Economies of Scale, Efficiency and Optimal Size of the Hospital

Abstract

Hospitals are being expanded all over the world. Hospitals are becoming larger (i.e., increasing patient admissions each year) and more complex (i.e., offering a wider range of services to patients with more diverse medical care needs). In the hospital sector and other branches of the economy, economies of scale are important, according to which the volume of medical services can be increased by reducing average costs and increasing quality. However, measuring this relationship between the volume of medical services and costs is difficult because hospitals differ substantially in terms of specialization, patient composition, and other parameters that affect the volume of costs. The paper discusses the features of economies of scale in the healthcare sector and the dependence of the volume of medical services on costs and quality. Studies confirm that the influence of various factors on the costs and quality of medical services depends on the environment and the system of incentives in which hospitals operate. Relationships between patients and healthcare providers based solely on price negotiations do not ensure adequate healthcare quality. Due to informational asymmetry with respect to the real cost of hospital services and quality of treatment, medical service buyers cannot influence cost reductions and increase the quality of treatment, which increases hospital power. Thus, when evaluating the impact of hospital competition on costs and quality of care, we must remember that market mechanisms in health care do not always increase public welfare.