RESOLVING THE IMPASSE ON HOSPITAL SCALE ECONOMIES - A NEW APPROACH

The existence of scale economies in hospitals is important for both public and managerial policy, yet production and cost function studies have found conflicting evidence. More recently, more sophisticated studies have typically found scale diseconomies, which is inconsistent with the views of industry participants and observers. In the early 1980s, California deregulated both private and public health insurance (MediCal), which provides a natural laboratory for examining hospital efficiency. Using Stigler's original and multivariate survivor analysis, we resolve the conflict in favour of scale economies, and reconcile the controversy. The survivorship methodology is simple to apply, and a useful tool in conjunction with statistical cost and production studies.