Agglomeration and Cost Economies for Washington State Hospital Services

Hospital cost efficiency is dependent on the potential to generate cost economies, which imply lower costs for hospitals that are, for example, larger or more diversified. Although scale and scope economies have been recognized in the literature on hospital costs, agglomeration economies due to hospital clustering have received little attention. We consider the impact of such spatial linkages, which may result from labor pooling or knowledge spillovers, by including a measure of other hospitals' proximity in a flexible cost function model. We find significant agglomeration economies for the Washington State hospitals in our dataset; geographic concentration appears to reduce costs for most treatment centers. We also find significant scale economies, and some evidence of scope economies from complementarities between outputs and among treatment centers.