Skip to main content
SpringerLink
Log in

Impact of internal and external environmental pressures on hospital inefficiency

  • Published:
Health Care Management Science Aims and scope Submit manuscript

Abstract

This study used stochastic frontier analysis to study variations in inefficiency in US hospitals. Cost‐inefficiency (i.e., differences between best practice and actual expenses) is assumed to be affected by ownership status, competition, regulatory pressure, and market demand conditions. The level of analysis is the hospital (n = 3,262) and data for 1994 were used. The market was defined as the county in which the hospital was located.

A two‐stage approach was used in the analysis. In the first stage, translog cost‐functions were estimated. Outputs used in the cost function analysis include inpatient discharges, post‐admission days, outpatient visits, medical education, and case‐mix index. Following Jondrow's technique, inefficiency scores (i.e., the difference between predicted least costs and actual costs) were estimated. Inefficiency estimates were not sensitive to changes in assumptions about the distribution of the error term. In the second stage, the estimated inefficiency scores were used as dependent variables to test hypotheses about the impact of internal and external environmental pressures on cost‐inefficiency. Since the distribution of the estimated inefficiency scores was censored, Tobit equations were estimated.

The second stage analysis found that measured inefficiency was negatively related with industry concentration (Herfindahl index), public payment policy, and unemployment rate and positively related with for‐profit status.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  1. D.J. Aigner, K. Lovell and P. Schmidt, Formulation and estimation of stochastic frontier production models, J. Econometrics 6 (1977) 21–37.

    Google Scholar 

  2. A.N. Berger and D. Humphrey, Efficiency of financial institutions: international survey and directions for future research, European J. Oper. Res. 98(2) (1997) 175–212.

    Google Scholar 

  3. A.N. Berger, W.C. Hunter and S.G. Timme, The efficiency of financial institutions: a review and preview of research past, present, and future, J. Banking and Finance 17(2) (1993) 221–249.

    Google Scholar 

  4. J. Burgess and P. Wilson, Variation in inefficiency among US hospitals, INFOR 36(3) (1998) 84–102.

    Google Scholar 

  5. K.J. Button and T.G. Weyman-Jones, Ownership structure, institutional organization and measured X-efficiency, Am. Economic Review 82 (1992) 439–445.

    Google Scholar 

  6. R.E. Caves, Industrial Efficiency in Six Nations (MIT Press, Cambridge, 1992).

    Google Scholar 

  7. A. Charnes, W. Cooper, A. Lewin and L. Seifford, eds., Data Envelopment Analysis: Theory, Methodology and Applications (Kluwer, Boston, 1994).

    Google Scholar 

  8. J.A. Chilingerian, New directions for hospital strategic management: the market for efficient care, Health Care Management Review 17(4) (1992) 73–80.

    Google Scholar 

  9. T. Chirikos, Identifying efficiently and economically operated hospitals: the prospects and pitfalls of applying frontier regression techniques, J. Health Politics, Policy and Law 23(6) (1998) 879–904.

    Google Scholar 

  10. L.R. Christensen, D.W. Jorgenson and L.J. Lau, Transcendental logarithmic utility functions, Am. Economic Review 65(3) (1975) 367–383.

    Google Scholar 

  11. T. Coelli, A guide to FRONTIER Version 4.1: A computer program for stochastic frontier production and cost function estimation, University of New England, Armidale (1996).

    Google Scholar 

  12. R. Coulam and G. Gaumer, Medicare prospective payment: a critical appraisal, Health Care Financing Review 13 (Annual Supplement) (1991) 45–77.

    Google Scholar 

  13. T. Cowing and A. Holtmann, Multiproduct short-run hospital cost functions: empirical evidence and policy implications from crosssection data, Southern Economic J. 49(3) (1983) 637–663.

    Google Scholar 

  14. T. Cowing, A. Holtmann and S. Powers, Hospital cost analysis: a survey and evaluation of recent studies, Advances in Health Economics and Health Services Research 4 (1983) 257–303.

    Google Scholar 

  15. P. Diehr, W. Madden, A. Cheadle, D. Patrick, P. Fishman, P. Char and S. Skillman, Estimating county percentages of people without health insurance, Inquiry 28(4) (1991) 413–419.

    Google Scholar 

  16. A. Dor, Non-minimum cost functions and the stochastic frontier: on applications to health care providers, J. Health Economics 13(3) (1994) 329–334.

    Google Scholar 

  17. D. Dranove, C. Simon and W. White, Determinants of managed care penetration, J. Health Economics 17(6) (1998) 729–746.

    Google Scholar 

  18. S.R. Eastaugh, Health Economics: Efficiency, Quality, and Equity (Auburn House, Westport, CT, 1992).

    Google Scholar 

  19. M.J. Farrell, The measurement of productive efficiency, J. Roy. Statist. Soc. Ser. A General 120(3) (1957) 253–281.

    Google Scholar 

  20. S. Folland, A. Goodman and M. Stano, The Economics of Health and Health Care, 2nd ed. (Prentice-Hall, Upper Saddle River, NJ, 1997).

    Google Scholar 

  21. G.M. Fournier and J.M. Mitchell, Hospital costs and competition for services: a multiproduct analysis, Review of Economic Statistics 74 (1992) 627–634.

    Google Scholar 

  22. R. Franz, X-efficiency: Theory, Evidence and Application (Kluwer, Boston, 1988).

    Google Scholar 

  23. D. Freund, R.H. Schachtman, M. Ruffin and D. Quade, Analysis of length-of-stay differences between investor-owned and voluntary hospitals, Inquiry 22(1) (1985) 33–44.

    Google Scholar 

  24. GAO, Medicare HMO Enrollment: Area Differences Affected by Factors other than Payment Rates, Report to US Senate (General Accounting Office, Washington, DC, 1997).

    Google Scholar 

  25. L. Gardner and M. Grace, X-efficiency in the US life insurance industry, J. Banking and Finance 17 (1993) 497–510.

    Google Scholar 

  26. D. Garnick, H. Luft, J. Robinson and J. Tetreault, Appropriate measures of hospital market areas, Health Services Research 22 (1987) 69–89.

    Google Scholar 

  27. D.J. Gaskin and J. Hadley, The impact of HMO penetration on the rate of hospital cost inflation, 1985–1993, Inquiry 34(3) (1997) 205–216.

    Google Scholar 

  28. P.B. Ginsburg, The dynamics of market-level change, J. Health Politics, Policy and Law 22(2) (1997) 363–382.

    Google Scholar 

  29. T.W. Grannemann, R.S. Brown and M.V. Pauly, Estimating hospital costs: a multiple-output analysis, J. Health Economics 5(2) (1986) 107–127.

    Google Scholar 

  30. W.H. Greene, LIMDEP 7.0: User's Manual and Reference Guide (Econometric Software, Plainview, NY, 1998).

    Google Scholar 

  31. W.H. Greene, Econometric Analysis, 3rd ed. (Prentice-Hall, Upper Saddle River, NJ, 1997).

    Google Scholar 

  32. Institute of Medicine, For-Profit Enterprise in Health Care (National Academy Press, Washington, DC, 1986).

    Google Scholar 

  33. J. Jondrow, K. Lovell, I. Materov and P. Schmidt, On the estimation of technical inefficiency in the stochastic frontier production function model, J. Econometrics 19(2) (1982) 233–238.

    Google Scholar 

  34. P. Kooreman, Nursing home care in the Netherlands: a nonparametric efficiency analysis, J. Health Economics 13(3) (1994) 301–316.

    Google Scholar 

  35. H. Leibenstein, Inside the Firm: The Inefficiencies of Hierarchy (Harvard Univ. Press, Cambridge, MA, 1987).

    Google Scholar 

  36. C.K. Lovell, Production frontiers and productive efficiency, in: The Measurement of Productive Efficiency, eds. H. Fried, C.K. Lovell and S.S. Schmidt (Oxford Univ. Press, New York, 1993).

    Google Scholar 

  37. H. Luft, J. Robinson, D. Garnick, S. Maerki and S. McPhee, The role of specialized clinical services in competition among hospitals, Inquiry 23 (1986) 83–94.

    Google Scholar 

  38. E. Munoz, D. Regain, I. Margocis and L. Wise, Surgonomics: the identifier concept, Annals of Surgery 202 (1985) 119–125.

    Google Scholar 

  39. J. Nyman and D. Bricker, Profit incentives and technical efficiency in the production of nursing home care, Review of Economics and Statistics 71(3) (1989) 586–594.

    Google Scholar 

  40. Y. Ozcan, R. Luke and C. Haksever, Ownership and organizational performance: a comparison of technical efficiency across hospital types, Medical Care 30(9) (1992) 781–794.

    Google Scholar 

  41. ProPAC, Prospective Payment Assessment Commission Report and Recommendations to the Congress (ProPAC, Washington, DC, 1995).

    Google Scholar 

  42. J. Robinson and H. Luft, The impact of hospital market structure on patient volume, average length of stay, and the cost of care, J. Health Economics 4(4) (1985) 333–356.

    Google Scholar 

  43. M.D. Rosko, Measuring technical efficiency in health care organizations, J. Medical Systems 14(4) (1990) 307–322.

    Google Scholar 

  44. M. Rosko, All-payer rate-setting and the provision of hospital care to the uninsured: the New Jersey experience, J. Health Politics, Policy and Law 15(4) (1990) 815–831.

    Google Scholar 

  45. M.D. Rosko, Understanding variations in hospital costs: an economic perspective, Ann. Oper. Res. 67 (1996) 1–21.

    Google Scholar 

  46. M.D. Rosko and R. Broyles, The Economics of Health: A Reference Handbook (Greenwood Press, New York, 1988).

    Google Scholar 

  47. M. Rosko and C. Carpenter, The impact of intra-DRG severity of illness on hospital profitability, J. Health Politics, Policy and Law 19(4) (1994) 729–751.

    Google Scholar 

  48. M. Rosko, J. Chilingerian, J. Zinn and W. Aaronson, The effects of ownership, operating environment, and strategic choices on nursing home efficiency, Medical Care 33(9) (1995) 1–20.

    Google Scholar 

  49. F. Scherer and D. Ross, Industrial Market Structure and economic Performance, 3rd ed. (Houghton Mifflin Company, Boston, 1990).

    Google Scholar 

  50. K.E. Thorpe, The use of regression analysis to determine hospital payment: the case of Medicare's indirect teaching adjustment, Inquiry 25(2) (1988) 219–231.

    Google Scholar 

  51. K.E. Thorpe, The health system in transition: care, cost, and coverage, J. Health Politics, Policy and Law 22(2) (1997) 339–362.

    Google Scholar 

  52. C. Timmer, Using a probabilistic frontier production function to measure technical efficiency, J. Political Economy 79(4) (1971) 776–794.

    Google Scholar 

  53. M.G. Vita, Exploring hospital production relationships with flexible functional forms, J. Health Economics 9(1) (1990) 1–22.

    Google Scholar 

  54. D. Vitaliano and M. Toren, Cost and efficiency in nursing homes:a stochastic frontier approach, J. Health Economics 13(3) (1994) 281–300.

    Google Scholar 

  55. D. Vitaliano and M. Toren, Hospital cost and efficiency in a regime of stringent regulation, Eastern Economic J. 22(2) (1996) 161–184.

    Google Scholar 

  56. A. Wagstaff, Estimating efficiency in the hospital sector: a comparison of three statistical cost frontier models, Applied Economics 21 (1989) 659–672.

    Google Scholar 

  57. B.A. Weisbrod, Nonprofit and propriety sector behavior in health care: does institutional form matter?, Paper presented at the Annual Meetings of the American Public Health Association, San Francisco, CA (1993).

  58. S. Zuckerman, J. Hadley and L. Iezzoni, Measuring hospital efficiency with frontier cost functions, J. Health Economics 13(3) (1994) 255–280.

    Google Scholar 

  59. J. Zwanziger and G. Melnick, The effects of hospital competition and medicare pps program on hospital cost behavior in California, J. Health Economics 7(4) (1988) 301–320.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Health & Medical Services Administration, School of Business Administration, Widener University, One University Place, Chester, PA, 19013, USA E-mail:

    Michael D. Rosko

Authors
  1. Michael D. Rosko
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Cite this article

Rosko, M.D. Impact of internal and external environmental pressures on hospital inefficiency. Health Care Management Science 2, 63–74 (1999). https://doi.org/10.1023/A:1019031610741

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1023/A:1019031610741

Keywords

Search

Navigation