• KDI Journal of Economic Policy
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• v.14 no.2
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• pp.109-153
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• 1992

This paper estimates a translog cost function for the Korea's banking industry and derives various implications on the prospect for the Korean banking structure in the future based on the estimated efficiency indicators for the banking sector. The Korean banking industry is permitted to operate trust business to the full extent and the security business to a limited extent, while it is formally subjected to the strict, specialized banking system. Security underwriting and investment businesses are allowed in a very limited extent only for stocks and bonds of maturity longer than three year and only up to 100 percent of the bank paid-in capital. Until the end of 1991, the ceiling was only up to 25 percent of the total balance of the demand deposits. However, they are prohibited from the security brokerage business. While the in-house integration of security businesses with the traditional business of deposit and commercial lending is restrictively regulated as such, Korean banks can enter the security business by establishing subsidiaries in the industry. This paper, therefore, estimates the efficiency indicators as well as the cost functions, identifying the in-house integrated trust business and security investment business as important banking activities, for various cases where both the production and the intermediation function approaches in modelling the financial intermediaries are separately applied, and the banking businesses of deposit, lending and security investment as one group and the trust businesses as another group are separately and integrally analyzed. The estimation results of the efficiency indicators for various cases are summarized in Table 1 and Table 2. First, security businesses exhibit economies of scale but also economies of scope with traditional banking activities, which implies that in-house integration of the banking and security businesses may not be a nonoptimal banking structure. Therefore, this result further implies that the transformation of Korea's banking system from the current, specialized system to the universal banking system will not impede the improvement of the banking industry's efficiency. Second, the lending businesses turn out to be subjected to diseconomies of scale, while exhibiting unclear evidence for economies of scope. In sum, it implies potential efficiency gain of the continued in-house integration of the lending activity. Third, the continued integration of the trust businesses seems to contribute to improving the efficiency of the banking businesses, since the trust businesses exhibit economies of scope. Fourth, deposit services and fee-based activities, such as foreign exchange and credit card businesses, exhibit economies of scale but constant returns to scope, which implies, the possibility of separating those businesses from other banking and trust activities. The recent trend of the credit card business being operated separately from other banking activities by an independent identity in Korea as well as in the global banking market seems to be consistent with this finding. Then, how can the possibility of separating deposit services from the remaining activities be interpreted? If one insists a strict definition of commercial banking that is confined to deposit and commercial lending activities, separating the deposit service will suggest a resolution or a disappearance of banking, itself. Recently, however, there has been a suggestion that separating banks' deposit and lending activities by allowing a depository institution which specialize in deposit taking and investing deposit fund only in the safest securities such as government securities to administer the deposit activity will alleviate the risk of a bank run. This method, in turn, will help improve the safety of the payment system (Robert E. Litan, What should Banks Do? Washington, D.C., The Brookings Institution, 1987). In this context, the possibility of separating the deposit activity will imply that a new type of depository institution will arise naturally without contradicting the efficiency of the banking businesses, as the size of the banking market grows in the future. Moreover, it is also interesting to see additional evidences confirming this statement that deposit taking and security business are cost complementarity but deposit taking and lending businesses are cost substitute (see Table 2 for cost complementarity relationship in Korea's banking industry). Finally, it has been observed that the Korea's banking industry is lacking in the characteristics of natural monopoly. Therefore, it may not be optimal to encourage the merger and acquisition in the banking industry only for the purpose of improving the efficiency.

• Korea Journal of Hospital Management
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• v.2 no.1
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• pp.1-21
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• 1997

In order to analyze the shifts in the volume and profits of Computed Tomography(CT) and Magnetic Resonance Imaging(MRI) utilization for a year before and after the implementation of insurance coverage for CT, this study has been undertaken examining CT and MRI cost data from 'Y' University Hospital situated in Seoul, Korea. Following are the results of this study: 1. The medical insurance payment for CT, implemented on January 1, 1996, increased CT utilization from January 1996 to April 1996 due to low insurance premiums: however, from May 1996 the number of CT cases significantly decreased as a result of strengthened medical cost reviews and the new 'Detailed standards for approval of CT' announced near the end of April 1996 by the insurer. 2. Since the implementation of insurance coverage for CT, CT fee reduction rates for reimbursements by the insurer to the hospital were 50% and 40% for January and February, respectively, and 31% and 15% for March and April. A significant point in the lowering of the reduction rate was reached in May at 11%; furthermore, since June the reduction rate fell below the average reduction rate for reimbursements for all procedures. If the 'Detailed standards for approval of CT' had been announced before the implementation of insurance coverage for CT, CT utilization would not have been so high due to the need to meet those 'standards'. In addition, loss of hospital profits resulting from the reduction for reimbursements would not have occurred. 3. The shifts in MRI utilization showed that there was no particular change with the beginning of insurance coverage for CT, and the introduction of the 'Detailed standards for approval of CT' made MRI utilization increase because MRI is free of restrictions imposed by the insurer. 4. The relationship between CT utilization and MRI utilization showed that they were supplementary to each other before insurance coverage for CT, but that CT was substituted for MRI because of strengthened medical cost reviews after t~e beginning of insurance coverage for CT. 5. The shifts in volume by patient characteristics showed that the number of inappropriate case patients, according to the insurer's "Standards for approval", decreased more than the number of appropriate case patients after the introduction of insurance coverage for CT. Therefore, the health insurance fee schemes for CT have influenced patient care. 6. The shifts in profits from CT utilization showed a net profit decrease of 31.6%. In order to match the pre-coverage profit level, 5,471 more cases would need to be seen and productivity would need to be increased by 32.7%. This profit decrease resulted from a decrease of CT utilization and low reimbursements. With insurance coverage, net profits from CT were 24.4%, and a margin of safety ratio was 39.6%. Because of the net profits and margin of safety ratio, CT utilization fees for insured appropriate cases could not be considered inappropriate. 7. The shifts in profits from MRI utilization before and after the introduction of CT coverage showed that in order to match pre-CT coverage profit levels, 2,011 more cases would need to be seen and productivity would need to be increased by 9.2%. The reasons for needing to increase the number of cases and productivity result from cost burdens created by adding new MRI units. But with CT coverage already begun, MRI utilization increased. Combined with a minor increase in the MRI fee schedule, MRI utilization showed a net profit increase of 18.5%. Net profits of 62.8% and a 'margin of safety ratio' of 43.1% for MRI utilization showed that the hospital relied on this non-covered procedure for profits. 8. The shifts in profits from CT and MRI utilization showed the net profits from CT decreased by 2.33billion Won while the net profits from MRI increased by 815.7million Won. Overall, these two together showed a net profit decrease of 1.51billion Won. The shifts in utilization showed a functional substitutionary relationship, but the shifts in profits did not show a substitutionary relationship. From these results, We can conclude that if insurance is to be expanded to include previously uncovered procedures using expensive medical equipment, detailed standards should be prepared in advance. The decrease in profits from the shifts in coverage and changes in fees is a difficult burden that should be shared, not carried by the hospital alone. Also, a new or improved fee schedule system should include revised standards between items listed and the appropriateness of the fee schedule should constantly be ensured. This study focused on one university hospital in Seoul and is therefore limited in general applicability. But it is valuable for considering current issues and problems, such as the influence of CT coverage on hospital management. Future studies will hopefully expand the scope of the issues considered here.