Comparing the allocative efficiencies of hospitals

A new technique for comparing the performance of firms in controlling costs is introduced and applied to a sample of 60 hospitals. The multi-output, multi-input approach utilizes observed costs, process counts and non-controllable factors for a sample of hospitals to form peer groups to build allocative cost frontiers. The approach can be used to provide insights regarding conjectures about the relative efficiencies of various institutional types as well as the cost differentials associated with different levels of quality of care. The programming approach handles environmental factors such as case mix severity, the teaching mission of the institution, etc. Our illustrative results found an average of a 14% differential in the efficient cost between public and not-for-profits. Much better data is needed before any definitive findings can be stated, but the type of insights regarding the varying degree of separation of the cost frontiers for different levels of outputs is concretely illustrated.