Reimbursement Under Uncertainty

What to Do if One Cannot Identify an Efficient Hospital

by Joseph P. Newhouse

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This report comments on methods for identifying an efficient hospital. A direct approach to this task is to estimate frontier cost or production functions; i.e., determine hospitals that, for a given output, seem to be minimizing cost. The difficulty comes in the measurement. The existing literature usually assumes that the output of hospitals is simply patient days or stays or both, neglecting both case mix variation and the quality of the services delivered. The author concludes that the prospects for identifying efficient hospitals through direct estimation of cost and production functions are not good and that reimbursement should be partly a function of the firm's observed cost and not purely prospective.

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