DaCHE discussion papers,
University of Southern Denmark, Dache - Danish Centre for Health Economics

Abstract: The Danish hospital sector is facing a major restructuring over the coming decade that will involve hospital mergers and closures as well as construction of new hospitals. There is a clear trend towards fewer and larger hospitals. The evidence for economies of scale and scope underpinning these decisions is lacking, however. The present study applies a hybrid translog cost function to examine whether there are unexploited economies of scale and scope in the current configuration of the Danish hospital sector. Cross section data relating to Danish public hospitals in year 2004 were analyzed. Issues relating to hospital definition, hospital production, functional form, scale and scope testing were addressed. Stochastic frontier analysis and OLS-regression were used to examine sensitivity to the assumption of cost-minimization. Economies of scale and diseconomies of scope were identified in connection with hospital outputs in the largest hospitals (200+ beds). Furthermore, the assumption of cost-minimization had little influence on the results. Results for the smallest hospitals (less than 200 beds) showed economies of both scale and scope.

Keywords: Economies of scale; economies of scope; hospital cost function; cost function; hospital efficiency; translog.

JEL-codes: C13; D24; H42; I11; I12; L38; L44

31 pages, October 23, 2008

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