Elsevier

Journal of Health Economics

Volume 6, Issue 4, December 1987, Pages 305-318
Journal of Health Economics

On the estimation of hospital cost functions

https://doi.org/10.1016/0167-6296(87)90018-XGet rights and content

Abstract

Data from 166 general hospitals in New York State (1981) is used to estimate a quadratic and logarithmic long-run cost function. Both equations fit the data very well but give very different results. The quadratic appears to confirm the commonly-held view of a shallow U-shaped average cost curve, whereas the log function indicates significant economies of scale: a total and average cost elasticity of 0.9 and −0.10, respectively (using beds or patient days to measure output). Ramsey's RESET test is used to discriminate between the two models and the quadratic is clearly rejected as a misspecification. Scale economies thus exist even where the usual quadratic suggests otherwise.

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  • Cited by (0)

    This paper was written while the author was visiting the Institute for Research in the Social Sciences and the Department of Economics and Related Studies at York University, England. The valuable comments and suggestions of Professor J.P. Hutton are gratefully acknowledged. Professor A.J. Culyer and Dr. Keith Hartley have also made useful comments. All remaining errors are, of course, the sole responsibility of the author.

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