On the estimation of hospital cost functions

J Health Econ. 1987 Dec;6(4):305-18. doi: 10.1016/0167-6296(87)90018-x.


Data from 166 general hospitals in New York State (1981) is used to estimate a quadratic and logarithmic long-run cost function. Both equations fit the data very well but give very different results. The quadratic appears in confirm the commonly-held view of a shallow U-shaped average cost curve, whereas the log function indicates significant economies of scale: a total and average cost elasticity of 0.9 and -0.10, respectively (using beds or patient days to measure output). Ramsey's RESET test is used to discriminate between the two models and the quadratic is clearly rejected as a misspecification. Scale economies thus exist even where the usual quadratic suggests otherwise.

MeSH terms

  • Costs and Cost Analysis / methods*
  • Data Collection
  • Hospitals, General / economics*
  • Models, Theoretical*
  • New York
  • Statistics as Topic