Empirical assessment of the economic behaviour of Dutch general hospitals

We study the cost structure and efficiency of Dutch general hospitals over the period 1985-1995. Several studies on the efficiency of hospitals now exist. Most of them start from the assumption that hospital management attempts to minimize cost. We went beyond this assumption by trying to collect empirical evidence on management behaviour with respect to patient selection. We did so by estimating both the direct cost function and the indirect cost function as proposed by Färe and Primont and compared the results. We found that acknowledging the possibility of output reallocation increases the validity of optimizing models in the hospital sector but a complete indirect optimizing model ignores that some output categories are less flexible especially in the short run. Endogenous shifts in the allocation of patients appear to be realized through time by increased specialization of hospitals. We suggest that a mixed direct-indirect cost model is probably preferable.