Economies of scale and scope in the Danish hospital sector prior to radical restructuring plans

Abstract

Objective: The Danish hospital sector faces a significant rebuilding program driven by recent regional reform and guidelines for acute admission hospitals. Within the next 5-10 years, the number of public hospitals offering acute admission will be reduced from 35 to approximately 20 larger hospitals. As the administrative data may be biased during the middle of a restructuring process our objective was to analyze whether the configuration of Danish public hospitals was subject to economies of scale and scope prior to the restructuring plans.

Methods: We estimated a quadratic cost function using panel data on the total costs for somatic treatment, casemix adjusted DRG-production values, and other cost drivers for the three years before the 2007 reforms. A short-run cost function was used to derive estimates of a long-run cost function by applying the envelope condition. Next, we estimated economies of scale and scope.

Results: We identified moderate-to-significant economies of scale and scope. This indicates that the Danish hospital sector was characterized by unexploited gains from consolidation.

Conclusions: Our results suggest that the proposed plans have the potential to result in hospitals that are more efficient. However, post-restructuring studies elsewhere show that the strategy of horizontal integration has failed.