On the Estimation of Hospital Cost: The Approach
Hari Kurup K K, Research Scholar, Centre for Development Studies,
Thiruvananthapuram
Recent discussions on mobilisation of resources for the health sector have suggested various possibilities.
These may be broadly classified as cost recovery and cost containment methods. Cost recovery methods
include user financing and health insurance. Cost containment measures refer to decentralisation and
private public mix. Among the direct measures of cost recovery, user financing is widely conceived as
unpopular. Health insurance as a method of financing health care services has received the attention of the
academicians and policy makers for it allows for customer choice. Out of pocket payments are the main
source of financing for discretionary care in low-income countries. Since, out of pocket financing cannot
cover expensive care or deal with catastrophic illness, widespread financing of discretionary care is
possible only through insurance (World Development Report 1993). However, operationalizing health
insurance programme is a tough task. In addition to the institutional requirements, the success of an
insurance package depends on a clear understanding of the health care environment of the region under
consideration, the cost of provision of different health care services through the various systems and
providers of heath care etc..
The following discussion attempts to bring to light the issues and methodology related to cost estimation in
health care provision. A study on insurance needs to examine the cost involved in the provision of different
health care services. In order to ensure that scarce resources are used to best effect and to develop a financing
strategy which will help to cover all or some of the costs involved in operating such institutions, it is necessary
to know how hospital costs are influenced by output levels and other variables. Such attempts would often
examine the determinants of hospital costs and ascertain whether an improved policy insight can be obtained in
the process, particularly with respect to the development of a financing strategy. In this context, the principal
questions to be addressed are: What causes costs to vary among hospitals? Do they vary simply because
activity levels differ from hospital to hospital or is there something more fundamental involved? How does
hospital size enter the picture? Are larger hospitals really more efficient than smaller hospitals in terms of lower
costs per day or per unit of service? What is the influence of the occupancy rate on hospital costs? What is the