Measurement and sources of overall and input inefficiencies: Evidences and implications in hospital services

Traditional data envelopment analysis (DEA) focuses exclusively on measuring the overall efficiency of a decision making unit (DMU). Yet, variables that have explanatory power for the overall operational inefficiency of a DMU may not necessarily be the same as those that affect its individual input inefficiencies. On many occasions, variables that explain the overall inefficiency of a DMU can be inconsistent or incongruent with those that cause its individual input inefficiencies. Therefore, we conjecture that an overall inefficiency score alone may have limited value for decision making since such a process requires fine-tuning and adjustments of specific input factors of the DMU in order to maximize its overall efficiency. In this paper, the utilization and financial data of a set of hospitals in California is used to empirically test the above conjecture. Our study has several important contributions and practical implications. First, we fine-tune previous efficiency measures on hospitals by refining input and output measures. Second, with variables on organization, management, demographics, and market competition, we identify specific factors associated with a hospital's overall operational inefficiency. More importantly, by decomposing the overall DEA operational inefficiency score into different individual input inefficiencies (including slacks), we further identify specific variables that cause individual input inefficiency. Third, significant differences are observed among factors of the overall inefficiency and individual input inefficiencies. These findings have important implications for identifying congruent factors for performance standard setting and evaluation; it also provides invaluable information for guiding effective resource allocation and better decision making for improving hospital operational efficiency.