The Role of Technology, Demand and Labor Markets in the Determination of Hospital Costs

Abstract

This paper attempts to sort out the contribution of demand factors, labor market conditions and changing technology to the determination of hospital costs in the United States. Data on approximately 200 non-profit hospitals for the period from 1962 to 1968 are analyzed in a pooled time-series, cross-section regression estimation. Measures of sources of demand changes — such as insurance coverage, income and various demographic factors — proxy measures of composition of cases treated, hospital wage rates and a time-shift variable are used to explain variation in hospital expenses per admission and expenses per patient-day. Of the predicted increase in expenses per hospital admission, demand variables accounted for 45 per cent of the increase; case-mix variables added another 7 per cent. Increases in average earnings of hospital employees represented another 10 per cent of the overall increase, while shifts upward over time were responsible for the remaining 38 per cent. Labor and non-labor inputs, as well as the wage rate paid for labor, were also found to be responsive to demand, case-mix and technological factors.

The work for this paper was funded by a contract with the Social Security Administration. The views expressed here are those of the author; they should not be ascribed to the Social Security Administration nor to the trustees, officers or the staff members of the Brookings Institution.