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Which diversification strategies pay off?

Freestanding outpatient diagnostic centers and home health services enjoyed the greatest increases in profitability for hospitals last year, according to a recent national survey of hospital diversification strategies.

The survey--conducted last October by Hamilton/KSA, Atlanta, for Hospitals magazine--drew responses from 524 hospital chief executive officers out of 2,000 polled. In its Jan. 5 issue, the magazine said more than half the respondents reported having made a profit or at least having broken even--the survey's criteria for success--in 18 out of 19 diversification areas (see Table I).

Only four strategies were actually profitable, however. Three of them were for outpatients--freestanding surgery centers, freestanding diagnostic centers, and home health services--pointing up the importance of outpatient services to hospital revenues. Only one, physical rehabilitation, was an inpatient service.

The success rate of freestanding outpatient diagnostic centers rose dramatically last year. In 1989 about 6% of survey respondents reported making money on diagnostic centers, but in 1990 almost 72% cited such centers as having been profitable for them.

A continued rise in demand for diagnostic services has helped these centers recoup the heavy fixed costs associated with their start-up, said Barry Moore, managing director of Hamilton/KSA. Also, because a number of these centers were initiated or expanded several years ago, they are now beginning to experience dramatic increases in profitability, he explained.

Several additional reasons cited for the 90% success rate of freestanding diagnostic centers: increased management efficiencies, a second wave of hospital-physician joint ventures that is introducing economies of scale into the centers, growing market scale into the centers, growing market share for those facilities that have weathered initial competition, and integration of these centers with hospitals' centers of excellence for ambulatory care.

Home health services also registered sizable growth. In 1990, more than 60% of respondents reported that home health services were making money, compared with less than 49% in 1989. Consequently, the success rate for this strategy rose to almost 88% last year.

Wellness/health promotion was the only diversification strategy that lost money for the majority of hospitals. Such programs are often viewed as loss leaders, however, building goodwill and indirectly benefiting their sponsors.
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Title Annotation:hospital diversification
Author:Fitzgibbon, Robert J.
Publication:Medical Laboratory Observer
Article Type:editorial
Date:Jun 1, 1991
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