Dynamic analysis of healthcare providers’ cost efficiency

ABSTRACT

This study uses quarterly longitudinal data to examine the cost efficiency of 20 New Zealand District Health Boards between 2011 and 2018. A random-effects dynamic stochastic frontier model is applied to estimate the persistence of Health Boards’ cost efficiency while considering both observed and unobserved heterogeneity. The findings reveal that New Zealand Health Boards, on average, spent approximately 7.5% more than the estimated costs of efficient operation, primarily due to high persistence in cost inefficiency. Notably, Health Boards serving rural areas faced even higher levels of long-run cost inefficiency, resulting in an overspending of about 15% of annual budgets. The results of this study highlight that most Health Boards demonstrated excellent short-term performance relative to the long-run equilibrium level of cost inefficiency. However, the more significant concern lies in high long-run cost inefficiency within the sector attributed to structural and regulatory issues. Policymakers are urged to address these underlying problems to improve overall cost efficiency in the health sector.

KEYWORDS:

• Stochastic frontier
• dynamic cost efficiency
• New Zealand DHBs
• long-run equilibrium efficiency
• short-run efficiency

JEL CLASSIFICATION:

• D24
• C14
• C44
• C31, O56, L32

Disclosure statement

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

Notes

¹ As of September 2021, the 20 New Zealand District Health Boards (DHBs) were disestablished, and their functions were merged into Te Whatu Ora (Health New Zealand), which now leads the day-to-day running of the healthcare system for the whole country.

² The information in the table is for 2017.

³ DHBs pay 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 depreciation rate is calculated by dividing the depreciation expenditure by the total value of capital assets.

⁵ The data on treasury bond rates was obtained from the Reserve Bank of New Zealand (2019).

⁶ The price index can be accessed at Statistics New Zealand (2019).