Economies of Scale and Scope

Economies of scale and scope are defined, respectively, as follows. Reduction in cost per unit resulting from increased production achieves economies of scale through operational efficiencies.

Economies of scale reduce costs by reducing waste. The assumption is that if the same resource can be used to support 2 or more functions, it is wasteful to duplicate that resource, and the functions should be merged so that all who require the resource can take advantage of it. With a merger, efficiencies may occur because a single unit was too small to take advantage of economies of scale and scope. Economies of scale and scope also can be realized by merging units in a large hospital that are underutilized. In a study that reviewed a number of hospital mergers that occurred in the late 1980s, Sinay³ compared operating efficiencies 2 years after merger occurred in 2 groups of hospitals: hospitals in one group were the result of the merger of 2 hospitals, and the other was a group of hospitals that had not merged. Mergers occurred during a 4-year period. Sinay noted that merging hospitals revealed no diseconomies of scale premerger (waste), no economies of scale in the first year postmerger, and economies of scale in the second year post­merger. It appears that after the merger, hospitals needed to find and correct opportunities for saving.

This study may have some significant implications for transport ser­vices. Merging of units that provide the same function for different age groups of patients may be beneficial, because it allows managerial and logistical expenses to be shared and, thus, decreases the allocated fixed cost per transport. In the classic sense, it might be difficult to appreciate how economies of scale can be realized if each transport retains an individual cost that is multiplied by simultaneous transports, although as noted, fixed costs (eg, salaried personnel, vehicles) that are allocated over more transports will indeed bring the real cost of each transport down, if within the established capacity of the current fixed assets. Economies of scope may be achieved by making transport team members more productive at the base facility when not engaged transporting a patient. Nonengaged personnel, after transport preparation and other requirements are completed, could participate in other easily transferable hospital-based activities (such as assignment to care for intensive care unit patients in stable condition, in-house transport, or phle­botomy) that could be accomplished while awaiting transport need.

References

1. Centers for Medicare and Medicaid Services. Roadmap for Implementing Value Driven Healthcare in the Traditional Medicare Fee-for-Service Program. Washington, DC: Centers for Medicare and Medicaid Services; 2009. Available at: http://www.cms.gov/Medicare/ Quality-Initiatives-Patient-Assessment-Instruments/QualityInitiativesGenInfo/downloads/ vbproadmap_oea_1-16_508.pdf. Accessed May 9, 2013

2. Maclaran P, McGowan P. Managing service quality for competitive advantage in small engineering firms. Int J Entrepreneur Behav Res. 1999;5(2):35-47

3. Sinay UT. Pre- and post merger investigation of hospital mergers. East Econ J. 1998;24(1): 83-97

Selected Readings

American Medical Association.

Bradley JF, Salus T, eds. Coding for Pediatrics 2013 11th ed. Elk Grove Village, IL: American Academy of Pediatrics; 2013

Centers for Medicare and Medicaid Services, US Department of Health and Human Services. Development of a Plan to Transition to a Medicare Value-Based Purchasing Program for Physician and Other Professional Services, Issues Paper. Washington, DC: Centers for Medicare and Medicaid Services; 2008. Available at: http://www.cms.gov/Medicare/Medicare-Fee-for- Service-Payment/PhysicianFeeSched/downloads/physicianvbp-plan-issues-paper.pdf. Accessed May 9, 2013

Glaizier KL. Managing behavioral health. J Healthc Manag. 1998;43(5):393-396

Glazier KL, Eselius LL, Hu T, Shore KK, G'Sell WA. Effects of a mental health carve-out on use, costs and payers: a four-year study. J Behav Health Serv Res. 1999;26(4):381-389

Krumrey NA, Byerly GE. A step-by-step approach to identifying a partner—and making the partnership work. Hosp Mater Manage Q. 1995;16(3):10-14

Vonderabe B. Hopes and reality: a vendor's perspective on shared services in a total system. Hosp Mater Manage Q. 1988;10(1):70-75