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Are Factor Substitutions in HMO Industry Operations Cost Saving?

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Author Info

  • Albert A. Okunade

    ()
    (Department of Economics, The University of Memphis)

Abstract

Past research on the potentials for cost-saving scale and scope economies in multiproduct HMO operations in the United States are incomplete in their economics of the underlying technology structure. This article exploits the translog cost model estimates of all past studies of HMO production to infer the extent to which pairwise factor substitutions (e.g., administrative services vs. medical care resources, e.g., hospital days, physician services) suggest potential for cost savings in groups and independent practice associations. Given the industry's nonhomothetic production over a 20-year period, the conceptually valid Morishima elasticity measure at constant output reveals limited cost-saving potentials from factor interchange and input demands. These opportunities differ for groups and IPAs across Medicare and non-Medicare products. My findings add a timely and significant dimension to understanding potential cost savings in HMO operations. Policy suggestions and cost implications are rationalized in light of the declining Medicare HMO enrollment and recent changes in factor input prices.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 69 (2003)
Issue (Month): 4 (April)
Pages: 800-821

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Handle: RePEc:sej:ancoec:v:69:4:y:2003:p:800-821

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Web page: http://www.southerneconomic.org/
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Cited by:
  1. John Cawley & David C. Grabowski & Richard A. Hirth, 2004. "Factor Substitution and Unobserved Factor Quality in Nursing Homes," NBER Working Papers 10465, National Bureau of Economic Research, Inc.
  2. Okunade, Albert A., 2004. "Concepts, measures, and models of technology and technical progress in medical care and health economics," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(3), pages 363-368, July.
  3. Piacenza, Massimiliano & Turati, Gilberto & Vannoni, Davide, 2010. "Restructuring hospital industry to control public health care expenditure: The role of input substitutability," Economic Modelling, Elsevier, vol. 27(4), pages 881-890, July.
  4. Cawley, John & Grabowski, David C. & Hirth, Richard A., 2006. "Factor substitution in nursing homes," Journal of Health Economics, Elsevier, vol. 25(2), pages 234-247, March.
  5. Massimiliano Piacenza & Gilberto Turati & Davide Vannoni, 2007. "Hospital Industry Restructuring and Input Substitutability: Evidence from a Sample of Italian Hospitals," CERIS Working Paper 200703, Institute for Economic Research on Firms and Growth - Moncalieri (TO).

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