Health inefficiency and unobservable heterogeneity - empirical evidence from pathology services in the UK National Health Service

Pathology services are increasingly recognised as key to effective healthcare delivery - underpinning diagnosis, long-term disease management and research. To the extent that pathology services affect a patient’s treatment pathway, significant healthcare costs are influenced directly by the performance of these services. Pathology is thus closely tied to a multiplicity of other healthcare services, meaning that inefficient practice here can reverberate throughout the healthcare system. Given pressures on the UK Department of Health to make efficiency savings and that little is known about the efficiency of pathology laboratories, this area offers unlocked potential for timely efficiency gains. We measure inefficiency to identify potential efficiency savings available in these services. Inefficiency is measured by applying Stochastic Frontiers to a panel of 57 laboratories over a five year period. Panel data techniques can account for unobservable heterogeneity and we use a series of statistical tests to decide between models. In addition, we report the impacts of the determinants of laboratory costs, thus providing useful information to policy makers. We find 15% potential efficiency savings in pathology services in this sample, which implies £450m in monetary terms in pathology across the NHS.