Abstract
This research quantifies the bias caused in hospital productivity measurements when cost heterogeneity is not considered. A multi-output stochastic cost frontier under a normalised translog specification is used to approximate the structure of technology of a sample of public general hospitals in Spain during the period 2002–2009. To control for observable heterogeneity in costs, a set of variables related to hospital characteristics are included in the cost frontier specification (i.e., hospital complexity, degree of specialisation, availability of outpatient clinics, variety of high-technology equipment available, teaching activity and quality of care), whereas unobservable heterogeneity is accounted for by means of individual dummy variables. A measure of hospitals’ cost efficiency is first obtained, and the analysis is then completed by measuring and decomposing the total factor productivity index (TFP-I) change. Findings reveal that controlling for heterogeneity decreases total productivity from an annual average rate of 0.028% to 1.330%, mainly driven by the negative contribution of the cost efficiency change component. Hence, a bias of 1.303 percentage points in the overall TFP-I is found as consequence of not controlling for heterogeneity. In addition to this, if heterogeneity factors are not accounted for, the mean cost efficiency index during the period analysed is 0.730, figure that increases up to 0.974 if heterogeneity is considered. Hence, the omission of heterogeneity leads to a bias of 24.4 percentage points in the mean cost efficiency. Therefore, not adjusting for heterogeneity in costs gives rise to distorted measurements of hospital productivity, as well as distortions in the contribution of each of its components, which may lead to the adoption of inadequate policies and decisions on resource allocation.
Highlights
In the literature on hospital performance, increasing attention has been paid to the fact that hospital production activity could be influenced by factors other than merely outputs and inputs
Comparison of results on the Total Factor Productivity (TFP) index change between models provides a measure of the biased caused in hospital productivity by not controlling for cost heterogeneity
This study has used a stochastic cost frontier approach to quantify the bias that not accounting for heterogeneity in costs may cause in hospital productivity measurements in the Spanish public hospital sector during the period 2002–2009
Summary
In the literature on hospital performance, increasing attention has been paid to the fact that hospital production activity could be influenced by factors other than merely outputs and inputs. Two types of hospital cost heterogeneity can be distinguished: on the one hand, differences in costs whose causative factors–other than input and outputs- can be identified (i.e., observable heterogeneity). These elements have been commonly captured by including them as a vector of exogenous variables in the model chosen to analyse the optimal productive behaviour. Differences in hospital costs arising from elements that cannot be associated with any possible known factor (i.e., unobserved heterogeneity) This latter type of heterogeneity has been traditionally controlled for by means of individual dummy variables
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