ABSTRACT
This chapter addresses the production, cost, technology, and efficiency of health care. It investigates first the flexibility available in the production process through the substitution of differently trained personnel or improved testing or treatment devices. Second, cost functions can provide further clues to finding efficiency gains. The reader learns that economies of scale and scope exist in many health care industries, and society can gain if firms choose the size that minimizes average costs. Theory states that a perfectly competitive industry achieves this goal in the long run without outside interference. Health care providers are generally not perfectly competitive nor necessarily perfectly managed, and health economists inquire into the extent that adjusting scale or scope can reduce excess costs.
The chapter then examines the technical and allocative efficiency of health care firms, and the question of whether they are operating at least cost. Technology changes over time, and even when new health technologies provide improvements, they may either decrease (e.g. shorter hospital stays) or increase (e.g. organ transplants) costs. Finally, the chapter addresses how and why new health care technology diffuses through the health system. The diffusion can be rapid, although it may be slowed by regulatory or institutional realities.
