The Effect of Activity-Based Financing on Hospital Efficiency: A Panel Data Analysis of DEA Efficiency Scores 1992–2000

Department of Economics, University of Oslo, PO Box 1095 Blindern, NO-0317 Oslo, Norway.
Health Care Management Science (Impact Factor: 1.05). 12/2003; 6(4):271-83. DOI: 10.1023/A:1026212820367
Source: PubMed


Activity-based financing (ABF) was implemented in the Norwegian hospital sector from 1 July 1997. A fraction of the block grant from the state to the county councils has been replaced by a matching grant depending upon the number and composition of hospital treatments. As a result of the reform, the majority of county councils have introduced activity-based contracts with their hospitals. This paper studies the effect of activity-based funding on hospital efficiency. We predict that hospital efficiency will increase because the benefit from cost-reducing efforts in terms of number of treated patients is increased under ABF as compared with global budgets. The prediction is tested using a panel data set from the period 1992-2000. Efficiency indicators are estimated by means of data envelopment analysis (DEA) with multiple inputs and outputs. Using a variety of econometric methods, we find that the introduction of ABF has improved efficiency when measured as technical efficiency according to DEA analysis. The result is less uniform with respect to the effect on cost-efficiency.

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    • "Chalkley and Malcomson already delineated a theoretical understanding of changes in the financing system for non-profit hospitals [13,14], and Biørn et al. adapted this theory to the Norwegian setting [15,16]. These models often assume a trade-off between efficiency and quality in hospital production that can be shifted by various reimbursement systems. "
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    ABSTRACT: Background Whether activity-based financing of hospitals creates incentives to treat more patients and to reduce the length of each hospital stay is an empirical question that needs investigation. This paper examines how the level of the activity-based component in the financing system of Norwegian hospitals influences the average length of hospital stays for elderly patients suffering from ischemic heart diseases. During the study period, the activity-based component changed several times due to political decisions at the national level. Methods The repeated cross-section data were extracted from the Norwegian Patient Register in the period from 2000 to 2007, and included patients with angina pectoris, congestive heart failure, and myocardial infarction. Data were analysed with a log-linear regression model at the individual level. Results The results show a significant, negative association between the level of activity-based financing and length of hospital stays for elderly patients who were suffering from ischemic heart diseases. The effect is small, but an increase of 10 percentage points in the activity-based component reduced the average length of each hospital stay by 1.28%. Conclusions In a combined financing system such as the one prevailing in Norway, hospitals appear to respond to economic incentives, but the effect of their responses on inpatient cost is relatively meagre. Our results indicate that hospitals still need to discuss guidelines for reducing hospitalisation costs and for increasing hospital activity in terms of number of patients and efficiency.
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    • "The RHAs receive an annual budget from the Norwegian Government, based on a weighted capitation formula. In addition, the RHAs receive an activity-based grant which size is proportional to the number and composition of hospital treatments [10]. The activity-based component is about 40 % of the somatic budget. "
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    ABSTRACT: Targeting hospital treatment at patients with high priority would seem to be a natural policy response to the growing gap between what can be done and what can be financed in the specialist health care sector. The paper examines the distributional consequences of this policy. 450000 elective patients are allocated to priority groups on the basis of medical guidelines developed by one of the regional health authorities in Norway. Probit models are estimated explaining priority status as a function of age, gender and socioeconomic status. Women and older people are overrepresented among patients with low priority. Conditional on age, women with low priority have lower income and less education than women with high priority. Among men below 50 years, patients with low priority have less education than patients with high priority. Targeting hospital treatment at patients with high priority, though sensible from a pure medical perspective, may have undesirable distributional consequences.
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    • "An increased share of ABF is likely to lead to higher levels of measured efficiency for two reasons. First, a high share of ABF will give stronger incentives to perform efficiently, so technical efficiency should increase (Biørn et al, 2003). Second, a high share of ABF will give incentives both to increase DRG-creep and to select patient groups with a high price/cost ratio. "
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