The French hospital industry is one example of a market where public, private nonprofit and private for-profit hospitals co-exist in significant proportions. Recently, several administrative reports have shown that in France public and private nonprofit hospitals are more costly than for-profit hospitals, suggesting that productivity is rather low for the former. Defenders of public and nonprofit hospitals argue that this productivity gap is related to their mandate to deliver hospital care in relation to social welfare considerations. The purpose of this paper is to examine to what extent differences in stay composition might explain productivity differences between public, private nonprofit and private for-profit hospitals. The model of yardstick competition supposes that hospitals are identical and that any heterogeneity in cost for a stay in a given DRG derives from heterogeneity in cost reduction efforts provided by hospitals' managers. Actually, there are many other sources of cost heterogeneity, such as quality of care, patient characteristics, returns to scale, and scope economies. Dealing with adverse selection due to hospital heterogeneity is an important issue on the research agenda. However, most of the literature focuses on reimbursement of stays in a given DRG, without paying attention to the potential influence of the composition of stays that form the whole hospital activity. In order to satisfy needs, many governments put mandates on some hospitals (public or nonprofit) that are not shared by their for-profit counterparts. Should payments be adjusted for differences in the hospital production composition? This issue is of major importance when yardstick competition is implemented between hospitals with different mandates. In France, a prospective payment system with a fixed payment per stay was introduced in 2004 for all hospitals. Two payment schedules are used, one for nonprofit hospitals, one for private for profit hospitals. Currently, payments per stay in a given DRG are on average 27 % higher in the public and nonprofit sector. The current government is planning convergence of payments between the nonprofit and for profit sectors by 2018. Our purpose is to question the relevance of the convergence objective by analyzing the causes of productivity differences between hospital types. We use quasi-exhaustive information from an administrative file recording stays for acute care. The empirical analysis is performed on a panel of 1,604 French hospitals observed over the years 1998 to 2003: 642 are public, 126 private nonprofit and 836 private for-profit. For the year 2003, this database represents more than 13 millions stays, covering about 90 % of total discharges. Using a stochastic production frontier approach combined with hospital fixed effects, we find that the lower productivity of public hospitals is not explained by inefficiency (distance to the frontier), but oversized establishments, patient characteristics (severity) and production characteristics (proportion of surgical stays). Once patient and production characteristics are taken into account, public hospitals appear to be more efficient than private hospitals. As a result, payment convergence would provide incentives for public hospitals to modify the types of care they supply.
