Exploring hospital production relationships with flexible functional forms

Research trends in contemporary health economics: a scientometric analysis on collective content of specialty journals

INTRODUCTION

Health economics is a thriving sub-discipline of economics. Applied health economics research is considered essential in the health care sector and is used extensively by public policy makers. For scholars, it is important to understand the history and status of health economics-when it emerged, the rate of research output, trending topics, and its temporal evolution-to ensure clarity and direction when formulating research questions.

METHODS

Nearly 13,000 articles were analysed, which were found in the collective publications of the ten most specialised health economic journals. We explored this literature using patterns of term co-occurrence and document co-citation.

RESULTS

The research output in this field is growing exponentially. Five main research divisions were identified: (i) macroeconomic evaluation, (ii) microeconomic evaluation, (iii) measurement and valuation of outcomes, (iv) monitoring mechanisms (evaluation), and (v) guidance and appraisal. Document co-citation analysis revealed eighteen major research streams and identified variation in the magnitude of activities in each of the streams. A recent emergence of research activities in health economics was seen in the Medicaid Expansion stream. Established research streams that continue to show high levels of activity include Child Health, Health-related Quality of Life (HRQoL) and Cost-effectiveness. Conversely, Patient Preference, Health Care Expenditure and Economic Evaluation are now past their peak of activity in specialised health economic journals. Analysis also identified several streams that emerged in the past but are no longer active.

CONCLUSIONS

Health economics is a growing field, yet there is minimal evidence of creation of new research trends. Over the past 10 years, the average rate of annual increase in internationally collaborated publications is almost double that of domestic collaborations (8.4% vs 4.9%), but most of the top scholarly collaborations remain between six countries only.

Costs of polish county hospitals-A behavioral panel function

In the paper the costs of Polish county hospitals in 2015-2018 are studied using behavioral cost function. The set of variables combines hospitals' characteristics which may determine their level of costs, such as the form of ownership, bed turnover rate, number of patient-days and share of beds in emergency department with environment characteristics which may influence both outsourcing costs and patients' health. In 2017 the system of basic hospital service provision (hospital network) was introduced in Poland. Dummy variables included in the model represent the category of hospital in the system. The results show that the costs may be described using fixed effect panel model. Positive impact of percentage of emergency department patients transferred to other departments and of wages is found. Higher ratio of residents and interns to doctors is found to decrease costs. Dummy variable for the period after the introduction of hospital network assumed a negative sign with costs, but the parameter remained insignificant.

The costs of scaling up HIV and syphilis testing in low- and middle-income countries: a systematic review

Around two-thirds of all new HIV infections and 90% of syphilis cases occur in low- and middle-income countries (LMICs). Testing is a key strategy for the prevention and treatment of HIV and syphilis. Decision-makers in LMICs face considerable uncertainties about the costs of scaling up HIV and syphilis testing. This paper synthesizes economic evidence on the costs of scaling up HIV and syphilis testing interventions in LMICs and evidence on how costs change with the scale of delivery. We systematically searched multiple databases (Medline, Econlit, Embase, EMCARE, CINAHL, Global Health and the NHS Economic Evaluation Database) for peer-reviewed studies examining the costs of scaling up HIV and syphilis testing in LMICs. Thirty-five eligible studies were identified from 4869 unique citations. Most studies were conducted in Sub-Saharan Africa (N = 17) and most explored the costs of rapid HIV in facilities targeted the general population (N = 19). Only two studies focused on syphilis testing. Seventeen studies were cost analyses, 17 were cost-effectiveness analyses and 1 was cost-benefit analysis of HIV or syphilis testing. Most studies took a modelling approach (N = 25) and assumed costs increased linearly with scale. Ten studies examined cost efficiencies associated with scale, most reporting short-run economies of scale. Important drivers of the costs of scaling up included testing uptake and the price of test kits. The 'true' cost of scaling up testing is likely to be masked by the use of short-term decision frameworks, linear unit-cost projections (i.e. multiplying an average cost by a factor reflecting activity at a larger scale) and availability of health system capacity and infrastructure to supervise and support scale up. Cost data need to be routinely collected alongside other monitoring indicators as HIV and syphilis testing continues to be scaled up in LMICs.

Geographic variation in the delivery of high-value inpatient care

OBJECTIVES

To measure value in the delivery of inpatient care and to quantify its variation across U.S. regions.

DATA SOURCES / STUDY SETTING

A random (20%) sample of 33,713 elderly fee-for-service Medicare beneficiaries treated in 2,232 hospitals for a heart attack in 2013.

STUDY DESIGN

We estimate a production function for inpatient care, defining output as stays with favorable patient outcomes in terms of survival and readmission. The regression model includes hospital inputs measured by treatment costs, as well as patient characteristics. Region-level effects in the production function are used to estimate the productivity and value of the care delivered by hospitals within regions.

DATA COLLECTION / EXTRACTION METHODS

Medicare claims and enrollment files, linked to the Dartmouth Atlas of Health Care and Inpatient Prospective Payment System Impact Files.

PRINCIPAL FINDINGS

Hospitals in the hospital referral region at the 90th percentile of the value distribution delivered 54% more high-quality stays than hospitals at the 10th percentile could have delivered, after adjusting for treatment costs and patient severity.

CONCLUSIONS

Variation in the delivery of high-value inpatient care points to opportunities for better quality and lower costs.

Specialization and production cost efficiency: evidence from ambulatory surgery centers

In the U.S. health care sector, the economic logic of specialization as an organizing principle has come under active debate in recent years. An understudied case is that of ambulatory surgery centers (ASCs), which recently have become the dominant provider of specific surgical procedures. While the majority of ASCs focus on a single specialty, a growing number are diversifying to offer a wide range of surgical services. We take a multiple output cost function approach to an empirical investigation that compares production economies in single specialty ASCs with those in multispecialty ASCs. We applied generalized estimating equation techniques to a sample of Pennsylvania ASCs for the period 2004-2014, including 73 ASCs that specialized in gastrointestinal procedures and 60 ASCs that performed gastrointestinal as well as other specialty procedures. Results indicated that both types of ASC had small room for expansion. In simulation analysis, production of GI services in specialized ASCs had a cost advantage over joint production of GI with other specialty procedures. Our results provide support for the focused factory model of production in the ASC sector.

Too Big, Too Small, or Just Right? Cost-Efficiency of Environmental Inspection Services in Connecticut

OBJECTIVE

To assess optimal activity size/mix of Connecticut local public health jurisdictions, through estimating economies of scale/scope/specialization for environmental inspections/services.

DATA SOURCES/STUDY SETTING

Connecticut's 74 local health jurisdictions (LHJs) must provide environmental health services, but their efficiency or reasons for wide cost variation are unknown. The public health system is decentralized, with variation in organizational structure/size. We develop/compile a longitudinal dataset covering all 74 LHJs, annually from 2005 to 2012.

STUDY DESIGN

We estimate a public health services/inspections cost function, where inputs are translated into outputs. We consider separate estimates of economies of scale/scope/specialization for four mandated inspection types.

DATA COLLECTION/EXTRACTION METHODS

We obtain data from Connecticut Department of Public Health databases, reports, and other publicly available sources. There has been no known previous utilization of this combined dataset.

PRINCIPAL FINDINGS

On average, regional districts, municipal departments, and part-time LHJs are performing fewer than the efficient number of inspections. The full-time municipal departments and regional districts are more efficient but still not at the minimum efficient scale. The regional districts' elasticities of scale are larger, implying they are more efficient than municipal health departments.

CONCLUSIONS

Local health jurisdictions may enhance efficiency by increasing inspections and/or sharing some services.

Estimation of a physician practice cost function

OBJECTIVE

The goal of the present paper is to provide evidence on the behavior of physician practice cost functions.

DATA SOURCES

Our study is based on the data of 3686 physician practices in Germany for the years 2006 to 2008.

STUDY DESIGN

We apply a translog functional form and include a comprehensive set of variables that have not been previously used in this context. A system of four equations using three-stage least squares is estimated.

PRINCIPAL FINDINGS

We find that a higher degree of specialization leads to a decrease in costs, whereas quality certification increases costs. Costs of group practices are higher than of solo practices. The latter finding can be explained by the existence of indivisibilities of expensive technical equipment. Smaller practices do not reach the critical mass to invest in certain technologies, which leads to differences in the type of health care services provided by different practice types.

CONCLUSIONS

This is the first study to use physician practices as the unit of observation and to consider the endogenous character of physician input. Our results suggest that identifying factors that influence physician practice costs is important for providing evidence-based physician payment systems and to enable decision-makers to set incentives effectively.

Efficiency and optimal size of hospitals: Results of a systematic search

Background

National Health Systems managers have been subject in recent years to considerable pressure to increase concentration and allow mergers. This pressure has been justified by a belief that larger hospitals lead to lower average costs and better clinical outcomes through the exploitation of economies of scale. In this context, the opportunity to measure scale efficiency is crucial to address the question of optimal productive size and to manage a fair allocation of resources.

Methods and findings

This paper analyses the stance of existing research on scale efficiency and optimal size of the hospital sector. We performed a systematic search of 45 past years (1969–2014) of research published in peer-reviewed scientific journals recorded by the Social Sciences Citation Index concerning this topic. We classified articles by the journal’s category, research topic, hospital setting, method and primary data analysis technique. Results showed that most of the studies were focussed on the analysis of technical and scale efficiency or on input / output ratio using Data Envelopment Analysis. We also find increasing interest concerning the effect of possible changes in hospital size on quality of care.

Conclusions

Studies analysed in this review showed that economies of scale are present for merging hospitals. Results supported the current policy of expanding larger hospitals and restructuring/closing smaller hospitals. In terms of beds, studies reported consistent evidence of economies of scale for hospitals with 200–300 beds. Diseconomies of scale can be expected to occur below 200 beds and above 600 beds.

Do hospital mergers reduce costs?

Proponents of hospital consolidation claim that mergers lead to significant cost savings, but there is little systematic evidence backing these claims. For a large sample of hospital mergers between 2000 and 2010, I estimate difference-in-differences models that compare cost trends at acquired hospitals to cost trends at hospitals whose ownership did not change. I find evidence of economically and statistically significant cost reductions at acquired hospitals. On average, acquired hospitals realize cost savings between 4 and 7 percent in the years following the acquisition. These results are robust to a variety of different control strategies, and do not appear to be easily explained by post-merger changes in service and/or patient mix. I then explore several extensions of the results to examine (a) whether the acquiring hospital/system realizes cost savings post-merger and (b) if cost savings depend on the size of the acquirer and/or the geographic overlap of the merging hospitals.

Effects of Specialty Hospitals on the Financial Performance of General Hospitals, 1997–2004

Hospital specialization has become a controversial topic, culminating in a moratorium issued in 2003 by Congress directing the Centers for Medicare and Medicaid Services to cease payments to new physician-owned specialty hospitals for those Medicare and Medicaid patients referred by physicians with a financial interest in the facility. This paper focuses on one important economic question: does the presence of specialty hospitals in a market affect general hospitals' financial performance? We estimate longitudinal fixed-effects models for a national panel of short-term acute care hospitals for the period 1997 though 2004; models are estimated for general hospital patient-care revenue, costs, and operating margins. We find that the presence of one or more new or established specialty hospitals in a market has a negative effect on general hospital costs and a positive effect on general hospital operating margins. Results, which were consistent across several different modeling approaches, imply that the presence of specialty hospitals encourages greater efficiency on the part of incumbent general hospitals, and the existence of profits attracts market entry. Our findings question the contention that competition from specialty hospitals harms general hospitals financially.

Are Big Hospitals the Best Medicine

Article empirically examines the question of the existence and magnitude of economies of scale in the provision of hospital services. A variety of econometric techniques are employed to statistically estimate structural and behavioral cost functions from disaggregated state data. Implications for antitrust policy are discussed.

Does integration of HIV and SRH services achieve economies of scale and scope in practice? A cost function analysis of the Integra Initiative

OBJECTIVE

Policy-makers have long argued about the potential efficiency gains and cost savings from integrating HIV and sexual reproductive health (SRH) services, particularly in resource-constrained settings with generalised HIV epidemics. However, until now, little empirical evidence exists on whether the hypothesised efficiency gains associated with such integration can be achieved in practice.

METHODS

We estimated a quadratic cost function using data obtained from 40 health facilities, over a 2-year-period, in Kenya and Swaziland. The quadratic specification enables us to determine the existence of economies of scale and scope.

FINDINGS

The empirical results reveal that at the current output levels, only HIV counselling and testing services are characterised by service-specific economies of scale. However, no overall economies of scale exist as all outputs are increased. The results also indicate cost complementarities between cervical cancer screening and HIV care; post-natal care and HIV care and family planning and sexually transmitted infection treatment combinations only.

CONCLUSIONS

The results from this analysis reveal that contrary to expectation, efficiency gains from the integration of HIV and SRH services, if any, are likely to be modest. Efficiency gains are likely to be most achievable in settings that are currently delivering HIV and SRH services at a low scale with high levels of fixed costs. The presence of cost complementarities for only three service combinations implies that careful consideration of setting-specific clinical practices and the extent to which they can be combined should be made when deciding which services to integrate.

TRIAL REGISTRATION NUMBER

NCT01694862.

Demand uncertainty and hospital costs: an application to Portuguese public hospitals

In this paper, we evaluate the effect of demand uncertainty on hospital costs. Since hospital managers want to minimize the probability of not having enough capacity to satisfy demand, and since demand is uncertain, hospitals have to build excess capacity and incur the associated costs. Using panel data comprising information for 43 Portuguese public hospitals for the period 2007-2009, we estimate a translog cost function that relates total variable costs to the usual variables (outputs, the price of inputs, some of the hospitals' organizational characteristics) and an additional term measuring the excess capacity related to the uncertainty of demand. Demand uncertainty is measured as the difference between actual and projected demand for emergency services. Our results indicate that the cost function term associated with the uncertainty of demand is significant, which means that cost functions that do not include this type of term may be misspecified. For most of our sample, hospitals that face higher demand uncertainty have higher excess capacity and higher costs. Furthermore, we identify economies of scale in hospital costs, at least for smaller hospitals, suggesting that a policy of merging smaller hospitals would contribute to reducing hospital costs.

Cost effects of hospital mergers in Portugal

The Portuguese hospital sector has been restructured by wide-ranging hospital mergers, following a conviction among policy makers that bigger hospitals lead to lower average costs. Since the effects of mergers have not been systematically evaluated, the purpose of this article is to contribute to this area of knowledge by assessing potential economies of scale to explore and compare these results with realized cost savings after mergers. Considering the period 2003-2009, we estimate the translog cost function to examine economies of scale in the years preceding restructuring. Additionally, we use the difference-in-differences approach to evaluate hospital centres (HC) that occurred between 2004 and 2007, comparing the years after and before mergers. Our findings suggest that economies of scale are present in the pre-merger configuration with an optimum hospital size of around 230 beds. However, the mergers between two or more hospitals led to statistically significant post-merger cost increases, of about 8 %. This result indicates that some HC become too large to explore economies of scale and suggests the difficulty of achieving efficiencies through combining operations and service specialization.

Assessing cost and technical efficiency of HIV prevention interventions in sub-Saharan Africa: the ORPHEA study design and methods

BACKGROUND

Scaling up services to achieve HIV targets will require that countries optimize the use of available funding. Robust unit cost estimates are essential for the better use of resources, and information on the heterogeneity in the unit cost of delivering HIV services across facilities - both within and across countries - is critical to identifying and addressing inefficiencies. There is limited information on the unit cost of HIV prevention services in sub-Saharan Africa and information on the heterogeneity within and across countries and determinants of this variation is even more scarce. The "Optimizing the Response in Prevention: HIV Efficiency in Africa" (ORPHEA) study aims to add to the empirical body of knowledge on the cost and technical efficiency of HIV prevention services that decision makers can use to inform policy and planning.

METHODS/DESIGN

ORPHEA is a cross-sectional observational study conducted in 304 service delivery sites in Kenya, Rwanda, South Africa, and Zambia to assess the cost, cost structure, cost variability, and the determinants of efficiency for four HIV interventions: HIV testing and counselling (HTC), prevention of mother-to-child transmission (PMTCT), voluntary medical male circumcision (VMMC), and HIV prevention for sex workers. ORPHEA collected information at three levels (district, facility, and individual) on inputs to HIV prevention service production and their prices, outputs produced along the cascade of services, facility-level characteristics and contextual factors, district-level factors likely to influence the performance of facilities as well as the demand for HIV prevention services, and information on process quality for HTC, PMTCT, and VMMC services.

DISCUSSION

ORPHEA is one of the most comprehensive studies on the cost and technical efficiency of HIV prevention interventions to date. The study applied a robust methodological design to collect comparable information to estimate the cost of HTC, PMTCT, VMMC, and sex worker prevention services in Kenya, Rwanda, South Africa, and Zambia, the level of efficiency in the current delivery of these services, and the key determinants of efficiency. The results of the study will be important to decision makers in the study countries as well as those in countries facing similar circumstances and contexts.

Production cost structure in US outpatient physical therapy health care

This paper investigates the technology cost structure in US physical therapy care. We exploit formal economic theories and a rich national data of providers to tease out implications for operational cost efficiencies. The 2008-2009 dataset comprising over 19 000 bi-weekly, site-specific physical therapy center observations across 28 US states and Occupational Employment Statistics data (Bureau of Labor Statistics) includes measures of output, three labor types (clinical, support, and administrative), and facilities (capital). We discuss findings from the iterative seemingly unrelated regression estimation system model. The generalized translog cost estimates indicate a well-behaved underlying technology structure. We also find the following: (i) factor demands are downwardly sloped; (ii) pair-wise factor relationships largely reflect substitutions; (iii) factor demand for physical therapists is more inelastic compared with that for administrative staff; and (iv) diminishing scale economies exist at the 25%, 50%, and 75% output (patient visits) levels. Our findings advance the timely economic understanding of operations in an increasingly important segment of the medical care sector that has, up-to-now (because of data paucity), been missing from healthcare efficiency analysis. Our work further provides baseline estimates for comparing operational efficiencies in physical therapy care after implementations of the 2010 US healthcare reforms.

Do mergers really reduce costs? Evidence from hospitals

In this paper, we compare potential and realized cost savings from hospital mergers. Our approach isolates changes in realized cost savings due to different output mixes from systematic changes due to time and also provides a measure of the potential cost savings due to scale economies. Our findings suggest that economies of scale are present for merging hospitals and they realize these cost savings immediately following a merger. However, we also show that over time, cost savings from the merger decrease and the proportion of hospitals experiencing positive cost savings declines.

Electronic medical records and cost efficiency in hospital medical-surgical units

This study examines the impact of electronic medical records (EMRs) on cost efficiency in hospital medical-surgical units. Using panel data on California hospitals from 1998 to 2007, we employed stochastic frontier analysis (SFA) to estimate the relationships between EMR implementation and the cost inefficiency of medical-surgical units. We categorized EMR implementation into three stages based on the level of sophistication. We also examined the effects of specific EMR systems on cost inefficiency. Our SFA models addressed potential bias from unobserved heterogeneity and heteroskedasticity. EMR Stages 1 and 2, nursing documentation, electronic medication administration records, and clinical decision support were associated with significantly higher inefficiency.

The challenge of corporatisation: the experience of Portuguese public hospitals

The inability of traditional state organisations to respond to new economic, technological and social challenges and the associated emerging problems has made it necessary to adopt new methods of health management. As a result, new directions have emerged in the reform of Public Administration together with the introduction of innovative models. The aim is to achieve a type of management that focuses on results as well as on effort and efficiency. We intend to analyse to what extent the adoption of business management models by hospital healthcare units can improve their performance, mainly in terms of standards of efficiency. Data envelopment analysis (DEA) was used to investigate the efficiency of a set of public Portuguese hospitals. The aim was to evaluate the impact of business management in Portuguese public hospitals with regards to efficiency, specifically taking into account the fact that lack of resources and increased health care needs are a present and future reality. From a total of 83 public hospitals, a sample of 59 hospitals was chosen, of which 21 are state-owned hospital enterprises (SA) and 38 are traditional public administration sector hospitals (SPA). This study evaluates hospital performance by calculating two efficiency measures associated with two categories of inputs. The first efficiency measures the costs associated with hospital production lines and the number of beds (representing fixed capacity) as inputs. The annual costs generated by the hospitals in the consumption of capital and work (direct and indirect costs) are used. A second measure of efficiency is calculated separately. This measure includes in the inputs the number of beds as well as the human resources available (number of doctors, number of nurses and other personnel) in each hospital. With regard to output, the variables that best reflect the hospital services rendered were considered: number of inpatient days, patients discharged, outpatient visits, emergencies services, sessions in hospital day care services and the number of surgeries. The results seem to suggest that the introduction of market processes and changes in organisational structure--such as managerial autonomy and corporatisation of public hospitals--have had a positive impact on Portuguese public hospitals. This positive evolution was particularly evident in SA hospitals, but further studies are needed to confirm these preliminary results.

Emergency department visits: the cost of trauma centers

Crowded emergency departments (EDs) have become a serious problem in the current U.S. healthcare system. Patient wait times and periods of ED diversion have increased, raising concerns about the timeliness, efficiency, and quality of ED treatment. This study addresses the question of whether there are economies of scale (EOS) in ED care, and the extent to which such economies vary across different types of EDs. A hospital cost function approach is taken to evaluate average and marginal costs of EDs designated as trauma centers. Data comes from acute care hospitals in Texas for the period 1998-2004. Cost functions corresponding to four different levels of ED trauma care are estimated using a translog panel data model with hospital fixed effects. The marginal costs (in 2004 dollars) of each trauma center level are: $53 (Level I), $177 (Level II), $119 (Level III), and $258 (Level IV). Average cost per ED visit for trauma centers exceeds marginal cost at all Levels, indicating the presence of EOS. The results support a possible expansion of ED size policy in order to improve the cost efficiency of ED services.

Do waiting times reduce hospital costs?

Using a sample of 137 hospitals over the period 1998-2002 in the English National Health Service, we estimate the elasticity of hospital costs with respect to waiting times. Our cross-sectional and panel-data results suggest that at the sample mean (103 days), waiting times have no significant effect on hospitals' costs or, at most, a positive one. If significant, the elasticity of cost with respect to waiting time from our cross-sectional estimates is in the range 0.4-1. The elasticity is still positive but lower in our fixed-effects specifications (0.2-0.4). In all specifications, the effect of waiting time on cost is non-linear, suggesting a U-shaped relationship between hospital costs and waiting times. However, the level of waiting time which minimises total costs is always below ten days.

The Economics of Specialty Hospitals

Specialty hospitals, particularly those specializing in surgery and owned by physicians, have generated a relatively high degree of policy attention over the past several years. The main focus of policy debates has been in two areas: the extent to which specialty hospitals might compete unfairly with incumbent general hospitals and the extent to which physician ownership might be associated with higher usage. Largely absent from the debates, however, has been a discussion of the basic economic model of specialty hospitals. This article reviews existing literature, reports, and findings from site visits to explore the economic rationale for specialty hospitals. The discussion focuses on six factors associated with specialization: consumer demand, procedural operating margins, clinical efficiencies, procedural economies of scale, economies (and diseconomies) of scope, and competencies and learning. A better understanding of the economics of specialization will help policy makers evaluate the full spectrum of advantages and disadvantages of specialty hospitals.

Effects of ownership, subsidization and teaching activities on hospital costs in Switzerland

This paper explores the cost structure of Swiss hospitals, focusing on differences due to teaching activities and those related to ownership and subsidization types. A stochastic total cost frontier with a Cobb-Douglas functional form has been estimated for a panel of 148 general hospitals over the six-year period from 1998 to 2003. Inpatient cases adjusted by DRG cost weights and ambulatory revenues are considered as two separate outputs. The adopted econometric specification allows for unobserved heterogeneity across hospitals. The results suggest that teaching activities are an important cost-driving factor and hospitals that have a broader range of specialization are relatively more costly. The excess costs of university hospitals can be explained by more extensive teaching activities as well as the relative complexity of the offered medical treatments from a teaching point of view. However, even after controlling for such differences university hospitals have shown a relatively low cost-efficiency especially in the first two or three years of the sample period. The analysis does not provide any evidence of significant efficiency differences across ownership/subsidy categories.

The market for elective surgery: joint estimation of supply and demand

This paper develops models of the demand for and supply of elective (non-emergency) surgery using a panel of quarterly data for 200 English hospitals over the period 1995-2002. Unusually, distinct measures of supply (outpatients seen and inpatient admissions) and demand (outpatient referrals and decisions to admit) are available for each observation. These offer the opportunity to estimate separate empirical models of supply and demand using ordinary least squares (OLS) regression methods. However, the strong correlation between the residuals of these models suggests some merit in the deployment of seemingly unrelated regression (SUR) methods. Although both static and dynamic SUR estimations leave the results largely qualitatively unchanged, SUR estimation can have a considerable quantitative effect relative to the OLS results. For example, SUR estimation generates a lower elasticity of inpatient demand with respect to waiting time than that obtained via OLS. The results offer an important justification for more careful econometric modelling of hospital behaviour than has traditionally been employed in the health economics literature.

Cost structure of osteopathic hospitals and their local counterparts in the USA: Are they any different?

Due to the emphasis on preventive care and less invasive solutions to medical problems, osteopathic hospitals may deliver cost efficient and cost effective care. This study examines the cost structure of osteopathic hospitals and compares their performance to a local control group selected from allopathic hospitals. Osteopathic hospitals are identified in the 1999 American Hospital Association (AHA) data and matched to local allopathic hospitals with respect to location, bed size, system, for-profit and teaching status. Cost functions are estimated for both groups of hospitals, and significant differences in input, output and costs are highlighted. Results show that osteopathic hospitals are more costly and less productive in comparison to their counterparts. Inefficient production of outpatient services and high cost of medical education are two reasons for the poor performance. The study has important policy implications on two fronts: first, osteopathic hospitals are more costly to operate than their counterparts, and subsequently this requires further analysis of the osteopathic treatments and techniques. In an environment where health care revenues are shrinking and costs are rising, this is probably much needed information for osteopathic hospitals. Secondly, there is an emerging concern among osteopathic medical schools and osteopathic physicians due to the declining number of osteopathic hospitals, which translates to a smaller number of residency positions for osteopathic medical school graduates. Analyzing cost, input and output variables reveal some of the contributing factors to the decline of osteopathic hospitals and help preserve this rich tradition.

Economies of scale and scope in Vietnamese hospitals

Hospitals consume a large share of health resources in developing countries, but little is known about the efficiency of their scale and scope. The Ministry of Health of Vietnam and World Bank collected data in 1996 from the largest sample ever surveyed in a developing country. The sample included 654 out of 815 public hospitals, six categories of hospitals and a broad range of sizes. These data were used to estimate total variable cost as a function of multiple products, such as admissions and outpatient visits. We report results for two specifications: (1) estimates with a single variable for beds and (2) estimates with interaction terms for beds and the category of hospital. The coefficient estimates were used to calculate marginal costs, short-run returns to the variable factor, economies of scale, and economies of scope for each category of hospital. There were important differences across categories of hospitals. The measure of economies of scale was 1.09 for central general and 1.05 for central specialty hospitals with a mean of 516 and 226 beds, respectively, indicating roughly constant returns to scale. The measure was well below one for both provincial general and specialty hospitals with a mean of 357 and 192 beds, respectively, indicating large diseconomies of scale. The measure was 1.16 for district hospitals and 0.89 other ministry hospitals indicating modest economies and diseconomies of scale, respectively. There were large economies of scope for central and provincial general hospitals. We conclude that in a system of public hospitals in a developing country that followed an administrative structure, the variable cost function differed significantly across categories of hospitals. Economies of scale and scope depended on the category of the hospital in addition to the number of beds and volume of output.

Within-year variation in hospital utilization and its implications for hospital costs

Variability in demand for hospital services may have important effects on hospital costs, but this has been difficult to examine because data on within-year variations in hospital use have not been available for large samples of hospitals. We measure daily occupancy in California hospitals and examine variation in hospital utilization at the daily level. We find substantial day-to-day variation in hospital utilization, and noticeable differences between hospitals in the amount of day-to-day variation in utilization. We examine the impact of variation on hospital costs, showing that increases in variance are associated with increases in hospital expenditures, but that the effects are qualitatively modest.

One DRG, one price? The effect of patient condition on price variation within DRGs and across hospitals

Costs and prices per patient admission vary greatly across patients and across hospitals. The variance across hospitals is due in part to institutional differences--hospital size, teaching status, local labor costs, and so on--but also to differences in different hospitals' patients' conditions. For purposes of reimbursement under the Medicare program, differences in patients' conditions are typically accounted for by nothing more than noting their different DRGs, without regard to intra-DRG patient differences. My results, which are based on 3.6 million individual patients, show that differences in individual patient DRGs and in observable indicators of their conditions are more than just relevant or important: They are nearly dispositive, explaining over 80% of the total variation in net price per patient admission. Moreover, cross-DRG differences explain only half of that price variation, with the other half explained by patient-level intra-DRG differences in patient condition that are not accounted for by patients' DRG classifications. Further analysis shows that those hospitals that tend to attract the more complex DRGs tend also to attract those patients who are more expensive to treat within each of their DRGs.

Stochastic demand, production responses and hospital costs

This paper considers the production responses to demand uncertainty within the hospital sector. It is noted that such responses have an impact on hospital cost structures. An empirical model is specified. Estimation is undertaken on a sample of UK hospitals over the period 1993-1995, differentiating between hospital output which arises from uncertain demand (emergency treatment) and output considered to be predictable (elective treatment). The model estimates that the cost of an elective admission is approximately 45% of the cost of an emergency admission. Demand uncertainty imposes a direct cost equivalent to around 5% of the total cost of emergency admission.

Cost characteristics of hospitals

Modern hospitals are complex multi-product organisations. The analysis of a hospital's production and/or cost structure should therefore use the appropriate techniques. Flexible functional forms based on the neo-classical theory of the firm seem to be most suitable. Using neo-classical cost functions implicitly assumes minimisation of (variable) costs given that input prices and outputs are exogenous. Local and global properties of flexible functional forms and short-run versus long-run equilibrium are further issues that require thorough investigation. In order to put the results based on econometric estimations of cost functions in the right perspective, it is important to keep these considerations in mind when using flexible functional forms. The more recent studies seem to agree that hospitals generally do not operate in their long-run equilibrium (they tend to over-invest in capital (capacity and equipment)) and that it is therefore appropriate to estimate a short-run variable cost function. However, few studies explicitly take into account the implicit assumptions and restrictions embedded in the models they use. An alternative method to explain differences in costs uses management accounting techniques to identify the cost drivers of overhead costs. Related issues such as cost-shifting and cost-adjusting behaviour of hospitals and the influence of market structure on competition, prices and costs are also discussed shortly.

Striving towards efficiency in the Greek hospitals by reviewing case mix classifications

In order to verify the efficiency level of Greek public hospitals, this paper evaluates the most recent indicators. Relevant data were collected from the two following databases: (a) hospitals' utilisation data generally and per clinical speciality [Ministry of Health, Athens, (Data based) 1995]; (b) Patients' and hospitals' characteristics per diagnosis [National Statistical Office, Athens, (Data based) 1993]. As explanatory variables, the study examines supply and demand factors following case mix classifications. Firstly, average length of stay (ALOS) and secondly, cost per case were regressed as dependent variables. The study highlights the extent of variability across hospitals for different groups of patients with the same condition. The results specify the most important factors that affect ALOS and cost pertaining to efficiency. Per speciality analysis shows occupancy, size-type of the hospital, beds and doctors per speciality, access and use of outpatient services, and surgical operations, etc. as the most significant factors. Per disease-diagnosis analysis shows age of over 65 years, gender, residence, marital status, surgical operation and insurance as the most important factors. General cost analysis in all National Health Systems (NHS) hospitals shows that economies of scale appear in: (a) district and/or specialised hospitals of 250-400 beds; (b) regional and/or teaching hospitals of over but near to 400 beds. Consequently, the author determines the 'Greek' Diagnostic Related Groups (DRGs), based on the cost per clinical speciality in the nine basic specialities and on the cost per diagnosis of the top 15 diagnoses. Further to the scientific results, such studies will enhance much necessary discussions on the organisation of service delivery and financing, by following case mix classification.

Productive efficiency of rural health clinics: the Midwest experience

This article identifies the characteristics of efficient and inefficient rural clinics in the Midwest, using 1994 Medicare cost reports. Rural health clinics are compared on the basis of productive efficiency by estimating a nonparametric frontier. Six inputs and five output categories were employed to estimate an efficient frontier. The results show that an efficient clinic, on average, employs approximately 1.5 more physicians than an inefficient clinic and incurs capital expenses more than twice those of the inefficient clinic. Future rural clinics are expected to be larger, employing more capital and labor to take advantage of scale economies. However, given the steady (or decreasing) population of rural communities, the expansion of relatively small rural clinics could involve forming rural health care systems and/or networks in close proximity to create synergies from scale economies, staff recruitment, easier access to capital, shared information systems, improved mobility of physicians among several clinics and savings from management costs.

Estimating hospital costs with a generalized Leontief function

This paper estimates a long-run hospital cost function with multiple outputs and inputs using a panel data set from Washington State hospitals during 1988-1993. We find that with our data the generalized Leontief function is more appropriate than a translog for estimating hospital cost functions. With respect to hospital costs, we find that hospitals readily adjust the use of intermediate products. Radiology, therapies and surgery, and other inpatient days, all serve as substitutes for core inpatient days. Outpatient services are found to be complementary to core inpatient services, indicating that the growth of stand-alone outpatient clinics might increase the costs of providing healthcare services. Our analysis finds that hospitals show significant economies of scale, but there is a limited amount of evidence of scope economies. Also, there is some evidence that profit-seeking hospitals achieve some of their goals by controlling costs, and that diagnostically related groups (DRG)-based Medicare services are effective in getting hospitals to control costs.

Omitted variable bias and hospital costs

This research examines the impact of omitted variables on the accuracy of parametric hospital cost function estimations based on Québec hospital level data. We assess the effect of omitted variables resulting from incomplete data on technology and performance measurement and on tests of the cost minimizing behavior of the institution. Our results show that important characteristics of hospital technology, such as returns to scale, are extremely sensitive to omitted variable bias. Similarly, estimates of hospital performance are poor indicators of actual performance when data are incomplete.

A comparison of hospital scale effects in short-run and long-run cost functions

Numerous estimates of economies of scale in the hospital setting have been obtained since the early 1980s from both flexible long-run and short-run cost functions. Although the theoretical superiority of the latter approach is widely recognized, it has been previously suggested that the two cost specifications yield quite similar econometric findings regarding scale effects. This paper utilizes a new data set consisting of 91 Greek NHS hospitals in order to empirically examine this proposition by comparing economies of scale estimates derived from both translog total and variable cost functions. The results indicate that the use of long-run equations might seriously mislead policy makers and that constant returns to scale prevail in Greek public hospitals.

On measuring the hospital cost/quality trade-off

This paper explores the relationship between cost and quality of hospital care. A total operating cost function is estimated for 137 US Department of Veterans Affairs hospitals for 1988-1993 using three rate-based measures of quality as regressors. The high likelihood of the existence of measurement error in quality in the cross section leads to the application of novel instrumental variable techniques. Results suggest that mortality and readmission indices are adjusted inadequately for illness severity. The measure on the failure to follow up inpatient discharges with outpatient care, however, appears to increase cost. The results of this paper underscore a number of practical difficulties and challenges facing government or other systems in evaluating the relative performance of their hospitals.

Hospital mergers and closures: survival of rural hospitals

There are two major models to save financially failing rural hospitals: (1) expanding through an affiliation or merger with other hospitals to increase the utilization and diversity of services, or (2) downsizing by employing the limited-service model and providing only emergency and primary care service with limited acute care. This study investigates hospital mergers and closures from 1990 to 1992 using the American Hospital Association's (AHA's) data from the Annual Survey of U.S. Hospitals. The presence of potential scale and scope economies among merging and closing hospitals prior to the merger or closure suggests that rural hospitals are operating at a size level that has great potential for achieving scope and scale efficiencies through mergers.

Impact of internal and external environmental pressures on hospital inefficiency

This study used stochastic frontier analysis to study variations in inefficiency in US hospitals. Cost-inefficiency (i.e., differences between best practice and actual expenses) is assumed to be affected by ownership status, competition, regulatory pressure, and market demand conditions. The level of analysis is the hospital (n = 3,262) and data for 1994 were used. The market was defined as the county in which the hospital was located. A two-stage approach was used in the analysis. In the first stage, translog cost-functions were estimated. Outputs used in the cost function analysis include inpatient discharges, post-admission days, outpatient visits, medical education, and case-mix index. Following Jondrow's technique, inefficiency scores (i.e., the difference between predicted least costs and actual costs) were estimated. Inefficiency estimates were not sensitive to changes in assumptions about the distribution of the error term. In the second stage, the estimated inefficiency scores were used as dependent variables to test hypotheses about the impact of internal and external environmental pressures on cost-inefficiency. Since the distribution of the estimated inefficiency scores was censored, Tobit equations were estimated. The second stage analysis found that measured inefficiency was negatively related with industry concentration (Herfindahl index), public payment policy, and unemployment rate and positively related with for-profit status.

Risk adjustment and hospital cost-based resource allocation, with an application to El Salvador

Ignorance about the costs, case loads and case mixes of different hospitals within the public health system constitutes an important obstacle to reforming health care spending in many developing countries. National (tertiary) hospitals generally receive significantly larger budgets, per patient, than lower-level (district) hospitals. One reason for these differential allocations is the widely held belief that national hospitals treat persons with more difficult illnesses and persons who are more severely ill than do other, non-national, hospitals. This belief is but a presumption and one that warrants investigation. This paper analyzes expenditures among public hospitals in El Salvador over a 12-year period to address this question. While controlling for patient morbidity, outputs and other characteristics, district hospitals are found to be substantially underfunded relative to national hospitals. Four policy options to redress this situation are examined.

The effects of regulation and competition in the NHS internal market: the case of general practice fundholder prices

The 1989 reforms of the UK National Health Service introduced competition in supply within a tightly regulated framework. The paper examines whether this competition affects the prices posted by sellers of medical services. We argue that despite regulation market forces may have an impact on price. We test this using the posted prices for one of the two types of buyer, General Practice Fundholders. We find the regulatory rules are not observed, and some evidence of the impact of market forces on price.

Physician opportunity costs in physician practice cost functions

Estimation of cost functions for physician firms is problematic because many physicians are self-employed, and the marginal opportunity cost of physician labor is not observed. In this paper, we show how to recover marginal costs and conventional measures of economies of scale from cost functions that condition on the amount of physician labor input. In addition, we introduce the new concepts of marginal nonphysician input costs and 'behavioral' economies of scale, which reflect the structure of costs when physician labor input moves along a utility-maximizing expansion path. Our results could be useful in the design of resource-based physician fee schedules.

Economies of scale and scope as an explanation of merger and output diversification activities in the health maintenance organization industry

This paper tests for the existence and magnitude of economies of scale and scope as possible explanations for the recent observed trends in increasing health maintenance organization (HMO) scale (through merger and acquisition) and scope (through greater participation in public enrollee markets) using firm level data from a sample of California HMOs for the time period 1986-1992. The results suggest that economies of scale provide a strong justification for mergers only in the case of relatively small HMOs (i.e. those with fewer than 115,000 enrollees), and economies of scope do not explain the increasing HMO enrollment of public enrollees.

Payment source and the cost of hospital care: evidence from a multiproduct cost function with multiple payers

This study investigates the capacity of hospitals to vary the intensity of their services based on patients' expected sources of payment. While the concept of price discrimination by hospitals based on payer generosity ("cost-shifting") has been discussed extensively, the notion that hospitals can adjust payer-specific marginal costs to reflect differences in reimbursement policies has not been studied in depth. To examine this issue. this analysis employs a multiproduct cost function with hospital outputs defined as admissions by payment source, controlling for the distribution and severity of illness ("casemix") for each payer. Marginal costs of casemix-adjusted discharges are obtained and compared for Medicare, Medicaid, Private Payers, and a residual category that includes uncompensated care. We find that indeed, payer-specific marginal costs generally reflect payer generosity.

The creation of economic efficiencies in hospital mergers

Antitrust evaluation of proposed mergers requires the assessment of merger-created efficiencies, the beneficial effects of which may swamp any competitively adverse effects of higher market concentration. There are many potential sources of such efficiencies, and this paper investigates one that has been largely overlooked. Because merger often makes it possible to consolidate two small clinical departments into one larger unit, it can reduce the relative variability - the "peak load problem" - of daily patient census. This in turn makes it possible to reduce the costs of staffing adequately for random periods of high demand. Based upon a sample of two years of daily admissions data for several merging hospitals, and confirmed with data averaged over all U.S. hospitals, the efficiency effects of such clinical consolidation are estimated to be a substantial percentage of affected operating costs.