HOSPITAL COST AND EFFICIENCY IN A REGIME OF STRINGENT REGULATION

Abstract

A stochastic frontier cost function is fitted to data for 219 New York hospitals (1991). Economic inefficiency is estimated to be about 18 percent, comparable to published estimates for hospitals nationwide. Hospitals with over 300 beds are notably more efficient, and those with more Medicare patients are also more efficient. A reduction in excess bed capacity to control costs appears warranted. Rochester area hospitals, where a system of monopsony reimbursement exists, are more efficient. Unionized hospitals are less efficient. The stringent regulatory system in New York does not appear to effectively control costs or to affect efficiency.