A comparison of shadow prices and reimbursement rates of hospital services

The purpose of this paper is to calculate shadow prices of hospital services and compare them to the reimbursement rates those hospitals receive. These shadow prices are calculated by estimating a multiple-output distance function and applying a dual Shephard's lemma, a technique suggested by Fare and Grosskopf [8]. In contrast to cost functions, distance functions require no price data and do not presume cost minimization. We apply this technique to a sample of California hospitals operating in 1986. We find that hospitals engaged in selective contracting for Medi-Cal patients exhibit closer agreement between relative shadow prices and relative reimbursement rates (Medi-Cal relative to private patients) than noncontracting hospitals.