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Uncertain demand, the structure of hospital costs, and the cost of empty hospital beds

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  • Gaynor, Martin
  • Anderson, Gerard F.

Abstract

One of the fundamental facts of the environment hospitals face is uncertainty over demand for their services. This uncertainty leads hospitals to hold excess standby capacity to avoid turning away patients. In this paper we reformulate the theory of cost and production to take account of this uncertainty. We then use this model to calculate the cost of empty hospital beds. Utilized capacity in the hospital industry, as measured by the inpatient hospital bed occupancy rate, has gradually declined since 1980 and was approximately 65 percent in 1992. Congress and the Administration are concerned that the costs associated with empty beds represent wasteful expense and some have proposed an adjustment to Medicare payment rates which will penalize hospitals with low occupancy rates. We estimate a short run cost function for a hospital facing uncertain demand using data from a national sample of over 5000 hospitals for the years 1983-1987. The traditional cost model is strongly rejected in favor of the reformulated model. We calculate the cost of an empty hospital bed as $61,395 in 1987 dollars. We estimate that a one percent decrease in the number of hospital beds would decrease hospital costs by slightly over one-half of one percent. These costs are substantial, but smaller than some others have indicated.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Health Economics.

Volume (Year): 14 (1995)
Issue (Month): 3 (August)
Pages: 291-317

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Handle: RePEc:eee:jhecon:v:14:y:1995:i:3:p:291-317

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Web page: http://www.elsevier.com/locate/inca/505560

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Citations

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Cited by:
  1. Luigi Siciliani & Anderson Stanciole & Rowena Jacobs, 2008. "Do waiting times reduce hospital costs?," Discussion Papers 08/02, Department of Economics, University of York.
  2. Escobari, Diego & Lee, Jim, 2013. "Demand Uncertainty and Capacity Utilization in Airlines," MPRA Paper 46059, University Library of Munich, Germany.
  3. Hughes, David & McGuire, Alistair, 2003. "Stochastic demand, production responses and hospital costs," Journal of Health Economics, Elsevier, vol. 22(6), pages 999-1010, November.
  4. Baker, Laurence C. & Phibbs, Ciaran S. & Guarino, Cassandra & Supina, Dylan & Reynolds, James L., 2004. "Within-year variation in hospital utilization and its implications for hospital costs," Journal of Health Economics, Elsevier, vol. 23(1), pages 191-211, January.
  5. Martin Gaynor & Deborah Haas-Wilson, 1998. "Change, Consolidation, and Competition in Health Care Markets," HEW 9809001, EconWPA.
  6. Hidalgo, Soraya & Núñez-Sánchez, Ramón, 2012. "Estimating allocative efficiency in port authorities with demand uncertainty," MPRA Paper 38136, University Library of Munich, Germany.
  7. Martin Gaynor & William B. Vogt, 1999. "Antitrust and Competition in Health Care Markets," NBER Working Papers 7112, National Bureau of Economic Research, Inc.
  8. Paul W. Wilson & Kathleen Carey, 2004. "Nonparametric analysis of returns to scale in the US hospital industry," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(4), pages 505-524.
  9. Kurup, Hari K K, 2010. "On the estimation of hospital cost: the approach," MPRA Paper 22767, University Library of Munich, Germany.
  10. Dor, Avi & Farley, Dean E., 1996. "Payment source and the cost of hospital care: Evidence from a multiproduct cost function with multiple payers," Journal of Health Economics, Elsevier, vol. 15(1), pages 1-21, February.
  11. Jon Magnussen & Lee Rivers Mobley, 1999. "The Impact of Market Environment on Excess Capacity and the Cost of an Empty Hospital Bed," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 6(3), pages 383-398.
  12. Mike Smet, 2007. "Measuring performance in the presence of stochastic demand for hospital services: an analysis of Belgian general care hospitals," Journal of Productivity Analysis, Springer, vol. 27(1), pages 13-29, February.
  13. Lindrooth, Richard C. & Lo Sasso, Anthony T. & Bazzoli, Gloria J., 2003. "The effect of urban hospital closure on markets," Journal of Health Economics, Elsevier, vol. 22(5), pages 691-712, September.
  14. Capps, Cory & Dranove, David & Lindrooth, Richard C., 2010. "Hospital closure and economic efficiency," Journal of Health Economics, Elsevier, vol. 29(1), pages 87-109, January.

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