Complementary effect of patient volume and quality of care on hospital cost efficiency

This study explores the direct effect of an increase in patient volume in a hospital and the complementary effect of quality of care on the cost efficiency of U.S. hospitals in terms of patient volume. The simultaneous equation model with three‐stage least squares is used to measure the direct effect of patient volume and the complementary effect of quality of care and volume. Cost efficiency is measured with a data envelopment analysis method. Patient volume has a U‐shaped relationship with hospital cost efficiency and an inverted U‐shaped relationship with quality of care. Quality of care functions as a moderator for the relationship between patient volume and efficiency. This paper addresses the economically important question of the relationship of volume with quality of care and hospital cost efficiency. The three‐stage least square simultaneous equation model captures the simultaneous effects of patient volume on hospital quality of care and cost efficiency.