Hospital expenditures have been growing rapidly in many developed economies, putting increasing pressure on public finances. In this environment, improving the productivity and efficiency of hospitals is an attractive option for policymakers. A new study, An Examination of Public Hospital Productivity and its Persistence: An Index Number Approach, published in The Australian Economic Review on 13 April 2020 by PCHSS’ Professor Tony Scott and Associate Professor Jongsay Yong and colleagues documents the level and changes in the productivity of public hospitals over time in Victoria, Australia, using the concept of total factor productivity (TFP). TFP measures productivity of a hospital by comparing outputs produced by hospitals (meaning patient care, such as in-patient admissions, emergency department presentations, mental health episodes) against inputs used. Hospital inputs include resources like labour (e.g. doctors’ and nurses’ hours), capital investment (e.g. buildings and equipment) and materials (pharmaceuticals, prosthesis, etc.).
The authors examined productivity level and productivity growth. The former measures the production capability of hospitals to convert inputs (resources) into outputs (patient care), while the latter measures the change in this capability over time. Using the level and growth measures, this paper tracked the changes in productivity of Victorian public hospitals from 2007–08 to 2011–12.
Overall, the study found that over that five-year period, Victorian public hospitals were less able to convert resources into patient care. Previous studies have found the same results for hospitals in the UK and in the United States. The study also found substantial differences in productivity across public hospitals in Victoria. For example, hospitals in the top 20% for productivity level were almost five times more productive than those in the bottom 20%. This difference was closely related to hospital size: Large hospitals consistently outperformed small hospitals both in productivity levels and growth. However, even between hospitals of the same size, substantial variation in productivity existed.
The findings suggest that the operation of small hospitals would be an area of focus for policymakers. A policy option that deserves investigation is facilitating mergers of small hospitals in close proximity to each other. However, it is worth noting that small hospitals are usually located in geographically remote areas serving specific communities and with specific roles and functions. They are likely to be organised quite differently from large hospitals or from small hospitals in populated areas.
Of equal importance is to understand why hospitals of similar size differ in their productivity levels. An issue deserving of further investigation is the extent to which productivity heterogeneity could be attributed to data artefacts, since our data on outputs does not include teaching and research, which are relevant for large hospitals, and outpatient care, thus possibly resulting in underestimation of output for small hospitals.