A new look at hospital cost function estimation
The production of hospital care can be viewed as a two-tiered production process. At the first tier, intermediate services are produced which are used in the production of final services, which comprise the second tier of production. Intermediate services are not always produced internally. Some hospitals produce them in-house, others purchase them from outside vendors. In this era of aggressive vertical integration by hospitals, it is important to account for these differences when estimating a hospital cost function and when evaluating the performance of the hospitals. This dissertation uses 1990 hospital disclosure data from 540 California hospitals to estimate a traditional multi-product translog (T.T) cost function. Then, a modified (quasi) translog (Q.T) cost function was estimated which acknowledges the multiple tiers in production. The two functions and their key economic parameters were compared and contrasted. The findings of this study suggest notable quantitative similarities with regard to output and input elasticities and interesting qualitative differences in the measurement of hospital efficiencies. While T.T suggests mild economies of scale, Q.T indicates the presence of significant economies of scale and also positive vertical scope economies. Q.T suggests lower marginal cost of production of various categories of output and higher substitutability between various inputs when compared to their counterparts based on the T.T estimates. Q.T suggests efficiency of production as an alternative to the "medical arms race" hypothesis for the growth in sophisticated medical services. Overall, the findings suggest that Q.T provided more accurate estimates of economies of scale and scope due to the identification and inclusion of vertical economies.
Year of publication: |
1995-01-01
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Authors: | Velagapudi, Kalyani R Mandadi |
Publisher: |
Wayne State University |
Subject: | Business costs | Health care |
Saved in:
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