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

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 A fraction (30 to 50 per cent) of the block grant from the state to the county councils has been replaced by a matching grant depending upon the number and composition of hospital treatments.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.