How Does Payer Mix and Technical Inefficiency Affect Hospital Net Revenue?

As changes in the US health care system continue to evolve and change, maintaining the financial viability of hospitals is crucial to the system’s operation. Two lines of inquiry have been pursued in describing factors affecting financial viability. The first line of inquiry relates to the external payer mix of patients focusing on patients who are unable to compensate hospitals for the care received. The second line of inquiry focuses on internal management and because hospitals do not typically answer to shareholders, managers become lax and X-inefficiency may arise. In this paper, we assess both these lines of research in order to determine if payment source by patients and/or managerial efficiency contributes to higher total net revenue. By using a weighted DEA we measured the inefficiency of inputs to the production process on our sample of 144 hospitals operating in Florida during 2005. We used the derived inefficient use of inputs along with the number of days by payer group (Medicare, Medicaid, private insurance, other public insurance, and uncompensated care) in order to explain their effects on total net revenue. To preview our results, we found that the inefficient use of beds and the provision of care to patients who are considered as uncompensated care reduce significantly total net revenue while private pay patients and patients covered by other public insurance add to total net revenue. These findings add to the literature by showing that it is patient payer mix and managerial inefficiency together affect hospital financial viability. We also demonstrate how our findings contribute to current policy debates both on the federal US and the state of Florida level.