shared input costs. Hence, the total cost in the hospital is the sum of the costs directly attributable to each
hospital department plus the common costs inclusive of fixed cost. In the case of multi-product firms, it is
practically very difficult to arrive at a separate cost measurement for the different services provided.
In this context let us mention some basic steps in hospital costing
1. Define the intervention: It is required to specify the nature of intervention, the types of patients to be
treated and the types of treatment to be administered.
2. Identify relevant costs: These include both direct and indirect costs, such as patient time, lost earnings
or other social costs associated with the intervention.
3. Measure costs: This involves attaching a monetary value to every component of costs, discounting
future costs to present values.
4. Account for uncertainties: This involves the testing of the robustness of the measurement using
sensitivity analysis.
Methodological Formulations in Hospital Cost Studies
Earlier models of hospital cost estimated average cost as a function of various hospital determinants. This
widely used set of "behavioural" cost function is often accused of being adhoc and lacking foundation in the
usual assumptions of production technology.
A later group of models, following the work of Fuss and McFadden (1978), employs "flexible" functional
forms. Because these forms regress total costs on output quantities and input prices, they are more consistent
with economic theory of production than the earlier adhoc cost functions. Notable within this literature are the
papers by Cowing and Holtmann (1983). They reject the concept of a single aggregate measure of output.
The trend in recent work is toward "hybrid" flexible forms that include explanatory variables in addition to
output quantities and input prices. These efforts strike some balance between the previous two groups of
models and retain a number of desirable features from each. Leading in this approach is the study by
Grannemann et al. (1986), which separates inpatient discharges (by type) from patient days and emergency
department visits from other outpatient visits. They found distinct measures of marginal cost for the two
dimensions of inpatient care. They also showed strong emergency department scale economies, unlike other
outpatient visits for which marginal and average incremental costs were roughly equivalent. Vita (1990)