The economics of the hospital : an analysis of production and cost relations
This study consists of an economic analysis of the Scottish hospital sector. In particular analysis is directed towards an understanding of the hospital production process and the resultant cost - output relations. Both theoretical and empirical study is undertaken. The underlying methodological approach relies heavily on the transaction cost analysis developed by Williamson (1975). As such the study suggests that many of the traditional neo-classical theories applied to the hospital sector have been misdirected. The study includes a review of existing theories of hospital behaviour and the empirical literature on hospital production and cost functions. This reveals that there has been little overlap between these two literatures. It is suggested that this is largely because the hospital as an economic institution does not readily lend itself to positive analysis. In part this arises because of the inherent characteristics of the hospital production process, but it is also suggested that economic analysis at this level of aggregation is not appropriate. A behavioural analysis of hospital production is forwarded which emphasises the internal allocation processes. The agency relationship that exists between the doctor and the patient is highlighted, as are the underlying ethical constraints within which this relationship operates. The importance of internal organisational and process choice aspects of production are also emphasised. The rights to self-regulation held by the medical profession are seen to lie outside of the normal monitoring and control channels which are focussed largely upon the expenditure determination process. The limitations of a neo-classical production function analysis is outlined through the empirical estimation of a generalisable production function applied to a sample of Scottish hospitals. Following consideration of the behavioural aspects of the hospital production process a behavioural cost function model is estimated. As a secondary objective analysis of the specification of hospital output is undertaken.