Transplant Centers as Focused Factories

Abstract

Many advocates for health care reform have suggested applying the "focused factory" concept from strategic operations to improve the operation of hospitals. The benefits of focused operations have been extolled as improving both efficiency and profitability; yet this concept was developed for manufacturing, and its application to the health care industry is a recent innovation pursued by a handful of hospitals seeking competitive advantage. It is not clear whether such superiority holds in the more service-oriented health care industry. I examine this question in the setting of kidney transplant centers diversifying into liver transplants. I estimate the effect of diversification on the risk-adjusted mortality rates of kidney transplant recipients, controlling for selection bias. I find that while there is a “diversification discount” for mortality overall, the effect disappears for patients whose own health issues tend to be “diversified.” This suggests that firms’ patient (or customer) mix and characteristics will determine whether a firm experiences detrimental effects from diversification or not. In turn, these results imply that for firms where consumers are also an input into production (such as health care or education), the characteristics of consumers as inputs must be considered as part of a firm’s overall strategy.