Cost Efficiency in the Public Finances of the Japanese National Health Insurance: A Stochastic Frontier Approach

Abstract

In this study, I examine the cost inefficiency and production inefficiency of municipal insurers operating under the Japanese National Health Insurance system. I employ insurer-level panel data for 2005 and 2010 and adopt stochastic frontier cost and production models to overcome analytical problems encountered in previous studies. The cost frontier estimation indicates that adverse effects on efficiency are associated with aging of the insured population, soft budget constraints due to government subsidies, insurer contributions to the elder care systems, and an increase in care provider densities. A positive effect on efficiency is associated with an expansion in insurer scale. The production frontier estimation suggests that cost inefficiencies decreased by roughly 15 percent between 2005 and 2010. The correlation between cost inefficiency and technical inefficiency is not particularly strong, whereas the correlation between cost inefficiency and allocative inefficiency is strong and positive.