Monday, January 10, 2005

Still Further to Economies of Scale

The subject of economies of scale stimulated the below from Jeff Frommelt, long-time friend, colleague and head of the now defunct hospital consulting firm Herman Smith Associates.

Usually I post responses without comment, but I find it noteworthy in this case that they are focused on mergers. My posting tried to address what I saw as a basic misunderstanding of the concept itself, using hospital mergers as an example. Too abstract to be interesting, I guess.

Now to Jeff’s remarks:

I just love this discussion. However, comparing operational changes (economies of scale) in a static business, such as the production of burgers and fries, to a changing service delivery system, such as healthcare, is difficult.

During the merger mania of the 70's and 80's, we went back to several of the hospital organizations we had assisted in their merger to see if, after several years, the promises were obtained. We found that costs had risen faster than expected. However, the scope of services provided by the merged organizations had expanded considerably and market penetration had grown. The results were published.

These merged organizations were not located in the larger metropolitan areas and only had one or two local major competitors. Also, although clinical service scope increased, there was no indication that the quality of service to the community did or did not improve.

Don Arnwine's observations are the same I have seen. It is easy to fire human resource and purchasing people to save costs. Merging medical staff's and clinical departments are often CEO career shorteners.

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