Abstract
The purpose of this paper is to calculate shadow prices of hospital services and compare them to the reimbursement rates those hospitals receive. These shadow prices are calculated by estimating a multiple-output distance function and applying a dual Shephard's lemma, a technique suggested by Färe and Grosskopf [8]. In contrast to cost functions, distance functions require no price data and do not presume cost minimization. We apply this technique to a sample of California hospitals operating in 1986. We find that hospitals engaged in selective contracting for Medi-Cal patients exhibit closer agreement between relative shadow prices and relative reimbursement rates (Medi-Cal relative to private patients) than noncontracting hospitals.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
D. Aigner and S.F. Chu, On estimating the industry production function, American Economic Review 58, 1968, 826–839.
J.F. Burgess, Jr. and P.W. Wilson, Technical efficiency in VA hospitals, Paper presented at the Atlantic Economic Association Meetings in Washington, DC, October 1991.
P. Byrnes and V. Valdmanis, Variable cost functions and efficiency: An investigation of labor costs in hospitals, in Lecture Notes in Economics and Mathematical Systems,Cost Analysis Applications of Economics and Operations Research, T. Gulledge and L. Litteral, eds., Springer, New York, 1989.
J. Cromwell, J. Mitchell, M. Rosenbach, W. Staron and S. Hurdle, Using physician time and complexity to identify mispriced procedures, Inquiry 26, 1989, 7–23.
B.K. Eakin, Some nonnegative thoughts on allocative efficiency and the second best, Paper presented at the Atlantic Economic Society Meetings, 1991.
B.K. Eakin and T.J. Kniesner, Estimating a non-minimal cost function for hospitals, Southern Economic Journal 54, 1988, 583–597.
R. Färe,Fundamentals of Production Theory, Springer, Heidelberg, 1988.
R. Färe and S. Grosskopf, A distance function approach to price efficiency, Journal of Public Economics 43, 1990, 123–126.
R. Färe, S. Grosskopf and W. Weber, Measuring school district performance, Public Finance Quarterly 17, 1989, 409–428.
M.J. Farrell, The measurement of productive efficiency, The Journal of the Royal Statistical Society, Series A, 120, 1957, 107–127.
P. Feldstein,Health Care Economics, 3rd edition, Wiley Medical, New York, 1988.
G. Ferrier, S. Grosskopf, K. Hayes and S. Yaisawarng, Measuring economies of diversification in banking: A nonparametric approach, Mimeo, Department of Economics, Southern Methodist University, Dallas, TX, 1991.
T.W. Granneman, R.S. Brown and M.V. Pauly, Estimating hospital costs: A multiple output analysis, Journal of Health Economics 5, 1986, 107–127.
W.H. Greene, Maximum likelihood esimation of economic frontier functions, Journal of Econometrics 13, 1980, 27–56.
S. Grosskopf and K. Hayes, Bureaucrats and their input choices, Journal of Urban Economics, to appear.
S. Grosskopf, K. Hayes, W. Weber and L. Taylor, Budget-constrained frontier measures of fiscal equality and efficiency in schooling, Review of Economics and Statistics, forthcoming.
S. Grosskopf and S. Yaisawarng, Economics of scope in the provision of local public services, National Tax Journal 43, 1990, 61–74.
W. Härdle, P. Hall and L. Simar, Iterated bootstrap with applications to frontier models, Paper presented at EURO XI, Aachen, Germany, July 1991.
S. Jacobsen, On Shephard's duality theorem, Journal of Economic Theory 4, 1972, 458–464.
S. Johansen, A prospective individualized reimbursement (PIR) model, Medical Care 26, 1988, 824–832.
L. Johns, Selective contracting in California: An update, Inquiry, 26, 1989, 345–353.
J.R. Lave, Is compression occurring in DRG prices?, Inquiry 22, 1985, 142–147.
M.L. Lee, A conspicuous production theory of hospital behavior, Southern Economic Journal 38, 1971, 48–58.
C. McCarthy, DRGs — five years later, New England Journal of Medicine 318, 1988, 1683–1686.
S.T. Mennemeyer and L. Olinger, Selective contracting in California: Its effect on hospital finances, Inquiry 26, 1989, 442–457.
J.P. Newhouse, Toward a theory of non-profit institutions: An economic model of a hospital, American Economic Review 60, 1970, 64–74.
M. Pauly and M. Redisch, The not-for-profit institutions: An economic model of a hospital, American Economic Review 63, 1973, 87–99.
J.C. Robinson and C.S. Phibbs, An evaluation of medicaid selective contracting in California, Journal of Health Economics 8, 1989, 437–455.
R.W. Shephard,Theory of Cost and Production Functions, Princeton University Press, Princeton, NJ, 1970.
L. Simar, Estimating efficiencies from frontier models with panel data: A comparison of parametric, nonparametric and semiparametric methods with bootstrapping, Journal of Productivity Analysis, 3, 1992, 171–203.
F.A. Sloan, M.A. Morrisey and J. Valvona, Hospital care for the self-pay patient, Journal of Health Politics, Policy, and Law 13, 1988, 83–102.
F. Sloan and B. Steinwald,Insurance, Regulation and Hospital Costs, Lexington Books, Lexington, MA, 1980.
J. Vertrees and K.G. Manton, A multivariate approach for classifying hospitals and computing blended payment rates, Medical Care 24, 1986, 283–300.
M.G. Vita, Exploring hospital production relationships with flexible functional forms, Journal of Health Economics 9, 1990, 1–21.
D.F. Vitaliano, On the estimation of hospital cost functions, Journal of Health Economics 6, 1987, 305–318.
P.A. Wilson, Bootstrap methodology for estimating production efficiency with multiple inputs and multiple outputs, Mimeo, Department of Economics, University of Texas, Austin, TX, 1991.
J. Zwanziger and G.A. Melnick, The effects of hospital competition and the Medicare PPS program on hospital cost behavior in California, Journal of Health Economics 7, 1988, 301–320.
Author information
Authors and Affiliations
Additional information
Contact author.
Rights and permissions
About this article
Cite this article
Clement, J., Grosskopf, S. & Valdmanis, V. A comparison of shadow prices and reimbursement rates of hospital services. Ann Oper Res 67, 163–182 (1996). https://doi.org/10.1007/BF02187028
Issue Date:
DOI: https://doi.org/10.1007/BF02187028