Pricing public health care services using Data Envelopment Analysis: Methodology versus politics

The New Zealand public health sector has used DEA since 1997 to identify efficient expenditure levels to set prices for hospital services at the DRG level. Given the size of the expenditure (NZ$ 2.6 billion), considerable robustness was required for the results and sophistication of the models/process. While the model development and application appeared to be successful, politics overturned the results in the short run. In the longer term, the results have been shown to be reasonably robust and have become a base-line reference for future developments. As such, this paper reports a relatively successful transfer of theory into practice.