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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.

This study examines the relationship between health outcomes and cost inefficiency in Florida hospitals over the period 1999-2001, with health outcomes measured by risk-adjusted in-hospital mortality rates. Previous research has come to conflicting conclusions regarding the relationship between costs and health outcomes. We hypothesize that these seemingly conflicting findings are due to the fact that total cost has two components--cost that reflects the best use of resources under current circumstances and cost associated with waste or inefficiency. By isolating costs due to inefficiency, we can examine directly their relationship, if any, to hospital mortality rates, and begin to assess whether policies that create incentives for hospitals to increase efficiency have adverse effects on health outcomes. We regress an in-hospital mortality index for each hospital on a measure of the hospital's cost inefficiency, obtained from a stochastic cost frontier estimation, as well as on predicted mortality and a set of variables linked to mortality performance. Our results indicate a positive and significant relationship between a hospital's mortality performance and its inefficiency: on average, a one percentage point reduction in cost inefficiency would be associated with one fewer in-hospital death per 10,000 discharges, holding patient risk and other factors constant.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.. University of Wisconsin Press andThe Board of Regents of the University of Wisconsin System are collaborating with JSTOR to digitize, preserve and extend access to The Journal of Human Resources. ABSTRACTThis study uses data on hospital closures to examine the relation between exit and inefficiency in an industry where for-profit, not-for-profit, and government firms coexist. The likelihood of hospital exit over the period 1986-91 is estimated as a function of hospital relative inefficiency, ownership type, and other factors, where hospital relative inefficiency is measured using residuals from estimation of a stochastic frontier cost function. We find that less efficient hospitals were more likely to exit when ownership was for-profit or not-for-profit, but that relative inefficiency did not have a significant effect on the probability of exit for government hospitals. This content downloaded from 169.229.32.137 on Thu, 8 May 2014 21:46:02 PM All use subject to JSTOR Terms and ConditionsDeily, McKay, and Dorner 735 firms will be more likely to exit than more efficient firms when an industry of forprofit firms contracts, and the somewhat limited empirical work on exit supports this expectation (Baden-Fuller 1989; Deily 1991; Lieberman 1990; Schary 1991). But in an industry that also includes private not-for-profit and/or government-owned firms, the exit process may not operate in the same manner. In particular, the link between exit and inefficiency may be affected by differing firm objectives associated with ownership. It may be, for example, that not-for-profit or government-owned firms would tolerate a lower rate of return before exiting than for-profit firms (Bowen 1994). The objective of this paper is to use the hospital industry to examine how exit and inefficiency are related in an industry with mixed ownership. A major complication in such a study is the possibility that a firm's level of inefficiency may be linked to its ownership type. Suppose, for example, that private notfor-profit hospitals were more efficient but also less likely to exit; we would need to distinguish the effect of a higher level of efficiency from the effect of commitment to nonprofit goals on the exit decision.1 In this paper we estimate an exit equation in which we control separately for relative inefficiency and for ownership type on the probability that a hospital will exit. Specifically, we use inefficiency residuals from a stochastic frontier cost estimation as estimates of relative hospital inefficiency.The hospital industry provides a good test case for a study of ownership effects on exit and inefficiency. First, there are an ample number of all three types of ownership: in the 1980s, about...