An economic analysis of hospital costs in New Zealand

Abstract

The main purpose of this study is to apply economic principles and methods to the analysis of New Zealand’s hospital services in order to ascertain how the costs of providing those services varies among hospitals and over time. Achievement of this objective at the same time enables an assessment to be made of the relevance of the various theoretical models and empirical techniques that have been employed in recent studies of hospital costs in other countries. Attention in the initial chapters is devoted to identifying and assessing the quantitative importance of the factors responsible for the rapid and accelerating cost increases associated with the provision of hospital services in recent years. Two main groups of factors are identified - demand and supply-related - and their relative cost impacts are tested first by means of a descriptive historical analysis, and then, following the development of a general behavioural model of hospital cost inflation, by means of econometric techniques.

The results of the estimation process indicate that rising hospital costs are largely due to changes on the supply side, particularly to the rising cost, quantity and quality of the labour and non-labour inputs used by hospitals. Demand variables, particularly changing length of stay and the changing diagnostic mix of patients treated in hospital, are also shown to have had an important, though less substantial impact on hospital cost levels. The second part of the study is devoted to identifying and examining the factors that give rise to variations in costs among hospitals at a given point in time. Three main groups of factors are identified - patient or output characteristics, institutional characteristics and utilisation levels, and their relative importance in explaining the interhospital cost variations is tested by means of econometric techniques. The results indicate that variations in the average costs of hospital care are largely explained by the types of patient treated, both by age and diagnosis, by the length of time the patient stayed in hospital, and by the teaching status of the hospital. Considerable attention in this section is also devoted to establishing whether economies of scale exist in New Zealand’s hospital industry and to developing and testing a number of alternative measures of hospital output based on similar measures employed in earlier overseas studies.

A number of implications for policy and for further research arise from the findings. On the cost inflation side apart from suggesting possible ways in which to combat and control the rapid rise in hospital costs, considerable emphasis is placed on the need both for more rigorous evaluation of alternative hospital expenditure programmes and for more and better planning of all hospital and health services. Future research, it is argued, should be directed towards assessing the costs and benefits of particular hospital programmes with a view to ensuring the most efficient and effective utilisation of the scarce resources available for hospital care in New Zealand. On the cost variation side a revised system of allocating finance to Hospital Boards is advocated which would take into account the various differences among hospitals found to be responsible for the wide variations in their average costs. Introduction of such a population-based allocation system would, it is maintained, ensure that the desired objective of an equitable distribution of resources throughout New Zealand is achieved. Further research is required firstly, to develop a simple yet reliable means of accounting for interboard case-mix differences; secondly, to assess more accurately the nature and extent of the impact of teaching on hospital costs; and finally, to ensure that the economies of scale that appear to exist in New Zealand’s hospital industry are fully exploited.