Internal markets and health care efficiency: A multiple-output stochastic frontier analysis

This paper has two purposes. The first purpose is methodological and aims t o extend previous work on efficiency analysis by implementing a multiple-ou tput stochastic ray frontier production function model. This model generali zes the single-output stochastic frontier model to multiple-input, multiple -output technologies and allows simultaneous estimation of technical effici ency and analysis of influential variables on efficiency. The second, empir ical, purpose is to test for existence and magnitude of the effect of purch aser/provider split combined with new reimbursement schemes on technical ef ficiency in the Swedish public hospital system. The analysis is carried out with a panel data set covering the total population of 26 Swedish County C ouncils from 1989 to 1995. Our empirical results support the frontier model specification and indicate that output-based reimbursement improves techni cal efficiency. The potential saving in costs due to a switch from budget-b ased allocation to output-based allocation is estimated to be almost 10%. C opyright (C) 1999 John Wiley & Sons, Ltd.