Stochastic Production Function and Physician’s Choices∗

There is a paucity of literature concerning the relation between the resource utilization decisions of the salaried hospital based physician and patient outcomes in a national health service. The purpose of our study is to model and test hospital production where the major decision makers are physicians. We view the outcome process of the hospital as a change in the distribution function over final health states of the patient. Our model contains a utility function for physicians whose arguments include the expected final health status of the patient and a pressure function which reflects the resource allocation and hospital financing policy of the Health Administration Authority. This allows simultaneous consideration of resource utilization and output production within the hospital. The model is estimated using data consisting of inpatient discharges for the most frequent non-obstetric Diagnosis Related Group during the 1992-1999 time period. We find evidence that budget setting methods and the possession of a third-party payer outside of the NHS are important predictors for use of the resource in question. Moreover, we find that use of the resource is important in predicting the final health status of the patient. JEL Numbers: I12, I18