Cost inefficiency and hospital health outcomes

This study explores the association between cost inefficiency and health outcomes in a national sample of acute‐care hospitals in the US over the period 1999–2001, with health outcomes being measured by both mortality and complications rates. The empirical analysis examines health outcomes as a function of cost inefficiency and other determinants of outcomes, using stochastic frontier analysis to obtain hospital cost inefficiency scores. The results showed no systematic pattern of association between cost inefficiency and hospital health outcomes; the basic results were unchanged regardless of whether cost inefficiency was measured with or without using instrumental variables. The analysis also indicated, however, that the association between cost inefficiency and health outcomes may vary substantially across geographical regions. The study highlights the importance of distinguishing between ‘good’ costs that reflect the efficient use of resources and ‘bad’ costs that stem from waste and other forms of inefficiency. In particular, the study's results suggest that hospital programs focused on reducing cost inefficiency are unlikely to be associated with worsened hospital‐level mortality or complications rates, while, on the other hand, across‐the‐board reductions in cost could well have adverse consequences on health outcomes by reducing efficient as well as inefficient costs. Copyright © 2007 John Wiley & Sons, Ltd.