An Empirical Investigation of Cost Efficiencies in the Health Care Industry
Choi, Jeong Hoon
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This dissertation work is motivated by the need of hospitals to address efficiency issues confronting health care reforms in the present environment. The main objective is to investigate the cost efficiency of hospitals using various methods and variables, and compare the results estimated by the different methods and variables. This dissertation consists of three parts, addressing: (1) Cost efficiency of hospitals in the U.S. between 1996 and 2008; (2) Cost efficiency of hospitals with quality issues: Using data envelopment analysis (DEA) method; and (3) Cost efficiencies and scope and scale economies of U.S. hospitals. The first essay aims to formulate the frontier approach to measure the cost efficiencies of hospitals in the U.S. The frontier methods are mainly divided into two major approaches: the econometric approach (Stochastic Cost Frontier Approach: SCFA) and the mathematical approach (Data Envelopment Analysis: DEA). This essay applies both SCFA and DEA for measuring the cost efficiency of hospitals, and analyzes the results by tracking the trend of cost efficiency and by grouping hospitals by a number of criteria such as control type, region, and size. This study investigates a longitudinal panel data set of 1,878 hospitals over 13 years in the period of 1996–2008. This first essay indicates that a discrepancy between results from DEA and SCFA exists in the cost efficiency measurement. This study also finds that the annual trend of cost efficiency is not increasing over the years in a majority of cases and, hence, supports the so-called Baumol effect which anticipates that the soaring labor price is likely to stem cost efficiency growth in labor-intensive industries including the health care industry. The second essay aims to focus more on the DEA method to measure cost efficiencies of hospitals by adding outcome factors as output variables. This second study employs a cross-sectional data of 1,872 hospitals in 2008. The results support the general view of hospital classification by control types and size, and find that regional differences have faded in recent years. The inclusion of quality variables generates different results between the models. These differences among cases verify the significance of quality factors as output variables in the efficiency measurement studies in the health care industry. The final essay attempts to attest how external variables affect the cost efficiencies of hospitals. This study applies a three-stage procedure to capture dynamic features of cost efficiencies of hospitals. For this, this study introduces the generalized two-equation translog cost function model, and shows how to estimate economies of scale and scope of hospitals. This study also examines the impacts of scale and scope economies on cost efficiencies using Tobit Regression. This study finds that the inclusion of the external factors makes differences between the means of cost efficiencies. The main contributions of this dissertation are expected to be, but not limited to: (1) the formulation of the SCFA and DEA methods to measure the cost efficiency of hospitals; (2) filling the dearth of large-scale comparative studies between the SCFA and DEA methods; (3) testing empirically the so-called Baumol effect which addresses the problem that highly labor-intensive industries such as the health care may hardly attain efficiency growth, (4) applying different SCFA and DEA models and compare them; and (5) considering quality or external factors to affect the cost efficiencies of hospitals.