Production cost structure of US hospital pharmacies: time-series, cross- sectional bed size evidence

There are current concerns about potential factor substitutions and their implications for factor employments and cost containment in US hospital pharmacies. A translog production cost model is estimated for these pharmacies, using 1981-9 time-series data consisting of seven cross-sectional bed size classes per year. Zellner's joint GLS estimation of three-factor cost share equations and the parent translog cost function reveals that pairwise factor substitutions are severely limited; production is nonhomothetic, occurring in the range of scale diseconomies; biased and pure technical change effects dominate the scale-augmenting component. Implications of findings are rationalized in the context of the emerging biopharmaceutical technologies.