The Hospital - An Economic Model

Scientific Study 2005 9 Pages

Economy - Health Economics


Index of contents

1 The situation of the health care in Europe with a focus on hospitals

2 The economic model
2.1 Processes in the hospital
2.2 The goals and variables of the model
2.3 The model
2.4 Maximizing the profit

3 Appraisal


1 The situation of the health care in Europe with a focus on hospitals

The financing of costs of services in hospitals is a basic and growing problem in Europe. Considering the hospital as a manufacturing company, its product is the health of the patients. But to measure this product is quite hard, and therefore it is difficult to allocate an adequate price for it. Thus, the ascertainment of hospital services occurs by an orientation on inputs. But the menace of such a measuring is that hospitals would increase their inputs and thereby increase costs to maximize their revenues.

Another approach defines the medical care partially as a consumer good. By analyzing the cost-utility-consideration and the evaluation of the medical care, also in this case “The law of diminishing returns” can be noticed. Therefore, more input (expenditures or costs) in the health care system doesn’t automatically lead to more output (morbidity or mortality).

Facing the problem of increasing costs and the law of diminishing returns, hospitals in Europe start to change their thinking. More and more the organizational structures transform from a general department focused hospital to a patient and economic focused company. Therefore, medical directors are about to be replaced by business managers in the hierarchic structure. These leaders start to use business models and also economic models to increase efficiency, quality and profit in the hospital. The following chapter introduces one approach of an economic model applied to a hospital[1].

2 The economic model

2.1 Processes in the hospital

Generally, a model is a simplified presentation of the reality. To create this model it is necessary to identify basic processes that can demonstrate the important issues and causalities of a hospital system. The processes can be allocated to the catogories: Provide and manage inpatient care, ambulatory care, emergency/urgent care, customer complaints, health services/education, service availability and cost and improve revenue cycle processes. As mentioned before, to create the economic model of the hospital like for a manufacturing company it is also necessary to consider the processes that are related to the clinical pathways (following the value chain concept) to provide full information for a cost, revenue and profit focus. The following processes can be identified:

- Admission
- Diagnostics
- Primary therapy
- Post intervention
- Secondary therapy
- Discharge

Every single process has its own costs and also generates its own revenues. Therefore, general variables must be defined to express costs and revenues with which it is possible to calculate profit.

2.2 The goals and variables of the model

Basically, the economic model applies fundamental causalities of the production theory on the clinical treatment in the hospital. It also describes the hospital as an own economic unit with its own objectives.

illustration not visible in this excerpt

The variables used in the model are:






φ (Q):



w, r:

L*, K*:







These variables are necessary to create and analyse the economic model. However, several assumptions have to be made that will be explained in the following chapter.

2.3 The model

First of all, the model considers only one type of a patient (“one-product-case”). There are also just two types of inputs: L (labor) and K (other factors like equipment, medicine…).

The first equation describes the quality of treatments. It depends on the number of individual performances (services) per patient and increases concave down until the certain saturation level γ = Y/X is reached:

Q = g(Y/X)

Two types of input exist: the expenditure results from employment of labor with its wage rate and the quantity of other factors with its prices:

A = w . L + r . K

The model also assumes that the prices of factors are constant. Therefore, it always exists a cost minimizing quantity of factors for a given number of beds and individual performances. But this doesn’t imply a technical efficient quantity.


[1] Hentze, J./ Kehres, E.: Accounting and Balance Sheets in Hospitals, Kohlhammerverlag, 2nd Edition, 2005


ISBN (eBook)
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950 KB
Catalog Number
Institution / College
Western Carolina University
Hospital Economic Model Managerial Economics




Title: The Hospital - An Economic Model