Demand Uncertainty and Hospital Costs: an Application to Portuguese NHS Hospitals
AbstractIn 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, hospitals have to build excess capacity since demand is uncertain, and incur on the associated costs. Using panel data that comprises information for 43 Portuguese NHS hospitals for the period 2007 to 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 make a significant contribution to the reduction of hospital costs.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 499.
Length: 21 pages
Date of creation: Jul 2013
Date of revision:
hospitals; demand uncertainty; cost function;
Find related papers by JEL classification:
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-07-28 (All new papers)
- NEP-EFF-2013-07-28 (Efficiency & Productivity)
- NEP-EUR-2013-07-28 (Microeconomic European Issues)
- NEP-HEA-2013-07-28 (Health Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Breyer, Friedrich, 1987. "The specification of a hospital cost function : A comment on the recent literature," Journal of Health Economics, Elsevier, vol. 6(2), pages 147-157, June.
- Duncan, Gregory M, 1990. " The Effect of Probabilistic Demands on the Structure of Cost Functions," Journal of Risk and Uncertainty, Springer, vol. 3(3), pages 211-20, September.
- C. A. Knox Lovell & Ana Rodr�guez-�lvarez & Alan Wall, 2009. "The effects of stochastic demand and expense preference behaviour on public hospital costs and excess capacity," Health Economics, John Wiley & Sons, Ltd., vol. 18(2), pages 227-235.
- Smet, Mike, 2002. "Cost characteristics of hospitals," Social Science & Medicine, Elsevier, vol. 55(6), pages 895-906, September.
- 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.
- Vitaliano, Donald F., 1987. "On the estimation of hospital cost functions," Journal of Health Economics, Elsevier, vol. 6(4), pages 305-318, December.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- #HEJC papers for September 2013
by academichealtheconomists in The Academic Health Economists' Blog on 2013-08-31 23:01:38
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.