The impact of internal markets on health care efficiency: evidence from health care reforms in Sweden

A purchaser/provider split together with output-based reimbursement were re cently introduced by several Swedish county councils. These changes have be en motivated by arguments of efficiency and consumer choice. This paper tes ts the null hypothesis that hospital services are provided as efficiently b y county councils with internal markets and output-based reimbursement as b y county councils with budget reimbursement. We first estimate technical ef ficiency using data envelopment analysis and then we regress the efficiency scores as the dependent variable on new internal organizations in a multip le regression by use of pooled cross-section data for the 26 county council s for two years (1993 and 1994). The results reject our null hypothesis and we conclude that the organizational changes in the county councils improve health care efficiency. Our results further indicate that the potential sa vings in costs due to a hypothetical switch from budget based allocation to an output based allocation is about 13%. We also found some evidence indic ating that county councils with a nonsocialist political majority are relat ively more efficient than those with a socialist regime and that large coun ty councils are more efficient than small county councils.