Hospital Industry Restructuring and Input Substitutability: Evidence from a Sample of Italian Hospitals

In this paper we investigate the economic rationality of the bed downsizing process characterising the hospital industry worldwide in the last decades, providing new evidence on the factor substitutability in the production of hospital services. We consider a sample of Italian regional producers and – differently from other studies – estimate a general cost function model, namely the Generalised Composite, firstly introduced by Pulley & Braunstein (1992). Alternative cost function specifications (included Translog) are estimated jointly with their associated input cost-share equations. For all models we derive Allen, Morishima and Shadow elasticities of substitution between input pairs, obtaining a fairly consistent picture across all specifications and elasticity concepts. More precisely, our results suggest a very limited degree of substitutability between factors in the production of hospital services (in particular, between beds and medical staff). These findings, consistent with previous evidence in the literature, suggest that a restructuring policy of the hospital industry which is confined to limiting the number of beds could not be a viable strategy for controlling the increase in public health care expenditure.