Estimating Technical Efficiency in the Hospital Sector with Panel Data: A Comparison of Parametric and Non-Parametric Techniques

Background: Policy makers are increasingly interested in developing performance indicators that measure hospital efficiency. These indicators may give the purchasers of health services an additional regulatory tool to contain health expenditure. Objective: Using panel data, this study compares different parametric (econometric) and non-parametric (linear programming) techniques for the measurement of a hospital's technical efficiency. Method: This comparison was made using a sample of 17 Italian hospitals in the years 1996-9. Results: Highest correlations are found in the efficiency scores between the non-parametric data envelopment analysis under the constant returns to scale assumption (DEA-CRS) and several parametric models. Correlation reduces markedly when using more flexible non-parametric specifications such as data envelopment analysis under the variable returns to scale assumption (DEA-VRS) and the free disposal hull (FDH) model. Correlation also generally reduces when moving from one output to two-output specifications. Conclusions: This analysis suggests that there is scope for developing performance indicators at hospital level using panel data, but it is important that extensive sensitivity analysis is carried out if purchasers wish to make use of these indicators in practice.