Uncertain Demand, the Structure of Hospital Costs, and the Cost of Emptyhospital Beds

52 Pages Posted: 18 Jul 2001 Last revised: 13 Sep 2010

See all articles by Martin Gaynor

Martin Gaynor

Carnegie Mellon University; National Bureau of Economic Research (NBER); Leverhulme Centre for Market and Public Organisation

Gerard F. Anderson

Johns Hopkins University - Department of Health Policy and Management; National Bureau of Economic Research (NBER)

Date Written: September 1993

Abstract

One of the fundamental facts of the environment hospitals face is uncertainty over demand for their services. This uncertainty leads hospitals to hold excess standby capacity to avoid turning away patients. In this paper we reformulate the theory of cost and production to take account of this uncertainty. We then use this model to calculate the cost of empty hospital beds. Utilized capacity in the hospital industry, as measured by the inpatient hospital bed occupancy rate, has gradually declined since 1980 and was approximately 65 percent in 1992. Congress and the Administration are concerned that the costs associated with empty beds represent wasteful expense and some have proposed an adjustment to Medicare payment rates which will penalize hospitals with low occupancy rates. We estimate a short run cost function for a hospital facing uncertain demand using data from a national sample of over 5000 hospitals for the years 1983-1987. The traditional cost model is strongly rejected in favor of the reformulated model. We calculate the cost of an empty hospital bed as $61,395 in 1987 dollars. We estimate that a one percent decrease in the number of hospital beds would decrease hospital costs by slightly over one-half of one percent. These costs are substantial, but smaller than some others have indicated.

Suggested Citation

Gaynor, Martin and Anderson, Gerard F., Uncertain Demand, the Structure of Hospital Costs, and the Cost of Emptyhospital Beds (September 1993). NBER Working Paper No. w4460. Available at SSRN: https://ssrn.com/abstract=227330

Martin Gaynor (Contact Author)

Carnegie Mellon University ( email )

H. John Heinz III School of Public Policy
and Management
Pittsburgh, PA 15213-3890
United States
412-268-7933 (Phone)
412-268-5338 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Leverhulme Centre for Market and Public Organisation

12 Priory Road
Bristol BS8 1TN
United Kingdom

Gerard F. Anderson

Johns Hopkins University - Department of Health Policy and Management ( email )

624 North Broadway
Baltimore, MD 21205

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
71
Abstract Views
1,136
rank
329,257
PlumX Metrics