A hedonic prices approach to hospitalization costs. The case of Israel

The paper suggests a hedonic prices approach to estimate the cost of hospital services. It applies this approach to Israeli data as a first approximation of hospitalization costs in that country. In the absence of accounting data, this approach enables us to estimate the relative cost of basic hospital services, how hospital characteristics affect cost and how cost changes with time. Moreover, it provides for a standardized measure to view the relative efficiency of a cross section of hospitals. Several findings based on Israeli data demonstrate the potential of the approach and may be of general interest. First, controlling for department mix, bigger hospitals, which are usually also teaching hospitals and may have a different case-mix, incur higher cost per admission than smaller hospitals. Second, by institution, General Sick Fund hospitals are more expensive, but also experience, in terms of budget allocations, less discrimination than Government hospitals. Hence, provision of equitable service may be less efficient than in services where there is budgetary discrimination to induce specialization, etc. Third, hospitals have been subject to inflationary pressures over and above the general inflation level in Israel, as may be the case in most other western countries. Fourth, a comparison of cost per admission across hospitals and over time shows that cost has been consistently increasing in particular hospitals and falling in others, beyond the average increases warranted by growth in size, changes in composition, and hospitalization-specific inflation. More research is needed in order to explain these unexplained but consistent trends.