Frontier methods for comparing public hospital efficiency

Abstract

This research examines the impact, if any, of the introduction of casemix funding on public hospitals in Victoria. The results reported here show that in Victoria, during the period under observation, rural hospitals showed a significantly greater preponderance, relative to metropolitan hospitals, to either amalgamate or close down. Since 1 July 1993 public hospitals in Victoria have been compared for efficiency in the delivery of their services. The casemix funding arrangements were installed, among other reasons, to improve efficiency in the delivery of hospital services. Duckett, 1999, p 107 states that under casemix funding 'The hospital therefore becomes more clearly accountable for variation in the efficiency of the services it provides'. Also, 'Generally, case-mix funding is seen as being able to yield efficiency improvements more rapidly than negotiated funding'. Hospital comparisons provide State bodies with information on how to allocate funding between hospitals by means of annual capped budgets. Budgets are capped because funding is restricted to a given number of patients that can be treated in any given year. Thus, casemix funding relies heavily on cost comparisons between hospitals, and the way that hospital output is measured relies on the use of diagnosis related groups (DRGs).