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Hospital cost efficiency: an examination of US acute care inpatient hospitals

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  • Sebastian Linde

    (Medical College of Wisconsin
    Medical College of Wisconsin)

Abstract

The use of stochastic frontier models for inference on hospital efficiency is complicated by the inability to fully control for quality differences across hospitals. Additionally, the potential existence of cross-sectional dependence due to the presence of unobserved common factors leads to endogeneity problems that can bias both cost function and efficiency estimates. Using a panel consisting of 1518 hospitals for the years 1996–2013 (T = 18), I adopt techniques for dealing with long, cross-sectionally dependent panel data in order to estimate cost parameters and hospital specific efficiency. In particular, I employ the estimation technique proposed by Bai (Econometrica 77(4):1229–1279, 2009), which assumes that the unobservable heterogenous effects have a factor structure. I find evidence of considerable scale economies and that hospital cost inefficiencies have been increasing during the period of 1996–2013, and that the growth in expenditures is, in part, driven by spending that increases patient satisfaction, but that does not significantly contribute to improved patient health outcomes.

Suggested Citation

  • Sebastian Linde, 2023. "Hospital cost efficiency: an examination of US acute care inpatient hospitals," International Journal of Health Economics and Management, Springer, vol. 23(3), pages 325-344, September.
  • Handle: RePEc:kap:ijhcfe:v:23:y:2023:i:3:d:10.1007_s10754-023-09356-x
    DOI: 10.1007/s10754-023-09356-x
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    More about this item

    Keywords

    Cost inefficiency; Economies of scale; Principal components; Stochastic frontier analysis; Value-based purchasing;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • I10 - Health, Education, and Welfare - - Health - - - General
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets

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