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Measuring hospital efficiency with frontier cost functions.

S Zuckerman1, J Hadley, L Iezzoni

  • 1Urban Institute, Washington, DC 20037.

Journal of Health Economics
|September 5, 1994
PubMed
Summary
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This study quantifies hospital inefficiency, finding it accounts for 13.6% of total costs. Using a stochastic frontier multiproduct cost function, researchers measured hospital inefficiency robustly.

Area of Science:

  • Health Economics
  • Healthcare Management
  • Operations Research

Background:

  • Measuring hospital inefficiency is crucial for cost containment and quality improvement.
  • Previous models often struggled to account for unobserved variations in hospital outputs.

Purpose of the Study:

  • To derive accurate, hospital-specific measures of inefficiency.
  • To incorporate illness severity, output quality, and patient outcomes into cost function models.
  • To test and address the assumption of output endogeneity.

Main Methods:

  • Employed a stochastic frontier multiproduct cost function.
  • Utilized data from the AHA Annual Survey, Medicare Hospital Cost Reports, and MEDPAR.
  • Explicitly tested and rejected the assumption of output endogeneity.

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Main Results:

  • Inefficiency was found to account for 13.6% of total hospital costs.
  • The inefficiency estimates were robust across different model specifications and data pooling methods.
  • Direct measures of illness severity, output quality, and patient outcomes improved inefficiency estimation.

Conclusions:

  • A significant portion of hospital costs is attributable to inefficiency.
  • The methodology provides a reliable approach for measuring hospital inefficiency.
  • Accounting for output characteristics is essential for accurate inefficiency assessment.