Efficiency of Health Care Services

8/13/2023
 What is efficiency?
▪ We want the health system to be
efficient.

▪ Policy makers often suggest

interventions to improve efficiency of
health care organizations.

▪ People may actually imply different

things when they talk about efficiency.
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 Efficiency
Maximise benefits for given resources

Countries with highest health care expenditure per

capita are not necessarily those with healthiest
populations.

For example, in 2007, per capita health expenditure in

the United States was 2.7 times that in Japan, but
health adjusted life expectancy in Japan was 6
years longer than that in the United States (WHO,
2010).
Inefficient use of health system resources poses serious concerns, for a
number of reasons:

• It may limit health gains for patients who have received treatment,
because they do not receive the best possible care available within the
health system’s resource limits.

• By consuming excess resources, inefficient treatment may deny

treatment to other patients who could have benefited from treatment had
resources been better used.

• Inefficient use of resources in the health sector may sacrifice

consumption opportunities elsewhere in the economy, such as education.

• Particularly in higher income countries where public sources dominate

funding for health, suboptimal use of resources may reduce society’s
willingness to contribute to the funding of health services, thereby
harming social solidarity, health system performance and social welfare.
Efficiency, the relationships between
costs & benefits
 What is efficiency?
The term efficiency is used by
economists to consider the extent to
which decisions relating to the
allocation of limited resources
maximizes the benefits for society and
has been defined as ‘maximizing well-
being at the least cost to society

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 What is efficiency
• A measure of performance
• Identifies resources used to create health
care products
• Efficiency considers both inputs and
outputs

▪ An efficient provider
• Maximizes output for a given set of inputs

• Minimizes input for a given set of outputs

 The concept of efficiency embraces
inputs (costs) and outputs and/ or
outcomes (benefits) and the
relationship between them, with a
society being judged in efficiency
terms by the extent to which it
maximizes the benefits for its
population, given the resources at its
disposal.
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 Aspects of efficiency
There are a number of aspects of efficiency
we should consider

▪ Technical efficiency
▪ Productive efficiency.
▪ Allocative efficiency.
▪ Social efficiency.

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 Technical efficiency?
The simplest notion of efficiency is the one
synonymous with economy, and is often
referred to as efficiency savings, where
output is expected to be maintained, while at
the same time making cost reductions, or
where additional output is generated with the
same level of inputs. This type of efficiency
has been referred to as technical efficiency or
operational efficiency, but also as cost-
effectiveness
An organization achieves technical efficiency when it cannot
produce the same outputs with any fewer inputs
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 In health that means
▪ In the context of achieving health outcomes,
technical efficiency is achieved by applying
cost-effective care procedures with the least
inputs.

▪ Allocative efficiency is achieved by choosing

a set of technically efficient health programs
to yield the greatest possible health
improvements for the population.
 Productive efficiency
▪ The efficiency of a production process — that is,
productive efficiency — refers to “How well
inputs are converted into final products”.

▪ An organization achieves productive efficiency

when it cannot produce the same output at a
lower cost

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 Productivity Definitions
• Productivity is one measure of the effective use of
resources within an organization

• The classical productivity definition measures outputs

relative to the inputs needed to produce them. That is,
productivity is defined as the number of output units per
unit of input

Output
Pr oductivity=
Input
13
 Example: Technical vs. Productive Efficiency

▪ Technical Efficiency
– Hospital A has a good HIS system and staff are
able to use it well

– Hospital B has a HIS system but it is difficult to

use; staff follow old order entry process, but
now with the extra step of computer entry

Hospital A has higher technical efficiency than

Hospital B
 Example: Technical vs. Productive Efficiency

▪ Productive Efficiency
– Hospital A bought a HIS system, Hospital B did
not; Hospital A now turns around orders more
quickly

– Hospital A and Hospital C both bought a HIS

system, but Hospital A got a better deal

Hospital A has higher productive efficiency than

Hospitals B and C
Technical and Productive Efficiency Measures
Point to Different Root Causes of Efficiency

Technical Efficiency Productive Efficiency

Inputs are put to good use Inputs are put to good use

+
Best mix of inputs chosen

+
Lowest prices are paid
 Allocative
This type of efficiency exists when it is
impossible to make one person better
off without at the same time making
someone else worse off. It represents a
situation where no input and no output
can be transferred so as to make
someone better off without at the same
time making someone else worse off.
This situation is called Pareto-efficient.
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 Allocative efficiency
▪ Given the distribution of income in a society,
allocative efficiency means that it is not
possible to make one person better – off
without making at least one person worse –
off.

▪ Allocative efficiency implies both productive

efficiency and technical efficiency.

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 Social efficiency
▪ The allocative efficiency may not necessarily be the
desired one. In a situation where income is unequally
distributed, it might not be possible to improve the
situation of the poor without taxing the rich.

▪ This system may make the poor better-off at the

expense of the rich. However, it may be considered
socially just and desirable.

▪ A change is considered socially efficient if the total

benefits to the gainers outweigh the losses of the group
being made worse-off.

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 Output in health care
▪ In the measurement of efficiency, it is clear
that we need to define the output of the
system. Can we measure outputs in health
care in countable form?

▪ Output measures often used: number of

patient seen, number of in-patient hospital
days, etc. These are actually intermediate
outputs, not he final output.

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 Efficiency and distribution of output

▪ Allocative efficiency implies efficiency in

production and distribution. In health
care the equivalent situation can be
achieved if treatments are allocated to
those who will benefit most from them

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 Efficiency in distribution
▪ Horizontal target efficiency: proportion of
those needing the service who actually
receive it.

▪ Vertical target efficiency: the extent to

which services go to those who need them
rather than those who do not.

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 Target efficiency
measurement
▪ Vertical target
efficiency=D/(C+D)
– The ratio of the number of
those who needed the
treatment and got it to the
A= C D B=
number of all people who got
don’t need TREATED need it, regardless if they needed
treatment treatment it or not
▪ Horizontal target
efficiency=D/B
– The ratio of the number
of who needed the
treatment and got it to
the number of those who
needed it, whether they
got it or not

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 Measuring Efficiency
▪ Tremendous pressure exists from various stakeholders
to measure ‘efficiency’,
▪ Concern about rising health care costs
▪ Variability in intensity of resource use not associated
with better processes and outcomes
▪ Little is known about how well available metrics capture
the quantities of interest
▪ Considerable lack of common language, conceptual
clarity
▪ Little is known about the consequences (intended and
unintended) of applying those metrics at different levels
in the system
▪ How is efficiency established in an environment with
different payment methods or multiple providers like in
Palestine?
We recommend that for any efficiency
indicator, five aspects should be explicitly
considered:

▪ The entity to be assessed

▪ The outputs (or outcomes) under
consideration
▪ The inputs under consideration
▪ The external influences on attainment
▪ The links with the rest of the health system.
 Links with the rest of the system
▪ The effectiveness of preventive services will affect the
nature of demand for curative services
▪ The performance of hospital support services, such as
diagnostic departments, will affect the efficiency of
functional areas such as surgical services
▪ The actions of hospitals, for example in creating care
plans for discharged patients, may have profound
implications for primary care services
▪ The performance of rehabilitative services may have
important implications for future hospital readmissions.
Economic evaluation is

“The comparative analysis of alternative

courses of action in terms of both their
costs and consequences in order
to assist policy decisions”.

1. Costs and consequences - efficiency!

2. Comparative - relative efficiency

 Benefit Categories

Intervention

Direct Benefits Indirect Benefits

Reduced health
Improved Family and
services Savings in
patient health friends quality
resource use productivity.
status / utility. of life.
eg. LoS.
Complicating characteristics of health services

Compared with other industries, measuring efficiency in

the health sector is complicated by characteristics
specific to health and health services. This explains why
it is necessary to adapt and modify efficiency concepts
and evaluation techniques in the study of health care
efficiency.

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Complicating characteristics of health services
Market anomalies
Due to market characteristics specific to the health
sector, a proper economic perspective requires
evaluating health services in terms of health
outcomes. There are particular considerations in
relying on the market mechanism to guide the use of
cost-effective health care procedures. Typically
consumers have limited knowledge about health care.
The supply of health services is characterised by
regulation and market segmentation due to
geography, service specialty and reimbursement
arrangements.

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 Providing services versus achieving outcomes

Efficiency measures comparing resources used

against the provision of services and, alternatively,
against the achievement of health outcomes are not
necessarily consistent, as service outputs may not
vary directly with the resulting health outcomes.

For instance, a costly medical procedure may

represent a high level of service output but may offer
little health benefits in terms of disease treatment.

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 Two Complementary types of efficiency measurement
techniques:
▪ Benchmarking analysis — which compares service providers,
individually or collectively; procedures, operational efficiency

This form of analysis accounts for the operational aspects of

production, such as resource management and service
administration within an organisation.

▪ Economic evaluation — which compares alternative health

programs.
▪ Cost minimization analysis;
▪ Cost–effectiveness analysis;
▪ Cost–utility analysis;
▪ Cost–benefit analysis.

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 Cost minimization analysis (CMA)
▪ CMA comprises for the least costly alternatives when the
outcomes of two or more therapies are virtually identical.
CMA involves calculating drug costs to analyse the least costly
drug or therapeutic modality. It also reflects the cost of
preparing and administering a dose. This method of cost
evaluation is the one used most often in evaluating the cost of
a specific drug.

▪ A CMA can be used to compare two or more health

technologies that have proven to be fully equivalent in
survival, quality of life, therapeutic effect, tolerability, safety,
and compliance. In such a case the focus of the analysis shifts
only to their treatment overall cost to choose the least costly
as the preferable therapeutic option.
 Cost-Effectiveness Analysis (CEA)
▪ CEA estimates the costs and health gains of alternative
interventions. CEA provides a method for prioritizing the allocation
of resources to health interventions by identifying projects that have
the potential to yield the greatest improvement in health for the
least resources.

▪ Cost-effectiveness Analysis quantifies the gains, or setbacks, in

population health as a result of a particular policy or intervention.
The gains are typically measured in disability-adjusted life years
(DALYs), representing a weighted combination of mortality and
morbidity effects of an intervention.
▪ (Other possible denominators could include cost per life saved or
cost per life year saved, but these fail to capture the morbidity
element.)
 Cost-utility analysis
▪ A type of cost-effectiveness analysis that compares
different procedures and outcomes relative to a
person’s quality of life.

▪ In healthcare economics a form of cost-effectiveness

analysis in which the results are expressed in terms of
cost per quality adjusted life year (QALY) gained.

▪ In health economics the purpose of CUA is to determine

the ratio between the cost of a health-related
intervention and the advantage it produces in terms of
the amount of years lived in full health by the
beneficiaries.
 Cost-benefit analysis
▪ Widely used technique to assist
with decision making. The
expected benefits of the project
are subtracted from the total cost
of implementation. The unit of
measurement is monetary.
▪ Cost-utility ratio Comparison of
interventions to achieve one
quality-adjusted life year
 Efficiency includes
▪ These include common measures, such
as average length of patient stay,
incidence of duplicate testing,
expenditures per case and generic
prescribing rates, as well as others.
 How to improve efficiency?
▪ In most cases, managers of health care facility
focus on costs without reducing the activity
levels.

▪ Developing appropriate measures: length of

stay, occupancy rates, and turnover interval.

▪ These measured are interrelated and one can

derive other values from any two of the four
activity measure.

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 Continued
1.Identify cases of overtreatment. ...
2.Reduce clinical errors. ...
3.Strengthen care coordination. ...
4.Simplify administration. ...
5.Accelerate medical research efforts to
reduce prices. ...
6.Fight fraud and abuse.
 Continued
▪ Start with training

▪ Underscore patient safety

▪ Eliminate redundancies

▪ Improving coordination across

departments

▪ Create a better system for decision-

Thank you