Hospital policy and productivity: Evidence from German states

Total factor productivity (TFP) growth allows for additional health care services under restricted resources. We examine whether hospital policy can stimulate hospital TFP growth. We exploit variation across German federal states in the period 1993 to 2013. State governments decide on hospital capacity planning (number of hospitals, departments and beds), ownership, medical students, and hospital investment funding. We show that TFP growth in German hospital care reflects quality improvements rather than increases in output volumes. Second-stage regression results indicate that reducing the length of stay is generally a proper way to foster TFP growth. The effects of other hospital policies depend on the reimbursement scheme: under activity-based (DRG) hospital funding, scope-related policies (privatization, specialization) come with TFP growth. Under fixed daily rate funding, scale matters to TFP (hospital size, occupancy rates). Differences in capitalization in East and West Germany allows to show that deepening capital may enhance TFP growth if capital is scarce. We also show that there is less scope for hospital policies after large-scale restructurings of the hospital sector.