THE SOFTNESS OF MEDICAL PRODUCTION AND IMPLICATIONS FOR SPECIFYING HOSPITAL OUTPUTS

This paper considers the implications of an inarticulate medical production function when specifying and interpreting estimated hospital production functions. Lack of scientific knowledge regarding the relationship between medical inputs and outputs results in variations in styles of care, and medical payment contains inefficient production incentives. These production distortions are implicit in reported hospital data. Empirical results of this study provide information regarding the extent and direction of bias resulting from estimating production functions using reported outputs under retrospective cost-reimbursement.