What governs the decision to contract out for local hospital services?

Increasing hospital costs coupled with increasing numbers of individuals dependent on local governments for health care, at a time of reduced abilities to finance these expenditures, are causing local governments to reexamine their role in the delivery of hospital services. A potentially cost-reducing option for governments is to contract out for service delivery. In this paper we examine the decision of local governments to contract out for hospital services. Factors believed to influence this production choice decision are the cost savings that can be expected from economies of scale or increased competition, the willingness of local officials to trade control for such cost savings, and the political incentives and obstacles to contracting out. Our empirical analysis indicates that the pivotal factors in the contracting-out decision are the availability of external suppliers and the potential for scale economies.