Factor substitution in hospitals

Abstract

The substitutability of inputs to health production in hospitals has recently become an issue in Germany. New regulations concerning the renumeration of hospitals set incentives to reduce patients’ length of stay and, in turn, to operate less care-intensive. Based on data at the individual hospital level from Germany, covering the years 2006 to 2008, we test whether substitutability of inputs and its change over time exhibits heterogeneity across different types of ownership. If found in the data, this may point at differently owned hospitals adapting differently to the new regulations. In order to avoid relying on input prices as regressors, which exhibit only very limited variation across hospitals, we pursue a price-free empirical approach by calculating technical elasticities of substitution from the multiplier representation of data envelopment analysis. The empirical analysis yields pronounces ownership-specific heterogeneity in the technical elasticity of substitution between physicians and nurses indicating that non-profit hospitals operate particularly ‘physician-intensive’. Yet, this pattern is stable over the considered period.