Will the real elasticity of substitution 'in Norwegian dentistry' please stand up?

Health Economics

Volumn 8, Issue 3, 1999, Pages 221-232

  Okunade, Albert A ^a  

^a UNIVERSITY OF MEMPHIS   (United States)

Author keywords

Allen Uzawa partial elasticities; Conditional factor demands and pairwise input substitutions; Elasticities; Morishima; Norwegian dentistry costs; Policy; Shadow elasticities

Indexed keywords

ARTICLE; DENTISTRY; HEALTH CARE COST; HEALTH CARE POLICY; NORWAY; PRIORITY JOURNAL;

COST CONTROL; ECONOMICS, DENTAL; GROUP PRACTICE; HEALTH CARE COSTS; HEALTH POLICY; HEALTH SERVICES NEEDS AND DEMAND; HUMANS; INFLATION, ECONOMIC; MODELS, ECONOMETRIC; NORWAY; PERSONNEL STAFFING AND SCHEDULING; PRACTICE MANAGEMENT, DENTAL; PRIVATE PRACTICE;

EID: 0032917742     PISSN: 10579230     EISSN: None     Source Type: Journal    
DOI: 10.1002/(SICI)1099-1050(199905)8:3<221::AID-HEC408>3.0.CO;2-Y     Document Type: Article

References (40)

1. Countries included in the price level indices (EU15 = 100) comparison are: Norway, Denmark, Italy, Netherlands, Sweden, Finland, France, Spain, UK, and Germany. Denmark had the highest medical and health care inflation, followed by Norway, Spain and Sweden ranking second. (Source: Statistical Yearbook 1997, Statistics Norway (Oslo), electronically accessed at http:// www.ssb.no/www-open/english/yearbook/tab/T1509 005.shtml).
2. However, pharmaceutical (medicines) expenditure growths of 9.95% from 1994 to 1995 and 10.92% from 1995 to 1996 exceeded the growths of dental expenditures. (Source: Statistical Yearbook 1997, National Insurance Administration (Oslo). Data were electronically accessed at http://www.ssb.no/ www-open/english/yearbook/tab/T0304003.shtml).
3. Spivey, R.N., Wertheimer, A.I. and Rucker, T.D. (eds.) International pharmaceutical services: the drug industry and pharmacy practice in twenty-three countries of the world. New York: Pharmaceutical Products Press, 1992.
4. Slightly behind Sweden (10%) and Switzerland (9.9%). Norwegian medical doctors are paid using a mixture of salary and fees. Salaries are generally negotiated centrally, with individual-based adjustments for experience, location and other reward or incentive considerations. Also, Norway, among the OECD countries: (i) in 1992 ranked 4th in total annual health care expenditure in trend GDP; (ii) in 1990 (1993) ranked 4th (3rd) in the number of practicing physicians per 1000 residents (health care worker per available hospital bed). See OECD. New directions in health care policy. OECD Policy Studies No. 7.
5. OECD. New Directions in Health Care Policy. OECD Policy Studies No. 7. Paris: Organization for Economic Cooperation and Development, 1995.
6. Grytten, J. and Dalen, D.M. Too many for too few? Efficiency among dentists working in private practice in Norway. Journal of Health Economics 1997; 16: 483-497.
7. Hazilla, M. Separability and capital aggregation in sectoral models of US production. Applied Economics 1997; 29: 955-974.
8. Blackorby, C. and Russell, R.R. Will the real elasticity of substitution please stand up? (A comparison of the Allen/Uzawa and Morishima Elasticities). American Economic Review 1989; 79: 882-888.
9. Thompson, P. and Taylor, T.G. The capital-energy substitutability debate: A new look. The Review of Economics & Statistics 1995; LXXVII: 565-569.
10. Cowing, T.G. and Holtmann, A.G. Multiproduct short-run cost functions: empirical evidence and policy implications from cross-sectional data. Southern Economic Journal 1983; 49: 637-653.
11. See also Escarce, J.J. and Pauly, M.V. Physician opportunity costs in physician practice cost functions. Journal of Health Economics 1998; 17: 129-151.
12. A true, single measure of capital input does not exist and there is no standard measure of capital depreciation of dental practices. The two proxies for capital used here are assumed related to the true capital input, however. Dental equipment normally includes: drills, forceps and sealers, X-ray machines, sterilizers, computers, IV-sedation equipment, and mixing machines. Shift (dummy) variables earlier used (Grytten, J. and Dalen, D.M. Journal of Health Economics 1997; 16: 483-497) in a cost regression model to control for differences in the technology (non-economic factors that may affect costs) among practices included: whether the dentists used a computer for: accounting (ACCOUNTC), recording patient information and treatment provided (RECORDC), and recalling patients (RECALLC), and whether the dentist used an OPG machine to supplement the X-ray machine (OPG). Among these, OPG increased solo (0.08, t = 2.74) and group (0.15, t-ratio = 3.81) practice costs significantly while RECORDC (-0.17, t-ratio = 20.07) and RECALLC (-0.26, f-ratio = 3.18) were significantly cost-reducing for group practices.
13. Changes in input factor demands can be decomposed into those due to the output level, factor interchange along the isoquant, and technical progress. Cross-sectional data at constant output can only investigate factor substitutions along a given isoquant.
14. Mundlak, Y. Elasticities of substitution and the theory of derived demand. Review of Economic Studies 1968; 35: 225-236.
15. Okunade, A.A. Cost structure in college and university student health centres: comment. Applied Economics Letters 1997; 4: 338-354.
16. Morishima, M. A few suggestions on the theory of elasticity. Economic Review 1967; 16: 770-771.
17. McFadden, D. Further results on CES production. Review of Economic Studies 1963; 30: 73-83.
18. Berndt, E. and Christensen, L.R. Testing for the existence of a consistent aggregation index for labor inputs. American Economic Review 1974; June: 391-404.
19. SA).
20. SA = 0.02 for group dentists.
21. Hamermesh, D.S. Labor demand. Princeton, NJ: Princeton University Press, 1993.
22. Dummy variables capturing this effect in the estimated cost model (Grytten, J. and Dalen, D.M. Journal of Health Economics 1997; 16: 483-497) show that solo and group practice dentists paying their assisting wives 25% of full salary hardly experience any cost saving. Those paying > 25-75% of full salary incur higher costs.
23. 0.5 ∀i = j.
24. Hamermesh (Labor demand. Princeton, NJ: Princeton University Press, 1993) remarks that the labour-materials substitution estimate '. . . is of much less interest for predictive or policy purposes than is the . . .' labour-energy substitution relationship, because supply or 'materials input is a loosely defined aggregate of many inputs'. This raises issues of how best to make sense of the supplies-labour substitution in production cost models.
25. Feldstein, P.J. Health care economics, 4th edition. New York: Delmar Publishers, Inc., 1993.
26. Dentists study and treat diseases, injuries and problems of the mouth, teeth, gums and jaws. Generally they: examine mouths, teeth, gums and jaws; diagnose diseases; may assess oral conditions and refer clients to other dental specialists and health professionals; administer injectibles; drill, fill, scale and polish teeth; extract teeth; treat diseased gums and jaw-joint problems; fit braces to straighten teeth; replace missing teeth with implants, bridges, or partial or full dentures; and improve teeth appearance with veneers and crowns.
27. I owe this point to Professor Grytten, in his November 19, 1997, e-mail discussion with me.
28. Hart, L.G., Wagner, E., Pirzada, S., Nelson, A. and Rosenblatt, R.A. Physician staffing ratios in staff-model HMOs: a cautionary tale. Health Affairs 1997; 16: 55-70.
29. Okunade, A.A. Can factor substitutions save HMO industry operational costs? Research Monograph 1998/99. Department of Economics, The University of Memphis.
30. Okunade, A.A. and Suraratdecha, C. Cost efficiency, factor interchange and decomposed technical change in US specialized hospital pharmacies. Health Economics 1998; 7: 363-372.
31. AU complement set (see Gyimah-Brempong, K. and Gyapong, A.O. Elasticities of factor substitution in the production of education. Economics of Education Review 1992; 11: 205-218. Also, Davis, G.C. and Gauger, J. Journal of Business & Economic Statistics 1996; 14: 203-208). Our study results accord with these observations.
32. AU complement set (see Gyimah-Brempong, K. and Gyapong, A.O. Elasticities of factor substitution in the production of education. Economics of Education Review 1992; 11: 205-218. Also, Davis, G.C. and Gauger, J. Journal of Business & Economic Statistics 1996; 14: 203-208). Our study results accord with these observations.
33. Due to poor general oral health and increased complexity of cases with aging, the demand for private dental services by the 45 years and older adult sub-population (16% of the total population) is expected to rise. Norwegian adults 18 years and older almost exclusively obtain dental care from private practitioners. The percentage of Norwegian adults with less than 20 teeth rises exponentially with age. In 1995, for example, the percentages (age ranges) were: 2 (25-44 years), 25 (45-66 years), and 71 ( > 67 years). On December 31, 1995, the percentages of total Norwegian population (in the age segments) were 7.43 (25-44 years), 5.38 (45-66 years), and 3.18 ( > 67 years). Population projections for the above-indicated age ranges in the year 2000 (year 2010, year 2030) are 7.4 (6.7, 6.35), 5.75 (6.53, 60.08), and 3.85 (30.06, 4.26). Thus, while population is projected to decline continually in the 25-44 age range, it is expected to grow consistently from 1995 through 2010 in the 45-66 age group. The population in the > 67 years age range is projected to grow between 1995 and 2000, decline briefly between the years 2000 and 2010 and then grow appreciably from 2010 to 2030. The 4.58% projected population growth from year 2030 to 2050 for the > 67 age range is even larger than that from 2010 to 2030. (Sources: National Health Survey 1995 (Statistics Norway) and NOS Population Projections 1996-2050 National and Regional Figures data electronically accessed at http:// www.ssb.no/www-open/english/yearbook/tab/ T0301014.shtml and http://www.ssb.no/www-open/ english/yearbook/tab/T0203002.shtml).
34. Our discussions apply to dental practices whose technology properties are similar to that at the mean data expansion point of the translog cost approximation model. The estimated elasticities can be very different for firms that are not at the expansion point and the regularity properties, satisfied at the mean data levels, are not also necessarily satisfied for all the sample data firms. Evaluating how these elasticities change at various sample points can be enlightening. I thank Prof. Timothy G. Taylor for pointing out this caveat in his 13:41 h e-mail of December 18, 1997.
35. Davis, G.C. and Gauger, J. Measuring substitution in money-asset demand systems. Journal of Business & Economic Statistics 1996; 14: 203-208.
36. Norwegian pharmacists are either educated in a 5-year curriculum at the Institute of Pharmacy (the University of Oslo) or in a 2.5-year curriculum at the National College of Dispensers. Only pharmacists graduated at the university level may be licensed to own and manage a pharmacy (Spivey, R.N., Wertheimer, A.I. and Rucker, T.D. (eds.) International pharmaceutical services: the drug industry and pharmacy practice in twenty-three countries of the world. New York: Pharmaceutical Products Press, 1992; pp. 443-444).
37. A previous study (Grytten, J. and Dalen, D.M. Journal of Health Economics 1997; 16: 483-497) reported an elasticity of scale estimate of 1.85 for a typical solo practice, 'which could indicate increasing returns to scale' (p. 496). The precision or informational contents of this estimate could be analysed by computing its S.E. and then its confidence interval bounds
38. (Okunade, A.A. and Suraratdecha, C. Health Economics 1998; 7: 363-372) to see if it is significantly different from constant returns.
39. The Federation of Norwegian Professional Associations is the umbrella organization for Norwegian Dental Association. NDA membership grew on average 1.6% from 4719 in 1993 to 4947 in 1996. Source: Statistical Yearbook 1997 (Statistics Norway) data obtained electronically at http:// www.ssb.no/www-open/english/yearbook/tab/T0603 004.shtml.
40. Gaumer, G.L. Regulating health professionals: a review of the empirical literature. Milbank Memorial Fund Quarterly 1984; 62: 380-416.