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What governs the decision to contract out for local hospital services?
1School of Public Administration, University of Southern California, Los Angeles 90089-0041.
Insights
Local governments are exploring contracting out hospital services to reduce rising costs. Key factors influencing this decision include supplier availability and potential for economies of scale.
Area of Science:
- Public Health Policy
- Health Services Management
- Government Administration
Background:
- Rising hospital costs strain local government budgets.
- Increasing demand for government-funded healthcare services.
- Need for local governments to reassess their role in hospital service delivery.
Purpose of the Study:
- To analyze the decision-making process of local governments regarding contracting out hospital services.
- To identify key factors influencing the choice to contract out for healthcare delivery.
Main Methods:
- Empirical analysis of local government decisions on hospital service contracting.
- Examination of cost savings, control trade-offs, and political factors.
Main Results:
- The availability of external healthcare suppliers is a critical factor.
- The potential for achieving economies of scale significantly influences the decision.
- Local officials' willingness to trade control for cost savings plays a role.
Conclusions:
- Contracting out hospital services is a viable cost-reduction strategy for local governments.
- External supplier availability and economies of scale are pivotal in the contracting-out decision.
- Political considerations and the balance of control are important but secondary to economic factors.
Abstract:
Increasing hospital costs coupled with increasing numbers of individuals dependent on local governments for health care, at a time of reduced abilities to finance these expenditures, are causing local governments to reexamine their role in the delivery of hospital services. A potentially cost-reducing option for governments is to contract out for service delivery. In this paper we examine the decision of local governments to contract out for hospital services. Factors believed to influence this production choice decision are the cost savings that can be expected from economies of scale or increased competition, the willingness of local officials to trade control for such cost savings, and the political incentives and obstacles to contracting out. Our empirical analysis indicates that the pivotal factors in the contracting-out decision are the availability of external suppliers and the potential for scale economies.