The Impact of Market Environment on Excess Capacity and the Cost of an Empty Hospital Bed

Abstract

The health economics literature contains contradictory empirical findings regarding the cost of an empty hospital bed. Recent empirical studies which account for the endogeneity of reserve capacity produce high estimates of these costs, while earlier studies and industry experts maintain that empty beds are cheap. This paper provides evidence which helps to reconcile the controversy. The cost of excess bed capacity will depend upon staffing levels of different types of labor in the hospital. We provide a relationship between capacity utilization, productive efficiency, and the cost of empty beds, and then compare the utilization of bed capacity in four very different market environments. These are the highly regulated, public Norwegian hospitals, who face very little competitive pressure, and the unregulated, private California hospitals, divided into three groups with variation in ownership and competitive environment. We find considerable variation in input utilization and excess capacity, with different implications for the cost of empty beds across the hospital groups and their respective market environments. Our findings suggest that the cost of an empty bed varies with market conditions, hence the seemingly contradictory findings in the literature are to be expected. Our findings also suggest an interesting area of future research: the impact of managed care on reserve capacity in hospitals.