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Economies of scope in Norwegian hospital production - A DEA analysis

Author

Listed:
  • Kittelsen, Sverre A.C.

    () (The Ragnar Frisch Centre for Economic Research)

  • Magnussen, Jon

    (SINTEF Unimed, Health Services Research)

Abstract

From 2002 the Norwegian hospital sector is to be transferred from county to state ownership, organised through regional semiautonomous companies. A major motivation for the reform is to allow for more specialised hospital production. If there are economies or diseconomies of scope, the production of hospital services in a region could become more efficient by exploiting any cost savings that may stem from an optimal division of service production between units. While the theory of economics of scope is well developed, applications have chiefly been concerned with testing for natural monopoly, and few studies of hospital production have been concerned with scope. This paper estimates a multiple output cost function from data on Norwegian hospitals using the non-parametric Data Envelopment Analysis (DEA) method. The cost function is specified with total running costs as the only input, but with seven different outputs to focus on the properties of the output transformation frontier. To overcome the methodological assumption of convexity inherent in DEA, the sample is split into relative specialised and differentiated hospitals, before comparing costs. This partitioning is achieved through grouping as specialised the first and fifth quintiles of the hospitals ranked by the share of the relevant output, since in fact no hospital is fully specialised by producing only one output, or nothing of an output. Exploring scope economies of the best practice cost frontier along three different dimensions, strong economies are found for surgical and medical services, intermediate for inpatient and outpatient production, while elective and emergency care cases have only week economies of scope, which may not be statistically significant. Results for the output mix of individual observations, reveal both economies and diseconomies in the last of these three dimensions. Contrary to these results, average efficiencies are found to be lower for differentiated than specialised hospitals, in all of the dimensions mentioned, although the differences are not very large. Since the DEA method measures hospitals with the largest production of each output as efficient by default, the results for average efficiency may be due to the methods employed.

Suggested Citation

  • Kittelsen, Sverre A.C. & Magnussen, Jon, 2009. "Economies of scope in Norwegian hospital production - A DEA analysis," HERO On line Working Paper Series 2003:8, Oslo University, Health Economics Research Programme.
  • Handle: RePEc:hhs:oslohe:2003_008
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    File URL: http://www.hero.uio.no/publicat/2003/HERO2003_8.pdf
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    References listed on IDEAS

    as
    1. Diego Prior & Magda Solà, 2000. "Technical efficiency and economies of diversification in health care," Health Care Management Science, Springer, vol. 3(4), pages 299-307, September.
    2. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
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    Cited by:

    1. Gary Ferrier & Hervé Leleu & James Moises & Vivian Valdmanis, 2013. "The Focus Efficiency of U.S. Hospitals," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 41(3), pages 241-263, September.
    2. Wetzel, Heike & Growitsch, Christian, 2006. "Economies of Scope in European Railways: An Efficiency Analysis," IWH Discussion Papers 5/2006, Halle Institute for Economic Research (IWH).
    3. Pablo Arocena, 2005. "The measurement of scope, scale and diversification economies: How (in)efficient is electricity restructuring and unbundling?," Working Papers 2005/1, Institut d'Economia de Barcelona (IEB).
    4. Gary D. Ferrier & Hervé Leleu & James Moises & Vivian Valdmanis, 2009. "The Size and Service Offering Efficiencies of U.S. Hospitals," Working Papers 2009-ECO-09, IESEG School of Management.
    5. Arocena, Pablo, 2008. "Cost and quality gains from diversification and vertical integration in the electricity industry: A DEA approach," Energy Economics, Elsevier, vol. 30(1), pages 39-58, January.
    6. Kirsi Vitikainen & Miika Linna & Andrew Street, 2010. "Substituting inpatient for outpatient care: what is the impact on hospital costs and efficiency?," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 11(4), pages 395-404, August.
    7. Pedro Simões & Rui Marques, 2011. "Performance and congestion analysis of the portuguese hospital services," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 19(1), pages 39-63, March.

    More about this item

    Keywords

    Hospital performance; DEA; Economies of Scope;

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior

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