Heterogeneity in Hospitals' Responses to a Financial Reform: A Random Coefficient Analysis of the Impact of Activity-Based Financing on Efficiency in Norway

Abstract

We study the heterogeneous response of hospitals to a change of revenue system. First, two efficiency measures, Technical efficiency (TE) and Cost-efficiency (CE) are constructed by means of Data Envelopment Analysis (DEA). Second, the heterogeneity in the impact of introducing Activity Based Financing (ABF) on hospital-specific efficiency in Norway at the middle of the 1990s is estimated. A study of heterogeneous response requires data for individual hospitals of a certain time-series length, which are often unavailable. Often data only exist for two years, one pre-reform year and one year after the reform has been effective for some time. In the present study, we in particular seek to take advantage of the 10-year/47-hospital structure of our data set in the following way: After having estimated, or predicted, the response coefficients we make their sample distribution subject to a statistical investigation jointly with the sample distribution of the efficiency measures. Hence, we are not interested in 'average effects' of the responses and not only in heterogeneity in the intercept of the equations. Accordingly, heterogeneity in this study refers to both intercept heterogeneity and heterogeneity in slope coefficients. In particular we examine (i) whether there is a systematic pattern in the ranking numbers of the year-specific efficiencies and the ABF coefficients and (ii) whether we can find support for the hypotheses that the hospitals with the lowest pre-ABF efficiency had the strongest response, or to its converse. Our theory-model predicts ambiguous signs for these effects. The rank correlation shifts positively at about the time when ABF was imposed on the hospitals. A closer investigation of the ranking numbers and the quartiles of the distributions give somewhat mixed results. They depend on the efficiency indicator considered, whether estimated or predicted coefficients are used, and whether we look at the absolute efficiency or its ranking number. Overall, it is in the technical-efficiency measures that an improvement in efficiency from the year when ABF came into effect can be most easily detected.

Keywords: Health econometrics, Panel data, Hospital efficiency, Activity-based financing.

JEL Classification: C23, C33, H51, I12, I18