Scope and scale economies in merging hospitals prior to merger

During the 1980s, the impact of the Prospective Payment System and increased pressure from payers for discounts placed pressure on hospitals to become more efficient. An increase in the number of hospital mergers during this period suggests that merger was a strategy used by hospitals to improve efficiency. This hypothesis is tested by estimating multiproduct scope and scale economies in merging hospitals one year prior to the merger and comparing these with a group of controls using estimates from a hybrid translog cost function. Diseconomies of scale were present when the estimated hybrid translog cost function is evaluated at variable means. The results suggest that merging hospitals could obtain operational efficiencies through merger.