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The internal market and hospital efficiency: a stochastic distance function approach

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The UK internal market was one of the first European attempts to introduce a competitive mechanism in the provision of hospital services. The assumption was that competition would have led hospitals to increase efficiency in the use of their resources. The aim of this paper is to analyse the effectiveness of this kind of reform by measuring the changes in technical efficiency of a panel of 52 acute Scottish hospitals observed from 1991/92 to 1996/97. The time period covers the whole duration of the internal market and the sample contains a different mix of both trusts and non-trusts, where the former embed the proper working of the reform. The selected model is a stochastic output distance function that includes an interaction dummy variable to allow for parameters to change over time. The results show a structural break after which hospitals change not only the way in which they provide their services, but also the kind of services they provide, favouring the quicker treatment of patients on a day basis. No significant improvement in technical efficiency is detected instead over time, nor any significant difference in efficiency between trusts and non-trusts.

Document Type: Research Article


Affiliations: Department of Economics, University of Reading, Reading Business School, UK

Publication date: 2006-10-10

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