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How reliable are hospital efficiency estimates? Exploiting the dual to homothetic production

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  • Sherman T. Folland

    (Oakland University, Rochester, MI, USA)

  • Richard A. Hofler

    (University of Central Florida, Orlando, FL, USA)

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    Abstract

    For scientific use, stochastic frontier estimates of hospital efficiency must be robust to plausible departures from the assumptions made by the investigator. Comparisons of alternative study designs, each well within the 'accepted' range according to current practice, generate similar mean inefficiencies but substantially different hospital rankings. The three alternative study contrasts feature (1) pooling vs partitioned estimates, (2) a cost function dual to a homothetic production process vs the translog, and (3) two conceptually valid but empirically different cost-of-capital measures. The results suggest caution regarding the use of frontier methods to rank individual hospitals, a use that seems to be required for reimbursement incentives, but they are robust when generating comparisons of hospital group mean inefficiencies, such as testing models that compare non-profits and for-profits by economic inefficiency. Demonstrations find little or no efficiency differences between these paired groups: non-profit vs for-profit; teaching vs non-teaching; urban vs rural; high percent of Medicare reliant vs low percent; and chain vs independent hospitals. Copyright © 2001 John Wiley & Sons, Ltd.

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    File URL: http://hdl.handle.net/10.1002/hec.600
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    Bibliographic Info

    Article provided by John Wiley & Sons, Ltd. in its journal Health Economics.

    Volume (Year): 10 (2001)
    Issue (Month): 8 ()
    Pages: 683-698

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    Handle: RePEc:wly:hlthec:v:10:y:2001:i:8:p:683-698

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    Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/5749

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    References

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    1. Dor, Avi, 1994. "Non-minimum cost functions and the stochastic frontier: On applications to health care providers," Journal of Health Economics, Elsevier, vol. 13(3), pages 329-334, October.
    2. Zuckerman, Stephen & Hadley, Jack & Iezzoni, Lisa, 1994. "Measuring hospital efficiency with frontier cost functions," Journal of Health Economics, Elsevier, vol. 13(3), pages 255-280, October.
    3. Grosskopf, S. & Valdmanis, V., 1987. "Measuring hospital performance : A non-parametric approach," Journal of Health Economics, Elsevier, vol. 6(2), pages 89-107, June.
    4. Hadley, Jack & Zuckerman, Stephen, 1994. "The role of efficiency measurement in hospital rate setting," Journal of Health Economics, Elsevier, vol. 13(3), pages 335-340, October.
    5. Grannemann, Thomas W. & Brown, Randall S. & Pauly, Mark V., 1986. "Estimating hospital costs : A multiple-output analysis," Journal of Health Economics, Elsevier, vol. 5(2), pages 107-127, June.
    6. Tomas Philipson & Darius Lakdawalla, . "Nonprofit Production," University of Chicago - Population Research Center 97-8, Chicago - Population Research Center.
    7. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
    8. Adam Wagstaff & Guillem Lopez, 1996. "Hospital costs in Catalonia: a stochastic frontier analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 3(7), pages 471-474.
    9. Carey, Kathleen, 1998. "Stochastic Demand for Hospitals and Optimizing "Excess" Bed Capacity," Journal of Regulatory Economics, Springer, vol. 14(2), pages 165-87, September.
    10. Jondrow, James & Knox Lovell, C. A. & Materov, Ivan S. & Schmidt, Peter, 1982. "On the estimation of technical inefficiency in the stochastic frontier production function model," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 233-238, August.
    11. Kooreman, P., 1994. "Data envelopment analysis and parametric frontier estimation: Complementary tools," Open Access publications from Tilburg University urn:nbn:nl:ui:12-377581, Tilburg University.
    12. Kooreman, Peter, 1994. "Data envelopment analysis and parametric frontier estimation: complementary tools," Journal of Health Economics, Elsevier, vol. 13(3), pages 345-346, October.
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    Cited by:
    1. Cristian Nedelea, I. & Matthew Fannin, J., 2013. "Analyzing cost efficiency of Critical Access Hospitals," Journal of Policy Modeling, Elsevier, vol. 35(1), pages 183-195.
    2. Medhi Farsi & Massimo Filippini, 2006. "Effects of ownership, subsidization and teaching activities on hospital costs in Switzerland," Quaderni della facoltà di Scienze economiche dell'Università di Lugano 0606, USI Università della Svizzera italiana.
    3. Mehdi Farsi & Massimo Filippini & Diego Lunati, 2008. "Economies of Scale and Efficiency Measurement in Switzerland's Nursing Homes," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 144(III), pages 359-378, September.
    4. Daniel Friesner & Matthew McPherson & Robert Rosenman, 2006. "Are Hospitals Seasonally Inefficient? Evidence from Washington State Hospitals," Working Papers 2006-3, School of Economic Sciences, Washington State University.

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