factors beyond the financial performance of member hospitals.

 

The purpose of this study is to examine empirically the determinants of hospital divestitures in health systems. We draw on three bodies of organizational literatureresource-based theory, institutional theory, and interorganizational relations theoryin identifying determinants of divestitures. Multiple theories are considered because of the complexity of hospital behavior compared with that of non-health care organizations.15,16 To test our hypotheses, we use a national sample of community hospitals and health systems from 1994 to 1998.

 

Several potential implications can be drawn from our analysis. Results of our study may inform managers of health systems about how divestiture decisions are made in peer organizations, thus serving as a benchmark for their decisions to prune their own operation. Second, results of the study may better attune health care managers to strategic indicators other than financial performance.17 Financial measures are usually ex post facto and may convey information that is too untimely to be useful for strategic action.18,19 Our analysis would alert managers of health systems to a broad range of factors that should be of relevance to their decisions to retain or divest a particular member hospital. Third, the factors examined in our study may help system managers identify member hospitals at potential risk of divestiture. Preventive measures could then be established to either forestall or ease the organizational and community disruption that may be caused by divesting those hospital units. Fourth, findings of our study may potentially assist system managers in identifying appropriate acquisition targets, thus avoiding the potentially disruptive processes of divestiture. Finally, hospitals that value the benefits of affiliation with a parent health system may devise strategies based on our findings to strengthen the linkage with the system.