Economies of Scale and Hospital Productivity: An empirical analysis of medical area level panel data

This paper estimates the total factor productivity (TFP) of hospitals by using panel data drawn from prefectures and secondary medical areas. The study focuses on the economies of scale at the medical area and hospital levels. It uses the average length of stay as a measure of medical quality. We avoid case-mix bias by using data from medical areas instead of those from the hospital level. We control unobservable regional characteristics by employing panel data estimation. We eliminate price disparities among regions by using quantity data. Our results show that hospital size affects productivity: the larger the hospital, the higher the productivity. The hospital-size effect is economically significant: hospital productivity increases by more than 10% when the size of the hospital doubles. The size effects are null when we do not control the average length of stay. The main policy implication is the clear fact that consolidating hospitals improves productivity.