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

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  • C. A. Knox Lovell
  • Ana Rodríguez-Álvarez

    (University of Oviedo, Oviedo, Spain)

  • Alan Wall

    (University of Oviedo, Oviedo, Spain)

Abstract

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 Rodríguez-Álvarez 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.

Suggested Citation

  • C. A. Knox Lovell & Ana Rodríguez-Álvarez & 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.
  • Handle: RePEc:wly:hlthec:v:18:y:2009:i:2:p:227-235
    DOI: 10.1002/hec.1352
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    References listed on IDEAS

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    1. 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.
    2. Carey, Kathleen, 1998. "Stochastic Demand for Hospitals and Optimizing "Excess" Bed Capacity," Journal of Regulatory Economics, Springer, vol. 14(2), pages 165-187, September.
    3. R. G. Evans, 1971. "'Behavioural' Cost Functions for Hospitals," Canadian Journal of Economics, Canadian Economics Association, vol. 4(2), pages 198-215, May.
    4. Gaynor, Martin & Anderson, Gerard F., 1995. "Uncertain demand, the structure of hospital costs, and the cost of empty hospital beds," Journal of Health Economics, Elsevier, vol. 14(3), pages 291-317, August.
    5. 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.
    6. Friedman, Bernard & Pauly, Mark, 1981. "Cost Functions for a Service Firm with Variable Quality and Stochastic Demand: The Case of Hospitals," The Review of Economics and Statistics, MIT Press, vol. 63(4), pages 620-624, November.
    7. Hughes, David & McGuire, Alistair, 2003. "Stochastic demand, production responses and hospital costs," Journal of Health Economics, Elsevier, vol. 22(6), pages 999-1010, November.
    8. Ana Rodríguez-Álvarez & 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.
    9. 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 211-220, September.
    10. 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.
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    Cited by:

    1. Ana Rodríguez-Álvarez & David Roibás-Alonso & Alan Wall, 2013. "The response of decentralized health services to demand uncertainty and the role of political parties in the Spanish public health system," Journal of Productivity Analysis, Springer, vol. 40(3), pages 357-365, December.
    2. Alvaro Almeida & Joana Cima, 2015. "Demand uncertainty and hospital costs: an application to Portuguese public hospitals," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 16(1), pages 35-45, January.
    3. Rodríguez-Álvarez, Ana & Rosete-Rivero, Mayte, 2017. "Spanish public hospital waiting lists: A theoretical and empirical approach," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 11, pages 1-21.
    4. Rodríguez-Álvarez, Ana & Roibás, David & Wall, Alan, 2009. "Factors determining the response of hospitals to demand uncertainty," Efficiency Series Papers 2009/04, University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG).
    5. Alvaro Almeida & Joana Cima, 2013. "Demand Uncertainty and Hospital Costs: an Application to Portuguese NHS Hospitals," FEP Working Papers 499, Universidade do Porto, Faculdade de Economia do Porto.

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