Conclusions

Abstract

Economists interested in empirically estimating hospital cost functions face a dilemma. Flexible functional form multiproduct cost functions which allow non-jointness, input/output separability, and overall and product-specific economies and diseconomies of scale to be incorporated as testable rather than maintained hypotheses entail an exponential increase in the number of parameters to be estimated as the number of output categories increases. For hospitals, the number of output categories required to achieve approximate homogeneity within each category is quite large. Consequently, the use of flexible functional forms generally requires ad hoc aggregation to collapse hospital outputs into a smaller number of categories in order to achieve parameter parsimony. The alternative is to adopt a more restricted functional form which incorporates the above possible multiproduct cost function characteristics as maintained hypotheses but which then allows the use of a more disaggregated output classification scheme. This alternative has been chosen in the empirical work presented in this book.