Tuesday, February 22, 2011

More on Economy of Scale

Blog reader and fellow parishioner Steve Wenner asks if I could provide some insight why large hospitals fail to realize economies of scale.

The short and truthful answer is that I can’t say that I know the reason and, apparently, neither can anyone else.

But I can speculate.

A number of years ago my interest was piqued and I went to the Business School library of the University where I was working to look for some scholarly writings on the topic. I couldn’t find any. Apparently the subject of economy of scale lacks the pizzaz needed to command academic attention.

I did learn that the concept was attributed to Adam Smith, the renowned 18th century moral philosopher turned economist whose book, The Wealth of Nations, is credited as providing the foundation of modern capitalism.

Using the example of a pin factory, Smith contended that a group of workers, each performing one of the functions of pin-making – like forming the head or sharpening the point – could make more pins per worker than if each was making an entire pin by himself. In other words, scale results in economies because it permits the specialization of labor.

What Smith did not explore was what happened if the organization grew to include many people making pinheads and honing pinpoints. In Smith’s simple example, one of the workers might well have been the owner and manager of the factory. No CFO or human resource department.

Although I have no evidence other than the general experience that cost rises with the size of the hospital, I suspect it has to do with the need for a larger administrative superstructure, the greater effort required to keep track of materials and move them about and the expanded need for creating and communicating the information required to coordinate activities.

As to specialization, the health care workforce is largely structured by a deeply entrenched guild-like system so that the functions of nurses, pharmacists, therapists, etc. are basically the same in hospitals of all sizes so that there is little flexibility to rearrange duties among various categories of staff. Once a certain size is reached, it is mainly a matter of increasing the number of people performing any given function.

It is for sure a subject that we ought to know more about.

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