Estimating the cost and technical efficiency of Norwegian hospitals: An application of stochastic frontier analysis

Background: Despite multiple reforms in the Norwegian health care sector with the aim of cost containment and improving efficiency in the sector, health care expenditure appear to be on the rise. This study seeks to investigate the cost and technical efficiency of Norwegian hospitals as well as the impact of technical and allocative inefficiency on total cost of the hospitals. Methods: We used stochastic frontier analysis and a 13 year panel data on nineteen hospitals to estimate inefficiency of the hospitals. Based on the assumption of cost minimization behavior of hospitals which allows for the dual estimation of production and cost functions, we decomposed inefficiency into technical and allocative inefficiencies and further estimated the impact of both inefficiencies on total cost. Diagnosis related group scores on patients treatment was used as the output variable whiles Physicians, Nurses/ Supporting Staff and Other inputs and their corresponding prices were used as the input variables. Results: The observed technical efficiency (inefficiency) of Norwegian hospitals was 88.4 %. (11.6%). The impact of technical inefficiency on total cost was 12.3% whiles the impact of allocative inefficiency on total cost was 0.5%. The observed Total cost efficiency (inefficiency) of the hospitals was 87.1% (12.3%). Observation specific values of allocative inefficiency indicated that 54.3% of all hospitals under-utilized Nurses/SS relative to Physicians whiles 46.7% over utilized Other inputs relative to Physicians. Conclusion: Our estimates of efficiency (inefficiency) show that Norwegian hospitals are not operating on both the technically efficient health care production frontier and optimal total cost frontier.