Our colleagues Erik Magnus Sæther, Anders Modum Bilet, Halvard Sandvik Jansen and Johanna Lidman, together with Sverre Kittelsen (Frischsenteret), Kjartan Sarheim Anthun (SINTEF) and Jon Magnussen (NTNU), have published an article in the Journal of Productivity Analysis.
A central policy question in healthcare is how large hospitals should be, and how efficiently existing capacity is used. If economies of scale are present, the optimal size of hospitals will be larger, and since the scale elasticity is the inverse of the total cost elasticity, long run marginal costs will be below average costs.
The article investigates economies of scale in Norwegian somatic hospitals over the period 2013-2019, using data on operating and capital costs along with somatic patient admissions, aggregated by diagnosis-related group (DRG) weights from 19 hospital trusts. The analysis estimates a cost function using two approaches (a) a panel data Stochastic Frontier Analysis (SFA) method with a translog functional form, and (b) a non-parametric bootstrapped Data Envelopment Analysis (DEA) method with the Førsund–Hjalmarsson formula for scale elasticities. Based on specification tests, three outputs are included: medical inpatients, surgical inpatients, and outpatients.
The paper contributes by providing up-to-date evidence on scale economies and scale efficiencies in hospitals. The results indicate clear economies of scale during the study period. The total cost elasticity is estimated at between 90 and 95%. In public hospital systems where activity growth, for instance, due to demographic changes, is financed through higher government grants, this suggests that expanding hospital activity can be achieved at a marginal cost slightly below the average cost. Notably, in allocating funds to health trusts between 2008 and 2023, the Norwegian government assumed a total cost elasticity of 80%. Our findings therefore imply that, on average, hospital activity growth during this period may have been underfunded.
You can read the article here
