Summary This paper examines the cost efficiency in the nursing home industry, an issue of concern to Swiss policy makers because of the explosive growth of national expenditure on elderly care and the aging of the population. A stochastic cost frontier model has been applied to a panel of 1780 observations from 356 nursing homes operating over 1998–2002 in Switzerland. We compare the estimation results from different econometric techniques focusing on the specification of unobserved heterogeneity across firms. The potential effects of such unobserved factors on the estimation results and their interpretation have been discussed. The findings suggest that the economies of scale are an important potential source of cost reduction in a majority of Swiss nursing homes. Moreover the average performance of a representative nursing home is very close to the estimated best practice.

Switzerland (7.2 million inhabitants) is a federal State composed of 26 Cantons. Article 3 of the Federal Constitution grants large autonomy to the single cantons in the sectors which are not regulated directly by the constitution itself, among others the health and social care sector. The decision-making autonomy of the cantons in the field of health and social care for the elderly creates a strong heterogeneity in the regulations and organization in the various cantons. Moreover, the long-term care for the elderly is supplied by private for-profit nursing homes, private non-profit nursing homes and public nursing homes, respectively. This mixed economy and heterogeneity of regulation between the cantons, which characterizes the long-term care market in Switzerland, raises the interesting issue of the effects on scale and cost efficiency of the different institutional organization forms and regulation structures. In the first part of this paper we present the organization and regulation procedures of the Swiss nursing home industry. In the second part of the paper we estimate a translog cost frontier function for a sample of 835 Swiss nursing homes.The results of this analysis are used to examine the relationship between cost efficiency and the alternative institutional and regulation forms.

Switzerland is a federal State where policy decisions regarding long-term care regulation are by rights incumbent upon regional and local governments. This situation is in part responsible for the large number of small nursing homes operating in Switzerland. Moreover, long-term care for the elderly is supplied by public, private for-profit and non-profit nursing homes, respectively.

Switzerland is a federal State where policy decisions and implementation regarding regional hospital plans are by rights incumbent to the regional and local governments (Canton and Town Council). This situation is in part responsible for the large number of small hospitals that have been built in recent years. In Switzerland, in fact, approximately 70% of hospitals have a capacity of less than 135 beds. The purpose of this study is to analyse the cost structure of the Swiss hospitals in order to assess economies of scale and to estimate a typical hospital’s optimum size. A translog cost function was estimated using panel data for a sample of 145 hospitals over the period 1989-1991. The results indicate the existence of economies of scale for most output levels. Empirical evidence suggests that a hospital’s optimum size is reached with 300 beds, even though a capacity of 135 beds is sufficient to absorb most of the economies of scale. JEL C23 D24 I11 I18