Accounting for Heterogeneity in the Measurement of Hospital Performance

University of Zurich Department of Economics Working Paper No. 52

20 Pages Posted: 15 Dec 2011

See all articles by Philippe K. Widmer

Philippe K. Widmer

affiliation not provided to SSRN

Peter Zweifel

University of Zurich - Department of Economics

Mehdi Farsi

University of Neuchatel - Institute for Research in Economics (IRENE)

Date Written: December 1, 2011

Abstract

With prospective payment of hospitals becoming more common, measuring their performance is gaining in importance. However, the standard cost frontier model yields biased efficiency scores because it ignores technological heterogeneity between hospitals. In this paper, efficiency scores are derived from a random intercept and an extended random parameter frontier model, designed to overcome the problem of unobserved heterogeneity in stochastic frontier analysis. Using a sample of 100 Swiss hospitals covering the years 2004 to 2007 and applying Bayesian inference, significant heterogeneity is found, suggesting rejection of the standard cost frontier model. Estimated inefficiency decreases even below the 14 percent reported by Hollingsworth (2008) for European countries. Accounting for unobserved heterogeneity would make hospitals rated below 85 percent efficiency according to the standard model gain up to 12 percentage points, serving to highlight the importance of heterogeneity correction in the estimation of hospital performance.

Keywords: Hospital efficiency, unobserved heterogeneity, Bayesian inference, Switzerland, Stochastic Frontier Analysis

JEL Classification: C11, C33, D24, I18

Suggested Citation

Widmer, Philippe K. and Zweifel, Peter and Farsi, Mehdi, Accounting for Heterogeneity in the Measurement of Hospital Performance (December 1, 2011). University of Zurich Department of Economics Working Paper No. 52. Available at SSRN: https://ssrn.com/abstract=1972253 or http://dx.doi.org/10.2139/ssrn.1972253

Philippe K. Widmer (Contact Author)

affiliation not provided to SSRN ( email )

Peter Zweifel

University of Zurich - Department of Economics ( email )

Zuerich
Switzerland

Mehdi Farsi

University of Neuchatel - Institute for Research in Economics (IRENE) ( email )

Pierre-à-Mazel 7
Neuchatel, 2000
Switzerland
+41 32 718 1450 (Phone)

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