Behavior of the multiproduct firm. A model of the nonprofit hospital system

This article presents a hospital model that recognizes the multiproduct nature of hospital output and incorporates trade-offs among various competing goals. A utility function for the hospital is defined over quantity, quality and the net revenues associated with the treatments produced. Utility is constrained by epidemiological factors and by availability of beds. The model is used to draw comparative statics implications, from which econometric hypotheses are developed and tested. This is accomplished by a set of equations that predict variations in patient-specific lengths of stay, admissions, expenses per admission, and occupancy rates. Empirical results are generally consistent with predictions. The model has a variety of policy applications, and these are illustrated.