Economies of scope in the health sector: The case of Portuguese hospitals

Abstract

Background: Economies of scope are defined as the potential cost savings arising from the joint production of two or more outputs rather than their separate production. Given the importance of the health sector for the community, measuring the existence of potential economies of scope contributes to the improvement of this sectors sustainability.Objective(s): To identify economies of scope in Portuguese hospitals using frontier-based methods.Methods: This paper develops (1) a generalized algorithm to obtain locally convex frontiers using the directional order-α (LDOα) frontier method, and (2) a generalized economies-of-scope-based ratio that allows the introduction of any inefficiency source.Data: This paper uses the 2002–2009 dataset for Portuguese hospitals concerning the provision of obstetrics, gynaecology, and paediatrics (OGP), and psychiatric (Psy) services.Results: Considerable economies and diseconomies of scope were found in the Portuguese public hospitals. A considerable dependence on the production line and on the merger status of the hospital was observed. Diseconomies of scope were more likely for larger hospitals, i.e., those with more than 6000 inpatient discharges and/or 7500 medical appointments per year.Conclusions: Even merged hospitals can exploit economies of scope. However, when they become outsized entities, such efforts become more difficult.