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Production and Cost Theory of Health PDF
Production and Cost Theory of Health PDF
and
PRODUCTION COST
OUTLINE
PRODUCTION OF HEALTH
APPLICATION OF LAW OF DIMINISHING
RETURNS ON HEALTH CARE INSTITUTIONS
APPLICATION OF LAW OF DIMINISHING
MARGINAL UTILITY ON PATIENTS
q = hospital services
n = nurses
k = medical equipment, hospital building
b) Further in nurses
service, but a decreasing
rate - law of diminishing marginal productivity.
c) Too many nurses can cause congestion, communication problems,
hospital services
Graphical
Representation
Total product = q = f(n,k*)
hospital
services
(q)
TP
n1
marginal
product
n1
n2 Nurses (n)
n2
nurses
MP = Dq / Dn
Graphical Representation
AP = q / n
average
product
C
B
TP
A
n3
q = hospital admissions
inputs : physicians, nurses, other staff, hospital beds.
q = a0 + a1physicians + a2nurses + . + e
Results
Annual Marginal Products for Admissions
Input
Physicians
Nurses
Other Staff
Beds
6.05
20.30
6.97
3.04
Necessary for :
Comparing performance
evaluation across
providers/depts.
Taxes
Government
reimbursement/rate setting
Economic Costs
Costs
= Accounting
Recall
n = labor = nurse = n
k = capital = medical equipment, hospital
building
cost
STC
STC
wn
rk
q0
hospital service
wn
rk
q0
hospital service
costs rise at
Cost
SMC
APn
SAVC
APn
MPn
0
n1
n3
q1
q3
inputs
nursing labor
auxiliary labor
professional labor
administrative labor
general labor
materials and supplies
Physicians
SUBSTITUTION
Health care providers
choice of nursing staff
mix. <RNs and LPN) If a
hospital needs to hire
nurses to care for
growing patient
volume, which should
be hired?
Substitutability in Production of
Medical Care (cont.)
Potential
for substitutability
If price of 1 input
increases, can minimize impact on total costs by
substituting away.
Elasticity
of substitution :
r = [D(I1/I2)/I1/I2] : [D(MP2/MP1)/MP2/MP1]
% change in input ratio, divided by % change in
ratio of inputs MPs.
r=0
r=
no substitutability.
perfect substitutability.
Results
Elasticity of Substitution between Inputs
Input pair
0.547
0.175
0.124
Higher Costs?
Health Production
Functions
Outline
Measures of Health
Concepts:
Health Production Function
Marginal Product of Health
Measures of Health
Morbidity
Morbidity: A
statement about the
extent of disability a
person suffers as a
consequence of a
disease over time.
Health Status
(HS)
1 2 3 4 5 6
Health Care
Inputs (HI)
DHI HI
MP is diminishing in size,
demonstrating the law of
diminishing marginal returns.
1 2 3 4 5
Health Care
Inputs
Big Medicine:Antiobiotics
300
100
200
The development of
antibiotics helped, but it
came very late in the
process.
1900
1920
1940
1960
year
1980
2000
END