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Analysis of the marginal costs of activity growth in the Norwegian specialist health service

04.03.2024 - Health and life science

Oslo Economics, in collaboration with Sverre Kittelsen (Frisch Centre), Kjartan Sarheim Anthun (SINTEF) and Jon Magnussen (NTNU), has calculated the marginal costs associated with increasing the activity levels in the Norwegian specialist health service. The study is part of the foundation for the Norwegian government’s recently announced healthcare plan and has been conducted on the behalf of the Ministry of Health and Care Services.

Since 2008, the funding for planned activity growth in the specialist health service has been based on the marginal cost being equal to 80 percent of the average cost. Our estimates indicate that the marginal cost in the specialist health service is higher, instead being slightly above 90 percent of the average cost on the production frontier. We find significant variation in capacity utilization, efficiency, and marginal costs both across and within health regions. The health trusts describe a service that is becoming increasingly specialized, and in combination with increased emergency preparedness requirements and higher construction costs, this results in a higher marginal cost than before. The marginal cost is assessed to be somewhat higher in somatic care than in mental health care (PHV) and specialist multidisciplinary treatment for substance abuse (TSB).

Based on data at the health trust level, we estimate cost functions for Norwegian health trusts. We use two different methods to estimate these cost functions, namely Data Envelopment Analysis (DEA) and Stochastic Frontier Analysis (SFA). The estimated cost functions suggest that the cost elasticity (the percentage of marginal cost relative to average cost) for an average unit on the production frontier in specialist health services is slightly above 90 percent, specifically 91.7 percent in DEA and 93.2 percent in SFA.

The full report can be found in Norwegian here.

Erik Magnus Sæther
Erik Magnus Sæther
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