Elsevier

Journal of Health Economics

Volume 6, Issue 4, December 1987, Pages 305-318
Journal of Health Economics

On the estimation of hospital cost functions

https://doi.org/10.1016/0167-6296(87)90018-XGet rights and content

Abstract

Data from 166 general hospitals in New York State (1981) is used to estimate a quadratic and logarithmic long-run cost function. Both equations fit the data very well but give very different results. The quadratic appears to confirm the commonly-held view of a shallow U-shaped average cost curve, whereas the log function indicates significant economies of scale: a total and average cost elasticity of 0.9 and −0.10, respectively (using beds or patient days to measure output). Ramsey's RESET test is used to discriminate between the two models and the quadratic is clearly rejected as a misspecification. Scale economies thus exist even where the usual quadratic suggests otherwise.

References (31)

  • T.W. Grannemann et al.

    Estimating hospital costs: A multiple output analysis

    Journal of Health Economics

    (1986)
  • American Hospital Association

    Annual survey of hospitals

    (1981)
  • C.W. Bays

    Specification error in the estimation of hospital cost functions

    Review of Economics and Statistics

    (1980)
  • R. Berki

    Hospital economics

    (1972)
  • R. Berry

    Returns to scale in the production of hospital services

    Health Services Research

    (1967)
  • R.E. Berry

    On grouping hospitals for economic analysis

    Inquiry

    (1973)
  • J.W. Carr et al.

    The relationship of cost to hospital size

    Inquiry

    (1967)
  • T.G. Cowing et al.

    Hospital cost analysis: A survey and evaluation of recent studies

  • A.J. Culyer et al.

    What accounts for the higher cost of teaching hospitals

    Social and Economic Administration

    (1978)
  • R.G. Evans

    Behavioural cost functions for hospitals

    The Canadian Journal of Economics

    (1971)
  • M. Feldstein

    Economic analysis for health service efficiency

    (1968)
  • P. Feldstein

    Health care economics

    (1983)
  • E.W. Francisco

    Analysis of cost variations among short-term general hospitals

  • Health Care Financing Administration

    Abstracts of State Legislated Hospital Cost Containment Programs

    (1981)
  • M.C. Hornbrook et al.

    The contribution of case-mix severity to the hospital cost-output relation

    Inquiry

    (1985)
  • Cited by (87)

    • Does quality help the financial viability of hospitals? A data envelopment analysis approach

      2022, Socio-Economic Planning Sciences
      Citation Excerpt :

      However, while quality of care has been shown to reduce readmission rates, this generally comes with increased costs [6,7]. Hospitals might decide to focus on attracting more patients to benefit from economies of scale to reduce costs [8,9]. This might also help them improve their quality while reducing their costs through learning by doing [10].

    • Assessing the effect of standardized cost systems on financial performance. A difference-in-differences approach for hospitals according to their technological level

      2018, Health Policy
      Citation Excerpt :

      Moreover, based on the previous literature, we consider additional variables as possible determinants of the evolution of unit cost: average cost of personnel [30], workers per 100 beds [30], occupancy rate [9,30,31], in-hospital mortality rate [32], teaching status [33] and acute. The hospital size (number of beds) and the complexity of the cases treated [9,10] are represented in this paper by the variables endowment of high technology and teaching status [34]. Table 1 shows how each of the variables has been measured.

    • How do payer mix and technical inefficiency affect hospital profit? A weighted DEA approach

      2014, Operations Research for Health Care
      Citation Excerpt :

      For example, in the case of hospitals, other objectives are pursued including optimizing quality and quantity, providing social goods (i.e., teaching, see for example, [13]), maintaining safety net features (care for the poor, uninsured, and underinsured), offering highly technical and expensive services such as burn units, trauma center, and neo-natal care [14] and paying shareholders. Other factors associated with cost variability among hospitals include the maintenance of excess capacity in case of emergency [15]; the widely reported non-price competition in terms of duplication of highly technological services [16]; regulations requiring staffing ratios [17,18], and case mix of patients [19,20]. Because of the competing demands on hospitals to provide private as well as social goods, objectives such as cost minimization or profit maximization are not strictly pursued; therefore, theoretical cost (profit) functions are not appropriate.

    • Examining the impact of clinical quality and clinical flexibility on cardiology unit performance - Does experiential quality act as a specialized complementary asset?

      2013, Journal of Operations Management
      Citation Excerpt :

      We obtain information about the teaching status of a hospital from the COTH database. Past studies have found that costs and healthcare outcomes may differ across states, counties as well as urban and rural regions, due to varying practice patterns, quality of care, and case mix (Vitaliano, 1987; Thorpe, 1988; Menke, 1997; Athey and Stern, 2000; Li et al., 2002; Goldstein et al., 2002; Chandrasekaran et al., 2012). We handle this by considering a nested structure with random intercepts and random coefficients to capture differences that exist at the levels of states and counties.

    • Optimal productive size of hospitals intensive care units

      2012, International Journal of Production Economics
      Citation Excerpt :

      The same arguments also prevail at the hospital level. Derivation of the optimal size of hospitals and the measure of economies of scale were analyzed, partly to justify mergers among hospitals or to show that the most productive scale size was for medium hospitals (Vita, 1990; Vitalino, 1987; Dranove, 1998). The main point of the literature on this topic is the lack of consensus among previous authors determining economies of scale, especially from a cost perspective.

    View all citing articles on Scopus

    This paper was written while the author was visiting the Institute for Research in the Social Sciences and the Department of Economics and Related Studies at York University, England. The valuable comments and suggestions of Professor J.P. Hutton are gratefully acknowledged. Professor A.J. Culyer and Dr. Keith Hartley have also made useful comments. All remaining errors are, of course, the sole responsibility of the author.

    View full text