Cost inefficiency in Washington hospitals: a stochastic frontier approach using panel data

We analyze a sample of Washington State hospitals with a stochastic frontier panel data model, specifying the cost function as a generalized Leontief function which, according to a Hausman test, performs better in this case than the translog form. A one-stage FGLS estimation procedure which directly models the inefficiency effects improves the efficiency of our estimates. We find that hospitals with higher casemix indices or more beds are less efficient while for-profit hospitals and those with higher proportion of Medicare patient days are more efficient. Relative to the most efficient hospital, the average hospital is only about 67% efficient.