Persistent and Transient Inefficiency of Australian States and Territories in Providing Public Hospital Services: An Application of Bayesian Stochastic Finite Mixture Frontier Analysis

Abstract

Current literature on public hospital efficiency in Australia only reveals information on how efficient public hospitals are in the short run. The presence of persistent technical inefficiency arising from long‐term systemic problems and government‐related regulatory constraints does not appear to have been addressed. Using the aggregated hospital panel data for the period 2002–2018 on eight Australian states and territories, this study incorporates the measure of both transient and persistent technical inefficiency while controlling for unobserved heterogeneity to obtain a more precise measure of technical efficiency. This study’s findings estimate the national average transient efficiency to be 0.96. In contrast, the national average persistent efficiency is estimated to be 0.83. Further, Queensland (0.67), Victoria (0.66) and New South Wales (0.60) posted the lowest overall technical efficiency driven by the high level of persistent inefficiency. On the other hand, Northern Territory (0.96), Australian Capital Territory (0.95) and Tasmania (0.95) are the top performers. This study’s findings call on policy‐makers and regulators to disclose hospital‐level data to researchers to gain further insight into the causes of persistence in inefficiency, especially among bigger states, which will help formulate more targeted policy interventions.