| Summary: | Resource allocation formulae in Scotland include an adjustment for remoteness and rurality. However, there is little empirical evidence about the precise effects of remoteness and rurality on hospital costs. The main objective of this thesis is to identify and examine the reasons as to why hospitals in remote and rural areas incur higher costs, than comparable hospitals in urban areas. A literature review on the principal determinants of hospital costs and methods of empirical estimation identified input prices, such as labour costs, and output related features, such as delayed discharges, as the most likely influential factors. A new set of rurality and remoteness measures was developed, so as to perform sensitivity analysis regarding the impact of those measures on hospital costs. A panel translog hospital cost function was estimated that showed that rurality and remoteness contribute to increased hospital costs, although the size of this effect is relatively small. An hourly wage equation was estimated to assess how medical and dental staff pay is affected by rurality and remoteness and results confirmed compensating wage differential theory in that, staff working in urban hospitals will get higher pay in order to compensate for higher costs of living. Finally, a delayed discharge model showed that hospitals in remote and rural areas suffer from longer delayed discharges. A fixed-effect model was used in the estimation of these models, so as to control for unobserved factors that affect hospital costs and have been proved difficult to control for in the past. The different measures of rurality did not yield the same results, the measure that best reflected remoteness, instead of rurality, was the most significant across all models.
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