Hospital Productivity: An analysis at medical-area level

Medical services have become an important sector in recent years as Japan aims to deal with its aging population. This paper estimates hospital productivity by using panel data of prefectures and secondary medical areas. The major focus of this study is on the economies of scale at medical-area level and hospital level. The average length of stay is used as a measure of medical quality. We avoid effects of case-mix by using data of medical areas instead of hospital-level data. By using panel data, we can control unobservable regional characteristics. Disparity of price among regions is eliminated through the use of quantity data. Results show that hospital size affects productivity-the larger the hospital, the higher the productivity. The magnitude of the hospital size effect is economically significant: hospital productivity increases by more than 10% when the size of hospital doubles. The size effects are absent when we do not control the average length of stay. The policy implication is that the consolidation of hospitals through economies of scale contributes to an improvement in productivity.