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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)

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.

Suggested Citation

  • Sherman T. Folland & Richard A. Hofler, 2001. "How reliable are hospital efficiency estimates? Exploiting the dual to homothetic production," Health Economics, John Wiley & Sons, Ltd., vol. 10(8), pages 683-698.
  • Handle: RePEc:wly:hlthec:v:10:y:2001:i:8:p:683-698
    DOI: 10.1002/hec.600
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    References listed on IDEAS

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    Cited by:

    1. Stefan Meyer, 2015. "Payment schemes and cost efficiency: evidence from Swiss public hospitals," International Journal of Health Economics and Management, Springer, vol. 15(1), pages 73-97, March.
    2. Oliveira, Monica D. & Bevan, Gwyn, 2008. "Modelling hospital costs to produce evidence for policies that promote equity and efficiency," European Journal of Operational Research, Elsevier, vol. 185(3), pages 933-947, March.
    3. Andrew Street, 2003. "How much confidence should we place in efficiency estimates?," Health Economics, John Wiley & Sons, Ltd., vol. 12(11), pages 895-907.
    4. 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.
    5. Mehdi Farsi & Massimo Filippini, 2008. "Effects of ownership, subsidization and teaching activities on hospital costs in Switzerland," Health Economics, John Wiley & Sons, Ltd., vol. 17(3), pages 335-350.
    6. Esso-hanam Atake, 2015. "Technical efficiency of public hospitals in Togo: A directional distance function approach," Economics Bulletin, AccessEcon, vol. 35(3), pages 1752-1764.
    7. Di Giorgio, L. & Filippini, M. & Masiero, G., 2015. "Structural and managerial cost differences in nonprofit nursing homes," Economic Modelling, Elsevier, vol. 51(C), pages 289-298.
    8. repec:kap:hcarem:v:20:y:2017:i:2:d:10.1007_s10729-015-9349-8 is not listed on IDEAS
    9. 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.
    10. 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.
    11. Suthathip Yaisawarng & James F. Burgess, 2006. "Performance-based budgeting in the public sector: an illustration from the VA health care system," Health Economics, John Wiley & Sons, Ltd., vol. 15(3), pages 295-310.
    12. Annika Herr, 2008. "Cost and technical efficiency of German hospitals: does ownership matter?," Health Economics, John Wiley & Sons, Ltd., vol. 17(9), pages 1057-1071.
    13. Niccie L. McKay & Mary E. Deily, 2008. "Cost inefficiency and hospital health outcomes," Health Economics, John Wiley & Sons, Ltd., vol. 17(7), pages 833-848.
    14. Hacer Özgen Narcı & Yasar A. Ozcan & İsmet Şahin & Menderes Tarcan & Mustafa Narcı, 2015. "An examination of competition and efficiency for hospital industry in Turkey," Health Care Management Science, Springer, vol. 18(4), pages 407-418, December.
    15. Groot, Wim & van den Brink, Henriette Maassen, 2007. "Optimism, pessimism and the compensating income variation of cardiovascular disease: A two-tiered quality of life stochastic frontier model," Social Science & Medicine, Elsevier, vol. 65(7), pages 1479-1489, October.

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