Variable Cost Frontiers and Efficiency: An Investigation of Labor Costs in Hospitals
Health economists recognize that the rising cost of hospital services is due, at least in part, to features of the industry which create costly resource misallocation that decreases productivity. Organizational structure, lack of competition in the market for health care in some areas, imperfections in factor markets, and government regulation have all been hypothesized to effect the cost minimizing performance of hospitals. A growing body of empirical research which seeks to investigate cost inefficiencies in the health care industry and these predications of the effect of industry structure on performance has resulted. Most of this work has followed one modeling approach: (1) measuring either total cost or technical efficiency with aggregate measures of non- physician labor (2) without examining the technical and allocative components of cost inefficiency (3) and using statistical techniques to estimate a parametric cost or production frontier. In this study additional empirical evidence on inefficiency of hospitals is provided using a different modeling approach.
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