Heterogeneous effect of residency matching and prospective payment on labor returns and hospital scale economies

The paper evaluates heterogeneous effect of participation in a residency matching program and changeover from fee-for-service to a prospective payment system on labor returns and economies of scale at acute-care public hospitals in Japan. A range of frontier technologies for multi-product output function is introduced with panel data quantile regression models, where endogenous treatment variables account for the fact that participation in both the residency matching program and the prospective payment reform was voluntary. The analysis exploits nationwide longitudinal databases on Japanese hospital participation in each of the reforms and on financial performance of regional and municipal hospitals in 2006-2012. The results demonstrate a labor-capital trade-off and lower labor intensity in the most productive hospitals. The residency matching program is positively associated with hospital production and labor productivity, especially in medium quantiles. Prospective payment has a negative effect on labor productivity, but it is only significant for hospitals in the highest quantiles.