Determinants of Cost Efficiency of the Hospitals in India

Topics: Economic efficiency, Marginal cost, Costs Pages: 31 (9422 words) Published: July 3, 2011
Reprinted from

Journal of Quantitative Economics
Vol. 5 No. 2, July 2007, page 95-115

Abstract The main objective of this paper is to analyze the determinants of cost efficiency of public and private hospitals of Karnataka State in India. This is estimated through the parametric (stochastic frontier) and nonparametric (data envelopment) methods by using the Hospitals Facility Survey (2004) in Karnataka. The findings indicate that the choice of methods did not make any significant difference in the results and they are robust. The analysis infers that (a) hospitals (both public and private together in the analysis) are cost inefficient in the State, which is due to technical and allocative system of resources of the hospitals; (b) the private hospitals appear relatively less inefficient than the public hospitals; and (c) the main determinants of the technical and allocative inefficiencies of the public hospitals are inappropriate interventions of inpatient days care, share of medical personnel, beds capacity, quality indices, and choice of the locations; while in the case of private hospitals, it relates only to beds capacity and quality indices. It emphasizes that hospitals need to maintain the quality of healthcare services under the emerging competitive environment in the State; otherwise, it would be subject to financial vulnerability since private hospitals highly depend on the user fee payment of the patients. Need based financing through “capitation fee” and an effective alternative payment mechanisms such as user fee with a protected social justice criteria for poor in the public hospitals are the worth considering options in the State. Keywords: Hospital costs efficiency, stochastic frontier, data envelopment JEL classification: I1, I12, I18

1. Introduction
‘Hospital’ is an economic institution with a social role in the community. Cost of providing hospital care services is very important under the scarce resources of health sector in developing countries like India. The national average expenditure on hospital and dispensaries of revenue account in India was around 43.99 per cent in 1950-51, which had been reduced to 25.75 per 1

Research Fellow, Institute of South Asian Studies, National University of Singapore, 469A Tower Block, Bukit Timah Road, #07-01, Singapore-259770, Email:, I am thankful to anonymous reviewer of this paper. An earlier draft version of the paper was presented at the 35th Australian Conference for Economists, Perth, Australia, September 25-29, 2006.



cent in 1994-95 and 15.76 per cent in 2003-04 respectively.2 This same trend has been reflected at the State levels with significant variations. The highest proportion had been reported in Tamil Nadu State, which accounted for nearly 65.17 per cent in 1950-51 and had reduced to 43.52 per cent in 1994-95. It is imperative to note that Karnataka State, which is the focus of this paper, reported the second highest proportion spent on hospital and dispensaries. It accounted for nearly 63.04 per cent in 1950-51 and it had been drastically reduced to 22.91 per cent in 199495. It may be due to shift in the government policies towards healthcare delivery system in India. A low share of total hospital resources suggests that the government has emphasized on primary healthcare and their concern in reaching the rural population. It confirms from the recent estimation that for almost seven years between 1997-98 and 2003-04, spending on primary healthcare level by the Karnataka State remained fairly stable, which accounted to nearly 55 per cent (Mathiyazhagan, 2004a, 2004b). Though the share of tertiary level healthcare has increased from 27 per cent in 1997-98 to 34 per cent in 2003-04, there was a sharp decline in the share of spending on...
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