Abstract
Relative performance evaluation has been suggested as a means to overcome information asymmetry between regulators and organizations when assessing efficiency. By comparing similar organizations the relationship between costs and effort can be better isolated. The English Department of Health (DoH) has undertaken relative performance evaluation in comparing the unit costs of acute hospitals using ordinary least squares (OLS) methods. After adjusting for exogenous influences in costs, residual unexplained cost differences are deemed to represent inefficiency. This paper questions the official interpretation of the OLS residuals. The OLS model is re-estimated to calculate confidence intervals around the residuals and as a stochastic cost frontier (SCF). It is concluded that English acute hospitals exhibit less in efficiency than is implied by official estimates.
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