What drives the productivity growth of New Zealand district health boards: technology, efficiency, or scale?

Abstract

Using the longitudinal data on New Zealand District Health Boards (DHBs) for the period 2011-2018, the total factor productivity (TFP) change and its components are evaluated using an input distance function and a cost function. The empirical results indicate that TFP decreased at an average rate of between 0.73 and 0.98 per cent annually, mainly due to the deterioration of the technological component, which averaged close to −2 per cent between 2011 and 2018. However, contrary to the technological component, the scale component improved every year at an average rate of 1–1.16 per cent, thus cushioning some of the effects of the deteriorating technological component of the TFP. The TFP also posted a one-off positive growth in 2016, following the nationwide implementation of an ‘elective initiative’ programme in the 2015–2016 year, which raised both the scale and efficiency (technical and cost) components to their highest levels. Furthermore, the study also demonstrates the consistency in the effect of scale and technological change components on the TFP under both primal and dual approaches.

KEYWORDS:

• Stochastic frontier
• hospital efficiency
• cost efficiency
• New Zealand DHBs

7. Concluding remarks

In this study, the SFA is used to estimate and decompose the TFP growth of New Zealand DHBs for the years 2011–2018 while controlling for DHB level heterogeneity. The main findings can be summarised as follows:

1. TFP has declined at an average rate of 0.96 per cent (IDF) and 0.73 per cent (cost) between 2011 and 2018. While Nelson Marlborough DHB posted the largest average decline in TFP, Waitemata recorded the most considerable improvement in TFP between 2011 and 2018.

2. The deterioration of the technological component is the primary factor contributing to the decline of TFP overall years, except for 2016, when the increase in the scale component resulted in a one-off positive growth in TFP. The positive scale component posted every year, in addition to the occasional improvement in the inefficiency component, to some degree reduced the influence of negative technological growth on TFP.

3. Although all DHBs have experienced technological deterioration, Waikato, West Coast, Canterbury, and Southern DHBs reported the highest technological decline, whereas Hutt Valley, Tairawhiti, Whanganui and Lakes, experienced the lowest technological regress.

4. The implementation of the performance-based funding model - ‘elective initiative’ in 2016 appears to have briefly enabled DHBs to exploit the existing economies of scale and improve efficiency in the policy's first year, resulting in a one-off growth in TFP.

To conclude, the results from both primal and dual approaches are consistent and point towards a general decline in total factor productivity from 2011 to 2018. The primary determinant of the decline in total factor productivity was the technical change component, which was negative every year. In contrast, the scale component positively influenced the TFP every year. The performance-driven ‘elective initiative’ in 2016 appears to have allowed DHBs to harness existing economies of scale and improve efficiency. Regulatory authorities will need to analyze elective initiatives’ results to understand how it influences the DHB's decisions and to research what other policy initiatives can be developed, based on that experience, to boost the overall productivity of DHBs.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Where a ‘dot’ over a variable indicates its rate of change

2 At first the dynamic model was used to estimate IDF with random effects, however the value of scale elasticity and efficiency was too extreme to be consistent with the theory, therefore a static model was used instead.

3 DHBs pays capital charges to the crown every six months. The charge is based on the previous six months actual closing equity balance at 31 December and 30 June. The capital charge represents the opportunity cost of money – what the government can expect to earn in alternative investments entailing similar risk. It may be thought of as an internal rate of return on the government’s investment in its own entities.

4 The price index can be accessed at can be accessed at Statistics New Zealand (2019).

5 One FTE refers to 40 h of labour per week and is calculated based on accrual. However, a person working more than 40 h is only counted as one FTE.

6 The purchase unit is essentially a classification system used to measure and quantify a healthcare service . For more information refer to the Ministry of Health (2018b).

7 The prices of all inputs are deflated .