Farid Abolhassani Costs: Broader Service Perspective 9
Learning Objectives After working through this chapter, you will be able to: Diagnose whether economies or diseconomies of scale exist Discuss the advantages and disadvantages of hospital mergers
Key Terms Scale efficiency Scale efficiency A situation where the provider is producing at an output level such that average cost is minimized.
Marginal and Average Cost Output Cost Marginal Cost Average Cost always A marginal cost curve always intersects the average cost curve at its minimum.
Economies of Scale Average cost Total cost Input combination Total product VehiclesNurses × 100 = 5000 visits per day 50 × 165 = £ 8250 per day
Cost Saving Approaches Encourage providers to be efficient by reviewing their choice of inputs and substituting between factors where necessary Change the scale of provider units in order to exploit economies of scale. Average cost Total cost Input combination Total product VehiclesNurses × 180 = 5040 Visits per day 5000 × 1.22 = £6100 Cost per day 8250 – 6100 = £2150 Saving per day
Consider the following options Suppose again that each provider has the same cost function but instead of there being 50 units each producing 100 visits per day, there are 25 units each producing 200 visits a day. What cost savings can be made? Suppose this time that there are 10 units producing 200 visits a day and 30 producing 100 a day. Again, what cost savings can be made?
Conclusion When provider units are producing below the scale-efficient output then there are potential cost savings from merging. When provider units are producing above the scale-efficient output then there are potential cost savings from decentralizing production. If some provider units are above and some are below then there will be cost savings from transferring production between provider units.
How to improve hospital efficiency? Length of stay could be reduced; Staff productivity could be increased; Equipment could be fully utilized and maintained regularly; Over-prescribing of drugs could be avoided; Drug ordering and storage could be managed properly to avoid wastage and pilfering; Nurses could replace doctors when appropriate; Low-cost equipment could replace staff when appropriate; Day surgery could replace inpatient stays. Merging Merging