The impact of CON regulation on hospital efficiency

In this paper we propose an empirically implementable measure of aggregate-level efficiency along the lines of Debreu's (1951) coefficient of resource utilization but restricted to the production side. The efficiency measure is based on directional distance functions, which allows the overall measure of efficiency to be decomposed into measures of technical and "structural" efficiency. The latter measure, which captures inefficiencies associated with the organization of production within an industry, is further decomposed into measures of scale and mix efficiency. The measures developed in the paper are illustrated using U.S. hospital data. The illustration sheds light on the efficacy of certificate of need (CON) regulations.