Measuring hospital cost efficiency with panel data models

This paper investigated the development of hospital cost efficiency and productivity in Finland in 1988-1994 using a comparative application of parametric and non-parametric panel models. Stochastic cost frontier models with a time-varying inefficiency component were used as parametric methods. As non-parametric methods various DEA models were employed to calculate efficiency scores and the Malmquist productivity index. The results revealed a 3-5% annual average increase in productivity, half of which was due to improvement in cost efficiency and half due to technological change. The results by parametric and non-parametric methods compared well with respect to individual efficiency scores, time-varying efficiency and technological change. The state subsidy reform of 1993 did not seem to have any observable effects on the hospital efficiency.