The European Journal of Health Economics

, Volume 16, Issue 1, pp 35–45 | Cite as

Demand uncertainty and hospital costs: an application to Portuguese public hospitals

Original Paper

Abstract

In this paper, we evaluate the effect of demand uncertainty on hospital costs. Since hospital managers want to minimize the probability of not having enough capacity to satisfy demand, and since demand is uncertain, hospitals have to build excess capacity and incur the associated costs. Using panel data comprising information for 43 Portuguese public hospitals for the period 2007–2009, we estimate a translog cost function that relates total variable costs to the usual variables (outputs, the price of inputs, some of the hospitals’ organizational characteristics) and an additional term measuring the excess capacity related to the uncertainty of demand. Demand uncertainty is measured as the difference between actual and projected demand for emergency services. Our results indicate that the cost function term associated with the uncertainty of demand is significant, which means that cost functions that do not include this type of term may be misspecified. For most of our sample, hospitals that face higher demand uncertainty have higher excess capacity and higher costs. Furthermore, we identify economies of scale in hospital costs, at least for smaller hospitals, suggesting that a policy of merging smaller hospitals would contribute to reducing hospital costs.

Keywords

Portugal Hospitals Demand uncertainty Cost function 

JEL Classification

D24 I11 

References

  1. 1.
    Durán, A., Dubois, H.F.W., Saltman, R.B.: The evolving role of hospitals and recent concepts of public sector governance. In: Durán, A., Dubois, H.F.W., Saltman, R.B. (eds.) Governing Public Hospitals: Reform Strategies and the Movement Towards Institutional Autonomy, pp. 15–33. WHO European Observatory on Health Systems and Policies, Copenhagen (2011)Google Scholar
  2. 2.
    OECD: Health at a Glance: Europe 2012. OECD. doi:10.1787/9789264183896-en (2012)
  3. 3.
    Gaynor, M., Anderson, G.F.: Uncertain demand, the structure of hospital costs and the cost of empty hospital beds. J. Health Econ. 14(3), 291–317 (1995)PubMedCrossRefGoogle Scholar
  4. 4.
    Boutsioli, Z.: Demand variability, demand uncertainty and hospital costs: a selective survey of the empirical literature. Glob. J. Health Sci. 2(1), 138–149 (2010)Google Scholar
  5. 5.
    Lynk, W.J.: The creation of economic efficiencies in hospital mergers. J. Health Econ. 14(5), 507–530 (1995)PubMedCrossRefGoogle Scholar
  6. 6.
    Duncan, G.M.: The effect of probabilistic demands on the structure of cost functions. J. Risk Uncertain. 3(3), 211–220 (1990)CrossRefGoogle Scholar
  7. 7.
    Smet, M.: Measuring performance in the presence of stochastic demand for hospital services: an analysis of Belgian general care hospitals. J. Prod. Anal. 27(1), 13–29 (2007)CrossRefGoogle Scholar
  8. 8.
    Pauly, M.V., Wilson, P.: Hospital output forecasts and the cost of empty hospital beds. Health Serv. Res. 21(3), 403–428 (1986)PubMedCentralPubMedGoogle Scholar
  9. 9.
    Rechel, B., Wright, S., McKee, M.: Translating hospital services into capital asset solutions. In: Rechel, B., Wright, S., Edwards, N., Dowdeswell, B., McKee, M. (eds.) Investing in Hospitals of the Future, pp. 207–229. European Observatory on Health Systems and Policies, Copenhagen (2009)Google Scholar
  10. 10.
    Breyer, F.: The specification of a hospital cost function. A comment on the recent literature. J. Health Econ. 6(2), 147–157 (1987)PubMedCrossRefGoogle Scholar
  11. 11.
    Vitaliano, D.F.: On the estimation of hospital cost functions. J. Health Econ. 6(4), 305–318 (1987)PubMedCrossRefGoogle Scholar
  12. 12.
    Cowing, T.G., Holtmann, A.G., Powers, S.: Hospital cost analysis: a survey and evaluation of recent studies. Ad. Health Econ. Health Serv. Res. 4, 257–303 (1983)Google Scholar
  13. 13.
    Vita, M.G.: Exploring hospital production relationships with flexible functional forms. J. Health Econ. 9(1), 1–21 (1990)PubMedCrossRefGoogle Scholar
  14. 14.
    Joskow, P.L.: The effects of competition and regulation on hospital bed supply and the reservation quality of the hospital. Bell J. Econ. 11(2), 421–447 (1980)CrossRefGoogle Scholar
  15. 15.
    Thorpe, K.: Why are urban hospital costs so high? The relative importance of patient source of admission, teaching, competition, and case mix. Health Serv. Res. 22(6), 821–836 (1988)PubMedCentralPubMedGoogle Scholar
  16. 16.
    Friedman, B., Pauly, M.: Cost functions for a service firm with variable quality and stochastic demand: the case of hospitals. Rev. Econ. Stat. 63(4), 620–624 (1981)CrossRefGoogle Scholar
  17. 17.
    Friedman, B., Pauly, M.: A new approach to hospital costs functions and some issues in revenue regulation. Health Care Financ. Rev. 4(3), 105–114 (1983)PubMedCentralPubMedGoogle Scholar
  18. 18.
    Carey, K.: Stochastic demand for hospitals and optimizing “excess” bed capacity. J. Regul. Econ. 14(2), 165–187 (1998)CrossRefGoogle Scholar
  19. 19.
    Hughes, D., McGuire, A.: Stochastic demand, production responses and hospital costs. J. Health Econ. 22(6), 999–1010 (2003)PubMedCrossRefGoogle Scholar
  20. 20.
    Baker, L.C., Phibbs, C.S., Guarino, C., Supina, D., Reynolds, J.L.: Within year variation in hospital utilization and its implications for hospital costs. J. Health Econ. 23(1), 191–211 (2004)CrossRefGoogle Scholar
  21. 21.
    Lovell, C.A.K., Rodríguez-Alvarez, A., Wall, A.: The effects of stochastic demand and expense preference behaviour on public hospital costs and excess capacity. Health Econ. 18(2), 227–235 (2009)PubMedCrossRefGoogle Scholar
  22. 22.
    Boutsioli, Z.: Hospital costs and unexpected demand: the case of Greece. Open Econ. J. 4, 49–58 (2011)CrossRefGoogle Scholar
  23. 23.
    Butler, J.R.G.: Hospital Cost Analysis. Kluwer, Dordrecht (1995)CrossRefGoogle Scholar
  24. 24.
    Dranove, D.: Economies of scale in non-revenue producing cost centers: implications for hospital mergers. J. Health Econ. 17(1), 69–83 (1998)PubMedCrossRefGoogle Scholar
  25. 25.
    Peyra, C., Pink, G.: Scale and scope efficiencies through hospital consolidations. J. Health Econ. 25(6), 1049–1068 (2006)CrossRefGoogle Scholar
  26. 26.
    Smet, M.: Cost characteristics of hospitals. Soc. Sci. Med. 55(6), 895–906 (2002)PubMedCrossRefGoogle Scholar
  27. 27.
    Conrad, R.F., Strauss, R.P.: A multiple-output multiple-input model of the hospital industry in North Carolina. Appl. Econ. 15(3), 341–352 (1983)CrossRefGoogle Scholar
  28. 28.
    Cowing, T.G., Holtmann, A.G.: Multiproduct short-run hospital cost functions: empirical evidence and policy implications from cross-section data. South. Econ. J. 49(3), 637–653 (1983)CrossRefGoogle Scholar
  29. 29.
    ACSS: Base de Dados dos Elementos Analíticos, http://www.acss.min-saude.pt/bdea/, accessed 30 March 2012 (2012)
  30. 30.
    DGS: Centros de Saúde e Hospitais: Recursos e Produção do SNS (2007)Google Scholar
  31. 31.
    DGS: Centros de Saúde e Unidades Hospitalares: Recursos e Produção do SNS (2008)Google Scholar
  32. 32.
    DGS: Centros de Saúde e Unidades Hospitalares: Recursos e Produção do SNS (2009)Google Scholar
  33. 33.
    Aletras, V., Jones, A., Sheldon, T.A.: Economies of scale and scope. In: Ferguson, B., Sheldon, T.A., Posnett, J. (eds.) Concentration and Choice in Healthcare, pp. 23–36. Financial Times Healthcare, London (1997)Google Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  1. 1.cef.up - Center for Economics and Finance at UP, Faculdade de EconomiaUniversidade do PortoPortoPortugal
  2. 2.Faculdade de EconomiaUniversidade do PortoPortoPortugal

Personalised recommendations