Hospital cost estimation controlling for case-mix

Hospitals are multiproduct firms producing a multitude of different services at differing quality and cost levels. Thus, in estimating hospital cost functions the product mix and activity levels must be accounted for in either a vector measure of output or a vector of explanatory variables characterizing product mix. The multiproduct nature of hospitals is common to most firms and industries and guarantees estimation difficulties including collinearity among the explanatory variables. Other than expanding the data base, there are few suggestions for improving regression estimates in collinear situations