The Effect of Activity-Based Financing on Hospital Efficiency: A Panel Data Analysis of DEA Efficiency Scores 1992-2000

Biorn, Erik and Hagen, Terje P. and Iversen, Tor and Magnussen, Jon (2002): The Effect of Activity-Based Financing on Hospital Efficiency: A Panel Data Analysis of DEA Efficiency Scores 1992-2000. Published in: HERO Working Paper No. 2002:6 (2002): pp. 1-35.

Abstract

Activity-based financing (ABF) was implemented in the Norwegian hospital sector from 1 July 1997. A fraction (30 to 50 per cent) of the block grant from the state to the county councils has been replaced by a matching grant depending upon the number and composition of hospital treatments. As a result of the reform, the majority of county councils have introduced activity-based contracts with their hospitals. This paper studies the effect of activity-based funding on hospital efficiency. We predict that hospital efficiency will increase because the benefit from cost-reducing efforts in terms of number of treated patients is increased under ABF compared with global budgets. The prediction is tested using a panel data set from the period 1992-2000. Efficiency indicators are estimated by means of data envelopment analysis (DEA) with multiple inputs and outputs. Using a variety of econometric methods, we find that the introduction of ABF has improved efficiency when measured as technical efficiency according to DEA analysis. Contrary to our prediction, the result is less uniform with respect to the effect on cost-efficiency. We suggest several reasons why this prediction fails. Keywords are poor information of costs, production-oriented drive, tight factor markets and soft budget constraints.

• Item Type: MPRA Paper
• Language: English
• Keywords: Public Hospitals; Financing; Efficiency; DEA Scores; Panel Data; Norway
• Subjects: I - Health, Education, and Welfare > I1 - Health > I11 - Analysis of Health Care Markets; L - Industrial Organization > L3 - Nonprofit Organizations and Public Enterprise > L32 - Public Enterprises ; Public-Private Enterprises; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; I - Health, Education, and Welfare > I1 - Health > I18 - Government Policy ; Regulation ; Public Health

References

Arellano, M., and S. Bond (1991): Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58, 277-297.

Banker, R.D., A. Charnes, and W.W. Cooper (1984): Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis. Management Science, 30, 1078-92.

Baltagi, B.H. (1980): On seemingly unrelated regressions with error components. Econometrica, 48, 1547-1551.

Baltagi, B.H. (2001): Econometric analysis of panel data. Second edition. Chichester: Wiley, 2001.

Baltagi, B.H., and Q. Li (1992): A monotonic property for iterative GLS in the two-way random effects model. Journal of Econometrics, 53, 45-51.

Biørn, E. (2001): The Efficiency of Panel Data Estimators: GLS versus Estimators Which Do Not Depend on Variance Components. Department of Economics, University of Oslo. Memorandum No. 28/2001.

Breusch, T.S. (1987): Maximum likelihood estimation of random effects models. Journal of Econometrics, 36, 383-389.

Charnes, A., W. W. Cooper, and E. Rhodes (1978): Measuring the Efficiency of Decision Making Units. European Journal of Operational Research, 2, 429-44.

Charpentier, C., and L. Samuelsson (1999): "Effekter av en sjukvårdsreform - En analys av Stockholmsmodellen". Stockholm: Nerenius och Santerus Förlag AB.

Dranove D., and M. A. Satterthwaite (2000): The industrial Organization of health care markets. In A.J. Culyer and J.P. Newhouse (ed.): Handbook of Health Economics vol. 1B, 1093-1140. Amsterdam: Elsevier Science.

Ellis, R. P. (1998): Creaming, skimping and dumping: provider competition on the intensive and extensive margins. Journal of Health Economics, 17, 537-555.

European Observatory on Health Care Systems (2000): Health Care Systems in Transition - Norway. Copenhagen: WHO Regional office for Europe.

Farrell, M.J. (1957): The measurement of productive efficiency. Journal of the Royal Statistical Society, Series A, General, 120 (3), 253-81.

Färe, R., and C. A. Knox Lovell (1978): Measuring the Technical Efficiency of Production. Journal of Economic Theory, 19, 150-62.

Gerdtham, U.-G., C. Rehnberg and M. Tambour (1999): The impact of internal markets on health care efficiency: Evidence from health care reforms in Sweden. Applied Economics, 31, 935-945.

Hadley, J., S. Zuckerman and J. Feder (1989): Profits and fiscal pressure in the Prospective Payment System: their impacts on hospitals. Inquiry, 26, 354-365

Hagen, T. P. (1997): Agenda-setting Power and Moral Hazard in Principal-Agent Relations: Evidence from Hospital Budgeting in Norway. European Journal of Political Research, 31, 287-314.

Hagen, T. P. and S. M. Nerland (2001): Sykehuslegenes oppfatning av ISF: Kartlegging basert på en spørreundersøkelse. Working paper 2001:3. Oslo: Center for Health Administration, University of Oslo.

Harris II, J., H. Ozgen and Y. Ozcan (2000): Do mergers enhance performance of hospital efficiency? Journal of Operational Research Society, 51, 801-811.

Hodgkin, D., and T. G. McGuire (1994): Payment levels and hospital response to prospective payment. Journal of Health Economics, 13, 1-29.

Hsiao, C. (1986): Analysis of Panel Data. Cambridge: Cambridge University Press.

Koen, V. (2000): Public Expenditure Reform: The Health Care Sector in the United Kingdom; OECD Economics Department Working Papers, ECO/WKP (2000)29

Kornai, J. (2001): Hardening the budget constraint: The experience of the post-socialist countries. European Economic Review, 45, 1573-1599.

LeGrand, J. (1999): Competition, Cooperation or Control? Tales from the British National Health Service. Health Affairs, 18 (3), 27-39.

Ministry of Health and Social Affairs (1995): Ventetidsgarantien – kriterier og finansiering, Stortingsmelding nr 44, 1995-96. Oslo: Statens trykning.

Newey, W. K. (1985): Generalized Method of Moments Specification Testing. Journal of Econometrics, 29, 229-256.

Newhouse, J. P. (1989): Do unprofitable patients face access problems? Health Care Financing Review, 11, 33-42

Newhouse, J. P. (1996): Reimbursing Health Plans and Health Providers: Efficiency in Production Versus Selection. Journal of Economic Literature, XXXIV, 1236-1263

Propper, C., and N. Söderlund (1998): Competition in the NHS internal market: An overview of its effects on hospital prices and costs. Health Economics, 7, 187-197.

Sevestre, P., and A. Trognon (1985): A note on autoregressive error component models. Journal of Econometrics, 28, 231-245.

Sommersguter-Reichmann, M. (2000): The impact of the Austrian hospital financing reform of hospital productivity: empirical evidence on efficiency and technology changes using a non-parametric input-based Malmquist approach. Health Care Management Science, 3, 309-321.

Tulkens, H. and P. Van den Eeckaut (1993): Non-Parametric Efficiency, Progress and Regress Measures for Panel Data: Methodological Aspects. CORE Discussion Paper no 9316. Louvain-la-Neuve: Center for Operations Research and Econometrics, Universite Catholique de Louvain.

van den Noord, P., T. P. Hagen and T. Iversen (1998): The Norwegian Health Care System. Economics Department Working Papers no. 198. Paris: OECD.

White, H. (1984): Asymptotic Theory for Econometricians. Orlando: Academic Press.

Yip, C., and K. Eggleston (2001): Provider payment reform in China: The case of hospital reimbursement in Hainan Province. Health Economics, 10, 325-339.