Background: Many of public hospitals in Japan have had a deficit for a long time. Japanese local governments have been encouraging public hospitals to use group purchasing of drugs to benefit from the economies of scale, and increase their bargaining power for obtaining discounts in drug purchasing, thus improving their financial situation. In this study, we empirically investigate whether or not the scale of public hospitals actually affects their bargaining power. Methods: Using micro-level panel data on public hospitals, we examine the effect of the scale of public hospitals (in terms of the number of occupancy beds) on drug purchasing efficiency (DPE) (the average discount rate in purchasing drugs) as a proxy variable of the bargaining power. Additionally, we evaluate the effect of the presence or absence of management responsibility in public hospital for economic efficiency as the proxy variable of an economic incentive and its interaction with the hospital scales on the bargaining power. In the estimations, we use the fixed effects model to control the heterogeneity of each hospital in order to estimate reliable parameters. Results: The scale of public hospitals does not positively correlate with bargaining power, whereas the management responsibility for economic efficiency does. Additionally, scale does not interact with management responsibility. Conclusion: Giving management responsibility for economic efficiency to public hospitals is a more reliable way of gaining bargaining power in drug purchasing, rather than promoting the increase in scale of these public hospitals.

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