IT's Role in Hospital Industry Value and Competitiveness

Industry Overview

Hospitals form one element of the health care industry, providing medical care for patients. There are three main types of hospitals in the U.S.: for-profit, non-profit, and government. While many hospitals operate independently, some are part of larger groups, but overall the sector is diffuse. Annual revenues for the hospital industry are estimated at around $1 trillion (IBIS World, 2015). Approximately 5.5 million people work in hospitals, mainly in nursing, administration, and medicine. There are approximately 2,900 hospital businesses in the U.S. (IBIS World, 2015).

The largest hospital operators in the U.S. are Community Health Systems, based in Tennessee, which runs 188 hospitals, and Hospital Corporation of America, also based in Tennessee, which has 166 hospitals (Marshall, 2015). The tenth-largest chain, however, has only 8 hospitals, so outside of the major groups the hospital business is fairly fragmented. Among non-profit groups, Ascension Health in St. Louis has 73 hospitals, making it the largest. There are more medium-sized groups among non-profits than among for-profit hospitals (Gamble, 2014).

The nature of competition among hospitals is unique. Health care is a service that nobody would seek out by choice, but when someone needs it, they tend to be focused on their immediate needs and have access to limited information. The range of different payers is another key factor — larger payers such as government programs and insurance companies often have contracts to work with specific hospitals or hospital groups. Much of the marketing that hospitals conduct to build their market share therefore comes down to how they position themselves with large payer groups. Such groups are attracted by a hospital's ability to provide a reasonable standard of care at a reasonable cost. Government payers hold the most bargaining power by virtue of their market share. For-profit hospitals also compete on service mix, offering more high-margin services, whereas non-profit hospitals on average tend to offer a broader range of services and treat more patients who are unable to pay.

Suppliers are generally concentrated in the health care industry. Major medical equipment suppliers must receive FDA approval for their products, which comes with monopoly protections on medical devices. The same is true for new drugs. These factors result in fairly high costs from suppliers. Hospitals, even the larger groups, have only limited bargaining power due to these monopolies and the fact that no hospital group is large enough to move the market on supply prices. In general, however, because health care providers can pass costs along to the end payer, they are able to earn profits on their services. Even not-for-profit hospitals will often earn profits on their services.

Brief History

Hospitals began centuries ago as religious institutions to care for the sick and indigent, and this tradition still exists in health care today — many hospitals are run by religious groups as not-for-profit facilities. Medical care has advanced considerably, however, and is now a technology-based business. Fields have become more specialized, and this greater degree of specialization has allowed for highly refined services. The industry has been subject to increasing regulation over the past hundred years as it has evolved into a highly complex enterprise. Health care remains one of the most heavily regulated industries today. The U.S. system features several different payer types; crucially, these payers are not the end users of the service, and that distinction is one of the most unique features of this industry.

The modern health care system features three types of hospitals — government, not-for-profit, and for-profit — all of which perform the same basic service: providing health care to their immediate communities. Each hospital sets its own service mix across the many different types of care it offers. Hospitals typically serve their immediate geographical region. The modern hospital is comprised of specialized workers who generally have a high level of training and who operate high-tech equipment to perform the specific tasks required in the provision of health care.