Health care regulation and the operating efficiency of hospitals: Evidence from Taiwan
Introduction
The increasing cost of health care delivery has become a worldwide phenomenon. It has begun to raise concerns in parts of both the developed and the developing world. The rise in public and political debate over increasing costs and the demand for universal access has led policy makers and providers to encourage hospital cost control. Current debates, such as the one in the United States over “universal health coverage”, also raise questions about their impact on hospital operating efficiency and the costs of health care delivery (Scott, 1999, Weil, 1992). In March 1995, Taiwan implemented a policy of “universal health coverage”, commonly known as National Health Insurance (henceforth NHI). The introduction of universal coverage in Taiwan and the availability of data provide a unique opportunity to investigate changes in hospital operating efficiencies consequent to such a regulatory intervention using recent data. This issue is particularly important given that there is a need for “…additional research on methods for assessing the efficiency and effectiveness of hospitals.” (Mensah, 2000).
While there are many settings in which the cost impact of a regulatory intervention has been examined such as in Soderstrom (1993), few have considered the importance of using relative performance evaluation approach to assessing regulatory impacts. Specifically, it is necessary to measure and evaluate the relative efficiency (or inefficiency) of hospitals, and to assess changes in the performance of hospitals following the implementation of universal health coverage. Traditionally, the parametric frontier cost model has been used to estimate relative efficiencies in the hospital sector (Zuckerman et al., 1994). However, input cost and output price data are often times susceptible to wide variations and managerial manipulations across comparable units. Hence, efficiency measures based on physical inputs and outputs often provide a better assessment of relative efficiency by abstracting away from costs and prices. Also, in many instances, as in the case of Taiwan hospitals, cost and price data are not easily available to researchers. Thus, to overcome some of the limitations of parametric model specifications1 and the lack of cost data, we use the non-parametric Data Envelopment Analysis (DEA) that uses the input-output correspondence to estimate hospital efficiencies. These efficiencies are estimated for the sample of Taiwan hospitals both before and after the implementation of the NHI program. Banker et al., 1986, Banker et al., 1989 show that the DEA method is particularly well suited for measuring relative performance evaluation across a cross-section of health care organizations.
In assessing the impact of universal coverage on hospital operating efficiency, we also control for cross-sectional differences in operational efficiencies between pre- and post-implementation of NHI that may be attributable to some key underlying efficiency drivers. For example, organizational factors such as hospital ownership may affect the level of production efficiency since different ownership patterns create different incentives for managers. In a similar fashion, the more severely ill patients are more costly to treat and therefore one would expect that the average resource usage per discharge would be higher in hospitals that treat proportionately more severe patients. Our cross-sectional model examining variations in operating efficiency thus controls for such variables, to eliminate their possible confounding effect on changes in efficiency before and after the NHI program. This latter aspect is important since a common criticism of efficiency comparisons across hospitals has been that they do not adequately control for efficiency drivers such as differences in operational and case-mix factors.
Another interesting feature of this paper is our focus on a specific type of hospitals. Hospitals in Taiwan have been grouped into three main categories i.e., medical centers, regional hospitals, and district hospitals. The payment systems for similar types of services between health care providers at different hospital levels are different (Department of Health, Taiwan 1997, p. 97). Under the uniform payment system introduced as part of NHI, payments are homogeneous within hospital categories but differ across categories. District hospitals, for example, received a relatively low payment compared to regional hospitals and medical centers for a similar type of service. It is also possible that the nature of cases and patient types vary by hospital categories, with more severe patients from district hospitals being referred to regional hospitals or medical centers. Thus pooling hospitals across different categories may sacrifice homogeneity assumptions, since each category may have a different production function. To ensure homogeneity, we use the hospital classification scheme under the NHI. Of the three types of hospitals, the district hospitals comprise the largest number of health care service providers in Taiwan. The number of hospitals classified as regional hospitals and medical centers are relatively small. To avoid concerns regarding asymptotic properties of DEA estimators for small samples, this paper focuses only on district hospitals in Taiwan.
While this study also builds on earlier studies that assess the relative efficiency of health care providers, our primary contribution is assessing the impact of a public policy i.e., universal health insurance on hospital operating efficiency. Prior research in the health care sector has not yet examined this issue, particularly in an international context.2 Using data over three years surrounding but excluding the year of NHI implementation (year 1995), the results in this paper show that efficiency of district hospitals in Taiwan deteriorated after the implementation of the NHI program. This result, which is contrary to commonly held beliefs, is obtained even after controlling for hospital specific characteristics that impact operational efficiency.
The remainder of this paper is organized as follows. In the next section, we discuss the health insurance systems in Taiwan, including the context of the National Health Insurance program and the economic consequences for hospital efficiency. Section 3 describes the data, and discusses measurement of efficiency and the control variables used in the study. Section 4 presents and discusses empirical results. In Section 5 we conclude the paper.
Section snippets
Institutional background
Prior to the adoption of the National Health Insurance Program in 1995, about 60% of the population in Taiwan was covered by 13 health insurance schemes (Department of Health, Taiwan, 1994). The remainder of the population paid for treatments obtained. To care for the health of people, Taiwan government set up a planning committee under the Council for Economic Planning and Development in 1988 to draft mandatory and universal health insurance coverage called National Health Insurance Program
Description of data
In order to guide its policy for the development of medical manpower and facilities, the Department of Health in Taiwan conducts an annual survey of all hospitals. At the end of 1996, there were 773 hospitals in the Taiwan Area of which 578 hospitals were accredited.4 Included in the survey are physical items such as number of physicians, number of
Summary statistics
Table 1 provides the descriptive statistics on the inputs and outputs of sample district hospitals. Both the average number of patient beds and the average number of nurses had increased in the post-NHI period. This indicates that health care providers increased input levels anticipating an increase in health care service demand. Similarly, with the exception of patient days, all other outputs have also increased in the post-NHI period. One possible explanation for this is that strict
Concluding remarks and public policy implications
In this paper, we use the non-parametric DEA approach to assess the impact of a public policy/regulatory intervention (i.e., the National Health Insurance Program of Taiwan) on the operating efficiency of district hospital units. Since the NHI program increased the coverage rate substantially, a commonly held belief is that operational efficiency in the post-NHI period will increase. This belief is also consistent with the pattern of increasing efficiency during the pre-NHI period documented in
Acknowledgments
We are grateful to Mark Anderson, Rajiv Banker, Peter Chalos, Leslie Eldenburg, Dana Fargione, Marty Loeb (Editor), Sumit Majumdar, Raj Mashruwala, Jimmy Tsay, two anonymous reviewers and participants at the Annual Meetings of the American Accounting Association for their comments and suggestions. We are also thankful to Jia-Chi Shiau and Sheng-Cheng Yang from the Directorate-General of Budgets, Accounting and Statistics, the Executive Yuan-Taiwan, and Chin-Ho Lin from the Legislative
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