Excess Capacity and Expense Preference Behavior in National Health Systems: An Application to the Spanish Public Hospitals

Abstract:     
In the literature on the topic, excess capacity in the hospital sector is usually calculated using a short-run cost function, which implies cost minimisation with respect to variable inputs. However, the analysis of NHS hospitals reveals a bureaucratic structure characterised by expense preference behaviour, the observable consequence of which is a systematic misallocation of resources. In this sense, this paper presents a formal theoretical model of bureaucracy which concludes that in these hospitals persistent inefficiency may exist. We therefore propose, as an alternative, to use a short-run input distance function because it does not require the cost minimisation assumption.

We have presented an empirical application to the Spanish public hospital sector where we estimate an input distance function and the derived share equations using panel data consisting of 67 general hospitals observed over the period 1987-1994.

On the basis of our results, we have shown that the cost minimisation assumption is not fulfilled in this sector. We find statistically significant evidence of allocative inefficiency in variable inputs, which takes the form of systematic over-utilisation of supplies and care graduates relative to care technicians and other personnel. The human resource findings are consistent with the hypothesis that bureaucrats prefer better-qualified personnel to those with fewer qualifications. The over-utilisation of supplies is consistent with the information asymmetry and the consequent reductions in incentives for cost minimisation that characterise bureaucratic organisations.

Note: This is a description of the paper and not the actual abstract.

Keywords: Bureaucracy, Expense preference, Input Distance Function, Overcapitalisation, Spanish Public Hospitals

JEL Classification: C33, D24, D73, I12, L32

Accepted Paper Series