1、lMotivationlProductivity MeasureslCost Measuresl 2000l 2005l l l a)b)c)u u l inputs:.F s s q0STCSTCw nr k In the short run,k is fixed.rk*is the same,regardless of the amount of hospital services(q)produced.As q rises,increases in STC are only due to increases in the number of nurses needed(n).SMC=ST
2、C q=(wn+rk*)/q=w(n/q)=w(1/MPn)=w/MPnThe short run marginal cost of nurses depends on their marginal productivity.SAVC=STVCq=(wn)/q=w(1/APn)=w/APnThe short run average variable cost of nurses depends on their average productivity.Costsq0q0SMCSATCSAVCSAVC0SATC0SMC0lSATC and SAVC are u-shaped curves.uI
3、ncreasing returns to scale followed by decreasing returns to scale.lSMC passes through the minimum of both SATC and SAVC.uIf marginal cost is greater than average cost,then the cost of one additional unit of output must cause the average to rise.lWhy do all of these cost curves matter?lMany hospital
4、s operate at a loss(profitsCBAP,the hospital will lose less if it remains open.Price per PatientPatients0MCATCAVCBACPq*DElIn the SR,FC are critical for determining whether a hospital should stay open for business.lSo,in general,how large are FC?lStudy of Cook County Hospital in Chicago(Roberts,JAMA
5、1999)uUrban public teaching hospital,1993Fixed Costs:lCapitallWorker salaries&benefitslBuilding maintenancelUtilitiesVariable Costs:lWorker supplies(e.g.gloves)lPatient care supplieslPaperlFoodlLab supplieslMedicationslWhy are salary&benefits a FC?uWorkers often have long-term contracts.uMany worker
6、s wont take jobs w/frequent layoffs.lFor Cook,the budget was 84%FC,16%VC.Often makes sense for Cook to operate at a loss,not reduce patient load.lCutting the#of patients you serve wont save a lot if you cant cut FC simultaneously.lIf you serve 5%fewer patients,you may still need to:uPay for a CT sca
7、nner&technicianuPay for upkeep of the ER&ORuPay annual licensing fees to city&stateCowing and Holtmann 1983lEconomies of scope can arise at any point in the production process.uAcquisition and use of raw materialsuDistributionuMarketinglSpecialty Hospitals versus General Hospitals.uSpecialty Hospita
8、lslTexas Heart Institute in Houston.lShouldice Hospital in Ontario performs only hernia repair.lUniversity General Hospital in Houston,bariatric surgery.uGeneral HospitalslMethodist,St.Lukes,Memorial HermannlGeneral hospitals can spread the fixed costs of operating rooms and intensive care units ove
9、r multiple different operations.uOperate at full capacity by treating all types of patients.lHowever,specialty hospitals argue that they can lower marginal costs by specializing.lKnow-how can be spread over products sharing similar technology.uMedical device companies frequently produce multiple dif
10、ferent products.uEthicon Endo-Surgery.uMakes multiple different devices for minimally invasive surgery.uFactories often require similar technology,and the marketing strategies are similar too.lSpreading advertising costs.uMethodist hospital can pay for one ad advertising its top rankings in multiple
11、 services.lResearch and development.uPharmaceutical companies can spend hundreds of millions of$s to develop a drug.uOnce drug is developed,they sometimes find alternative beneficial applications.lGleevec for leukemia,and gastrointestinal tumors.uCosts of production and sales can be spread over many
12、 different drugs.lIn the long run,all inputs are variable.u k is no longer fixed.u e.g.A hospital can build a new facility or add extra floors to increase bedsize in the long run.lIf all inputs are variable,what does the long run average cost curve look like?Average Cost of Hospital Services#of pati
13、entsLATCq0q1q2lJust like the short run cost curve,the long run cost curve for a firm is also u-shaped.uHowever,the short run cost curve is due to IRTS,then DRTS relative to a fixed input.ue.g.In the short run,the only way to increase the number of patients treated was to hire more nurses;but the#of
14、beds(k)was fixed.uBut in the long run,there are no fixed inputs.lThe u-shaped long run average cost curve is due to economies of scale and diseconomies of scale.lEconomies of scale uAverage cost per unit of output falls as the firm increases output.uDue to specialization of labor and capital.lExampl
15、e of specialization and the resulting economies of scale.uA large hospital can purchase a sophisticated computer system to manage its inpatient pharmaceutical needs.uAlthough the total cost of this system is more than a small hospital could afford,these costs can be spread over a larger number of pa
16、tients.The average cost per patient of dispensing drugs can be lower for the larger facility.lIncreasing returns to scaleuAn increase in all inputs results in a more than proportionate increase in output.ue.g.If a hospital doubles its number of nurses and beds,it may be able to triple the number of
17、patients it cares for.lHowever,most economists believe that economies of scale are exhausted,and diseconomies of scale set in at some point.lDiseconomies of scale arise when a firm becomes too large.ue.g.bureaucratic red tape,or breakdown in communication flows.uAt this point,the average cost per un
18、it of output rises,and the LATC takes on an upward slope.lDiseconomies of scale(in costs)imply decreasing returns to scale in production.Average Cost of Hospital Services#of patientsLATCq0q1q2Economies of scaleDiseconomies of scalelDecreasing returns to scaleuAn increase in all inputs results in a l
19、ess than proportionate increase in output.ue.g.Doubling the number of patients cared for in a hospital may require 3 times as many beds and nurses.lIn some cases,the production process exhibits constant returns to scale.uA doubling of inputs results in a doubling of output.Average Cost of Hospital S
20、ervices#of patientslLike the short run cost curve,a number of factors can cause the short run cost curve to shift up or down.uInput prices.uQuality.uPatient casemix.le.g.If the hourly wage of nurses increases,the average cost of caring for each patient will also rise.The average cost curve will shift _lEmpirical evidence on HMOs and costs.lSee handout.
