Efficiency of local governments in health service delivery: A stochastic frontier analysis

The study analyzes the efficiency implications of fiscal decentralization using stochastic frontier analysis (SFA). It uses LGU health expenditure (in per capita real terms) as input. The output variables of interest include access to safe water and sanitation, health facility-based delivery, and access to hospital inpatient services. It also uses LGU income and its major components (i.e., own-source revenue and IRA, in per capita real terms) as covariates; as well as the health expenditure decentralization ratio to account for fiscal autonomy on the expenditure side and two measures of fiscal decentralization to account for financial/fiscal autonomy of the local government units (LGUs) on the income side (i.e., the ratio of LGU own-source revenue to LGU expenditures and ratio of LGU own-source revenue to LGU income) as factors affecting efficiency. The findings of SFA lend empirical evidences to what the literature says about the health devolution experience in the country. Issues on mismatch between local government fiscal capacity and devolved functions, fragmentation of health system, existence of two-track delivery system, and unclear expenditure assignments, among others inevitably create inefficiency. These issues should be addressed to fully reap the potential benefits (e.g., efficiency gains) from fiscal decentralization, particularly health devolution.