The impact of quality and efficiency on federal healthcare

This study evaluates the efficiency of hospitals in the USA and incorporates quality as a new measure to identify the 'value frontier' of federal healthcare services. It analyses the technical efficiency of federal hospitals using a variable returns to scale, input oriented, Data Envelopment Analysis (DEA) methodology. Data for 157 federal hospitals in 1997 and 175 in 2000 were analysed using DEA to measure hospital efficiency. Results indicate overall efficiency in federal hospitals improved from 65% in 1997 to 68% in 2000. At the macroeconomic level this is important because it indicates that value associated with expenditures in the federal hospital industry is increasing. The study has policy implications because many federal hospitals are facing potential budget cuts or closure due to limited healthcare resources. This article provides an innovative approach to measuring cost and quality as the federal government attempts to realign scarce healthcare resources.