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The effects of stochastic demand and expense preference behaviour on public hospital costs and excess capacity

  • C. A. Knox Lovell
  • Ana Rodr�guez-�lvarez

    (University of Oviedo, Oviedo, Spain)

  • Alan Wall

    (University of Oviedo, Oviedo, Spain)

The literature to date on the effect of demand uncertainty on public hospital costs and excess capacity has not taken into account the role of expense preference behaviour. Similarly, the research on expense preference behaviour has not taken demand uncertainty into account. In this paper, we argue that both demand uncertainty and expense preference behaviour may affect public hospital costs and excess capacity and that ignoring either of these effects may lead to biased parameter estimates and misleading inference. To show this, we extend the analysis of Rodr�guez-�lvarez and Lovell (Health Econ. 2004; 13 : 157-169) by incorporating demand uncertainty into the technology to account for the hospital activity of providing standby capacity or insurance against the unexpected demand. We find that demand uncertainty in Spanish public hospitals affects hospital production decisions and increases costs. Our results also show that overcapitalization in these hospitals can be explained by hospitals providing insurance demand when faced with demand uncertainty. We also find evidence of expense preference behaviour. We conclude that both stochastic demand and expense preference behaviour should be taken into account when analysing hospital costs and production. Copyright © 2008 John Wiley & Sons, Ltd.

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Article provided by John Wiley & Sons, Ltd. in its journal Health Economics.

Volume (Year): 18 (2009)
Issue (Month): 2 ()
Pages: 227-235

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Handle: RePEc:wly:hlthec:v:18:y:2009:i:2:p:227-235
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  1. Carey, Kathleen, 1998. "Stochastic Demand for Hospitals and Optimizing "Excess" Bed Capacity," Journal of Regulatory Economics, Springer, vol. 14(2), pages 165-87, September.
  2. Martin Gaynor & Gerard F. Anderson, 1991. "Hospital Costs and the Cost of Empty Hospital Beds," NBER Working Papers 3872, National Bureau of Economic Research, Inc.
  3. Ana Rodr�guez-�lvarez & C. A. Knox Lovell, 2004. "Excess capacity and expense preference behaviour in National Health Systems: an application to the Spanish public hospitals," Health Economics, John Wiley & Sons, Ltd., vol. 13(2), pages 157-169.
  4. 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.
  5. Hughes, David & McGuire, Alistair, 2003. "Stochastic demand, production responses and hospital costs," Journal of Health Economics, Elsevier, vol. 22(6), pages 999-1010, November.
  6. R. G. Evans, 1971. "'Behavioural' Cost Functions for Hospitals," Canadian Journal of Economics, Canadian Economics Association, vol. 4(2), pages 198-215, May.
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