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Economies of Scale and Efficiency Measurement in Switzerland's Nursing Homes

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  • Mehdi Farsi
  • Massimo Filippini
  • Diego Lunati

Abstract

This paper examines the cost efficiency in the nursing home industry, an issue of concern to Swiss policy makers because of the explosive growth of national expenditure on elderly care and the aging of the population. A stochastic cost frontier model has been applied to a panel of 1780 observations from 356 nursing homes operating over 1998-2002 in Switzerland. We compare the estimation results from different econometric techniques focusing on the specification of unobserved heterogeneity across firms. The potential effects of such unobserved factors on the estimation results and their interpretation have been discussed. The findings suggest that the economies of scale are an important potential source of cost reduction in a majority of Swiss nursing homes. Moreover the average performance of a representative nursing home is very close to the estimated best practice.

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Bibliographic Info

Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

Volume (Year): 144 (2008)
Issue (Month): III (September)
Pages: 359-378

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Handle: RePEc:ses:arsjes:2008-iii-5

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Keywords: cost efficiency; economies of scale; nursing homes; stochastic frontier; panel data;

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References

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  1. Cornwell, Christopher & Schmidt, Peter & Sickles, Robin C., 1990. "Production frontiers with cross-sectional and time-series variation in efficiency levels," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 185-200.
  2. Jondrow, James & Knox Lovell, C. A. & Materov, Ivan S. & Schmidt, Peter, 1982. "On the estimation of technical inefficiency in the stochastic frontier production function model," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 233-238, August.
  3. Greene, William, 2005. "Reconsidering heterogeneity in panel data estimators of the stochastic frontier model," Journal of Econometrics, Elsevier, vol. 126(2), pages 269-303, June.
  4. Mehdi Farsi & Massimo Filippini, 2004. "An Empirical Analysis of Cost Efficiency in Non-profit and Public Nursing Homes," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 75(3), pages 339-365, 09.
  5. Medhi Farsi & Massimo Filippini, 2006. "Effects of ownership, subsidization and teaching activities on hospital costs in Switzerland," Quaderni della facoltà di Scienze economiche dell'Università di Lugano 0606, USI Università della Svizzera italiana.
  6. Léopold Simar & Paul Wilson, 2000. "Statistical Inference in Nonparametric Frontier Models: The State of the Art," Journal of Productivity Analysis, Springer, vol. 13(1), pages 49-78, January.
  7. Newhouse, Joseph P., 1994. "Frontier estimation: How useful a tool for health economics?," Journal of Health Economics, Elsevier, vol. 13(3), pages 317-322, October.
  8. Skinner, Jonathan, 1994. "What do stochastic frontier cost functions tell us about inefficiency?," Journal of Health Economics, Elsevier, vol. 13(3), pages 323-328, October.
  9. Massimo Filippini, 2001. "Economies of scale in the Swiss nursing home industry," Applied Economics Letters, Taylor & Francis Journals, vol. 8(1), pages 43-46.
  10. Schmidt, Peter & Sickles, Robin C, 1984. "Production Frontiers and Panel Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 2(4), pages 367-74, October.
  11. Mehdi Farsi & Massimo Filippini & Michael Kuenzle, 2005. "Unobserved heterogeneity in stochastic cost frontier models: an application to Swiss nursing homes," Applied Economics, Taylor & Francis Journals, vol. 37(18), pages 2127-2141.
  12. Cornes,Richard, 1992. "Duality and Modern Economics," Cambridge Books, Cambridge University Press, number 9780521336017, October.
  13. Sherman T. Folland & Richard A. Hofler, 2001. "How reliable are hospital efficiency estimates? Exploiting the dual to homothetic production," Health Economics, John Wiley & Sons, Ltd., vol. 10(8), pages 683-698.
  14. Pitt, Mark M. & Lee, Lung-Fei, 1981. "The measurement and sources of technical inefficiency in the Indonesian weaving industry," Journal of Development Economics, Elsevier, vol. 9(1), pages 43-64, August.
  15. Antonio Estache & Tim Coelli & Sergio Perelman & Lourdes Trujillo, 2003. "A Primer on Efficiency Measurement for Utilities and Transport Regulators," ULB Institutional Repository 2013/44106, ULB -- Universite Libre de Bruxelles.
  16. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
  17. Vitaliano, Donald F. & Toren, Mark, 1994. "Cost and efficiency in nursing homes: a stochastic frontier approach," Journal of Health Economics, Elsevier, vol. 13(3), pages 281-300, October.
  18. Hadley, Jack & Zuckerman, Stephen, 1994. "The role of efficiency measurement in hospital rate setting," Journal of Health Economics, Elsevier, vol. 13(3), pages 335-340, October.
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Cited by:
  1. Laura Di Giorgio & Massimo Filippini & Giuliano Masiero, 2012. "The impact of the institutional form on the cost efficiency of nursing homes," Quaderni della facoltà di Scienze economiche dell'Università di Lugano 1203, USI Università della Svizzera italiana.

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