Gerdtham U, Löthgren M,Tambour M & Rehnberg C, (1999)

‘Internal markets and efficiency in health care: a multiple output stochastic frontier analysis’

Health Economics, 8: 151-164.

• Tests for the existence and magnitude of an effect of new reimbursement schemes on technical efficiency in Swedish health care.
• A stochastic frontier model is proposed and then empirically estimated.
• The Swedish healthcare system is financed and delivered by 26 County Councils which are politically, economically and administratively ‘independent’.
• Between 1991 and 1995, five of these Councils implemented a system of internal markets characterised by a purchaser/provider split and output-related (‘DRG’-type) reimbursement of providers.
• The authors test whether implementing output-based reimbursement affects technical efficiency.

Key results:

• Introducing output-based reimbursement was found to improve technical efficiency by 9.7% on average.
• The hypothesis of constant returns to scale in the health care production function could not be rejected.
• This implies a potential average cost saving of 9.7% as a result of a switch from budget-based to output-based reimbursement.