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Hospital Competition, Technical Efficiency, and Quality

  • C. L. Chua


    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

  • Alfons Palangkaraya


    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

  • Jongsay Yong


    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

This paper studies the link between competition and technical efficiency of public hospitals in the State of Victoria, Australia by accounting both quantity and quality of hospital output using a two-stage semi-parametric model of hospital production and Data Envelopment Analysis. On the one hand, it finds a positive relationship between efficiency and competition measured by the Hirschman-Herfindahl Index (HHI). On the other, it finds that efficiency and the number of competing hospitals, in particular the number of competing private hospitals, to be negatively correlated. More importantly, it finds that whether or not quality is treated as an endogenous output variable, as opposed to as an exogenous control variable, may impact on the statistical estimates of the link between efficiency and competition. Also, how the effect of competition on efficiency is modelled empirically may matter, though the impact of the treatment of quality as described above appears to be more important. Overall, the results highlight the importance of quality consideration in assessing the effects of competition on efficiency and points to possibly undesirable resource allocation effects when public hospitals are made to compete with a large number of private hospitals.

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Paper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2009n16.

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Length: 27 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:iae:iaewps:wp2009n16
Contact details of provider: Postal: Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia
Phone: +61 3 8344 2100
Fax: +61 3 8344 2111
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