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BOI - IER, Economies of Scale In The Israeli Health Funds Market: Estimation and Implications
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Amir Shmueli and David Messika
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Abstract
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This study examines the relationship between the size of Israel's four health funds and
average real cost per member over the period 1991–2003. Case-mix adjustment is
achieved by using the 1995 national risk adjustment formula. We used two estimation
methods, a panel data analysis, and a cross section of time series analysis. The results are
quite robust, and indicate that the size of fund that gives the minimum average cost is 2.2–
2.4 million members. The three small funds enjoy economies of scale in their operation,
while the biggest health fund, Clalit Health Services (henceforth Clalit) is beyond the
minimum point. The results do not change when the fact that Clalit owns hospitals is
taken into account. Mergers among the small funds would increase efficiency in
production, but would increase market concentration. Splitting the biggest health fund
would increase both efficiency and competitiveness. The existence of (dis)economies of
scale violates the assumption of constant average costs which is at the basis of the
updating of the health budget for population growth and its risk-adjusted allocation
among the health funds. Simulation of (i) the surpluses/deficits of the individual health
funds and of the market as a whole and (ii) the marginal profit/loss per member in the
four health funds under constant and variable average costs over the period 1995–2006
illustrate the importance of acknowledging the variability in average cost in the health
funds market.
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The full article as a PDF file
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