Cost characteristics of hospitals.

Modern hospitals are complex multi-product organisations. The analysis of a hospital's production and/or cost structure should therefore use the appropriate techniques. Flexible functional forms based on the neo-classical theory of the firm seem to be most suitable. Using neo-classical cost functions implicitly assumes minimisation of (variable) costs given that input prices and outputs are exogenous. Local and global properties of flexible functional forms and short-run versus long-run equilibrium are further issues that require thorough investigation. In order to put the results based on econometric estimations of cost functions in the right perspective, it is important to keep these considerations in mind when using flexible functional forms. The more recent studies seem to agree that hospitals generally do not operate in their long-run equilibrium (they tend to over-invest in capital (capacity and equipment)) and that it is therefore appropriate to estimate a short-run variable cost function. However, few studies explicitly take into account the implicit assumptions and restrictions embedded in the models they use. An alternative method to explain differences in costs uses management accounting techniques to identify the cost drivers of overhead costs. Related issues such as cost-shifting and cost-adjusting behaviour of hospitals and the influence of market structure on competition, prices and costs are also discussed shortly.