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International Journal of Operations & Production Management
Service specialization and operational performance in hospitals

Vedran Capkun Martin Messner Clemens Rissbacher
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IJOPM
32,4
Service specialization
and operational performance
in hospitals
468
Received 18 September 2010
Revised 7 January 2011,
14 March 2011
Accepted 15 March 2011
Vedran Capkun and Martin Messner

Department of Accounting & Management Control, HEC Paris,
Paris, France, and
Clemens Rissbacher
Department of Health, Infrastructure & Science,
Government of the Province of Tirol, Innsbruck, Austria
Abstract
Purpose The purpose of this paper is to examine the link between service specialization and
operational performance in hospitals. Existing literature has mostly been concerned with the
performance effects of operational focus, which can be seen as an extreme form of specialization. It is
not clear, however, whether an effect similar to the focus effect can be observed also in cases where
specialization takes on less extreme forms. The authors analyze this effect up to and above the effects
of volume, learning and patient selection.
Design/methodology/approach Ordinary least squares (OLS) and two-stage regression models
were used to analyze patient data from 142 Austrian hospitals over the 2002-2006 period. The sample
contains 322,193 patient groups (841,687 patient group-year observations).
Findings The authors find that increased specialization in a service leads to a more efficient
provision of this service in terms of shorter length of stay. The analysis shows that this effect holds
even after controlling for volume, learning, and patient selection effects. The authors suggest that the
pure specialization effect is due to the increased administrative and medical attention that is given to a
service when the relative importance of that service increases.
Practical implications The papers results indicate hospital managers should pay attention to the
impact of specialization when making service-mix decisions. If two services have the same or a similar
level of operational performance, then this does not mean that hospital managers should be indifferent
as to the relative volume of these services.
Originality/value The paper provides additional insights into the impact of service-level
specialization not examined in prior literature.
Keywords Austria, Hospitals, Customer service management, Operations management,
Operational performance, Service specialization
Paper type Research paper
International Journal of Operations

& Production Management
Vol. 32 No. 4, 2012
pp. 468-495
q Emerald Group Publishing Limited
0144-3577
DOI 10.1108/01443571211223103
The authors would like to thank Erkko Autio, Ari-Pekka Hameri, Gilles Hilary, Thomas Jeanjean,
Tobias Johansson, Matthias Mahlendorf, Svenja Sommer, Herve Stolowy and participants at the
research seminar at HEC Paris and University of Lausanne-HEC Lausanne for helpful comments
on earlier drafts of this paper. Vedran Capkun and Martin Messner acknowledge the financial
support of the HEC Foundation. Vedran Capkun is a member of GREGHEC, CNRS unit, UMR
2959.
1. Introduction
In the last few decades, hospitals across the world have faced increased economic
pressure. An important part of this pressure stems from the introduction of
performance-based reimbursement systems that many countries have adopted from
the 1970s on. These systems are based on taxonomies of services or treatments (e.g. in the
form of diagnosis-related groups) and they imply that hospitals are reimbursed for these
services not on the basis of their actual costs, but on the basis of standard or allowable
costs. Arguably, this has spurred hospitals concern with efficiency, motivating them to
look more closely at their operations and cost drivers. This is well documented in research
that has sought to understand the performance implications of managerial choices
concerning operational issues such as location, size, or technology (Butler et al., 1996;
Goldstein et al., 2002; Li et al., 2002; Li and Benton, 2003; McDermott and Stock, 2007).
At the same time, hospitals are now increasingly competing for patients.
Competition means that clinical outcomes and patient satisfaction become important
points of attention for hospital managers, if market share and revenues are to be
maintained or improved. Also, hospitals now increasingly seek to change their service
offering in such a way that they can attract patient-cases that are particularly
attractive to them. For example, Krishnan et al. (2004) find that hospitals merge with
other hospitals in order to get a higher share of those customers who require services
that are more profitable. Several studies have looked into the performance effects of
such service-mix related strategies (Duchessi, 1987; Douglas and Ryman, 2003;
Krishnan et al., 2004).
In this paper, we consider an organizational phenomenon that has the potential to
influence both the operational efficiency of a hospital and the attractiveness of its
service offering. We examine specialization in particular services and how it influences
operational performance. Specialization refers to the relative emphasis that a hospital
(or hospital department) puts on certain types of services and it is opposed to the idea
that a hospital (department) should pay equal attention to all services. For example, if a
hospitals department of surgery is specialized in diseases of the digestive system, then
it would have a high share of patients with such diseases compared to patients with
other treatment needs. Put another way, the higher the relative importance of a service,
the higher is the degree of specialization in this service.
Most of the existing studies on specialization in hospitals consider settings in which
hospitals or hospital units are dedicated to a very limited number of services, such as in
the case of cardiac specialty hospitals (Cram et al., 2005; Barro et al., 2006). In the
operations management literature, such an extreme form of specialization is usually
referred to as a focus strategy. According to Skinner (1974, p. 114), focusing on a limited,
concise, manageable set of products, technologies, volumes, and markets allows a
focused factory to achieve a cost and quality advantage over an unfocused one. The
applicability of the focus concept in health care settings is not uncontested. Pieters et al.
(2010) have recently illustrated that there may be practical difficulties when trying to
organize health care units as focused factories. In particular, they emphasize that
hospitals may not always be able to pre-assign a patient to the right focus unit, because a
patients treatment needs may not be fully known ex ante. Despite this caveat, many
health care units are organized as focused units, and several studies have provided
evidence for a positive performance effect of such focus (Cram et al., 2005; Huckman and
Zinner, 2008; Hyer et al., 2009). Some of these studies have pointed out that the observed
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469
IJOPM
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470
performance effect may be due to different reasons. For example, Cram et al. (2005)
compare patient outcomes for coronary surgeries between general hospitals and
speciality cardiac hospitals. While they find evidence for lower mortality rates in
speciality hospitals as compared to general hospitals, this difference disappears when
controlling for patient volume and characteristics of admitted patients. In other words,
the authors find no evidence for a focus effect above and beyond the effect of volume and
patient selection that goes along with focus. Huckman and Zinner (2008) provide
contrasting findings. They examine whether investigative sites that are focused on drug
trials outperform those that mix trials with other clinical services. The results of
Huckman and Zinner (2008) show that focused sites indeed outperform unfocused ones
in terms of the number of enrolled patients. This effect holds even after controlling for
the effects of volume and patient selection. In other words, Huckman and Zinner (2008)
find evidence for a pure focus effect, which they associate with the narrowness of the
service portfolio. This narrowness allows for a reduction of complexity through
mechanisms such as standardized processes, simpler scheduling, and fewer product
changeovers.
Specialization may not always take the extreme form of focus, however. It may well
be that organizations are relatively more specialized in a certain type of service than in
others, while at the same time offering a broad portfolio of services (Capon et al., 1988;
Farley and Hogan, 1990; Brush and Karnani, 1996). Public hospitals are a case in point.
An exclusive focus on a limited number of services will often not be feasible in public
hospitals, given their duty to treat all incoming patients whose treatment needs they can
fulfill. In such a situation, the service offering will automatically be rather broad and, in
this sense, unfocused. However, a hospital will still have possibilities to emphasize
certain services in which it has a particularly strong expertise or interest or in which
demand is particularly strong. It can do so by increasing the share of these services
within its service-mix and, in this sense, become more specialized in these services.
In such a setting, the focus effect may not materialize. At the same time, a positive
operational performance effect resulting from economies of scale, learning, or patient
selection may well exist. But will there be some additional (positive or negative) effect
of specialization that goes beyond these other effects? Something similar to the focus
effect, but not triggered by the narrowness of the service offering? In our paper, we
demonstrate the existence of such a positive effect of specialization that is independent
from volume, learning, and patient selection. We suggest that this specialization effect
relates to the increased medical and administrative attention that is given to a service
when the relative importance of that service increases.
In order to examine the impact of specialization on operational performance, we use
patient, service, department and hospital level data from a sample of 142 Austrian
hospitals over the 2002-2006 period. The results of our empirical analysis show that
increased specialization in a service leads to a more efficient provision of that service in
terms of shorter length of stay, even after controlling for volume, learning, and patient
selection effects. Our results are both statistically and economically significant and as
such have important implications for hospital management. Given the choice of
increasing or decreasing the relative importance of a service in a department
(specialization), hospital managers have to take into account the consequences of such a
decision in terms of an increase (decrease) in operational performance in the service
whose importance increases (decreases). Taking the impact of specialization into account
allows hospital managers to evaluate whether changing the relative weight of services is
a good decision that increases operational performance at the department and/or at the
hospital level.
Our paper is structured in the following way. In the next section we review the
relevant literature and develop our hypothesis. In Section 3 we present our data
analysis design. Section 4 describes the sample that we use for our empirical analysis
and the findings of our study. The final section provides a discussion and conclusion.
2. Background literature and hypothesis development
Focus and performance
The question of whether or not to focus an organizations activities on a limited set of
products, markets and processes has been widely discussed in the management
literature. There are two levels at which advantages and disadvantages of focus may be
observed. At the operational level, focus relates to the production of a narrow range of
products or services. This is the idea behind Skinners (1974) notion of a focused
factory, which is a factory dedicated to a limited, concise, manageable set of products,
technologies, volumes, and markets (Skinner, 1974, p. 114). Such focus, argues Skinner
(1974), will allow a plant to achieve a cost and quality advantage over more conventional,
unfocused factories:
The focused factory does a better job because repetition and concentration in one area allow its
work force and managers to become effective and experienced in the task required for success.
While operational focus is usually expected to bring improvements in operational

performance, such improvements account only for part of the potential performance
effects on the firm level. On the one hand, operational focus should translate into positive
effects also on the demand side, given that operational improvements in cost or quality
can help a firm achieve a competitive advantage in the market (Porter, 1985), thus
increasing its sales and profitability. On the other hand, offering only a limited range of
products prevents a firm from benefiting from possible demand externalities
(Siggelkow, 2003) and may be a more risky strategy when demand for a particular
product strongly fluctuates (Ketokivi and Jokinen, 2006). In such cases, diversification of
the product portfolio may well be a better strategy than focus. In a study of the US
mutual fund industry, Siggelkow (2003) finds that mutual funds belonging to focused
fund providers outperform competing funds offered by more diversified firms,
suggesting a positive focus effect on the operational level, whereas diversified fund
providers are found to be more profitable overall than non-diversified providers,
suggesting a negative focus effect on the firm level.
In line with most operations management research, our interest in this paper is with
operational performance only. While the results of existing studies in this area are
somewhat mixed, the majority of them provide evidence for a positive effect of focus on
operational performance (Anderson, 1995; MacDuffie et al., 1996; Bozarth and
Edwards, 1997; Tskikriktsis, 2007; Huckman and Zinner, 2008). Some of this literature
uses examples from hospital or medical settings and is thus of particular interest to our
paper. Hyer et al. (2009), for example, analyze the performance impact of reorganizing
hospital services into a focused hospital unit. They conduct a longitudinal case study
in the trauma unit of one US hospital and find evidence for performance improvements
after the trauma centre was reorganized into a focused unit. More specifically, they find
Service
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32,4
472
that patient length of stay was significantly reduced due to higher standardization and
improved efficiency in work processes. They also find that financial margins increased
considerably after the establishment of the trauma unit, mainly due to increases
in revenues.
Barro et al. (2006) examine the performance effects of specialty hospitals, i.e. hospitals
focused on a particular type of treatments. They distinguish between direct effects
(within the specialty hospitals) and spillover effects to non-specialized hospitals. Their
results suggest that markets experiencing the entry of specialized hospitals exhibit
lower expenditure growth after that entry, while patient outcomes remain stable.
However, specialty hospitals are found to attract healthier patients and to provide higher
levels of intensive procedures of questionable cost-effectiveness. Thus, while the focus
strategy of specialty hospitals tends to pay off for these hospitals, the effect on the health
care system overall is more ambiguous (Casalino et al., 2003).
The results of Barro et al. (2006) further suggest that focused hospitals or hospital
units may outperform unfocused ones for a number of reasons, such as economies of
scale, learning curve effects, or favorable patient selection. The existence of these effects
poses a problem for an understanding of the true benefits of focus, since all these effects
may also exist in the absence of a focus strategy. Indeed, there is a large body of literature
that provides empirical evidence on each of these effects individually. In a recent paper,
Huckman and Zinner (2008) set out to distinguish the pure focus effect from these other
effects. Their research looks at the pharmaceutical industry, where firms often outsource
the conduct of drug trials to teams of researchers or so-called investigative sites.
Huckman and Zinner (2008) examine whether sites that are focused on drug trials
outperform those that mix trials with other clinical services. Their results show that
focused sites indeed outperform unfocused ones in terms of output and productivity.
Importantly, they show that this effect holds even after accounting for differences in
scale, learning and favorable risk selection.
Hypotheses development
The above reviewed literature addresses the performance impact of operational focus.
Our interest in this paper is on forms of specialization that are less extreme than the focus
strategy. Generally speaking, being specialized in one service does not necessarily mean
that other services are not offered at all, as the notion of focus would suggest. It may
simply mean that other services have, in relative terms, a lower importance in the
service-mix. We adopt this understanding of specialization as a continuous variable
because many organizations may not be able to dedicate themselves to a small number
of products or services (focus). Nevertheless, they may have some discretion with respect
to the relative emphasis they can put on certain products or services (specialization).
This is the case for general hospitals that are the empirical focus of this paper.
While focus constitutes an extreme form of specialization, the theoretical arguments
regarding the benefits of a focus strategy may not apply in the same way to weaker
forms of specialization. The focus literature argues that the positive performance effect
of focus stems from the small number of products and processes and the corresponding
reduction of complexity. Such a reduction of complexity does not necessarily happen,
however, if an organization simply increases its degree of specialization in one service
at the expense of other services, while maintaining a broad portfolio of services. In this
case, there is no focus, but there is specialization.
One can imagine that the administrative and medical attention given to a particular
service increases as its relative importance in the service-mix grows. Heightened
awareness will mean that more effort is dedicated to the service in question, simply
because of the perceived importance of that service for the hospital or department. In
such a case, an improvement in operational performance can take place. We thus
hypothesize that specialization in a service will have a positive effect on operational
performance of that service. We further hypothesize that this effect should exist
independently of the effects of volume, learning and patient selection that are
correlated with, but not the same as, the specialization effect.
Past research on specialization mostly focuses on firm- or industry-wide performance
and its link to service-mix (product-mix) specialization. For example, Brush and Karnani
(1996) analyze the impact of specialization on the productivity of US manufacturing
plants. Using industry level data on specialization and plant performance, they find only
limited evidence in support of the link between specialization and performance. In the
hospital setting, Farley and Hogan (1990) find that hospital specialization increased
between 1980 and 1985; that it lowered costs; and that increases in hospital
specialization are most visible in those hospitals that have the greatest incentive to
reduce costs. Eastaugh (2001) finds specialization in hospitals to be associated with a
reduction in unit cost per patient admission and the increase in quality of care.
While the results of the above-cited studies indicate that there may be benefits from
specialization at the hospital level, they do not reveal if there is an underlying pure effect
of specialization on the performance of the service in question. The results of the studies
might be driven by the fact that hospitals select services in which performance effects
are the largest (Eldenburg and Kallapur, 1997) or admit patients with the best outcomes
(Kc and Terwiesch, 2009). Or they may be a consequence of an increased volume of a
service or of learning effects over time (Pisano et al., 2001; Huckman and Zinner, 2008). In
this study, we examine the impact of pure specialization on operational performance,
after controlling for the potential other factors that influence performance.
According to our above elaboration, we formulate the following hypotheses
regarding the performance impact of service-related variables. The first three
hypotheses relate to effects that may go along with specialization. The fourth
hypothesis concerns the pure specialization effect that may exist above and beyond
these other effects. This is the effect we are primarily interested in:
H1. An increase in the volume of a service leads to lower length of stay for that
service.
H2. An increase in cumulative volume (learning) leads to lower length of stay for
that service.
H3. Length of stay will be lower in the case of favorable patient selection.
H4. Specialization in a service reduces length of stay for that service.
3. Research design
In order to test our hypotheses, we need detailed data on hospital operations that allow
us to observe how an increase or decrease in a service relates to changes in the
performance of that service. To this end, we use a hospital and patient database provided
to us by the Austrian Ministry of Health. Similar to other countries, publicly financed
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hospitals in Austria are reimbursed for the costs of ongoing operations on the basis of a
DRG system (BMGFJ, 2008). The Austrian DRG system relies on a detailed
documentation[1] of patient-cases according to requirements defined by the Ministry
of Health[2]. The DRG system only applies to inpatients, while ambulant care is financed
on a lump sum basis. The total number of DRG points per hospital and year is translated
into a money value once the whole number of DRG points of all hospitals within the
respective province is known. This money value constitutes the revenues of the
hospital and these revenues are supposed to cover the costs for inpatient care[3].
Our database contains information on inpatients in 150 Austrian hospitals[4] for the
five-year period between 2002 and 2006. Data on the treatment of these patients are
provided in aggregated form. For each hospital, patients are classified into patient
groups by age and geographical origin. In total, there are 21 age groups (each
representing a five year age interval) and ten patient origin groups (nine Austrian
provinces and Foreign patients), thus equaling 210 different patient groups. A patient
group thus contains all patients within a certain age group (e.g. 0-5 years) and within a
certain region (e.g. Lower Austria). Information on the treatment of these patients is
provided in the form of 21 disease types as represented by the International
Classification of Diseases and Related Health Problems (ICD codes). These ICD codes
constitute broad service groups and may relate to rather different functional
specializations within a hospital. In order to better capture these specializations, we
combine ICD codes with information on hospital departments, which is also available
for each patient group. Hospitals contain up to 27 departments each of which may treat
up to 21 disease types. This gives us 567 different department-ICD combinations
(27 department types x 21 disease types) for every hospital. We refer to these
combinations as services throughout our paper.
Hospital level data include information on hospital location by Austrian province and
ownership information. Department level data include information on the type of
department, number of beds, number of intensive care beds, use of capacity, and number
of employees by employee category. For each patient group and service combination, the
database contains data on the number of patients and the total length of stay.
We proceed by defining the variables used in our analysis. These variables represent
the constructs we referred to in our literature review section, namely, operational
performance, specialization, volume, learning, patient characteristics, department
characteristics, and finally hospital characteristics. Following our discussion and
hypothesis development, we expect specialization to have an impact on operational
performance above and beyond the impact of volume, learning, patient characteristics,
department characteristics, and hospital characteristics.
Operational performance
How well an organization performs may be measured in a variety of ways, depending on
the dimension of performance one is interested in (Venkatraman and Ramanujam, 1986).
In public and non-profit hospitals, financial or economic viability is usually regarded as
only one of several important dimensions of performance. Stakeholders, such as owners,
patients, or the general public, usually associate hospital performance to an important
extent with additional criteria such as quality of care or patient satisfaction. Therefore,
research on hospital performance should ideally consider both measures of economic
performance and quality measures (Li and Benton, 1996; Berk and Moinzadeh, 1998).
Li and Benton (1996) classify performance measures into internal quality measures,
external financial status measures, external quality measures, and internal cost
measures. Measures relating to the external financial status may concern, for example,
the overall financial status of the hospital (e.g. profits) or its market position (e.g. market
share). Internal quality may be measured at different stages in hospital operations, such
as for clinical outcomes, customer service, or internal processes (Kc and Terwiesch,
2009). External quality may be measured through perceived quality and patient
satisfaction. Finally, Li and Benton (1996) divide internal cost measures into measures of
production efficiency (length of stay and case mix) and measures of utilization
(occupancy rate). While including measures of quality (internal and external) would
provide for a more comprehensive picture of performance, most existing studies have
focused on internal cost measures, such as average length of stay (Kim et al., 2000;
Eldenburg and Krishnan, 2003; McDermott and Stock, 2007; Hyer et al., 2009; Kc and
Terwiesch, 2009), occupancy rate (Kim et al., 2000; Goldstein et al., 2002), or financial
status measures, such as revenue per patient day (Eldenburg and Krishnan, 2003;
Krishnan, 2005). One reason for this may be that data on quality are often not available in
standardized form, since hospitals are usually not required to collect and report such
data. In this study, we analyze operational performance and measure it in terms of length
of stay (LOS). Consistent with the above cited prior studies, we define length of stay
(LOS) as the number of days a patient spends in the hospital.
Specialization
In a highly regulated public hospital sector such as that of Austria, hospitals usually face
structural constraints which make an exclusive focus on a small number of services
difficult or impossible. In Austria, public hospitals are subject to a Versorgungsauftrag
(mandate for ambulant and inpatient care), according to which they have to accept all
patients that require treatment that is offered by the hospital. To be sure, not every hospital
provides a comprehensive range of treatments. Rather, each provincial government
defines a plan which stipulates, among others, the department structure and maximum
number of beds that each hospital is allowed to carry. Size and department structure thus
constitute external constraints for public hospitals. Within these structures, hospitals have
some possibilities to specialize, however. Specialization thereby takes place not so much on
the level of specific treatments, but rather on the level of broader groups of treatments
(such as rheumatology)[5]. This is well captured with our definition of services as
department and ICD-code combinations. Consequently, we define Service Specialization
(SPEC) as the percentage that the service has in the departments total number of patients.
Our measure is based on the Specialization Ratio used in Capon et al. (1988)[6]. However,
instead of measuring specialization of the department by the percentage of the biggest
service only, we look at each service and its degree of specialization separately. Our
approach is therefore also different from the one adopted by Farley and Hogan (1990) who
explore changes in case-mix specialization and their effects on costs. Farley and Hogan
(1990, p. 759) define specialization as the extent to which [a hospitals] case-mix
proportions deviate from what might be considered normal (Eastaugh, 2001)[7].
Volume effect
We follow Huckman and Zinner (2008) in separating the effect of specialization on
performance from that of volume and learning. Prior literature analyzes the effect
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of volume on performance in hospitals (Luft et al., 1990; Hannan, 1999). Predominantly,

this literature finds positive performance effects of volume[8]. Since the volume effect
can be correlated with specialization, given the limited capacity of departments and
hospitals, we control for it in our analysis. We use three proxies to account for the
volume effect. Department volume (Volume.D) is computed as the natural log of
the number of patients in the hospital department (Huckman and Zinner, 2008). Service
volume (Volume.S) is computed as the natural log of the number of patients in the same
service. Patient volume (Volume.P) is computed as the natural log of the number of
patients in the same patient group.
Learning effect
Pisano et al. (2001) and Huckman and Zinner (2008) argue that there is a positive learning
effect on operational performance. Consistent with Pisano et al. (2001) we define learning
as the (over time) cumulative volume of patients. As with volume, we compute three
proxies for the learning effect, i.e. cumulative department volume (Learning.D),
cumulative service volume (Learning.S) and cumulative patient volume (Learning.P).
Case characteristics
Both length of stay of a patient and specialization might be affected by case
characteristics. As pointed out by Li and Benton (1996, p. 453), measurement of health
care production efficiency is usually based on the case mix and length of stay. Kc and
Terwiesch (2009) find a correlation between patient characteristics and length of stay
in an empirical study of cardiothoracic surgery patients. Specialization may also be
affected by patient characteristics, as hospitals are prone to favorable patient selection
(Huckman and Zinner, 2008) and changes in the service mix (Eldenburg and Kallapur,
1997). Under the case-mix approach patients are classified by their demographic
characteristics, diagnosed illness and case acuity (Li and Benton, 1996). We thus
control in our models for patient age, origin and the service group (type of
treatment)[9]. Patient age is given in our database in the form of 21 age categories in
five-year intervals. We use the variable Age as an ordinal variable ranging from one
(lowest age group) to 21 (highest age group). In terms of patient origin, we distinguish
between patients from the hospitals home province and other patients. To this end, we
create two binary variables. Other Province is a binary variable equal to one if the
patient comes from a province other than the one in which the hospital is located in,
and zero otherwise. Foreign is a binary variable that equals one if the patient comes
from a foreign country and zero otherwise.
Hospital and department characteristics
Prior research has found that various institutional characteristics impact the performance
of hospitals (Goldstein et al., 2002; Li et al., 2002; Douglas and Ryman, 2003; Eldenburg and
Krishnan, 2003; Eldenburg et al., 2004; Huckman and Pisano, 2006; McDermott and Stock,
2007). These cross-sectional differences between hospitals and hospital departments can
also have an impact on the level of specialization in a particular service. Li et al. (2002)
classify these characteristics into long term facility and service choices and intermediate
operations decisions. Long term facility and service choices include bed size, location,
outpatient service and service network and equipment/technology. Intermediate
operations decisions include demand management, workforce management,
and continuous improvement. We control for a majority of these characteristics by

introducing a series of control variables covering a range of department and hospital
characteristics identified in prior literature.
Following prior research, we control for size in our models by using the number of
beds in each department. Eldenburg and Krishnan (2003) and Krishnan (2005) show
that size has a positive impact on operating margin and revenue per patient day,
respectively. McDermott and Stock (2007) find size to be positively correlated with
length of stay. We compute the variable D.Beds as the natural log of the number of
beds in the given department.
In addition to the number of beds we control for the fraction of intensive care beds in
the department. We expect services in departments with higher fraction of intensive
care beds to have a longer length of stay due to the type of patients they are able to
admit. To this end, we use the variable IntBeds which equals one if the department has
intensive care beds and zero otherwise[10].
Organizational characteristics and compensation of staff in hospital departments
impact their operational and financial performance (Becker and Gerhart, 1996; Li et al.,
2002; Brown et al., 2003; Ittner et al., 2007). To control for these effects we construct two
variables. We use the ratio of medical staff to total staff in the department (MStaff) and
the ratio of medical doctors to medical staff (MDs) as control variables. We expect both
MStaff and MDs to be negatively related to the length of stay, as we expect the more
qualified staff to contribute to better performance.
Higher occupancy rate can signify better ability of management to attract patients,
but at the same time it can signify unfavorable patient selection. Krishnan (2005) does
not hypothesize about the sign of the correlation between occupancy rate and revenue
per patient day, but finds a negative correlation between occupancy rate and revenue
per patient day. We control for occupancy rate (OcRate), the department use of
capacity, but make no prediction on whether this coefficient should be negatively or
positively associated with length of stay.
We use a measure of complexity as a control variable in our regression models.
Number of services (N.Services) is the number of services in the department the service
belongs to. We control for the number of services to exclude the possibility that
specialization is driven by the number of services.
To take into account the effect that institutional characteristics can have on length of stay
and specialization, we control for a number of available hospital characteristics.
Goldstein et al. (2002) and Li et al. (2002) find hospital location has a significant impact on its
performance (McDermott and Stock, 2007). Eldenburg and Krishnan (2003) argue that
private hospitals perform better than their public counterparts (Eldenburg et al., 2004). In our
models we therefore control for the province in which the hospital is located by introducing
province fixed effects. We also introduce ownership fixed effects to control for cross
sectional ownership differences. We thereby use ownership dummies representing four
types of ownership: religious institutions, municipalities, provinces and private owners. At
the hospital level, like at the level of departments, we control for size and complexity. We use
the natural log of hospital number of beds as a proxy for the hospital size (H.Size) and the
number of departments as a proxy for the hospital complexity (N.Departments).
Huckman and Pisano (2006), however, find there are other unobserved hospital
characteristics that improve their performance. As a robustness check, we control for
hospital fixed effects.
Service
specialization
in hospitals
477
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Determinants of specialization
All of the above discussed variables can have an impact on the level of specialization in a
particular service. However, in addition to those variables, we identify three variables
that should be correlated with specialization, but should not be correlated with length of
stay: competition intensity, introduction of new services, and change in regulation.
Competition intensity in a particular service in a given province should limit the extent to
which a hospital can specialize in that service. Competition intensity, however, should
not have a direct impact on patient length of stay. Similar to Douglas and Ryman (2003)
and Krishnan (2005) we proxy for competition intensity by using the
Herfindahl-Hirschman Index (HHI) as a sum of the squared market shares of hospitals
in the market (Hirschman, 1964). To compute market shares we use the number of
patients by hospital and the total number of patients in the province. We compute the
HHI for every service, separately for every province. For easier interpretation we use
(1-HHI) where higher values represent higher levels of competition in a particular
service. Introducing a new service should arguably limit the extent to which a hospital
can specialize in that service. To proxy for the introduction of new services in
departments, we create a dummy variable NewServ that is equal to one if the service was
introduced during our 2002-2006 sample period and zero otherwise. Finally, to proxy for
regulatory change we use the change in the reimbursement policy of the province of
Carinthia. As of January 1, 2005, Carinthia started to discourage the provision of certain
types of services within Carinthian hospitals. This concerns especially those services
which can also be consumed in private practices. The new regulation stipulates a list of
services and a benchmark level for the DRG points that a hospital accumulates with each
of these services. Hospitals are then penalized for surpassing this benchmark level
insofar as all DRG points that they generate above the level are reimbursed at a reduced
rate. To control for this change in regulation, we introduce a variable called RegChange
that is equal to one if the observation is from the province of Carinthia and if year equals
2005 or 2006, and zero otherwise. We argue that a change in specialization will be
exogenously determined since it is driven by a change in reimbursement policy.
Regression models
In order to test our hypothesis that specialization yields positive performance effects
we first estimate the following OLS regression model, with the dependent variable
(LOS) being measured on the level of patient groups within each service:
LOS b0 b1 Specialization b2 Volume b3 Learning b4 Age
b5 Other Province b6 Foreign di Services Type Dummies
b7 Beds:D b8 IntBeds b9 MStaff b10 MDs b11 OcRate 1
b12 N:Services b13 Beds:H b14 N:Departments
di Owner Dummies dk Province Dummies dl Year Dummies
To correct for the presence of serial correlation and heteroskedasticity, we compute
cluster robust t-statistics (Arellano, 1987; Kezdi, 2004; Stock and Watson, 2008). Since
LOS is computed for each patient group (within a service), while our Specialization
variable is computed at the level of services, we cluster standard errors by clusters
defined by hospital and service type[11]. We introduce fixed effects by service type,
ownership type, province, and year. Fixed effects and other control variables account for
differences between patient characteristics and treatment types (Age, Other Province,
Foreign, and Service Type Dummies), department characteristics (Beds.D IntBeds,
MStaff, MDs, OcRate, and N.Services), hospital characteristics (Beds.H, N.Department,
Owner Dummies, Province Dummies) and different time periods (Year Dummies).
As measures of Volume and Learning, we use department volume and cumulative
department volume (Volume.D and Learning.D). As we explain in more detail in the
Results section, we run two robustness checks where we replace Volume.D and
Learning.D first with Volume.S and Learning.S and then with Volume.P and Learning.P.
These two robustness checks yield qualitatively unchanged results. In the remainder of
the paper, we refer to Volume.D and Learning.D simply as Volume and Learning,
respectively.
Based on our hypothesis that specialization has a positive impact on operational
performance (H4), we expect the coefficient associated with specialization
(Specialization) to be negative and statistically significant. In line with H1 and H2,
we expect the coefficients associated with Volume and Learning to be negative and
statistically significant, consistent with the results of prior studies. Based on H3, we
anticipate that favorable patient selection in terms of age and patient origin has a
negative impact on length of stay. We therefore expect our variables Age, Other
Province, and Foreign to have negative and significant coefficients.
McDermott and Stock (2007) find size to be positively correlated with length of stay.
Accordingly, we expect the coefficient associated with the Beds.D variable to be positive
and statistically significant. We further expect the coefficient associated with the
IntBeds variable to be positive and statistically significant given that departments
which have intensive care beds can be expected to admit patients with longer length of
stay. We expect both the coefficients associated with MStaff and MDs to be negative and
statistically significant, as we expect the more qualified staff to contribute to better
performance. Higher occupancy rate (OcRate) can signify better ability of management
to attract patients, but at the same time it can signify unfavorable patient selection.
Krishnan (2005) does not hypothesize about the sign of the correlation between
occupancy rate and revenue per patient day, but finds a negative correlation between
occupancy rate and revenue per patient day. We control for occupancy rate, the
department use of capacity including outpatients, but make no prediction on whether
this coefficient should be negatively or positively associated with our LOS variable.
Finally, we control for the number of services in the department (N.Services) as a
measure of complexity, but make no prediction on the sign of the coefficient associated
with this variable.
Consistent with the above cited prior literature, we control for the following hospital
characteristics: size (Beds.H), complexity (N.Departments), ownership (Ownership
Dummies), and location (Province Dummies). Table I summarises all variables of
interest and the control variables that can be expected to impact the operational
performance of a service.
Direction of causality between specialization and length of stay
In our regression model (1), we assume the Specialization variable to be exogenously
given. However, it is possible that a decrease in length of stay, as a proxy for hospital
efficiency, attracts more patients to the hospital, which in return allows the hospital to
become more specialized in the service in question. To account for this potential
Service
specialization
in hospitals
479
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480
Table I.
Independent variables
and their expected impact
(sign) on length of stay
(LOS)
Variable
Main variables of interest
Specialization
Volume
Learning (cumulated volume)
Patient age
Patient origin (other province)
Patient origin (foreign)
Controls for department characteristics
Size (number of beds)
Share of intensive care beds
Medical staff in total staff
Doctors in medical staff
Occupancy rate
Complexity (number of services)
Controls for hospital characteristics
Province
Ownership
Size (number of beds)
Complexity (number of departments)
Expected sign
?
?
?
?
?
?
reverse causality, we estimate a two stage generalized method of moments

(GMM)[12-14]. In the first stage, we estimate the following regression models:
Specialization b0 b1 Volume b2 Learning b3 Age
b4 Other Province b5 Foreign
di Services Type Dummies b6 Beds:D b7 IntBeds
b8 MStaff b9 MDs b10 OcRate b11 N:Services
2
b12 Beds:H b13 N:Departments di Owner Dummies
dk Province Dummies b14 NewServ b15 RegChg
dl Year Dummies
Specialization b0 b1 Volume b2 Learning b3 Age
b4 Other Province b5 Foreign
di Services Type Dummies b6 Beds:D b7 IntBeds
b8 MStaff b9 MDs b10 OcRate b11 N:Services
3
b12 Beds:H b13 N:Departments di Owner Dummies
dk Province Dummies b14 L:Specialization
b15 RegChg dl Year Dummies
In model (2), NewServ and RegChg serve as additional instruments in the regression on
the full sample of observations. In model (3), we replace the NewServ variable by a
lagged Specialization (L.Specialization) variable as an instrument[15]. This reduces the
number of observations to 669,016. While including all three instruments into the same
regression, or estimating the regression model with the any combination of instruments,
yields qualitatively unchanged results, we choose to use two instruments at a time.
Bound et al. (1996) argue that the problem of choice among multiple valid instruments
persists in large samples (Donald and Newey, 2001). Roodman (2009, p. 135) argues that
a large instrument collection overfits endogenous variables even as it weakens the

Hansen (1982) test of the instruments joint validity. In the second stage, we estimate the
regression model (1). In all regression models we cluster standard errors by
hospital-service clusters (as in our main regression models).
Volume and learning as additional endogenous regressors

As with Specialization, length of stay (LOS), consistent with our potential reverse
causality argument, could have an impact on the Volume and Learning variables. In order
to account for all three variables (Specialization, Volume, and Learning) as endogenous
regressors, we estimate a two-stage GMM with three first stage regressions as follows:
Specialization; Volume; Learning b3 Age b4 Other Province
b5 Foreign
di Services Type Dummies
b6 Beds:D b7 IntBeds b8 MStaff
b9 MDs b10 OcRate
b11 N:Services b12 Beds:H
4
b13 N:Departments
di Owner Dummies
dk Province Dummies
b14 L:Specialization b15 L:Volume
b16 L:Learning b17 RegChg
dl Year Dummies
The regressions are estimated separately for Specialization, Volume, and Learning.
L.Specialization, L.Volume, L.Learning, and RegChg are (additional) instrumental
variables. L.Volume and L.Learning are lagged Volume and lagged Learning variables,
respectively. In the second stage, we estimate the regression model (1). For the reasons
cited above, we keep the number of instruments to the minimum (number of endogenous
regressors plus one).
4. Data analysis and results
In order to estimate our regression models, we first impose several restrictions on our
dataset. We exclude observations where all required data are not available. We also exclude
hospitals and departments that started their operations after 2002 since their characteristics
and service mix is not comparable to existing hospitals and their departments[16]. Our final
sample thus contains data on 142 hospitals (666 hospital-year observations), their
876 departments (4,133 department-year observations), their 14,786 services
(60,248 service-year observations) and finally their 322,193 patient groups
(841,687 patient group-year observations). For each patient group observation, the
database contains the number of patients in the group and length of stay (total for group).
We provide descriptive statistics in Table II.
Panel A shows the distribution of hospitals and observations by Austrian
provinces. Austrian hospitals operate in nine Austrian provinces with the number of
hospitals ranging from five (Burgenland) to 26 (Steiermark), with a mean of 16 and a
median of 12 hospitals. Panel B of Table II shows the distribution of hospitals and
observations by ownership type. More than half of the Austrian hospitals are owned
Service
specialization
in hospitals
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482
Table II.
Sample characteristics
N hospitals
%
N observations
Panel A distribution of observations by province
Burgenland
5
3.52
33,646
Carinthia
11
7.75
62,146
Lower Austria
24
16.90
121,568
Upper Austria
24
16.90
148,876
Salzburg
10
7.04
75,499
Steiermark
26
18.31
109,753
Tirol
12
8.45
91,109
Vorarlberg
6
4.23
35,896
Vienna
24
16.90
163,194
Total
142
100.00
841,687
Panel B distribution of observations by ownership
Religious order
31
21.83
174,712
Municipal
19
13.38
133,677
Provincial
89
62.68
524,953
Private
3
2.11
8,345
Total
142
100.00
841,687
Panel C distribution of observations by year
Year
N
%
2002
172,661
20.51
2003
171,084
20.33
2004
168,157
19.98
2005
167,971
19.96
2006
161,814
19.22
Total
841,687
100.00
Panel D descriptive statistics
Variable
N
Mean
SD
LOS
841,687
7.05
6.52
Specialization
841,687
0.15
0.20
Volume
841,687
7.96
0.91
Learning
841,687
8.88
1.09
Age
841,687
10.70
4.84
Other province
841,687
0.33
0.47
Foreign
841,687
0.07
0.26
Beds.D
841,687
4.07
0.83
IntBeds
841,687
0.31
0.46
MStaff
841,687
0.91
0.06
MDs
841,687
0.22
0.06
OcRate
841,687
8.97
0.17
N.Services
841,687
16.44
2.66
Beds.H
841,687
6.07
0.84
N.Departments
841,687
10.25
6.16
HHI
841,687
0.70
0.27
NewServ
841,687
0.02
0.13
RegChange
841,687
0.03
0.17
%
4.00
7.38
14.44
17.69
8.97
13.04
10.82
4.26
19.39
100.00
20.76
15.88
62.37
0.99
100.00
Min.
1.00
0.00
0.00
0.00
1.00
0.00
0.00
0.00
0.00
0.40
0.00
8.35
1.00
3.37
1.00
0.00
0.00
0.00
p25
3.00
0.02
7.59
8.31
7.00
0.00
0.00
3.56
0.00
0.87
0.19
8.89
15.00
5.40
5.00
0.63
0.00
0.00
Mdn
5.00
0.06
8.01
8.99
11.00
0.00
0.00
4.11
0.00
0.91
0.21
9.01
17.00
5.93
9.00
0.81
0.00
0.00
p75
8.85
0.21
8.46
9.56
15.00
1.00
0.00
4.55
1.00
0.96
0.26
9.08
18.00
6.86
15.00
0.89
0.00
0.00
Max.
39.50
0.71
10.26
11.75
21.00
1.00
1.00
6.46
1.00
1.00
0.73
9.26
20.00
7.61
24.00
0.95
1.00
1.00
Notes: The sample of patient groups comes from the Austrian Ministry of Health database; the sample
contains information on patients in 142 Austrian hospitals for the five-year period between 2002 and 2006; this
includes detailed information on, hospitals, departments and 841,687 patient group-year observations; hospital
level data include information on hospital location by Austrian federal state and ownership information;
department level data include information on the department type, number of beds, number of intensive care
beds, use of capacity, and information on number of employees by employee category; for each service, the
database contains the number of patients in the group, length of stay (total for group); panel A shows the
distribution of hospitals and observations by Austrian provinces; panel B shows the distribution of hospitals
and observation by the type of ownership; panel C shows the distribution of observations by year; panel D
shows descriptive statistics on variables used in our study; variables are defined in the Appendix
by provinces (89 out of 142 hospitals), while the rest is repartitioned between religious
orders (31 hospitals), municipalities (19 hospitals) and private owners (three hospitals).
Panel C shows the distribution of observations by year.
The number of hospital departments ranges from one to 24 (a mean of six and a
median of five departments). The number of services per hospital department ranges
from one to 20, with a mean of 17 and a median of 18 while the number of services per
hospital ranges from one to 424, with a mean of 104 and a median of 84 (untabulated).
Big differences in hospital characteristics are the result of our sample containing all
publicly funded, non-profit hospitals in Austria, including the highly focused ones
(e.g. psychiatric hospitals with only one department). Excluding these specialized
hospitals from our sample does not alter our findings. We included them since these
hospitals can easily be compared at the department level to other hospitals, which
provide the same types of service in equivalent departments.
In Panel D of Table II we show descriptive statistics of the variables used in our
analysis. For brevity, we do not show descriptive statistics for the Volume.P,
Learning.P, Volume.S, and Learning.S variables as we do not tabulate results including
these four variables. Length of stay (LOS) ranges from one day to 39 and half days,
with a mean of seven and a median of five days. Across all observations, specialization
ranges from less than one to 71 percent of department number of patients, with a mean
of 20 percent and a median of 6 percent.
Table III shows Spearman pairwise correlations between our variables. There is a
high and statistically significant correlation between Volume and Learning regardless
if we measure these variables at the department, service or patient group level (all
correlations exceed 0.85). There is also a high and statistically significant correlation
between department number of beds (Beds.D) and department volume and learning
(0.86 with Volume.D and 0.72 with Learning.D).
We present our main results in Table IV.
Table IV shows estimates of our regression model (1). The results are consistent with
our hypothesis that specializing in a service yields shorter length of stay. The result is
statistically and economically significant. For a change in Specialization by 10 percent,
LOS would decrease by one-third of a day (0.31 fraction of a day), which compared to the
median length of stay of five days represents a significant improvement in performance.
Coefficients associated with the Volume and Learning variables are negative and
statistically significant, consistent with our predictions. They imply that positive
performance effects of volume and learning exist. Patient characteristics all have a
significant impact on length of stay. The results are shown for Volume.D and Learning.D
variables. In spite of high and statistically significant correlation between Volume.D and
Learning.D (0.8547), postestimation tests indicate no presence of multicollinearity in our
regression models. Individual variance inflation factors (VIFs) remain below ten, while the
mean VIF remains below six (see, e.g. Kutner et al., 2004 for interpretation of VIFs). We run
two robustness checks. First, we replace Volume.D and Learning.D with patient group
volume (Volume.P) and cumulative volume (Learning.P), respectively, (untabulated). Our
results remain qualitatively unchanged. Second, we replace Volume.D and Learning.D
with service volume (Volume.S) and cumulative volume (Learning.S). Correlation between
Specialization and Volume.S and Learning.S variables equals 0.6700 and 0.6365,
respectively, while the correlation between Volume.S. and Learning.S equals 0.9504.
In this case, Volume.S and Learning.S VIFs exceed ten (10.42 and 12.99, respectively)
Service
specialization
in hospitals
483
Table III.
Correlation matrix
1
20.1349 *
20.1118 *
20.0105 *
0.2406 *
0.0871 *
20.1203 *
20.1452 *
20.0701 *
0.0352 *
20.0165 *
20.3570 *
0.0753 *
0.0685 *
20.0615 *
20.0875 *
0.0044 *
Age
Other
province
Foreign
Beds.D
IntBeds
1
0.8547 * 1
0.0088 * 0.0115 * 1
0.1044 * 0.0895 * 20.0464 *
1
0.0345 * 0.0312 * 20.0506 * 20.1958 *
1
0.8626 * 0.7191 * 0.0872 *
0.1044 *
0.0217 * 1
0.2527 * 0.2022 * 0.0308 *
0.0415 *
0.0375 * 0.3810 * 1
*
*
*
*
20.1052 20.0897
0.0271 20.0521 20.0098 * 20.0964 * 0.0565 *
20.2009 * 20.1615 * 20.0589 *
0.0204 * 20.0062 * 20.3172 * 20.1241 *
0.3002 * 0.2740 * 0.1684 *
0.0322 *
0.0062 * 0.3320 * 0.2063 *
*
*
*
0.5617
0.4685 20.0658
0.0086 *
0.0218 * 0.4515 * 0.2337 *
0.2152 * 0.1855 * 20.0594 *
0.1022 *
0.0061 * 0.2219 * 0.1128 *
0.1325 * 0.1299 * 20.0742 *
0.0873 *
0.0240 * 0.0894 * 0.0890 *
*
*
*
*
0.2236
0.1776
0.0940 20.0064 20.0217 * 0.2456 * 0.1376 *
*
*
*
*
20.1321 20.0783
0.0056 20.0587 20.0236 * 20.1221 * 20.0255 *
0.0185 * 0.1101 * 20.0015 20.0103 *
0.0058 * 0.0238 * 20.0236 *
Learning
1
20.0710 *
20.0579 *
0.0618 *
20.2786 *
20.2515 *
0.1666 *
0.0069 *
20.0851 *
MStaff
1
20.0099 * 1
20.0203 * 0.8988 *
0.2357 * 20.3291 *
20.0973 * 0.0042 *
20.0024
0.0397 *
1
20.3159 *
0.0119 *
0.0500 *
OcRate N.Services Beds.H N.Departments
1
20.1549 * 1
20.0970 * 0.0632 *
0.1317 * 0.1162 *
0.1924 * 0.0708 *
20.1183 * 0.0811 *
0.0207 * 20.0352 *
20.0829 * 0.0195 *
MDs
NewServ RegChg
1
20.1085 * 1
20.0929 * 0.0121 *
HHI
Health database; the sample contains information on patients in 142 Austrian hospitals for the five-year period between 2002 and 2006; this includes
detailed information on, hospitals, departments and 841,687 patient group-year observations; hospital level data include information on hospital location
by Austrian federal state and ownership information; department level data include information on the department type, number of beds, number of
intensive care beds, use of capacity, and information on number of employees by employee category; for each service, the database contains the number of
patients in the group, length of stay (total for group); variables are defined in the Appendix
Notes: Significant at: *5 percent level; correlation matrix of variables used in the study; the sample of patient groups comes from the Austrian Ministry of
1
0.0250 *
20.0897 *
20.0882 *
0.3225 *
20.0011
20.0553 *
0.1031 *
0.0504 *
20.0415 *
20.0824 *
0.1497 *
20.1277 *
0.0629 *
0.0174 *
20.0360 *
0.0154 *
20.0008
Specialization Volume
484
LOS
Specialization
Volume
Learning
Age
Other province
Foreign
Beds.D
IntBeds
MStaff
MDs
OcRate
N.Services
Beds.H
N.Departments
HHI
NewServ
RegChg
LOS
IJOPM
32,4
LOS
Specialization
Volume
Learning
Age
Other province
Foreign
Beds.D
IntBeds
MStaff
MDs
OcRate
N.Services
Beds.H
N.Departments
Owner municipalities
Owner state
Owner private
Constant
Service type FE
Year FE
Province FE
Number of observations
F
Prob . F
Adjusted R 2
2 3.104 * * * (6.840)
2 3.979 * * *(14.739)
2 0.600 * *(2.318)
0.417 * * *(99.726)
2 0.076 * *(2.376)
2 0.929 * * *(19.262)
5.007 * * *(28.208)
2 0.490 * * *(6.365)
2 1.159 * *(2.244)
2 0.813 (1.524)
4.456 * * *(20.500)
2 0.062 * *(2.551)
2 0.086 (0.522)
0.034 * *(1.976)
2 0.249 * * *(3.158)
2 0.040 (0.572)
1.268 * * *(3.468)
2 18.335 * * *(13.006)
Included
Included
Included
841,687
501.185
0.000
0.316
Notes: Significant at: *10, * *5 and * * *1 percent levels, respectively; determinants of length of stay
(LOS); the sample contains data on 841,687 patient group-year observations from 142 Austrian nonprofit hospitals financed from public sources in the 2002-2006 period; the regression model is estimated
as OLS regression models; the regression includes fixed effect as stated in the table; standard errors
are clustered at the hospital-service level; t-statistics are in parentheses; all data are annual; all data
come from the Austrian Ministry of Health Database; variables are defined in the Appendix
indicating a potential multicollinearity problem in our regression model. To circumvent

this problem, we use a modified Gram-Schmidt procedure Golub and Van Loan, 1996) to
orthogonalize Specialization, Volume.S and Learning.S variables. This procedure
generates a new set of orthogonal variables, eliminating the problem of multicollinearity
in our regression model. Estimating our regression model with orthogonalized variables
yields results qualitatively unchanged compare to our main results (untabulated).
However, as orthogonalizing variables is a procedure that depends on the sequence of
variables orthogonalized in the equation, we rather use Volume.D and Learning.D as
control variables in our main results.
Age is naturally positively correlated with LOS, while patients from other Austrian
provinces (Other Provinces) and foreign patients (Foreign) spend less time in hospitals,
all else being equal. Huckman and Zinner (2008) argue that even patients destined for the
same treatment, if they are capable of travelling larger distances, should be healthier and
more mobile than other patients. Our results are consistent with this argument.
Similar to McDermott and Stock (2007) we find size (Beds.D) to be positively
correlated with length of stay. We additionally find that the presence of intensive care
Service
specialization
in hospitals
485
Table IV.
Specialization and
length of stay
IJOPM
32,4
486
beds (IntBeds) reduces the number of days patients spend in the department,
inconsistent with our prediction. The coefficients associated with MStaff and MDs
variables have the predicted signs indicating that more medical staff and more medical
doctors lower length of stay. The coefficient associated with occupancy rate (OcRate) is
positive and statistically significant providing support for the unfavorable patient
selection argument. We find no correlation between hospital size (Beds.H) and length of
stay (LOS). While length of stay (LOS) is negatively correlated with number of services
within a department (N.Services), it seems to be unrelated to the number of
departments in a hospital (N.Department). Finally, our analysis indicates that
compared to hospitals owned by religious orders (our base case), hospitals owned by
municipalities are more efficient, while private hospitals are less efficient. Provincial
hospitals do not differ significantly from those owned by religious orders.
Table V shows estimates of two-stage GMM LOS regressions with models (2) and
(3) in the first stage. For brevity we do not tabulate the first stage regression estimates.
Our results are consistent with the results for the OLS regression model (1). The
coefficient associated with the Specialization variable is negative and statistically
significant in both regressions. With the exception of Learning and Other Province, all
variables in the LOS regression with model (2) in the second stage are statistically
significant and have the same sign as the coefficient in the OLS regression. Coefficients
in the LOS regression with model (3) in the second stage are statistically significant
and have the same sign as those from the OLS regression. For both regression models,
post-estimation, we test for the validity of our instruments. We use the Sargan-Hansen
test of over-identifying restrictions. In both cases, the test does not reject the null
hypothesis that our instruments are valid (Hansens J statistic p-value is . 0.10). Our
tests also reject under-identification, implying that our instruments are correlated with
the endogenous regressor (Kleibergen-Paap rk statistic p-value , 0.01)[17]. The
p-values of the F-statistic of the first stage regressions and F-statistic of excluded
instruments are all , 0.01. The endogeneity test of the endogenous regressor (as the
difference between Sargan-Hansen statistics for the model with the endogenous
regressor and the model with the variable being treated as exogenous) supports our
preference for a two-stage GMM as compared to an OLS regression model.
Table VI shows the estimates of the two-stage GMM model with three models (4) in
the first stage. As in Table V we do not tabulate the first stage regression estimates. The
coefficient associated with the Specialization variable is negative and statistically
significant, in line with our expectations and in line with our prior tests. Compared to the
estimates presented in Tables IV and V, the coefficient associated with the Learning
variable is not statistically significant, while its sign remains negative. As with LOS
regression models (2) and (3) in the first stage, our post-estimation tests confirm the
validity of the chosen regressors. The p-values of the F-statistic of the first stage
regressions and F-statistic of additional instruments are all , 0.01. The endogeneity test
of endogenous regressors supports our choice of the two-stage GMM over the OLS
regression model.
5. Discussion and conclusion
In this paper we analyze the impact of specialization within hospital departments on
operational performance. More precisely, we examine the impact of the relative weight of
a service in a department on patient length of stay. The empirical analysis is conducted
Specialization
Volume
Learning
Age
Other province
Foreign
Beds.D
IntBeds
MStaff
MDs
OcRate
N.Services
Beds.H
N.Departments
Owner municipalities
Owner state
Owner private
Constant
Service Type FE
Year FE
Province FE
F
Prob . F
R2
p-value (F test of excluded instruments)
p-value of Hansens J statistic
p-value of Kleibergen-Paap rk LM statistic
LOS with model

(2) in the first stage
LOS with model

(3) in the first stage
212.482 * *(2.542)
24.178 * * *(14.587)
20.446(1.617)
0.415 * * *(95.804)
0.086(0.964)
20.786 * * *(8.666)
5.034 * * *(27.524)
20.494 * * *(5.784)
21.332 * *(2.423)
20.827(1.463)
4.482 * * *(18.734)
20.104 * * *(3.577)
20.075(0.441)
0.032 *(1.843)
20.254 * * *(2.912)
20.042(0.544)
1.340 * * *(3.331)
20.002(0.060)
Included
Included
Included
841,687
471.298
0.000
0.164
0.0000
0.2814
0.0000
2 2.896 * * *(5.914)
2 4.024 * * *(15.024)
2 0.572 * *(2.249)
0.412 * * *(96.695)
2 0.084 * *(2.534)
2 0.889 * * *(17.977)
5.047 * * *(28.612)
2 0.460 * * *(5.705)
2 1.242 * *(2.380)
2 0.915 *(1.710)
4.439 * * *(19.996)
2 0.071 * * *(2.824)
2 0.126(0.765)
0.035 * *(2.057)
2 0.194 * *(2.412)
2 0.013(0.186)
1.254 * * *(3.425)
2 0.001(0.029)
Included
Included
Included
669,026
482.587
0.000
0.176
0.0000
0.3733
0.0000
Service
specialization
in hospitals
487
(LOS); the sample contains data on 841,687 patient group-year observations from 142 Austrian non-profit
hospitals financed from public sources in the 2002-2006 period; the regression models are estimated as a
two-stage GMM regression models; first stage regressions are estimated from the following models:
Specialization b0 b1 Volume b2 Learning b3 Age b4 Other Province
b5 Foreign di Services Type Dummies b6 Beds:D b7 IntBeds
b8 MStaff b9 MDs b10 OcRate b11 N:Services b12 Beds:H
b13 N:Departments di Owner Dummies dk Province Dummies
b14 NewServ b15 RegChg dl Year Dummies
Specialization b0 b1 Volumeb2 Learningb3 Ageb4 OtherProvinceb5 Foreign

di ServicesTypeDummiesb6 Beds:Db7 IntBedsb8 MStaff
3
b9 MDsb10 OcRateb11 N:Servicesb12 Beds:H
b13 N:Departmentsdi OwnerDummiesdk ProvinceDummies
b14 L:Specializationb15 RegChgdl YearDummies
The regression includes fixed effect as stated in the table. Standard errors are clustered at the hospitalservice level. t-statistics are in parentheses. All data are annual. All data come from the Austrian Ministry
of Health Database. Variables are defined in the Appendix
Table V.
Two-stage GMM
estimates with
specialization as
endogenous regressor
IJOPM
32,4
488
LOS with models (4) in the first stage

Specialization
Volume
Learning
Age
Other province
Foreign
Beds.D
IntBeds
MStaff
MDs
OcRate
N.Services
Beds.H
N.Departments
Owner Municipalities
Owner State
Owner Private
Constant
Service Type FE
Year FE
Province FE
F
Prob . F
R2
p-values (three F-tests of excluded instruments)
p-value of Hansens J statistic
p-value of Kleibergen-Paap rk LM statistic
2 2.899 * * *(5.921)
2 4.383 * * *(9.692)
2 0.368(0.878)
0.411 * * *(96.555)
2 0.081 * *(2.440)
2 0.885 * * *(17.906)
5.168 * * *(28.762)
2 0.467 * * *(5.769)
2 1.235 * *(2.367)
2 0.738(1.371)
4.563 * * *(20.324)
2 0.060 * *(2.274)
2 0.104(0.631)
0.034 * *(1.967)
2 0.196 * *(2.440)
2 0.017(0.237)
1.292 * * *(3.546)
2 0.000(0.016)
Included
Included
Included
669,016
478.393
0.000
0.176
0.0000
0.4885
0.0000
(LOS); the sample contains data on 841,687 patient group-year observations from 142 Austrian nonprofit hospitals financed from public sources in the 2002-2006 period; the regression model is estimated
as a two-stage GMM regression models; first stage regressions are estimated from the following models:
Table VI.
Two-stage GMM
estimates with
specialization, volume
and learning as
endogenous regressors
Specialization;Volume;Learning b3 Ageb4 OtherProvinceb5 Foreign

di ServicesTypeDummiesb6 Beds:Db7 IntBeds
b8 MStaffb9 MDsb10 OcRateb11 N:Services
b12 Beds:Hb13 N:Departmentsdi OwnerDummies 4
dk ProvinceDummiesb14 L:Specialization
b15 L:Volumeb16 L:Learningb17 RegChg
dl YearDummies
The regression includes fixed effect as stated in the table. Standard errors are clustered at the hospitalservice level. t-statistics are in parentheses. All data are annual. All data come from the Austrian Ministry
of Health Database. Variables are defined in the Appendix
on a sample of 142 Austrian non-profit hospitals for the 2002-2006 period. The Austrian
market is characterized by standardized services, fixed service prices, fixed capacity and
a limited ability of managers to make major investment decisions. In this environment,
hospitals have to treat a patient if they have the capabilities and capacity to do so. While,
therefore, an exclusive focus on a limited number of services will usually not be
a feasible strategy, hospital managers still have possibilities to emphasize certain

services in which their hospitals have a particularly strong expertise or interest.
We find that specialization results in shorter patient length of stay. We find this
effect to be not only statistically, but also economically significant. On average, an
increase in specialization by 10 percent would yield an approximately one-third of a
day shorter length of stay for that service. Our results indicate that this effect exists
over and above related effects of volume, learning and favorable patient selection. In
addition to our main results, we find that some organizational characteristics, such as
the number of medical doctors, have an impact on operational performance. Our results
are in line with the findings from prior research on economies of scale, learning effects,
and operational focus in hospitals (Pisano et al., 2001; Huckman and Zinner, 2008;
Hyer et al., 2009).
The reduction of patients length of stay should be interpreted as an improvement of
operational efficiency. Increasing the relative importance of a particular service
relative to other services allows a hospital department to become more efficient in
performing the service in question. We would argue that the main reason behind this
effect is that a service with high weight in the department is likely to receive particular
administrative attention, because performance improvements (or deteriorations) in this
service will have a relatively high impact on the overall performance of the department.
The fact that we find an impact of specialization on operational performance suggests
that this is something for hospital managers to pay attention to when making
service-mix decisions. Existing research has shown that hospital managers actively seek
to emphasize services which are highly attractive for their hospital (Krishnan et al.,
2004). Our findings add an interesting nuance to this. It is not only important to know
where one is good at, but also by how much one can improve in any of the activities
carried out. Hence, whether a service is attractive for a hospital is not only a question of
the current operational performance of that service, as measured, for example, by
average length of stay. It is also important to know by how much operational
performance in each service can be improved over time through stronger specialization
in that service. As our paper shows, this marginal effect is likely to differ between
services. Specializing more strongly in those services where the marginal improvement
is particularly high would thus seem like a good strategy in order to improve a hospitals
overall operational performance.
Our results are based on data collected and provided to us by the Austrian Ministry of
Health. While the data we obtained are very rich, they do not contain all variables that
would have been of interest for our research question. The database does not contain
data on the severity of cases, which limits the interpretation of our results, as the severity
of cases is correlated with patient length of stay, and as it may be correlated with
specialization. A hospital may decide to specialize in less severe cases within an ICD,
which will have a direct impact on length of stay. While we control for age and patient
origin (Austrian province), these are arguably only imperfect proxies for the severity of
cases within each ICD.
Moreover, data on the quality of service, for example, would add a different
dimension of service performance, but are not available in our database. Past research
has examined the importance of quality as an outcome of hospital operations. Li and
Benton (1996) discuss measures of external and internal quality, while Li (1997) links
hospital quality management to service quality performance. Future research could
Service
specialization
in hospitals
489
IJOPM
32,4
490
build upon this earlier research and examine to which extent the quality of services is
influenced by specialization, and how it mediates the relationship to economic
performance on the service level.
Notes
1. For each inpatient, a hospital has to record administrative data (e.g. age of the patient, residence,
admission date, receiving hospital department, etc.) and medical data (main diagnosis,
additional diagnoses, and specific medical treatments). Main and additional diagnoses are based
on the international ICD classification, whereas specific medical treatments are classified
according to a classification established by the Ministry of Health.
2. Name and responsibilities of the Ministry have changed over the years. As of 2008, it is
called the Ministry of Health, Family and Youth. To simplify matters, we will use the
shortcut Ministry of Health throughout the paper.
3. The calculation of DRG points per inpatient-case depends on the type of diagnosis and/or
specific medical treatment as well as on the length of stay of the patient. Since DRG points
increase on a diminishing scale with length of stay, the system motivates hospitals to reduce
length of stay (Theurl and Winner, 2007).
4. During the observed five-year period, some of the hospitals discontinued their operations or
changed the way they are financed. For 2006, our database contains 133 hospitals. These are
non-profit hospitals that are fully integrated into the DRG-based funding system. While all
of these are financed by public means, they are not all in public ownership. About 78 of them
are owned by provincial agencies, 31 are owned by religious orders and congregations, 18 by
municipalities, three by private institutions, and three by other owners. Ownership is
important insofar as it is the owner of a hospital who has to cover any deficit that remains
after costs have been reimbursed through the Austrian DRG system.
5. We conducted interviews with administrative directors of ten Austrian hospitals that
indicate specialization occurs at the level of treatment groups that we refer to as Services.
6. Brush and Karnani (1996) use a similar specialization ratio but at the industry aggregate level.
7. In our analysis we control for fixed effects by service type, effectively demeaning our
specialization variable by service type. However, we run a robustness check where we
compute the deviation of specialization from the average specialization in Austria for that
service. Our results are qualitatively the same.
8. MacKenzie et al. (1996) report that hospitals with higher volumes also have longer patient
length of stay.
9. While Kc and Terwiesch (2009) find other patient characteristics have impact on length of
stay, data availability limits our choice to only these three variables.
10. Using a fraction of intensive care beds in the total number of beds in a departments yield
qualitatively unchanged results.
11. Clustering standard levels at the observation level or using Huber White Sandwich robust
standard errors does not change our results qualitatively. However, this deflates standard
errors and inflates t-statistics. According to Petersen (2009) double clustering corrects for
heteroskedasticity and serial correlation more efficiently. We thus also cluster by two
dimensions (e.g. observations and year). This yields qualitatively unchanged results.
12. See Baum et al. (2003, 2007) and Baum (2006) for methodology and application in Stata
software package.
13. Using limited information maximum likelihood (LIML) or two stage least square (2SLS) instead
does not change our results qualitatively. We use GMM as it is a more efficient estimator.
14. For practical (computational) reasons we demean our variables by one dimension (service
type) and then use them in the regression models, instead of introducing them as fixed effects
into the regression. While this lowers R 2, it has no other impact on our estimates.
15. We run an additional robustness check where we add HHI as an instrument in our regression
model to account for the impact of competition on specialization. Our results remain
qualitatively the same.
16. Our results are not sensitive to these assumptions and remain qualitatively unchanged if
hospitals and departments that began their operations after 2002 are included.
17. For full explanation of our methods see, e.g. Hayashi (2000), Wooldridge (2001), Kleibergen
and Paap (2006) and Kleibergen (2007).
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Appendix 1. Definitions of variables
Service type
ICD (International Classification of Deseases) code within a given

department type.
Patient group
A group of patient with the same characteristics, as reported by the Austrian

Ministry of Health.
Specialization
Degree of specialization in a given Service, measured in terms of patients falling

under the service type as a fraction of total number of patients in the department.
LOS
Length of Stay. Number of days the patient stays in a hospital, computed for each
patient group.
Volume.D
Natural log of the number of patients in the same hospital department.
Volume.S
Natural log of the number of patients in same service.
Volume.P
Natural log of the number of patients in the same patient group.
Learning.D
Natural log of the cumulative (over time) number of patients in the same hospital
department.
Learning.S
Natural log of the cumulative (over time) number of patients in same Service.
Learning.P
Natural log of the cumulative (over time) number of patients in the same patient
group.
Age
A variable ranging from one to 21 representing five-year patient age intervals.
Other State
A binary variable equal one if the patients in the patient group come from the
province different from the one in which the hospital is located, and zero
otherwise.
Foreign
A binary variable equal one if the patients in the patient group come from a
foreign country and zero otherwise.
Beds.D
Natural log of number of Beds in a hospital department.
IntBeds
An indicator variable equal one if the department has intensive care beds and
zero otherwise.
MStaff
Number of medical staff divided by the total staff in the hospital department.
MDs
Number of medical doctors divided by the number of medical staff in the hospital
department.
OcRate
Department occupancy rate as reported by hospitals to the Austrian Ministry of

Health.
N.Services
Number of Service types in the department.
Beds.H
Natural log of number of Beds in the hospital.
N.Departments Number of Departments in the hospital.

NewServ
An indicator variable equal one if the service was introduced in the hospital
department after 2002, and zero otherwise.
RegChg
An indicator variable equal one if the observation belongs to the province of

Carinthia subsample and year is 2005 or 2006, and zero otherwise.
HHI
1-Herfindahl-Hirschman Index for service calculated on the basis of number of

patients as the sum of squared market shares. The market is defined as Austrian
province.
Corresponding author
Vedran Capkun can be contacted at: capkun@hec.fr
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Service
specialization
in hospitals
495
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International Journal of Operations & Production Management

Service specialization and operational performance in hospitals

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About Emerald www.emeraldinsight.com

Vedran Capkun and Martin Messner

International Journal of Operations

While operational focus is usually expected to bring improvements in operational

of volume on performance in hospitals (Luft et al., 1990; Hannan, 1999). Predominantly,

and continuous improvement. We control for a majority of these characteristics by

reverse causality, we estimate a two stage generalized method of moments

a large instrument collection overfits endogenous variables even as it weakens the

Volume and learning as additional endogenous regressors

OcRate N.Services Beds.H N.Departments

indicating a potential multicollinearity problem in our regression model. To circumvent

LOS with model

LOS with model

Specialization b0 b1 Volumeb2 Learningb3 Ageb4 OtherProvinceb5 Foreign

LOS with models (4) in the first stage

Specialization;Volume;Learning b3 Ageb4 OtherProvinceb5 Foreign

a feasible strategy, hospital managers still have possibilities to emphasize certain

Ittner, C.D., Larcker, D.F. and Pizzini, M. (2007), Performance-based compensation in

ICD (International Classification of Deseases) code within a given

A group of patient with the same characteristics, as reported by the Austrian

Degree of specialization in a given Service, measured in terms of patients falling

Natural log of the number of patients in the same hospital department.

Natural log of the number of patients in same service.

Natural log of the number of patients in the same patient group.

A variable ranging from one to 21 representing five-year patient age intervals.

Natural log of number of Beds in a hospital department.

Department occupancy rate as reported by hospitals to the Austrian Ministry of

Number of Service types in the department.

Natural log of number of Beds in the hospital.

N.Departments Number of Departments in the hospital.

An indicator variable equal one if the observation belongs to the province of

1-Herfindahl-Hirschman Index for service calculated on the basis of number of

To purchase reprints of this article please e-mail: reprints@emeraldinsight.com

This article has been cited by:

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