The Productive Efficiency of Health Care Institutions: An Application of Chinese Hospitals

1. The Productive Efficiency of Health Care Institutions: An Application of Chinese Hospitals Ying Chu NG Department of Economics Hong Kong Baptist University Hong Kong, CHINA Presented at The 7th International Conference on Data Envelopment Analysis Fox School of Business, Temple University Philadelphia, PA, USA July 10-12, 2009

2. Background • National expenditure on health care in China has been increasing over the years: 3.17% of GDP in 1980; 3.86% of GDP in 1995; 5.5% of GDP in 2004 • Decline in government’s contribution to health care provision: 30% in the late 1980s to 15% in 2002 • Rise in individual’s out-of-pocket health care payment: 21% in 1990 to 50% in 2006

3. Background • Health care reform since mid 1980s • Fall in government subsidies • Greater autonomy to generate, retain and manage surplus revenue of health care providers • Over-prescribing drugs and tests; adopting high-tech medical treatments (drug sales contribute nearly 50% of hospitals’ income) Improvement in efficiency and quality induced by market and economic incentives may be undermined by revenue generation imperative

4. Objectives • How efficient are Chinese hospitals in the post-reform period? • Any change in the productivity of Chinese hospitals? • DEA efficiency measures and Malmquist Indices

5. Hospital Efficiency and Productivity Growth See review studies by • Hollingsworth (2003, 2008) • Worthington (2004) • O’Neill, Rauner, Heidenberger and Kraus (2008) • Emrouznejad, Parker, Barnett and Tavares (2008)

6. Methodology - DEA • Input-oriented technical efficiency (TE) measures • Overall TE (CRS) • Scale efficiency • Pure TE (VRS) • Malmquist productivity indices • Productivity change • Efficiency change • Technical change

7. Data • 537 hospitals in the Guangdong province of China for the period 2004-2006 • 304 in Pearl River Delta region • 51 in the eastern region • 94 in the western region • 88 in the mountain area • 2 outputs: outpatient cases and inpatient cases • 5 inputs: the number of doctors; the number of nurses; the number of pharmacists; the number of other medical staff and administrative workers; the number of beds

8. Table I Hospital Inputs by Region, 2004-06

10. Note: Standard errors are in parenthesis.

11. Table II Hospital Outputs by Region, 2004-06 Note: Standard errors are in parenthesis.

12. Table III Efficiency Measures by Region, 2004-06

13. Hospital Efficiency • Hospitals in the Pearl River Delta are relatively efficient while hospitals in the west are relatively inefficient • About 20%-40% of inputs would be required to produce existing outputs had hospitals been efficient • Improvement in overall efficiency between 2004 and 2006

14. Hospital Efficiency • Pure technical inefficiency is the primary source of inefficiency • However, improvement in overall efficiency stems from improvement in pure technical efficiency for the studied period • Except hospitals in the west, scale inefficiency is relatively less serious as compared to pure technical inefficiency

15. Hospital Productivity Change • The Malmquist indices show that there are productivity growth of hospitals in Guangdong between 2004 and 2006 • West: growth in 2004-05 and 2005-06Pearl River Delta and mountain areas: growth in 2004-05 but deterioration in 2005-06East: low growth in 2004-05 and 2005-06

16. Table IV Malmquist Productivity Index and Its Decomposition by Region, 2004-06 Table IV Malmquist Productivity Index and Its Decomposition by Region, 2004-06

18. Hospital Productivity Change • Productivity growth of hospitals originates from efficiency improvement which outweighs technological regression • Technological improvement happens in 2004-05 while there is substantial regression in 2005-06 • Change in efficiency echoes the yearly efficiency measures presented in Table III • Efficiency improvement mainly results from pure technical efficiency change

19. Concluding Remarks • Guangdong hospitals suffer technical inefficiency with improvement over time for the studied period • The efficiency performance of this sampled hospitals is far below those found in the literature • Nevertheless, health care reform in China probably exert some positive effect on hospital efficiency

20. Concluding Remarks • Overall productivity growth experiencing by the Guangdong hospitals is in line with those found in European studies • Same as hospitals in Ukraine and South Africa, hospitals in Guangdong face technological regression • It is suspected that efficient hospitals become less efficient while inefficient hospitals show improvement, leading to an inward shift of the froniter

21. Concluding Rewards • Good performers are found in the most developed region as well as the remote area, and thus economic environment may not be too important to the performance of Guangdong hospitals • Limitations • Issue of case-mix in hospital services • Generalization of the results to China as a whole • Variation by hospital type

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