Hospital Competition, Technical Efficiency, and Quality

Melbourne Institute Working Paper No. 16/09

Date: June 2009


C. L. Chua
A. Palangkaraya
J. Yong


This paper studies the link between competition and technical efficiency of public hospitals in the State of Victoria, Australia by accounting both quantity and quality of hospital output using a two-stage semi-parametric model of hospital production and Data Envelopment Analysis. On the one hand, it finds a positive relationship between efficiency and competition measured by the Hirschman-Herfindahl Index (HHI). On the other, it finds that efficiency and the number of competing hospitals, in particular the number of competing private hospitals, to be negatively correlated. More importantly, it finds that whether or not quality is treated as an endogenous output variable, as opposed to as an exogenous control variable, may impact on the statistical estimates of the link between efficiency and competition. Also, how the effect of competition on efficiency is modelled empirically may matter, though the impact of the treatment of quality as described above appears to be more important. Overall, the results highlight the importance of quality consideration in assessing the effects of competition on efficiency and points to possibly undesirable resource allocation effects when public hospitals are made to compete with a large number of private hospitals.

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