Hospital capacity in large urban areas: is there enough in times of need?

Excess capacity can be viewed as wasteful (an unnecessary cost) or as prudential (a ready source of supply). The role of excess capacity is an important issue at the individual firm level as well as at the community level. In this paper we explore hospital capacity for a sample hospitals operating in the 15 largest standard metropolitan statistical areas (SMSAs) in the U.S. during 2002. Using Johanson's (1968) notion of capacity as the maximum rate of output possible from fixed inputs (i.e., without restrictions on variable inputs), we measure capacity in a frontier setting using directional distance functions. Rather than attempt to determine the ‘optimal’ level of hospital capacity, we instead quantify capacity and capacity utilization rates at both the individual hospital and, by aggregating, the SMSA levels. After determining capacity and capacity utilization rates, we then introduce a model that calculates the changes in variable inputs that would be needed to utilize excess capacity. Finally, we introduce a simulation model that is used to examine whether each SMSA has enough ‘excess’ hospital capacity to accommodate the loss of one of its five largest hospitals. The approach developed in this study should be of value to decision makers and planners in a variety of fields.