US hospitals are under siege. Their operating model once was simple: amass—under one expensive roof—powerful technologies, skilled physicians working at arm’s length, and a volume of patients sufficient to leverage enormous fixed costs. Now, however, intense competition from more focused health care providers, as well as the increasing ability of payers and consumers to obtain information about a hospital’s quality, service, and pricing—in short, about the value it provides—threaten to change the equation.
A hospital’s historical strengths—superior quality and technology, a productive environment for physicians, and access to capital—are now less distinctive.1 Focused competitors, including stand-alone ambulatory-service centers, diagnostic-imaging centers, endoscopy suites, and specialty hospitals, have access to tremendous amounts of capital. Physicians are often coinvestors, and many specialists can match the technology and quality of care that hospitals offer at lower cost and with better-perceived service levels.
What’s more, payers are beginning to exploit the power of information technology to collect and evaluate mountains of data on the quality, service, and pricing practices of hospitals. With this information, the payers design sophisticated benefits plans that show consumers the value they can expect from each provider, as well as various coverage options as they assume increasing responsibility for their...