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Investigating hospital efficiency in the new NHS: The role of the translog cost function

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  • Anthony Scott
  • David Parkin

Abstract

The reforms to the United Kingdom's National Health Service (NHS) of recent years have greatly increased the role of economic incentives in the hospital sector. Hospitals now have to compete for the business of GP and health authority purchasers and are assumed to have an incentive to minimise costs. This makes the analysis of cost functions much more relevant than has previously been the case. The objective of this paper is to assess the potential usefulness of the translog cost function applied in the NHS internal market. Three main issues are identified that limit the role of this type of cost function in the internal market: the adequacy of the econometric model (including data quality); the assumptions underlying the model, and; the interpretation of economies of scale, marginal costs and economies of scope that can be derived from such a cost function. It is concluded that at present the application of translog cost function analysis in the NHS is of limited usefulness, but that it does indicate areas for further methodological research.

Suggested Citation

  • Anthony Scott & David Parkin, 1995. "Investigating hospital efficiency in the new NHS: The role of the translog cost function," Health Economics, John Wiley & Sons, Ltd., vol. 4(6), pages 467-478, November.
    • Handle: RePEc:wly:hlthec:v:4:y:1995:i:6:p:467-478
    DOI: 10.1002/hec.4730040604
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    2. Pankaj Bahuguna & Lorna Guinness & Sameer Sharma & Akashdeep Singh Chauhan & Laura Downey & Shankar Prinja, 2020. "Estimating the Unit Costs of Healthcare Service Delivery in India: Addressing Information Gaps for Price Setting and Health Technology Assessment," Applied Health Economics and Health Policy, Springer, vol. 18(5), pages 699-711, October.
    3. Vassilis H. Aletras, 1999. "A comparison of hospital scale effects in short‐run and long‐run cost functions," Health Economics, John Wiley & Sons, Ltd., vol. 8(6), pages 521-530, September.
    4. Wang, Jian & Zhao, Zhong & Mahmood, Amir, 2006. "Relative Efficiency, Scale Effect, and Scope Effect of Public Hospitals: Evidence from Australia," IZA Discussion Papers 2520, Institute of Labor Economics (IZA).
    5. Alexander S. Preker & Xingzhu Liu & Edit V. Velenyi & Enis Baris, 2007. "Public Ends, Private Means : Strategic Purchasing of Health Services," World Bank Publications - Books, The World Bank Group, number 6683, December.
    6. Albert A. Okunade & Chutima Suraratdecha, 1998. "Cost efficiency, factor interchange, and technical progress in US specialized hospital pharmacies," Health Economics, John Wiley & Sons, Ltd., vol. 7(4), pages 363-371, June.
    7. Giuffrida, Antonio & Gravelle, Hugh & Sutton, Matthew, 2000. "Efficiency and administrative costs in primary care," Journal of Health Economics, Elsevier, vol. 19(6), pages 983-1006, November.
    8. Oliveira, Monica D. & Bevan, Gwyn, 2008. "Modelling hospital costs to produce evidence for policies that promote equity and efficiency," European Journal of Operational Research, Elsevier, vol. 185(3), pages 933-947, March.
    9. Liu, Xingzhu & Hotchkiss, David R. & Bose, Sujata, 2007. "The impact of contracting-out on health system performance: A conceptual framework," Health Policy, Elsevier, vol. 82(2), pages 200-211, July.
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    11. Suraratdecha, Chutima & Okunade, Albert A., 2006. "Measuring operational efficiency in a health care system: A case study from Thailand," Health Policy, Elsevier, vol. 77(1), pages 2-23, June.
    12. Productivity Commission, 2009. "Public and Private Hospitals," Research Reports, Productivity Commission, Government of Australia, number 37.
    13. Alessandra Ferrari, 2006. "NHS Reforms and efficiency of hospital services: a stochastic distance function apporach," Economic Analysis Research Group Working Papers earg-wp2006-06, Henley Business School, University of Reading.

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