ESRI Discussion Paper Series No.399 Capacity Constraints and Inefficient Service Delivery: Theory and Evidence from Nursing Facilities

Hiroki Saruya

Economic and Social Research Institute, Cabinet Office

Sophia University

Masaki Takahashi

Sophia University

Abstract

This paper studies frictions and inefficiencies in healthcare delivery under capacity constraints. We develop a novel economic model where a healthcare facility’s admission/discharge decisions depend on bed occupancy through capacity constraints and demand inducements. It generates behavioral and efficiency implications: (1) Capacity constraints imply that admissions/discharges respond to occupancy fluctuations more intensely at higher baseline occupancy, whereas demand inducements imply that the responses are more intense at lower baseline occupancy, so the relative importance of the mechanisms is testable. (2) If capacity constraints are more important, then smoothing occupancy across homogeneous facilities can increase aggregate service provision. Applying the framework to Japanese nursing facilities, with patient deaths as occupancy shocks, we find that admission responses to occupancy fluctuations are mainly driven by capacity constraints. Our simulation shows that smoothing occupancy across facilities can substantially increase aggregate admissions without expanding capacity, suggesting inefficient access to facilities in the status quo.