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Ownership and Hospital Productivity

  • Dormont, Brigitte
  • Milcent, Carine

There is ongoing debate about the effect of ownership on hospital performance as regards efficiency and care quality. This paper proposes an analysis of the differences in productivity and efficiency between French public and private hospitals. In France, public and private hospitals do not only differ in their objectives. They are also subject to different rules as regards investments and human resources management. In addition, they were financed according to different payment schemes until 2004: a global budget system was used for public hospitals, while private hospitals were paid on a fee-for-service basis. Since 2004, a prospective payment system (PPS) with fixed payment per stay in a given DRG is gradually introduced for both private and public hospitals. Payments generally differ for the same DRG, depending on whether the stay occurred in a private or public hospital. A convergence of payments between the nonprofit and for profit sectors was planned by 2018 by the previous government, but this project has been abandoned by the newly elected government. Pursuing such a convergence comes down to suppose that there are differences in efficiency between private and public hospitals, which would be reduced by the introduction of competition between these two sectors. The purpose of this paper is to compare the productivity of public and private hospitals in France. We try to assess the respective impacts, on productivity differences, of differences in efficiency, patient characteristics and production composition. We have chosen to estimate a production function. For that purpose, we have defined a variable measuring the volume of care services provided by each hospital, synthetizing the hospital multiproduct activity into one homogenous output. Our data comes from two administrative sources which record exhaustive information about French hospitals. Matching these two database provides us an original source of information, at the hospital-year level, about both the production composition (number of stays in each DRG), and production factors (number of beds, facilities, number of doctors, nurses, of administrative and support staff, etc.). We observe 1,604 hospitals over the period 1998-2003, of which 642 hospitals are public, 126 are private not-for-profit and 836 are private-for-profit. This database is relative to acute care and covers more than 95 % of French hospitals. We use a stochastic production frontier approach combined with hospitals fixed effects. We find that the lower productivity of public hospitals is not explained by inefficiency (distance to the frontier), but oversized establishments, patient characteristics and production characteristics (small proportion of surgical stays). Once patient and production characteristics are taken into account, large and medium sized public hospitals appear to be more efficient than private hospitals. As a result, payment convergence would provide incentives for public hospitals to change the composition of their supply for care.

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Paper provided by CEPREMAP in its series CEPREMAP Working Papers (Docweb) with number 1205.

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Length: 48 pages
Date of creation: Jul 2012
Date of revision:
Handle: RePEc:cpm:docweb:1205
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  1. Brigitte Dormont & Carine Milcent, 2003. "How to regulate heterogenous hospitals?," DELTA Working Papers 2003-19, DELTA (Ecole normale supérieure).
  2. Frank A. Sloan & Gabriel A. Picone & Donald H. Taylor, Jr. & Shin-Yi Chou, 1998. "Hospital Ownership and Cost and Quality of Care: Is There a Dime's Worth of Difference?," NBER Working Papers 6706, National Bureau of Economic Research, Inc.
  3. Chalkley, Martin & Malcomson, James M., 2000. "Government purchasing of health services," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 15, pages 847-890 Elsevier.
  4. Ma, Ching-to Albert, 1994. "Health Care Payment Systems: Cost and Quality Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(1), pages 93-112, Spring.
  5. 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.
  6. Clark, Andrew E. & Milcent, Carine, 2011. "Public employment and political pressure: The case of French hospitals," Journal of Health Economics, Elsevier, vol. 30(5), pages 1103-1112.
  7. Pope, Gregory C., 1990. "Using hospital-specific costs to improve the fairness of prospective reimbursement," Journal of Health Economics, Elsevier, vol. 9(3), pages 237-251, November.
  8. William Greene, 2004. "Distinguishing between heterogeneity and inefficiency: stochastic frontier analysis of the World Health Organization's panel data on national health care systems," Health Economics, John Wiley & Sons, Ltd., vol. 13(10), pages 959-980.
  9. Dor, Avi & Farley, Dean E., 1996. "Payment source and the cost of hospital care: Evidence from a multiproduct cost function with multiple payers," Journal of Health Economics, Elsevier, vol. 15(1), pages 1-21, February.
  10. Dor, Avi, 1989. "The costs of Medicare patients in nursing homes in the United States : A multiple output analysis," Journal of Health Economics, Elsevier, vol. 8(3), pages 253-270, December.
  11. 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.
  12. Vita, Michael G., 1990. "Exploring hospital production relationships with flexible functional forms," Journal of Health Economics, Elsevier, vol. 9(1), pages 1-21, June.
  13. Lien, Hsien-Ming & Chou, Shin-Yi & Liu, Jin-Tan, 2008. "Hospital ownership and performance: Evidence from stroke and cardiac treatment in Taiwan," Journal of Health Economics, Elsevier, vol. 27(5), pages 1208-1223, September.
  14. Gabriel Picone & Shin-Yi Chou & Frank Sloan, 2002. "Are For-Profit Hospital Conversions Harmful to Patients and to Medicare?," RAND Journal of Economics, The RAND Corporation, vol. 33(3), pages 507-523, Autumn.
  15. Keeler, Emmett B., 1990. "What proportion of hospital cost differences is justifiable?," Journal of Health Economics, Elsevier, vol. 9(3), pages 359-365, November.
  16. 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.
  17. Annika Herr & Hendrik Schmitz & Boris Augurzky, 2011. "Profit efficiency and ownership of German hospitals," Health Economics, John Wiley & Sons, Ltd., vol. 20(6), pages 660-674, June.
  18. Mehdi Farsi & Massimo Filippini & Michael Kuenzle, 2005. "Unobserved heterogeneity in stochastic cost frontier models: an application to Swiss nursing homes," Applied Economics, Taylor & Francis Journals, vol. 37(18), pages 2127-2141.
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