Description
This set of university notes provides a detailed analysis of the production and cost structures within healthcare services, authored by Mwimba Chewe from the Department of Health Policy and Management for Health Economics HSM 4230. It serves as essential tertiary revision material for students in health administration, public health, and health economics programs, covering the assessment of productivity in medical firms through production functions and the application of the law of diminishing marginal productivity. The material examines cost measures in depth, distinguishing between accounting costs and economic opportunity costs, and develops the analysis of short-run and long-run costs, including fixed, variable, marginal, and average costs. It explores the implications of cost structures for hospital operations, including the decision to remain open when facing losses, supported by real-world examples such as the study of Cook County Hospital. The notes also address economies of scale and scope, discussing how hospital size, specialization, and the joint production of multiple services can impact average costs and operational efficiency. This authoritative resource is designed to support exam preparation and academic mastery for students seeking to understand the economic principles governing the supply and cost of health services. Review this material to strengthen your analytical skills for evaluating healthcare production and costs.
What's inside
SUPPLY OF HEALTH SERVICES AND COSTS OF PRODUCTION Mwimba Chewe HSM 4230 Department of Health Policy And Management OUTLINE • Productivity Measures • Cost Measures ASSESSING THE PRODUCTIVITY OF MEDICAL FIRMS Economists often describe production of output as a function of labor and capital : q = f(n,k) In the case of health care : q = hospital services n = nurses k = medical equipment, hospital building ASSESSING THE PRODUCTIVITY OF MEDICAL FIRMS (CONT.) Short run : k is fixed, while n is variable a) At low level of n, k is abundant. Each in nurses when combined with capital greater in services. - potential synergy effect because nurses can work in teams. b) Further in nurses service, but a decreasing rate - law of diminishing marginal productivity. c) “Too many “ nurses can cause congestion, communication problems, hospital services SUBSTITUTABILITY IN PRODUCTION OF MEDICAL CARE There may be more than one way to produce a given level of health care. ◆Enrolled nurses (ENs) vs Registered Nurses (RNs) in hospitals. ENs have less training. Maybe not as productive, but not as costly. ◆ Physician assistants vs physicians at ambulatory clinics. But physician assistants can’t prescribe meds in most states. SUBSTITUTABILITY IN PRODUCTION OF MEDICAL CARE (CONT.) ◆ r = 0 no substitutability. r = perfect substitutability. ◆Potential for substitutability If price of 1 input increases, can minimize impact on total costs by substituting away. ◆Elasticity of substitution : r = [D(I1/I2)/I1/I2] : [D(MP2/MP1)/MP2/MP1] % change in input ratio, divided by % change in ratio of inputs’ MPs. PRODUCTION FUNCTION FOR HOSPITAL ADMISSIONS Jensen and Morrisey (1986) Sample : 3,450 non-teaching hospitals in 1983. q = hospital admissions inputs : physicians, nurses, other staff, hospital beds. q = a0 + a1physicians + a2nurses + …. + e Coefficients in regression are MPs. RESULTS • Each additional physician generated 6.05 more admits per year. • Nurses by far the most productive Annual Marginal Products for Admissions Physicians 6.05 Nurses 20.30 Other Staff 6.97 Beds 3.04 Input MP (at the means) RESULTS (CONT.) • Each inputs is a substitute for other in production process. • If wages of nurses rise, can substitute away by having more hospital beds. Elasticity of Substitution between Inputs Physicians with nurses 0.547 Physicians with beds 0.175 Nurses with beds 0.124 Input pair s Except for when s = 0 MEDICAL CARE COST Explicit costs of doing business. • e.g. staff payroll, utility bills, medical supply costs. Necessary for : • Comparing performance evaluation across providers/depts. • Taxes • Government reimbursement/rate setting Accounting Costs MEDICAL CARE COST (COST.) i.e. opportunity costs. • e.g. opportunity cost of a facility being used as an outpatient clinic = rent it could earn otherwise. Necessary for : • optimal business planning. • allows one to consider highest returns to assets anywhere, not just vs. direct competitors, or w/in health care industry. Economic Costs = Accounting Costs SHORT-RUN TOTAL COST cost hospital service STC( q ) = w n + r k* w = wage rate for nurses r = rental price of capital short run k fixed w n = variable cost r k = fixed cost . q0 STC STC w n r k
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