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Towards panel data specifications of efficiency measures for English acute hospitals

  • Neil Soderlund
  • Rowena Jacobs

    ()

    (Centre for Health Economics, The University of York)

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    This paper reports work undertaken for the Department of Health to explore different approaches of measuring hospital efficiency. The emphasis throughout is on developing adjusted cost-efficiency measures in line with NHS Trusts performance objectives. Previous work described the derivation of three residual-based cost indices (CCI, 2CCI and 3CCI), each with increasing adjustment in terms of case mix, factor prices and environmental factors for a single year’s data (1995/6) (Söderlund & van der Merwe, 1999). This study explores further options based on the previous work by: (1) supplementing hospital level with specialty level data; (2) studying a 4-year panel from 1994/5 to 1997/8; (3) estimating models with non-symmetric error terms and including Trust-specific effects when measuring inefficiency. Although the paper argues that panel data models may have certain advantages over cross-sectional ones, the results suggest that data pooling across years provide robust parameter estimates. Longitudinal fixed effect models may however be useful to construct efficiency indices while stochastic frontier models have the advantage of taking account of random noise. Specialty level models proved inferior to whole hospital estimations. The paper argues that the degree of variation between hospitals in terms of efficiency is not that great and scope for efficiency enhancement is primarily attainable by optimising capacity and activity levels in the long run. Increased activity levels may however have adverse consequences such as increased hospital infection rates, poorer quality of care and a lack of capacity to deal with emergency demand. The paper argues that the Department of Health might consider a shift from the adjusted cost index approach used in this normative benchmarking framework to the more conventional efficiency analysis approach using a total cost function, and more flexible functional forms, allowing for a more defensible interpretation of the residuals as inefficiency.

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    File URL: http://www.york.ac.uk/media/che/documents/papers/discussionpapers/CHE%20Discussion%20Paper%20185.pdf
    File Function: First version, 2001
    Download Restriction: no

    Paper provided by Centre for Health Economics, University of York in its series Working Papers with number 185chedp.

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    Length: 35 pages
    Date of creation: Jun 2001
    Date of revision:
    Handle: RePEc:chy:respap:185chedp
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    1. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November.
    2. Farley, Dean E., 1989. "Measuring casemix specialization and the concentration of diagnoses in hospitals using information theory," Journal of Health Economics, Elsevier, vol. 8(2), pages 185-207, June.
    3. Vitaliano, Donald F., 1987. "On the estimation of hospital cost functions," Journal of Health Economics, Elsevier, vol. 6(4), pages 305-318, December.
    4. Neil Soderlund & Rowena van der Merwe, 1999. "Hospital benchmarking analysis and the derivation of cost indices," Working Papers 174chedp, Centre for Health Economics, University of York.
    5. Breyer, Friedrich, 1987. "The specification of a hospital cost function : A comment on the recent literature," Journal of Health Economics, Elsevier, vol. 6(2), pages 147-157, June.
    6. Uwe Jensen, 2000. "Is it efficient to analyse efficiency rankings?," Empirical Economics, Springer, vol. 25(2), pages 189-208.
    7. Krishnan, Ranjani, 2001. "Market restructuring and pricing in the hospital industry," Journal of Health Economics, Elsevier, vol. 20(2), pages 213-237, March.
    8. Vita, Michael G., 1990. "Exploring hospital production relationships with flexible functional forms," Journal of Health Economics, Elsevier, vol. 9(1), pages 1-21, June.
    9. Robinson, James C. & Luft, Harold S., 1985. "The impact of hospital market structure on patient volume, average length of stay, and the cost of care," Journal of Health Economics, Elsevier, vol. 4(4), pages 333-356, December.
    10. Melnick, Glenn A. & Zwanziger, Jack & Bamezai, Anil & Pattison, Robert, 1992. "The effects of market structure and bargaining position on hospital prices," Journal of Health Economics, Elsevier, vol. 11(3), pages 217-233, October.
    11. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
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