Technical efficiency and the competitive behavior of hospitals

This paper examines whether the competitive behavior of hospitals influences the extent to which their productive efficiency deviates from best-practice standards. An index of technical inefficiency is constructed by means of Data Envelopment Analysis (DEA) for 189 acute-care hospitals in the State of Florida in 1989. A regression model is then specified that estimates the impact of competitive dynamics in local hospital markets over the period 1982–1988 on these 1989 DEA efficiency scores, controlling for a set uf internal and external constraints on managerial decision making. Among other things, the empirical analysis shows that these ratings are systematically accounted for by both the nature and vigor of hospital competition, with price leaders in highly competitive markets in particular shown to be more efficient. The public policy implications of these findings are discussed.