Production Factors, Productivity Dynamics and Quality Gains as Determinants of Healthcare Spending Growth in U.S. Hospitals

We analyze the contribution of production factors to revenue growth in almost the complete universe of U.S. hospitals, accounting for quality and productivity. Production factors (capital, labor, energy, materials and drugs) contributed 70% (drugs alone contributed 52%), better health outcomes (higher quality) contributed 5%, and better use of resources (productivity) contributed 25%. We find increasing returns to scale, a markup of between 15% and 36% and a much larger productivity dispersion in the hospital sector than the one found in manufacturing, with gains coming mainly from within-hospital productivity growth and almost zero coming from net entry.