Book Reviews ALAN MAYNARD Reviews

Hospital Certificate of Need Controls: Impact on Investment, Costs and Use

David S s.ltera mdlboau W. Bkq R m Cdl@ula d NcedCabob: m w h v a t m e m f Caetamd Ur, Amwhm EntUprhe ldltmtq wmhlmton Dc. 1979. $250. lsBN 0-8447-3325-3

At present the United States spends over 9% of its Gross National Product on health care; some 920 dollars per head of population. The rapid expansion in private and Federal expenditures has led to a variety of Federal initiatives to contain costs. One of these initiatives is the certificate of need controls which has been used in an effort to regulate hospital investment expenditure.

The Salkever and Bice study is concerned with measuring the impact of the certificate of need programme on hospital expenditure in the period 1968- 1972. The belief was that supply (beds) creates demand and that an effective way of curtail- ing cost inflation was to aim at a bed stock of 4.0 beds per 1000 population; this figure was arbitrary and some argue it was based on research carried out in the 1930s! There was (and is!) much argu- ment about the service area for this bed norm with one case in Tulsa, an over-bedded area, being put forward on the basis that the relevant service area for the bed - population calculation was the whole of the USA!

Despite these problems the certificate of need legislation gave planners the power to penalize financially, in the form of non-recognition of expen- ditures arising for non-approved capital construc- tion costs for Medicare and Medicaid, those institu- tions which did not obtain prior approval for hospi- tal bed expansions. The Salkever and Bice study indicates that the certificate of need controls appear to have reduced the aggregate level of bed stock investment. However, the level of hospital assets per bed has increased, i.e. the certificate of need controls squeezed the expenditure balloon in one place and caused it to expand in another, the net effect on overall investment in hospitals seems to have been minimal.

The authors place many caveats on their work. The data are aggregated at a State level and the appraisal period (1968 - 1972) was short. The esti- mation techniques have been criticized and the work examines the hospital effects of the legislation only: no account is taken of its effects, if any, on community-primary care. Despite these problems the general conclusions of Salkever and Bice have

been confirmed by Sloan (whose research results were published in 1980) of Vanderbilt University.

The effects of the certificate of need legislation seem to have been limited and perverse. These outcomes have been analysed by Salkever and Bice in a most interesting way and all students of health care policy are recommended to read their work.

Ah0 Mnnud-University of York, UK

STEPHEN HILL Reviews

The Theory of the Growth of the F h

E. T. Paoas. Ib lkoq ol tk Growth ol tbm Ekm (with a new hlmd.rtba by Marlin &(a), Bhckwell, Oxford, 1980. pp. m+n2. f10.00.

It is a central premise of Professor Penrose’s book that the firm seeking expansion will consider profit- able opportunities wherever they exist. The re-issue of this book after 21 years is a clear indication that Blackwells have got the message. There can be few production activities more profitable than the (hardback) reprint of an established classic, with a new introduction to ensure product differentiation, at a thoroughly modern price.

There is no doubt that The Theory of the Growth of the Firm has had a major impact on the develop- ment of both industrial and managerial economics. Modem analysis of decision making within the firm, and the effects of behaviour on industrial structure are considerably enriched by the emphasis on the firm’s internal administrative structure as the ulti- mate limit to growth. The concept of managerial diseconomies and the distinction between manager- ial and enterpreneurial services, have been suffi- ciently integrated into mainstream economics to avoid their reiteration here. More interesting is the modern neglect of the concept of interstices as the gap between large firms that provides the justifica- tion for the continued existence of small firms. These interstices arise because of the inability of management to develop all of the profitable expan- sion opportunities that are continually created in a growing economy.

Of the book Martin Slater comments ‘it is not read carefully enough these days’ and thus the intricacies of many of the arguments have been lost over the years. Yet this is a direct consequence of Professor Penrose’s descriptive literary style. The modern idiom for more rigorous and mathematical treatments may be less interesting and more difficult to read, but has the advantage of greater conciseness and precision. The scathing attack on more formal analysis, ‘attempts to reduce all be- haviour to mathematical utility functions are surely

192 MANAGERIAL AND DECISION ECONOMICS, VOL 2, NO. 3,1981 0 Heyden & Son Ltd. 1981

as unenlightening as they are complicated.. .’ (foot- note p. 185), undoubtedly contains an element of truth, but the other extreme invites misunder- standing.

The new introduction is divided into an appraisal of the significance of the book and a brief summary of more recent developments. The appraisal is suit- ably laudatory and the summary rather too concise. On a more technical note Martin Slater sees the book’s conclusion, that aggregate concentration would decline, as an understandable conjecture in view of information available at the time. This is surely to miss the point. The conjecture is not inductive, but deduced directly from the theory of growth. Either the managerial limit has receded more than anticipated or large firms have been more successful than expected in preventing the entry of new fums.

To the manager, the book would make interest- ing reading, especially the view that the success (or lack of success) of his firm is intimately connected with the collective personal characteristics of top management. To the student many of the modern treatments of the subject contain more concisely the main elements of this book (for example D. A. Hay and D. K. Moms, Industrial Economics, Ox- ford Universities Press, 1979).

Stepben Hm-UWIST. Cardiff. UK

W. DUNCAN REEKIE Reviews

Investment Appraisal and Related Decisions

S t q ~ b n Lamby. Invcatmenl A p p d nod Rd.ted Dechiom. Nebon, Loadon, 1981. pp. WII+262. U 7 S .

This book is honest and useful. Neither of these qualities have been universally apparent in the financial guide books of the last two decades. The author covers the three decision areas of investment choice, financing method and divident policy. The approach adopted is not dramatically innovative but it comprehensively covers the theoretical advances of the last 30 years. In a disarming postscript the author remarks that he ‘makes no claim that the theory ._ . (the book) contains is necessarily good theory . . . ’. Many financial managers would say ‘Amen’ to that. The controversies in the academic literature on finance seem, in many cases, to have generated more heat than they have light.

An author aware of such deficiencies is to be commended, and Lumby makes valiant efforts to overcome them. Most obviously in the 20 pages of the text devoted to practical problems using the

concepts put forward in the main chapters. (This is 10% of the main text, since 30 pages are devoted to notes and copious listing of references to the not ‘necessarily good theory’.) In addition the author is liberal in his use of numerical problems. Whatever the cause of the gap between hard practice and possibly non-applicable theory one way to bridge it is to encourage financial managers to use it. To do this one has to show that conceptually it can be used. If the theoretician fails or is unable to do this, and if the practitioner is equally unable to make contact with the theoretician, then a dialogue of the deaf (epitomized by the actions of those in the world of finance for a generation) is the result.

The author covers all financial decision making. Investment, financing and dividend policies are all dealt with competently and comprehensively. Obeisance is made toward the theories which oc- cupy so much of the current literature but whose level of abstraction is such that their finely carved structures could never bear the weight of the addi- tion of even one realistic assumption. The book concludes with brief but sensible surveys of recent developments in portfolio theory which leads the writer into a departure from the measure of max- imizing shareholder wealth via the discounted stream of future dividends to that of the Capital Asset Pricing Model. As a consequence, the author points out. ‘more questions are posed than ans- wered’. Thus the book will appeal both to prac- titioners who wish to be up to date and to students who wish to be up with the literature. Neither group will read this book and feel any discourage- ment for the future of finance so long as it is in the capable hands of intelligent realists like Mr Lumby.

W. Dun- Reebk-University of Edinburgh. UK

STUART COCHRAME Reviews

Managerial Economics: Theory, Practice and Problems

E m 1. Dougb, III.mtabl Fromomla: h y . PncIice d Robbem* Ren6IpH.u, Loadon, 1979. pp. XWLI+SOS. nS0.

This is a most readable text which combines the traditional topics - demand, cost, pricing and invest- ment analysis - with the more recent developments in the product attribute theory, mark up pricing and competitive bidding.

The three chapters on demand include an exten- sive analysis of the indifference - curve approach together with a discussion of the interdependence of the preferences of the consumer. Several valu- able insights, which are not so readily apparent

0 Heydcn & Son Ltd. 1981 MANAGERIAL AND DECISION ECONOMICS, VOL 2, NO. 3, 1981 1W