The Internal Organization of Hospitals: Some Economic Implications

This paper investigates the economic implications of the hospital's internal organizations structure. It concludes: (1) The hospital is actually two separate firms -- a medical staff (or demand division) and an administration (or supply division). Each half of the organization has its own managers, objectives, pricing strategies and constraints. (2) Within this dual organization, the medical staff and administration have devised a complicated system of nonprice allocative rules. (3) This internal allocative scheme is subject to repeated breakdowns, especially when the medical staff's internal demands exceed the short-run capacity supplied by the administration. (4) Our current regulatory policy toward hospitals is almost exclusively directed at the supply side of the organization. Unless we revise our definition of "hospital" to include the doctor part of the firm, this policy is doomed to failure. (5) Ultimately, a rational public policy toward hospitals requires a change in the internal organization of the hospital itself.