Changes in Hospital Competitive Strategy: A New Medical Arms Race?

OBJECTIVE: To describe changes in hospitals' competitive strategies, specifically the relative emphasis placed on strategies for competing along price and nonprice (i.e., service, amenities, perceived quality) dimensions, and the reasons for any observed shifts. METHODS: This study uses data gathered through the Community Tracking Study site visits, a longitudinal study of a nationally representative sample of 12 U.S. communities. Research teams visited each of these communities every two years since 1996 and conducted between 50 to 90 semistructured interviews. Additional information on hospital competition and strategy was gathered from secondary data. PRINCIPAL FINDINGS: We found that hospitals' strategic emphasis changed significantly between 1996-1997 and 2000-2001. In the mid-1990s, hospitals primarily competed on price through "wholesale" strategies (i.e., providing services attractive to managed care plans). By 2000-2001, nonprice competition was becoming increasingly important and hospitals were reviving "retail" strategies (i.e., providing services attractive to individual physicians and the patients they serve). Three major factors explain this shift in hospital strategy: less than anticipated selective contracting and capitated payment; the freeing up of hospital resources previously devoted to horizontal and vertical integration strategies; and, the emergence and growth of new competitors. CONCLUSION: Renewed emphasis on nonprice competition and retail strategies, and the service mimicking and one-upmanship that result, suggest that a new medical arms race is emerging. However, there are important differences between the medical arms race today and the one that occurred in the 1970s and early 1980s: the hospital market is more concentrated and price competition remains relatively important. The development of a new medical arms race has significant research and policy implications.