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Exploring hospital production relationships with flexible functional forms.

¹Bureau of Economics, Federal Trade Commission, Washington, DC 20580.

Journal of Health Economics

|May 9, 1990

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This study on California hospitals found that while the translog cost function offers good marginal cost estimates near its approximation point, its accuracy decreases elsewhere. Scale economies may be underestimated.

Area of Science:

Health Economics
Econometrics

Background:

Hospital cost analysis is crucial for healthcare management.
Flexible functional forms are used to model complex cost structures.
Evaluating the accuracy of these forms is essential for reliable insights.

Purpose of the Study:

To estimate a multiproduct variable cost function for California hospitals.
To assess the performance of flexible functional forms, specifically the translog function, in hospital cost analysis.
To investigate the presence of scale economies and cost complementarities in the hospital sector.

Main Methods:

Estimation of a multiproduct variable cost function.
Utilizing data from a sample of California hospitals.
Analysis of the translog functional form's accuracy at and outside its approximation point.

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Main Results:

The translog function provides reasonable marginal cost estimates near its approximation point.
The estimated function's performance declines when evaluated outside the approximation range.
Limited evidence for ray scale economies or weak cost complementarities was found.
Some indication suggests that the degree of scale economies might be underestimated.

Conclusions:

The choice of functional form and evaluation point significantly impacts hospital cost analysis.
The translog function's limitations necessitate careful application in healthcare cost studies.
Further research is needed to fully understand scale economies in hospitals.