Experimental Measures of Output and Productivity in the Canadian Hospital Sector, 2002 to 2010

This paper constructs a direct output measure of the hospital sector in Canada. The volume index of the output of the hospital sector is estimated from aggregating the number of inpatient cases and outpatient cases using their cost share as weights. It also examines two potential sources of bias in this cost-weighted volume index: substitution bias and aggregation bias. The analysis reveals a large substitution bias in the volume index when inpatient treatment and outpatient treatment of the same medical disease/condition are aggregated using their respective unit costs as weights. The substitution bias essentially captures quality improvements associated with the shift away from inpatient treatment toward outpatient treatment. The volume index of the hospital sector output corrected for substitution bias increased 4.3% annually during the 2002-to-2010 period. Labour productivity based on the direct output measure increased 2.6% annually over the period.