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Scale and scope efficiencies through hospital consolidations.

Colin Preyra¹, George Pink

¹Institute for Clinical Evaluative Sciences (ICES), Toronto, Ont., Canada. colin.preyra@utoronto.ca

Journal of Health Economics

|March 24, 2006

Summary

Ontario hospitals could achieve significant cost savings through strategic consolidation. This study reveals substantial unexploited economies of scale and scope, potentially missed by traditional analysis methods.

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Area of Science:

Health Economics
Healthcare Management
Econometrics

Background:

Ontario's hospital sector underwent major restructuring, including closures and mergers.
Previous assessments of consolidation gains relied on accounting rather than economic principles.
The economics literature on hospital consolidation is largely inconclusive.

Purpose of the Study:

To investigate economies of scale and scope in Ontario's hospital sector before restructuring.
To determine if significant cost-saving opportunities were missed by prior analyses.
To apply an economic cost function approach to assess consolidation potential.

Main Methods:

Developed and estimated a short-run economic cost function for hospitals.
Derived an equilibrium cost function to analyze cost concepts.

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Utilized index and direct approaches to evaluate potential hospital reconfigurations.

Main Results:

Identified substantial unexploited economies of scale and scope within the hospital sector.
Demonstrated that traditional analytical methods might overlook significant consolidation gains.
Quantified potential cost efficiencies achievable through strategic mergers and transfers.

Conclusions:

Strategic consolidation in Ontario's hospital sector offered significant, previously unrecognized, cost-saving opportunities.
An economic cost function approach provides a more accurate assessment of consolidation benefits than accounting methods.
The findings underscore the importance of economic analysis in healthcare restructuring decisions.