INVESTIGATING HOSPITAL EFFICIENCY IN THE NEW NHS - THE ROLE OF THE TRANSLOG COST FUNCTION

The reforms to the United Kingdom's National Health Service (NHS) of r ecent years have greatly increased the role of economic incentives in the hospital sector. Hospitals now have to compete for the business of GP and health authority purchasers and are assumed to have an incenti ve to minimise costs. This makes the analysis of cost functions much m ore relevant than has previously been the case. The objective of this paper is to assess the potential usefulness of the translog cost funct ion applied in the NHS internal market. Three main issues are identifi ed that limit the role of this type of cost function in the internal m arket: the adequacy of the econometric model (including data quality); the assumptions underlying the model, and; the interpretation of econ omies of scale, marginal costs and economies of scope that can be deri ved from such a cost function. It is concluded that at present the app lication of translog cost function analysis in the NHS is of limited u sefulness, but that it does indicate areas for further methodological research.