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Determinants of Cost Efficiency of the Hospitals in India

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Determinants of Cost Efficiency of the Hospitals in India
Reprinted from

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

DETERMINANTS OF COST EFFICIENCY OF PUBLIC AND PRIVATE HOSPITALS OF KARNATAKA STATE IN INDIA
MAATHAI K. MATHIYAZHAGAN1
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


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