The Health Care Manager Volume 33, Number 2, pp. 117–127 Copyright # 2014 Wolters Kluwer Health | Lippincott Williams & Wilkins
Measuring Efficiency Among US Federal Hospitals Jeffrey P. Harrison, PhD, MBA, MHA, FACHE; Sean Meyer, BHA This study evaluates the efficiency of federal hospitals, specifically those hospitals administered by the US Department of Veterans Affairs and the US Department of Defense. Hospital executives, health care policymakers, taxpayers, and federal hospital beneficiaries benefit from studies that improve hospital efficiency. This study uses data envelopment analysis to evaluate a panel of 165 federal hospitals in 2007 and 157 of the same hospitals again in 2011. Results indicate that overall efficiency in federal hospitals improved from 81% in 2007 to 86% in 2011. The number of federal hospitals operating on the efficiency frontier decreased slightly from 25 in 2007 to 21 in 2011. The higher efficiency score clearly documents that federal hospitals are becoming more efficient in the management of resources. From a policy perspective, this study highlights the economic importance of encouraging increased efficiency throughout the health care industry. This research examines benchmarking strategies to improve the efficiency of hospital services to federal beneficiaries. Through the use of strategies such as integrated information systems, consolidation of services, transaction-cost economics, and focusing on preventative health care, these organizations have been able to provide quality service while maintaining fiscal responsibility. In addition, the research documented the characteristics of those federal hospitals that were found to be on the Efficiency Frontier. These hospitals serve as benchmarks for less efficient federal hospitals as they develop strategies for improvement. Key words: data envelopment analysis, DEA, DoD and VA hospital efficiency, federal hospital efficiency
EALTH CARE SPENDING in the United States has increased in recent years. For example, health care expenditures in 2009 reached $2.5 trillion, representing a $134 billion increase from the previous year. This level of health care expenditure is 16.2% of the annual gross domestic product.1 Weeks et al2 reported that administrative costs in the United States consumed 31% of health care expenditures. This contrasts with only 16.7% of administrative costs in Canada. This study will focus on the US Department of Veterans Affairs (VA) and the US Department of Defense (DoD) expenditures on their hospital infrastructure. In 2009, the VA health care system was allocated $41 billion.3 The DoD
H
Author Affiliations: Department of Public Health (Dr Harrison), and Health Administration Program (Mr Meyer), University of North Florida, Jacksonville Florida. The authors have no conflicts of interest. Correspondence: Jeffrey P. Harrison, PhD, MBA, MHA, FACHE, 1 UNF Dr, Jacksonville, FL 32224 ( [email protected]). DOI: 10.1097/HCM.0000000000000005
spent an additional $45 billion in health care expenditures in 2009, which represented a 45% increase since fiscal year 2005.4 With diminishing resources and an increasing demand for federal health care services, the VA and DoD health care systems will be using benchmarking techniques to improve efficiency and enhance the quality of health care. Weeks et al2 recognized that the VA health system has experienced a transformation in the health care it provides. Harrison et al5 also found an increasing level of efficiency in federal health care services. They believe increased efficiency is linked with improved quality and provides enhanced value. A HISTORICAL PERSPECTIVE ON FEDERAL HOSPITALS The US federal government operates one of the most comprehensive health care systems for members of the armed services, their dependents, retired beneficiaries, and veterans of the armed services. These services are provided through DoD and the Veterans Administration. 117
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Fortunately, these federal health care systems have managed to contain costs, improve efficiency, and provide high-quality health care. For example, the VA has grown from operating 54 hospitals in 1930 to now operating 171 medical centers, 350 outpatient clinics, 126 nursing home care units, and 35 domiciliary care units for veterans.6 Similarly, the DoD currently operates 59 hospitals worldwide, providing care for active duty service members, their dependents, and retired military personnel totaling nearly 9.5 million beneficiaries.7 In 1995, the VA initiated organizational restructuring designed to improve quality and increase efficiency. These changes included implementing an electronic medical record, expanding ambulatory care, and integrating health care services at a regional level.8 Congress supported the reorganization of the VA health care system, creating comprehensive health care facilities, which led to improved quality of care. Today, VA patient satisfaction surveys are higher than comparable private health care facilities. In addition, VA patients have lower mortality rates and the VA has been able to provide increased care with fewer employees.9 For example, this regional reorganization led to a 25% reduction in hospital admissions and cost per patient from 1994 to 1999. This was even more impressive because the VA experienced a 25% increase in the number of patients served during that same period. Much of this improvement came as a result of the growth in ambulatory health care services.8 Because of the ever-changing US health care environment, the military health care system also faced growing pains. To ensure a balance between cost, quality, and access, the Military Health System (MHS) devised a new comprehensive health delivery system called TRICARE, which is the DoD’s model for managed care.10 Today, TRICARE has emerged as a comprehensive insurance model that links the MHS’s ability to provide high-quality care while maintaining low out-of-pocket expenses for beneficiaries to use civilian health care facilities.10 TRANSFORMING FEDERAL HOSPITALS In recent years, VA and DoD hospitals have become leaders in creating efficient organizations
through the implementation of various benchmark strategies. Some of the dynamic strategies that have improved efficiency and quality are integrated information systems, consolidation of health care services, focus on preventative health care, and a commitment to transactioncost economics. As part of this journey, Ozcan11 found that the overall efficiency in federal hospitals improved from 68% in 1998 to 79% in 2001, which may be attributed to these quality and efficiency initiatives. INTEGRATED INFORMATION SYSTEMS One of the most notable strategies implemented by federal hospitals has been the transition from paper-based medical records to integrated computerized health information systems. Integrated information systems have enabled these organizations to reduce expenses by allowing health care providers to improve their clinical decisions and coordinate the care being delivered.12 Starting in 1994, the VA began decentralizing their cumbersome bureaucratic organizational structure by placing regional managers in charge of implementing policy directives.9 At the same time, patient records were transferred to a systemwide electronic medical record, allowing health care providers unprecedented access to their patient’s medical history. The impact of digitizing patient records in the VA improved the quality of health care and provided increased opportunities for evidence-based research. In addition, access to digital medical records reduced the physician’s need to repeat expensive laboratory tests by 20%.9 Today a system-wide health information system allows VA clinicians online access to pharmacy, radiology, nursing, laboratory, and computerized physician order entry.13 Information sharing between the VA and DoD has been an ongoing goal and has resulted in better strategic planning. For example, the VA and DoD have made significant progress in developing interoperable medical records, which facilitates a military member’s transition from active duty to the VA.14 This collaboration has resulted in the implementation of the DoD/VA Joint Electronic Health Records Interoperability
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Efficiency Among US Federal Hospitals Plan, which ensures common data standards, allows shared electronic medical records, and facilitates joint ventures.14 To further enhance information sharing, the VA and DoD are working on a new joint inpatient medical record system.15 As the federal government faces increasing financial pressure, it is important that federal hospitals provide higher volumes of health care within their budget allocations. Therefore, federal hospitals are being challenged to increase efficiency to remain competitive in the budget allocation process. According to Harrison and Coppola,16 the federal government has been merging or closing federal hospitals in geographic areas with low demand. In response to environmental challenges and to maintain the viability of the federal hospital system, increased efficiency among federal hospitals is important. Those federal hospitals that most closely approach the efficiency frontier have the best opportunity for long-term survival. As discussed by Cooper et al,17 the efficiency frontier represents all points where inputs and outputs are maximized. This efficiency frontier becomes the optimal solution for the utilization of inputs to create outputs or production. CONSOLIDATING HEALTH CARE SERVICES The VA and DoD hospitals have implemented consolidated inventory purchasing to reduce supply chain costs. In addition, they have taken a leadership role in partnering to standardize product information between their respective hospitals and supply partners.18 Previously, the absence of a consolidated supply chain resulted in the inefficient exchange of information, resulting in higher costs and had a detrimental impact on patient safety. After implementation in 2007, the joint venture on e-commerce resulted in nearly $18.9 million in product price reductions and saved $7.9 million in labor costs.18 PREVENTATIVE HEALTH CARE MEASURES Veterans Affairs and DoD hospitals receive their budget allocation at the beginning of the
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fiscal year, leaving little incentive to conserve resources. However, more recently, federal health care providers are being required to balance priorities such as improving quality, reducing costs, and ensuring patient access. Although the incentive to conserve resources is not paramount, a significant advantage to the VA and DoD health care delivery system is the ability to focus on preventative health care services, to improve quality and reduce costs.10 Fortunately, the VA and DoD have placed a great emphasis on improving access and have implemented strategies aimed at reducing the need for unnecessary health care treatment. Several TRICARE regions have set up 24/7 telephone hotlines for patients to speak with nurse advisors who are able to discuss treatment alternatives and set up provider appointments.19 THEORETICAL FOUNDATION Transaction-cost economics provides a theoretical perspective on the allocation of functions within an organization and suggests that organizations will choose the least costly way to organize a transaction.20 This theory has been used within the federal health system because the VA and DoD provide 1-stop shopping for health care beneficiaries. The VA’s approach to integrated health care delivery has resulted in a system that now provides primary care, preventative health care services, mental health services, inpatient hospital services, long-term care, and prescription drugs.21 This allows eligible veterans to receive the full range of care within the VA system. Similarly, the MHS offers integrated health care delivery. Service members, retirees, and their families have access to military treatment facilities, which can offer inpatient and ambulatory care. Because many of these facilities often function as teaching and tertiary care medical facilities, patients often use the TRICARE insurance system for access to civilian health care facilities to support military treatment facilities.19 For nonroutine health care services, TRICARE beneficiaries have access to military hospitals and contracted civilian services, which provide sophisticated treatment of casualties in wartime.22
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RESEARCH QUESTIONS This study will perform a longitudinal analysis of national data on federal hospital efficiency. The primary research question is: What are the characteristics of federal hospitals that operate on the efficiency frontier? The following underlying research questions are provided: To identify those federal hospitals on the efficiency frontier and calculate the level of inefficiency in those organizations not on the efficiency frontier. Has the efficiency of federal hospitals improved from 2007 to 2011? Are federal hospitals efficiently managing their key input resources in relation to health care production? How can federal hospitals improve overall efficiency? Federal hospitals are an important source of health care for millions of Americans with previous military service. As a result, these hospitals provide an important community role by improving the health status of military members and their families. As the population continues to age and the number of military beneficiaries grows, federal hospitals will experience growing financial pressure to improve operations. Faced with increasing environmental pressures, many federal hospitals face potential closure of inpatient services and continuation as an outpatient facility.16
TECHNICAL EFFICIENCY As discussed by Cooper et al,17 technical efficiency refers to the sources of waste that can be eliminated without worsening any other input or output. This study uses technical efficiency analysis by measuring the inputs used to create outputs. Optimization is achieved when no other use of resources can improve efficiency. This is considered a Pareto type of efficiency, where one unit’s value cannot be increased without reducing the value of other units.23 Technical efficiency studies treat full-time employees (FTEs), operating expenses, and hospital beds as resource inputs used to create outputs of goods and services. Measuring the level of
technical efficiency involves comparing all federal hospitals to identify the most efficient organizations. This efficiency frontier is reflected by a score of 1.0, which represents production at the highest performance level.16
MEASURING EFFICIENCY Gandjour et al24 concluded that many quality and efficiency indicators used by hospital executives are lacking in general validity. Using a recognized and valid measure of efficiency is critical for hospital executives seeking to increase the effectiveness of their organizations. The most common measure of efficiency is the use of descriptive statistics.25 Because descriptive statistics are a parametrical statistical test, they require the data be normally distributed. Therefore, it is important that the restrictions for parametric data be met and that the distribution of the data not be skewed. For example, the mean can be adversely influenced by extreme scores within the data.26 By comparing the number of FTEs, hospital beds, operating expenses, and inpatient days from previous years with those of a more recent year, the researcher can determine if the rate of growth in inpatient days has exceeded the input resources. Unfortunately, descriptive statistics often provide a limited perspective on the performance of the organization and can easily exclude other factors that may be impacting efficiency. According to Harrison and Coppola,16 much of the research investigating single input or output variables has used ratio analysis, regression analysis, or stochastic frontier analysis. Ratio analysis measures relationships between inputs and outputs through simple comparisons but produces limited information about trends. Because regression analysis and stochastic frontier analysis techniques compare against an average, they often do not identify the most efficient organizations. More importantly, organizations with the greatest efficiency may be treated as outliers in these statistical analyses. The challenges with these research techniques have led to the use of data envelopment analysis (DEA) for many studies analyzing efficiency.16,27,28
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Efficiency Among US Federal Hospitals DATA ENVELOPMENT ANALYSIS Data envelopment analysis was first introduced into the literature by Charnes et al29 as a unique unit of analysis that redirects emphasis from financial assessment toward optimizing performance and decision making. As a result, DEA is a decision-making tool that allows for measuring the efficiency of each organization relative to similar organizations. The primary use of DEA is to evaluate and compare efficiency in organizations that share common characteristics. This type of performance analysis can then be applied to the benchmarking of facilities. As a result, DEA has become a respected health services research tool for assessing efficiency and productivity. Two frameworks, the constant returns to scale (CRS) model and the variable returns to scale (VRS) model, are used in DEA to evaluate performance. The CRS model was developed by Charnes et al29 and is considered the classical DEA model of efficiency = output/input. The CRS model generalized the single output/ input ratio measure of efficiency for an organization in terms of a fractional linear programming formulation, transforming the multiple output/input characterization of each organization to that of a single virtual output and virtual input. The CRS model focuses on technical efficiency. In this manner, the producers are able to linearly scale the inputs and outputs without increasing or decreasing efficiency.30 A unit operates under the CRS model if an increase in inputs results in a proportionate increase in outputs. Technical efficiency refers to the extent to which an organization fails to produce maximum outputs from a chosen combination of factor inputs. With the CRS model, producers are able to linearly scale inputs and outputs without increasing or decreasing efficiency. The model also identifies sources and estimated levels of inefficiency present.17,30 The second type of DEA model is VRS. Banker et al31 introduced the VRS into the literature in 1984. The Banker-Charnes-Cooper model measures mixed efficiency. Mixed inefficiency occurs when a percentage of outputs or inputs exhibit inefficient behavior.17 The subsequent elimination of these identified inputs or outputs
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will alter the proportions in which inputs are used or outputs produced. An organization uses VRS if an increase in their inputs does not produce a proportional change in its outputs. Therefore, as the organization changes its scale of operations, its efficiency will either increase or decrease. This model also measures technical efficiency as the convexity constraint that the composite unit is of similar scale size as the unit being measured.31 The resulting efficiency is always at least equal to the one given by the CRS model, and those Decision Making Units, which in this study are federal hospitals, with the lowest input or highest output levels are rated efficient. The VRS model is different from the CRS model in the sense that it allows for varying returns to scale and pure model efficiency.17,30 Technical efficiency deals with the use of labor, capital, and technology as inputs to produce outputs relative to best practice among a group of homogeneous organizations. For example, given the same inputs for all the organizations, there is no wastage of inputs at all in producing the given quantity of output. An organization is judged to be technically efficient if it operates at optimal levels in comparison with peer organizations in the sample with the same resources.32,33 If the organization operates below optimal best practice levels within the population, then the organization’s technical efficiency is expressed as a percentage of the total best practice within the population. In DEA, inputs are any factor used as a resource to produce something of value. Inputs may also include any environmental factor that has a strong impact on how resources are consumed. Outputs are the amount of goods or services produced as a result of the processing of resources. Data envelopment analysis has been used for the evaluation of resource consumption among US federal hospitals and can lead to improved hospital efficiency.5 As discussed by Harrison and Coppola,16 regression analysis and other parametric techniques can be used as part of a 2-stage analysis where DEA is used in conjunction with the other technique to analyze the operation of hospitals while identifying the efficiency frontier. This allows DEA to be more effective in evaluating multiple inputs and outputs.
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From a technical perspective, DEA evaluates inputs (beds, FTEs, and operating expenses) in relation to outputs (inpatient days, surgical procedures, and outpatient visits). Performance is indicated by a DEA score between 0 (lowest possible score) and 1 (highest possible score). A value less than 1 indicates inefficiency, whereas a value of 0.5 indicates that the organizations should be able to reduce resource input by 50% to be efficient. As discussed by Harrison and Kirkpatrick,34 an important feature of DEA is the ability to identify slack within individual organizations. This allows us to determine which inputs and/or outputs appear to be inefficiently used or produced by hospitals. This, in turn, offers practical applications for policymakers, managers, and researchers. Inefficiently used inputs or inefficiently produced outputs generate slacks. These slacks reflect either surpluses (inputs) or shortages (outputs) in production. Slacks can be analyzed to determine which inputs or outputs contribute most to an inefficient hospital’s efficiency scores. As discussed by Nyhan and Cruise,35 DEA has some advantages over previous statistical applications. These advantages include the ability to measure multiple input and output variables and provide a single measure of performance as well as provide a scalar ranking of organizations within the sample. In addition, outstanding organizations in the sample are not viewed as outliers and efficient organizations can be used as benchmarks to identify slack in the production process. Finally, DEA can provide longitudinal analysis through optimization. As discussed by Cooper et al,17 a potential advantage of DEA is that it includes extreme points in the sample data. These extreme points that other statistical tools may identify as outliers are sometimes judged to be high-performing organizations by DEA and as a result become benchmarks. According to Coppola,36 DEA scores are sensitive to the number of input and output variables included in the model. For example, increasing the total number of input and output variables within the model without increasing the sample size can lead to increased efficiency scores.
A major goal of DEA research was to identify an efficiency frontier for similar hospitals, which represents the optimum level of efficiency and serves as a benchmark for estimating cost savings as organizations strive for efficiency. In addition, DEA methodology has the ability to conduct a comparative analysis of the efficiency of hospitals over multiple time periods. Therefore, DEA can document what slack, if any, exists in the operations of organizations and identify any changes in efficiency that have occurred over time. METHODOLOGY This study evaluates the efficiency of federal hospitals using a VRS input–oriented DEA model. Data for this research were obtained from the American Hospital Association’s 2007 and 2011 annual surveys. Included in the study were a total of 165 federal hospitals in 2007 and 157 in 2011. The variables selected for this study are commonly used input and output variables affecting federal hospital efficiency.37 Inputs 1. Operating expenses: Payroll expenses are not included because the number of FTEs is used as a separate measure of labor input. 2. Hospital beds: The number of hospital beds is an accepted indicator of capital investment. The data on the number of hospital beds were recorded for each of the 2 years. Beds are a measure of hospital assets and show changes in organizational infrastructure and should reflect population shifts in geographic areas.8 3. FTEs: Labor is an important facet of an organization’s resource consumption. Outputs 1. Inpatient days: Inpatient days is a common measure of federal hospital productivity and is a widely accepted measure of inpatient workload.16 2. Surgical procedures: Surgical procedures is a widely accepted measure of federal hospital output.
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Efficiency Among US Federal Hospitals 3. Outpatient visits: Outpatient workload is a widely accepted measure of federal hospital output.38 Inpatient days, surgical procedures, and outpatient workload provide a comprehensive measure of hospital productivity.
RESULTS Descriptive statistics of the variables for 2007 and 2011 are shown in Table 1. Table 1 shows that operating expenses for federal hospitals increased by 29% from 2007 to 2011. When adjusted for a 3% annual inflation, the operating expenses have increased at a reasonable rate during the study period. Similarly, the average number of FTEs increased by 1.5% during the study period. In contrast, the number of hospital beds has decreased by 36 beds or 1.5%. This reduction in beds is a significant savings in organizational infrastructure. On a positive note, the increase in outpatient visits represents a fundamental shift from inpatient care to ambulatory services. A review of the descriptive statistics clearly documents that productivity in federal hospitals has increased during the study period. Nonetheless, as discussed previously, using descriptive statistics to analyze overall efficiency is cumbersome and lacks precision. The results of the 2007 and 2011 DEA are presented in Table 2. Data envelopment analysis provides a clear yet sophisticated determination of efficiency and shows that the average
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efficiency score of federal hospitals improved by 5% from 2007 to 2011. Whereas the average efficiency improved, representing a fundamental shift to the efficiency frontier, the number of efficient federal hospitals (score of 1) decreased from 25 in 2007 to 21 in 2011. Those hospitals located on the efficiency frontier represent the optimal application of inputs to create outputs within the homogenous organizations. Those organizations on the efficiency frontier serve as benchmarks for less efficient peer organizations. This evidence of improved efficiency and less slack is important and is a clear indication of increased organizational efficiency. Data for Table 3 were calculated using DEA solver software and show the average amount of slack among inefficient hospitals, compared with those federal hospitals on the efficiency frontier (DEA score of 1). These results represent the combined scores of slack for all inefficient federal hospitals. The combined scores were then divided by the number of inefficient hospitals to calculate the average level of slack within the homogenous population. This average level of slack provides a measure of overall inefficiency. From an input perspective, the results show that based upon the level of output, the average slack in beds was 6 in 2007, which decreased to 1 in 2011. Conversely, based on the level of output, the average slack in operating expenses was $4 910 708 in 2007, which increased to $11 409 269 in 2011. Similarly, the average slack in FTEs was 0 in 2007, which increased to 36 in 2011.
Table 1. Descriptive Statistics for the 2007 and 2011 Study Periods
Variable
2007 (N = 165), Mean (SD)
Inputs Operating expenses, $ 114 736 034 (93 500 624) FTEs 1757 (1294) Beds 240 (247) Outputs Inpatient days 59 733 (68 621) Surgical procedures 4265 (3665) Outpatient visits 440 971 (279 238)
2011 (N = 157), Mean (SD)
2007-2011 Difference
148 980 904 (108 229 374) 1785 (1126) 204 (210)
+34 244 870 +28 36
+29% +1.5% 1.5%
8442 432 +41442
14% 10% +9.3%
51 291 (58 597) 3833 (4887) 482 413 (319 339)
2007-2011 Percent Change
Data source: 2007 and 2011 American Hospital Association Surveys. Abbreviation: FTE, full-time employee.
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Table 2. Summary of Data Envelopment Analysis (DEA) Measures
N Average efficiency score Minimum score Maximum score Standard deviation Number of efficient hospitals Number of inefficient hospitals
2007
2011
165 0.81 or 81%
157 0.86 or 86%
0.47 1.00 0.12 25
0.23 1.00 0.11 21
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136
Data source: 2007 and 2011 American Hospital Association Surveys.
The level of inefficiency in output is also measured by DEA. In 2007, DEA showed that the level of output in inpatient days was underutilized by 5, which increased to 65 in 2011. Surgical procedures were underutilized by 24 in 2007 and 1563 in 2011. Similarly, provided a given amount of input, inefficiency results show that outpatient visits were underutilized by 26 034 in 2007, which decreased to 20 121 in 2011. Table 4 is a case study for a federal hospital operating below the efficiency frontier for federal hospitals in 2011. As stated previously, health care leaders of less efficient federal hospitals can improve efficiency by analyzing
Table 3. Analysis of Inefficiency or Slack 2007 (N = 165)
2011 (N = 157)
Input inefficiency per hospital Excess beds 6 1 Excess operating $4 910 708 $11 409 269 expenses Excess FTEs 0 36 Output inefficiency Shortage:inpatient 5 65 days Shortage:surgical 24 1563 procedures Shortage:outpatient 26 034 20121 visits Data source: 2007 and 2011 American Hospital Association Surveys. Abbreviation: FTE, full-time employee.
Table 4. Case Study of Inefficient Federal Hospital 2011 Input inefficiency per hospital Efficiency score Excess operating expenses Excess beds Excess FTEs Output inefficiency Shortage:inpatient days Shortage:surgical procedures Shortage:outpatient visits
0.66 or 66% 0 18 0 10 024 0 0
Data source: 2011 American Hospital Association Survey. Abbreviation: FTE, full-time employee.
DEA results. For example, the DEA score of 0.66 or 66% is not on the efficiency frontier and is well below the average efficiency score of 0.86 or 86% in 2011. According to the analysis, to become efficient, the case study federal hospital should consider closing 18 hospital beds. In addition, the case study federal hospital should explore methods to increase inpatient days. If all the adjustments discussed previously are implemented, DEA suggests that this case study federal hospital could approach the efficiency frontier.
DISCUSSION This study shows that federal hospitals have made significant strides in improving operating efficiency from 2007 to 2011. This was supported by Ozcan and Luke,8 who also found that changes in organizational structure, adoption of information systems, and managing population shifts have resulted in increased efficiency. The present study found that by reducing hospital beds and in some cases closing underutilized facilities, federal hospitals have increased their organizational efficiency during the timeframe of analysis. The significant increase in outpatient visits from 2007 to 2011 shows major improvement in productivity. Management of unoccupied beds is required as the industry continues to focus on shorter lengths of stays and increased ambulatory care. This was supported by a reduction in beds and the
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Efficiency Among US Federal Hospitals lower level of slack. On a negative note, this study shows that the average excess operating expense per hospital has increased from $4 910 708 of slack in 2007 to $11 409 269 of slack in 2011. Similarly, federal hospitals have increased slack in FTEs from 0 in 2007 to 36 in 2011. At $36 000 per FTE, this represents an increased cost in staff of $1 296 000 per hospital. During the study period, federal hospitals have reduced inpatient days by 14% and reduced surgical procedures by 10%. More importantly, outpatient visits increased by 9.3% during the study period. This documents increased productivity and efficiency during the study period. The study results indicate that federal hospital efficiency has improved their average efficiency score from 81% in 2007 to 86% in 2011. This was supported by Ozcan and Luke,8 who also found positive shifts in the efficiency frontier, which they believed were caused by structural and technological changes. Whereas federal hospitals had increased efficiency, the number of highly efficient hospitals ( score = 1) dropped from 25 in 2007 to 21 in 2011. This shows that there remain additional opportunities for increased efficiency among federal hospitals. According to Clement et al,39 improving efficiency scores are important because they are positively associated with quality. They found that the best use of resources improves efficiency and leads to lower mortality rates. In addition, they found a positive correlation between efficiency and quality. As a result, federal hospitals can improve their operations by focusing on the efficiency frontier, which will also enhance patient care outcomes.
MANAGERIAL IMPLICATIONS From a management perspective, the results of this study suggest that the increase in federal hospital efficiency during the study time frame is a result of improved management efficiency. From a transaction-cost economics perspective, this study found that an integrated organizational structure, combined with coordination
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across the continuum of health care, has increased the efficiency of federal hospitals. The VA and DoD will continue to face future challenges. Both organizations face an increase in beneficiaries, legislative challenges, and constrained economic resources.4 With an increasing number of wounded service members from Iraq and Afghanistan, both organizations will need to ensure that a comprehensive and integrated system is in place for beneficiaries transitioning from the DoD system to the VA health care system.4 Although ensuring comprehensive transition assistance will be vital, cost containment will be another major challenge for both organizations. For fiscal year 2012, the VA has requested $50.6 billion in appropriations to provide timely health care delivery to the growing population of veterans (Office of Management and Budget, 2011). With an increasing budget, the VA will be able to continue expanding eligibility to nondisabled veterans and needs-based veterans. Such an expanded eligibility could increase the VA beneficiaries by nearly 550 000 in 2013 (Office of Management and Budget, 2011).40 The DoD continues to refine TRICARE by providing incentives based on customer satisfaction, managing cost, reducing fraud, and placing federal ceiling prices on pharmaceuticals, ultimately setting the precedent for future contracts.4 The DoD is making great progress in implementing the use of generic drugs and promoting the use of the TRICARE Mail Order Pharmacy system, which will reduce cost and improve the quality of pharmaceutical management by focusing on the elimination of waste. Health care fraud has been elevated to 1 of the top 5 categories being pursued by the Defense Criminal Investigative Service, representing nearly 8.7% of the 1825 open cases.4 The future of federal health care will rely heavily on health information technology. Health information technology will get the most current information to the right people and allow them to make informed clinical decisions for federal beneficiaries. Collaborative planning by the VA and DoD will support the following objectives: (1) the interoperability of health care information, (2) develop an integrated
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electronic health record, (3) allow data sharing for program budget planning, (4) develop system-wide metrics to monitor performance, and (5) accelerate the exchange of health care information between DoD and the VA.41 Health care costs have continued to rise year after year. At the current rate of increase, health care costs will soon become unsustainable. As efficiency and cost containment have gained more emphasis within the VA and DoD health care system, both organizations have developed benchmark strategies aimed at reducing cost, improving quality, and expanding access to patients. Our research found that the strategies implemented by the VA and DoD are appropriate for large private health systems. Reducing operating expenses and labor will only support short-term improvements to the hospital’s bottom line. Efficiency gains as represented by higher productivity must be realized on a sustainable basis. As discussed by Harrison and Sexton,42 the efficiency frontier provides an opportunity for ongoing improvement. Benchmarking against the efficiency frontier will help federal hospitals to document their competitive position in the overall health care industry.
POLICY IMPLICATIONS Ozcan and Luke8 found that the federal health care system is reacting to the same trends as the nongovernmental health care sector. For example, they are experiencing a reduction in beds, declining admissions, and increasing operating expenses as well as FTE staff. As policy makers seek increased efficiency in the federal hospital system, they should monitor the access to federal health care within local communities. Dramatic changes in the availability of care may be affected by the closure of federal hospitals. Potential negative results include the loss of federal facilities and reductions in the range of clinical services available within geographic areas. Unfortunately, underutilized federal hospitals that need capital to continue to provide care may become a burden on the health care system and may be forced into closure. In summary, federal hospitals must clearly portrait their unique mission to Congress, the general public, veteran organizations, and the beneficiary population to ensure continuing support. As a result, federal hospitals must continue to enhance their image within the community and broaden their influence in government to ensure their long-term survival.
REFERENCES 1. Levey N. Soaring cost of healthcare sets a record. 2010. http://articles.latimes.com/2010/feb/04/nation/ la-na-healthcare4-2010feb04. Accessed March 15, 2011. 2. Weeks WB, Wallace AE, Wallace EA, Gottliev BJ. Does the VA offer good health care value? J Healthc Finance. 2009;35(4):1-12. 3. US Government Accountability Office. Challenges in Budget Formulation and Issues Surrounding the Proposal for Advance Appropriations. Washington, DC: US Government Printing Office; 2009. 4. US Department of Defense. Agency Financial Report for Fiscal Year 2009: Addendum B Other Accompanying Information. Washington, DC: US Government Printing Office; 2009. 5. Harrison JP, Coppola MN, Wakefield M. Efficiency of federal hospitals in the United States. J Med Syst. 2004; 28(5):411-422. 6. Department of Veterans Affairs. History—VA history. 2010. http://www.va.gov/about_va/vahistory.asp. Accessed March 15, 2011. 7. US Department of Defense. FY 2008 Department of Defense Health Care Quality Report to Congress.
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Washington, DC: US Government Printing Office; 2009. www.health.mil/.../2009_Health_Care_Quality_Report_ to_Congress.pdf. Accessed March 15, 2011. Ozcan YA, Luke RD. Health Care delivery restructuring productivity change: assessing the veterans integrated service networks (VISNs) using the malmquist approach. Med Care Res Rev Suppl 2. 2011;68(1):20S-35S. Waller D. How Veteran’s Hospitals became the best in health care. 2006. http://www.time.com/time/magazine/ article/0,9171,1376238,00.html. Accessed March 15, 2011. Kongstvedt P. Essentials of Managed Health Care. 5th ed. Sudbury, MA: Jones Bartlett Publishers; 2008. Ozcan Y. Health Care Benchmarking and Performance Evaluation. New York, NY: Springer Science + Business Media, LLC; 2008. Rosenstein A. Measuring the benefits of clinical decision support: return of investment. Health Care Manage Rev. 1999;24(2):32-34. Retrieved from Business Source Complete, EBSCO. Harrison J. Essentials of Strategic Planning in Healthcare. Chicago, IL: Health Administration Press; 2010.
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Efficiency Among US Federal Hospitals 14. Committee on Veterans Affairs. DOD/VA Collaboration and Cooperation to Meet the Needs of Returning Service Members. Washington, DC: US Government Printing Office; 2007. 15. US Government Accountability Office. VA and DOD Are Making Progress in Sharing Medical Information, But Remain Far From Having Comprehensive Electronic Medical Records. Washington, DC: US Government Printing Office; 2007. 16. Harrison JP, Coppola MN. The impact of quality and efficiency on federal healthcare. Int J Public Policy. 2007;2(3/4):356-371. 17. Cooper W, Seiford M, Tone K. Data Envelopment Analysis. Boston, MA: Kluwer Academic Publishers; 2003. 18. Oles R. DoD and VA take innovative steps to reduce healthcare supply chain costs. 2007. http://www.tricare .mil/DVPCO/downloads/Feature-Story-DoD-and-VATeam-to-Synchronize-Data.pdf. Accessed March 16, 2011. 19. Green M, Rowell J. Understanding Health Insurance: A Guide to Billing and Reimbursement. Clifton Park, NY: Delmar Cengage Learning; 2008. 20. Mick S, Wyttenbach M. Advances in Health Care Organization Theory. San Francisco, CA: Jossey-Bass; 2003. 21. US Government Accountability Office. Preliminary Findings on VA’s Provision of Health Care Services to Women Veterans. Washington, DC: US Government Printing Office; 2009. 22. US General Accounting Office. Issues and Challenges Confronting Military Medicine. Washington, DC: US Government Printing Office; 1995. 23. Aday LA, Begley CE, Lairson DR, Slater CH. Evaluating the Healthcare System: Effectiveness, Efficiency, and Equity. 2nd ed. Chicago, IL: Health Administration Press; 1998. 24. Gandjour A, Kleinschmit F, Littmann V, Lauterbach K. An evidence-based evaluation of quality and efficiency indicators. Qual Manag Health Care. 2002; 10(4):41-52. 25. White K, Ozcan Y. Church ownership and hospital efficiency. Hosp Health Serv Adm. 1996;41(3):297-310. 26. Neutens J, Rubinson L. Research Techniques for the Health Sciences. 3rd ed. San Francisco, CA: Pearson Education, Inc; 2002. 27. Wang B, Ozcan Y, Wan T, Harrison J. Trends in hospital efficiency among metropolitan markets. J Med Syst. 1999;23(2):83-97. 28. Ozcan Y, Jiang H, Pai C. Do primary care physicians or specialists provide more efficient care? Health Serv Manage Res. 2000;13:90-96.
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29. Charnes A, Cooper WW, Rhodes EL. Measuring the efficiency of decision-making units. Eur J Operations Res. 1978 2(6):429-444. 30. Thanassoulis E. Introduction to the Theory and Application of Data Envelopment Analysis: A Foundation Text With Integrated Software. Boston, MA: Kluwer Academic Publishers; 2001. 31. Banker RD, Charnes A, Cooper WW. Some models for estimating technical and scale inefficiencies in data envelopment analysis. Manage Sci. 1984;30:1078-1092. 32. Grosskopf S. The role of reference technology in measuring productive efficiency. Econ J. 1986;96:499-513. 33. Fare R, Grosskopf S, Lovell C. The Measurement of Efficiency of Production. Boston, MA: Kluwer-Nijhoff Publishing; 1986. 34. Harrison J, Kirkpatrick N. The improving efficiency frontier of inpatient rehabilitation hospitals. Health Care Manag. 2011;30(4):313-321. 35. Nyhan R, Cruise P. Comparative performance assessment in managed care: data envelopment analysis for health care managers. Managed Care Q. 2000;8(1): 18-27. 36. Coppola MN. Correlates of Military Medical Treatment Facility (MTF) Performance: Measuring Technical Efficiency With the Structural Adaptation to Regain Fit (SARFIT) Model and Data Envelopment Analysis (DEA) [doctoral dissertation]. Richmond, VA: Virginia Commonwealth University; 2003. 37. Harrison JP, Ogniewski RJ. An efficiency analysis of veterans administration hospitals. Milit Med. 2005; 170(7):607-611. 38. Bilodeau D, Cremieux P, Jaumard B, Ouellette P, Vovor P. Measuring hospital performance in the presence of quasi-fixed inputs: an analysis of Quebec hospitals. J Productivity Anal. 2004;21:183-199. 39. Clement JP, Valdmanis VG, Bazzoli GJ, Zhao M, Chukmaitov A. Response to modeling and notation of DEA strong and weak disposable outputs. Health Care Manag Sci. 2011;13(4):391-399. 40. Office of Management and Budget. Appendix, Budget of the U.S. Government Fiscal Year 2011. Washington, DC: US Government Printing Office; 2011. 41. Kilpatrick M. The DoD/VA Interagency Program Office: making strides for the future of health care information. 2009. http://www.usmedicine.com/articles/the-dodvainteragency-program-of%EF%AC%81ce-making-stridesfor-the-future-of-health-care-information-.html. Accessed April 23, 2011. 42. Harrison J, Sexton C. The paradox of the not-forprofit hospital. Health Care Manag. 2004;23(3): 192-204.
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Measuring Efficiency Among US Federal Hospitals Jeffrey P. Harrison, PhD, MBA, MHA, FACHE; Sean Meyer, BHA This study evaluates the efficiency of federal hospitals, specifically those hospitals administered by the US Department of Veterans Affairs and the US Department of Defense. Hospital executives, health care policymakers, taxpayers, and federal hospital beneficiaries benefit from studies that improve hospital efficiency. This study uses data envelopment analysis to evaluate a panel of 165 federal hospitals in 2007 and 157 of the same hospitals again in 2011. Results indicate that overall efficiency in federal hospitals improved from 81% in 2007 to 86% in 2011. The number of federal hospitals operating on the efficiency frontier decreased slightly from 25 in 2007 to 21 in 2011. The higher efficiency score clearly documents that federal hospitals are becoming more efficient in the management of resources. From a policy perspective, this study highlights the economic importance of encouraging increased efficiency throughout the health care industry. This research examines benchmarking strategies to improve the efficiency of hospital services to federal beneficiaries. Through the use of strategies such as integrated information systems, consolidation of services, transaction-cost economics, and focusing on preventative health care, these organizations have been able to provide quality service while maintaining fiscal responsibility. In addition, the research documented the characteristics of those federal hospitals that were found to be on the Efficiency Frontier. These hospitals serve as benchmarks for less efficient federal hospitals as they develop strategies for improvement. Key words: data envelopment analysis, DEA, DoD and VA hospital efficiency, federal hospital efficiency
EALTH CARE SPENDING in the United States has increased in recent years. For example, health care expenditures in 2009 reached $2.5 trillion, representing a $134 billion increase from the previous year. This level of health care expenditure is 16.2% of the annual gross domestic product.1 Weeks et al2 reported that administrative costs in the United States consumed 31% of health care expenditures. This contrasts with only 16.7% of administrative costs in Canada. This study will focus on the US Department of Veterans Affairs (VA) and the US Department of Defense (DoD) expenditures on their hospital infrastructure. In 2009, the VA health care system was allocated $41 billion.3 The DoD
H
Author Affiliations: Department of Public Health (Dr Harrison), and Health Administration Program (Mr Meyer), University of North Florida, Jacksonville Florida. The authors have no conflicts of interest. Correspondence: Jeffrey P. Harrison, PhD, MBA, MHA, FACHE, 1 UNF Dr, Jacksonville, FL 32224 ( [email protected]). DOI: 10.1097/HCM.0000000000000005
spent an additional $45 billion in health care expenditures in 2009, which represented a 45% increase since fiscal year 2005.4 With diminishing resources and an increasing demand for federal health care services, the VA and DoD health care systems will be using benchmarking techniques to improve efficiency and enhance the quality of health care. Weeks et al2 recognized that the VA health system has experienced a transformation in the health care it provides. Harrison et al5 also found an increasing level of efficiency in federal health care services. They believe increased efficiency is linked with improved quality and provides enhanced value. A HISTORICAL PERSPECTIVE ON FEDERAL HOSPITALS The US federal government operates one of the most comprehensive health care systems for members of the armed services, their dependents, retired beneficiaries, and veterans of the armed services. These services are provided through DoD and the Veterans Administration. 117
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Fortunately, these federal health care systems have managed to contain costs, improve efficiency, and provide high-quality health care. For example, the VA has grown from operating 54 hospitals in 1930 to now operating 171 medical centers, 350 outpatient clinics, 126 nursing home care units, and 35 domiciliary care units for veterans.6 Similarly, the DoD currently operates 59 hospitals worldwide, providing care for active duty service members, their dependents, and retired military personnel totaling nearly 9.5 million beneficiaries.7 In 1995, the VA initiated organizational restructuring designed to improve quality and increase efficiency. These changes included implementing an electronic medical record, expanding ambulatory care, and integrating health care services at a regional level.8 Congress supported the reorganization of the VA health care system, creating comprehensive health care facilities, which led to improved quality of care. Today, VA patient satisfaction surveys are higher than comparable private health care facilities. In addition, VA patients have lower mortality rates and the VA has been able to provide increased care with fewer employees.9 For example, this regional reorganization led to a 25% reduction in hospital admissions and cost per patient from 1994 to 1999. This was even more impressive because the VA experienced a 25% increase in the number of patients served during that same period. Much of this improvement came as a result of the growth in ambulatory health care services.8 Because of the ever-changing US health care environment, the military health care system also faced growing pains. To ensure a balance between cost, quality, and access, the Military Health System (MHS) devised a new comprehensive health delivery system called TRICARE, which is the DoD’s model for managed care.10 Today, TRICARE has emerged as a comprehensive insurance model that links the MHS’s ability to provide high-quality care while maintaining low out-of-pocket expenses for beneficiaries to use civilian health care facilities.10 TRANSFORMING FEDERAL HOSPITALS In recent years, VA and DoD hospitals have become leaders in creating efficient organizations
through the implementation of various benchmark strategies. Some of the dynamic strategies that have improved efficiency and quality are integrated information systems, consolidation of health care services, focus on preventative health care, and a commitment to transactioncost economics. As part of this journey, Ozcan11 found that the overall efficiency in federal hospitals improved from 68% in 1998 to 79% in 2001, which may be attributed to these quality and efficiency initiatives. INTEGRATED INFORMATION SYSTEMS One of the most notable strategies implemented by federal hospitals has been the transition from paper-based medical records to integrated computerized health information systems. Integrated information systems have enabled these organizations to reduce expenses by allowing health care providers to improve their clinical decisions and coordinate the care being delivered.12 Starting in 1994, the VA began decentralizing their cumbersome bureaucratic organizational structure by placing regional managers in charge of implementing policy directives.9 At the same time, patient records were transferred to a systemwide electronic medical record, allowing health care providers unprecedented access to their patient’s medical history. The impact of digitizing patient records in the VA improved the quality of health care and provided increased opportunities for evidence-based research. In addition, access to digital medical records reduced the physician’s need to repeat expensive laboratory tests by 20%.9 Today a system-wide health information system allows VA clinicians online access to pharmacy, radiology, nursing, laboratory, and computerized physician order entry.13 Information sharing between the VA and DoD has been an ongoing goal and has resulted in better strategic planning. For example, the VA and DoD have made significant progress in developing interoperable medical records, which facilitates a military member’s transition from active duty to the VA.14 This collaboration has resulted in the implementation of the DoD/VA Joint Electronic Health Records Interoperability
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Efficiency Among US Federal Hospitals Plan, which ensures common data standards, allows shared electronic medical records, and facilitates joint ventures.14 To further enhance information sharing, the VA and DoD are working on a new joint inpatient medical record system.15 As the federal government faces increasing financial pressure, it is important that federal hospitals provide higher volumes of health care within their budget allocations. Therefore, federal hospitals are being challenged to increase efficiency to remain competitive in the budget allocation process. According to Harrison and Coppola,16 the federal government has been merging or closing federal hospitals in geographic areas with low demand. In response to environmental challenges and to maintain the viability of the federal hospital system, increased efficiency among federal hospitals is important. Those federal hospitals that most closely approach the efficiency frontier have the best opportunity for long-term survival. As discussed by Cooper et al,17 the efficiency frontier represents all points where inputs and outputs are maximized. This efficiency frontier becomes the optimal solution for the utilization of inputs to create outputs or production. CONSOLIDATING HEALTH CARE SERVICES The VA and DoD hospitals have implemented consolidated inventory purchasing to reduce supply chain costs. In addition, they have taken a leadership role in partnering to standardize product information between their respective hospitals and supply partners.18 Previously, the absence of a consolidated supply chain resulted in the inefficient exchange of information, resulting in higher costs and had a detrimental impact on patient safety. After implementation in 2007, the joint venture on e-commerce resulted in nearly $18.9 million in product price reductions and saved $7.9 million in labor costs.18 PREVENTATIVE HEALTH CARE MEASURES Veterans Affairs and DoD hospitals receive their budget allocation at the beginning of the
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fiscal year, leaving little incentive to conserve resources. However, more recently, federal health care providers are being required to balance priorities such as improving quality, reducing costs, and ensuring patient access. Although the incentive to conserve resources is not paramount, a significant advantage to the VA and DoD health care delivery system is the ability to focus on preventative health care services, to improve quality and reduce costs.10 Fortunately, the VA and DoD have placed a great emphasis on improving access and have implemented strategies aimed at reducing the need for unnecessary health care treatment. Several TRICARE regions have set up 24/7 telephone hotlines for patients to speak with nurse advisors who are able to discuss treatment alternatives and set up provider appointments.19 THEORETICAL FOUNDATION Transaction-cost economics provides a theoretical perspective on the allocation of functions within an organization and suggests that organizations will choose the least costly way to organize a transaction.20 This theory has been used within the federal health system because the VA and DoD provide 1-stop shopping for health care beneficiaries. The VA’s approach to integrated health care delivery has resulted in a system that now provides primary care, preventative health care services, mental health services, inpatient hospital services, long-term care, and prescription drugs.21 This allows eligible veterans to receive the full range of care within the VA system. Similarly, the MHS offers integrated health care delivery. Service members, retirees, and their families have access to military treatment facilities, which can offer inpatient and ambulatory care. Because many of these facilities often function as teaching and tertiary care medical facilities, patients often use the TRICARE insurance system for access to civilian health care facilities to support military treatment facilities.19 For nonroutine health care services, TRICARE beneficiaries have access to military hospitals and contracted civilian services, which provide sophisticated treatment of casualties in wartime.22
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RESEARCH QUESTIONS This study will perform a longitudinal analysis of national data on federal hospital efficiency. The primary research question is: What are the characteristics of federal hospitals that operate on the efficiency frontier? The following underlying research questions are provided: To identify those federal hospitals on the efficiency frontier and calculate the level of inefficiency in those organizations not on the efficiency frontier. Has the efficiency of federal hospitals improved from 2007 to 2011? Are federal hospitals efficiently managing their key input resources in relation to health care production? How can federal hospitals improve overall efficiency? Federal hospitals are an important source of health care for millions of Americans with previous military service. As a result, these hospitals provide an important community role by improving the health status of military members and their families. As the population continues to age and the number of military beneficiaries grows, federal hospitals will experience growing financial pressure to improve operations. Faced with increasing environmental pressures, many federal hospitals face potential closure of inpatient services and continuation as an outpatient facility.16
TECHNICAL EFFICIENCY As discussed by Cooper et al,17 technical efficiency refers to the sources of waste that can be eliminated without worsening any other input or output. This study uses technical efficiency analysis by measuring the inputs used to create outputs. Optimization is achieved when no other use of resources can improve efficiency. This is considered a Pareto type of efficiency, where one unit’s value cannot be increased without reducing the value of other units.23 Technical efficiency studies treat full-time employees (FTEs), operating expenses, and hospital beds as resource inputs used to create outputs of goods and services. Measuring the level of
technical efficiency involves comparing all federal hospitals to identify the most efficient organizations. This efficiency frontier is reflected by a score of 1.0, which represents production at the highest performance level.16
MEASURING EFFICIENCY Gandjour et al24 concluded that many quality and efficiency indicators used by hospital executives are lacking in general validity. Using a recognized and valid measure of efficiency is critical for hospital executives seeking to increase the effectiveness of their organizations. The most common measure of efficiency is the use of descriptive statistics.25 Because descriptive statistics are a parametrical statistical test, they require the data be normally distributed. Therefore, it is important that the restrictions for parametric data be met and that the distribution of the data not be skewed. For example, the mean can be adversely influenced by extreme scores within the data.26 By comparing the number of FTEs, hospital beds, operating expenses, and inpatient days from previous years with those of a more recent year, the researcher can determine if the rate of growth in inpatient days has exceeded the input resources. Unfortunately, descriptive statistics often provide a limited perspective on the performance of the organization and can easily exclude other factors that may be impacting efficiency. According to Harrison and Coppola,16 much of the research investigating single input or output variables has used ratio analysis, regression analysis, or stochastic frontier analysis. Ratio analysis measures relationships between inputs and outputs through simple comparisons but produces limited information about trends. Because regression analysis and stochastic frontier analysis techniques compare against an average, they often do not identify the most efficient organizations. More importantly, organizations with the greatest efficiency may be treated as outliers in these statistical analyses. The challenges with these research techniques have led to the use of data envelopment analysis (DEA) for many studies analyzing efficiency.16,27,28
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Efficiency Among US Federal Hospitals DATA ENVELOPMENT ANALYSIS Data envelopment analysis was first introduced into the literature by Charnes et al29 as a unique unit of analysis that redirects emphasis from financial assessment toward optimizing performance and decision making. As a result, DEA is a decision-making tool that allows for measuring the efficiency of each organization relative to similar organizations. The primary use of DEA is to evaluate and compare efficiency in organizations that share common characteristics. This type of performance analysis can then be applied to the benchmarking of facilities. As a result, DEA has become a respected health services research tool for assessing efficiency and productivity. Two frameworks, the constant returns to scale (CRS) model and the variable returns to scale (VRS) model, are used in DEA to evaluate performance. The CRS model was developed by Charnes et al29 and is considered the classical DEA model of efficiency = output/input. The CRS model generalized the single output/ input ratio measure of efficiency for an organization in terms of a fractional linear programming formulation, transforming the multiple output/input characterization of each organization to that of a single virtual output and virtual input. The CRS model focuses on technical efficiency. In this manner, the producers are able to linearly scale the inputs and outputs without increasing or decreasing efficiency.30 A unit operates under the CRS model if an increase in inputs results in a proportionate increase in outputs. Technical efficiency refers to the extent to which an organization fails to produce maximum outputs from a chosen combination of factor inputs. With the CRS model, producers are able to linearly scale inputs and outputs without increasing or decreasing efficiency. The model also identifies sources and estimated levels of inefficiency present.17,30 The second type of DEA model is VRS. Banker et al31 introduced the VRS into the literature in 1984. The Banker-Charnes-Cooper model measures mixed efficiency. Mixed inefficiency occurs when a percentage of outputs or inputs exhibit inefficient behavior.17 The subsequent elimination of these identified inputs or outputs
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will alter the proportions in which inputs are used or outputs produced. An organization uses VRS if an increase in their inputs does not produce a proportional change in its outputs. Therefore, as the organization changes its scale of operations, its efficiency will either increase or decrease. This model also measures technical efficiency as the convexity constraint that the composite unit is of similar scale size as the unit being measured.31 The resulting efficiency is always at least equal to the one given by the CRS model, and those Decision Making Units, which in this study are federal hospitals, with the lowest input or highest output levels are rated efficient. The VRS model is different from the CRS model in the sense that it allows for varying returns to scale and pure model efficiency.17,30 Technical efficiency deals with the use of labor, capital, and technology as inputs to produce outputs relative to best practice among a group of homogeneous organizations. For example, given the same inputs for all the organizations, there is no wastage of inputs at all in producing the given quantity of output. An organization is judged to be technically efficient if it operates at optimal levels in comparison with peer organizations in the sample with the same resources.32,33 If the organization operates below optimal best practice levels within the population, then the organization’s technical efficiency is expressed as a percentage of the total best practice within the population. In DEA, inputs are any factor used as a resource to produce something of value. Inputs may also include any environmental factor that has a strong impact on how resources are consumed. Outputs are the amount of goods or services produced as a result of the processing of resources. Data envelopment analysis has been used for the evaluation of resource consumption among US federal hospitals and can lead to improved hospital efficiency.5 As discussed by Harrison and Coppola,16 regression analysis and other parametric techniques can be used as part of a 2-stage analysis where DEA is used in conjunction with the other technique to analyze the operation of hospitals while identifying the efficiency frontier. This allows DEA to be more effective in evaluating multiple inputs and outputs.
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From a technical perspective, DEA evaluates inputs (beds, FTEs, and operating expenses) in relation to outputs (inpatient days, surgical procedures, and outpatient visits). Performance is indicated by a DEA score between 0 (lowest possible score) and 1 (highest possible score). A value less than 1 indicates inefficiency, whereas a value of 0.5 indicates that the organizations should be able to reduce resource input by 50% to be efficient. As discussed by Harrison and Kirkpatrick,34 an important feature of DEA is the ability to identify slack within individual organizations. This allows us to determine which inputs and/or outputs appear to be inefficiently used or produced by hospitals. This, in turn, offers practical applications for policymakers, managers, and researchers. Inefficiently used inputs or inefficiently produced outputs generate slacks. These slacks reflect either surpluses (inputs) or shortages (outputs) in production. Slacks can be analyzed to determine which inputs or outputs contribute most to an inefficient hospital’s efficiency scores. As discussed by Nyhan and Cruise,35 DEA has some advantages over previous statistical applications. These advantages include the ability to measure multiple input and output variables and provide a single measure of performance as well as provide a scalar ranking of organizations within the sample. In addition, outstanding organizations in the sample are not viewed as outliers and efficient organizations can be used as benchmarks to identify slack in the production process. Finally, DEA can provide longitudinal analysis through optimization. As discussed by Cooper et al,17 a potential advantage of DEA is that it includes extreme points in the sample data. These extreme points that other statistical tools may identify as outliers are sometimes judged to be high-performing organizations by DEA and as a result become benchmarks. According to Coppola,36 DEA scores are sensitive to the number of input and output variables included in the model. For example, increasing the total number of input and output variables within the model without increasing the sample size can lead to increased efficiency scores.
A major goal of DEA research was to identify an efficiency frontier for similar hospitals, which represents the optimum level of efficiency and serves as a benchmark for estimating cost savings as organizations strive for efficiency. In addition, DEA methodology has the ability to conduct a comparative analysis of the efficiency of hospitals over multiple time periods. Therefore, DEA can document what slack, if any, exists in the operations of organizations and identify any changes in efficiency that have occurred over time. METHODOLOGY This study evaluates the efficiency of federal hospitals using a VRS input–oriented DEA model. Data for this research were obtained from the American Hospital Association’s 2007 and 2011 annual surveys. Included in the study were a total of 165 federal hospitals in 2007 and 157 in 2011. The variables selected for this study are commonly used input and output variables affecting federal hospital efficiency.37 Inputs 1. Operating expenses: Payroll expenses are not included because the number of FTEs is used as a separate measure of labor input. 2. Hospital beds: The number of hospital beds is an accepted indicator of capital investment. The data on the number of hospital beds were recorded for each of the 2 years. Beds are a measure of hospital assets and show changes in organizational infrastructure and should reflect population shifts in geographic areas.8 3. FTEs: Labor is an important facet of an organization’s resource consumption. Outputs 1. Inpatient days: Inpatient days is a common measure of federal hospital productivity and is a widely accepted measure of inpatient workload.16 2. Surgical procedures: Surgical procedures is a widely accepted measure of federal hospital output.
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Efficiency Among US Federal Hospitals 3. Outpatient visits: Outpatient workload is a widely accepted measure of federal hospital output.38 Inpatient days, surgical procedures, and outpatient workload provide a comprehensive measure of hospital productivity.
RESULTS Descriptive statistics of the variables for 2007 and 2011 are shown in Table 1. Table 1 shows that operating expenses for federal hospitals increased by 29% from 2007 to 2011. When adjusted for a 3% annual inflation, the operating expenses have increased at a reasonable rate during the study period. Similarly, the average number of FTEs increased by 1.5% during the study period. In contrast, the number of hospital beds has decreased by 36 beds or 1.5%. This reduction in beds is a significant savings in organizational infrastructure. On a positive note, the increase in outpatient visits represents a fundamental shift from inpatient care to ambulatory services. A review of the descriptive statistics clearly documents that productivity in federal hospitals has increased during the study period. Nonetheless, as discussed previously, using descriptive statistics to analyze overall efficiency is cumbersome and lacks precision. The results of the 2007 and 2011 DEA are presented in Table 2. Data envelopment analysis provides a clear yet sophisticated determination of efficiency and shows that the average
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efficiency score of federal hospitals improved by 5% from 2007 to 2011. Whereas the average efficiency improved, representing a fundamental shift to the efficiency frontier, the number of efficient federal hospitals (score of 1) decreased from 25 in 2007 to 21 in 2011. Those hospitals located on the efficiency frontier represent the optimal application of inputs to create outputs within the homogenous organizations. Those organizations on the efficiency frontier serve as benchmarks for less efficient peer organizations. This evidence of improved efficiency and less slack is important and is a clear indication of increased organizational efficiency. Data for Table 3 were calculated using DEA solver software and show the average amount of slack among inefficient hospitals, compared with those federal hospitals on the efficiency frontier (DEA score of 1). These results represent the combined scores of slack for all inefficient federal hospitals. The combined scores were then divided by the number of inefficient hospitals to calculate the average level of slack within the homogenous population. This average level of slack provides a measure of overall inefficiency. From an input perspective, the results show that based upon the level of output, the average slack in beds was 6 in 2007, which decreased to 1 in 2011. Conversely, based on the level of output, the average slack in operating expenses was $4 910 708 in 2007, which increased to $11 409 269 in 2011. Similarly, the average slack in FTEs was 0 in 2007, which increased to 36 in 2011.
Table 1. Descriptive Statistics for the 2007 and 2011 Study Periods
Variable
2007 (N = 165), Mean (SD)
Inputs Operating expenses, $ 114 736 034 (93 500 624) FTEs 1757 (1294) Beds 240 (247) Outputs Inpatient days 59 733 (68 621) Surgical procedures 4265 (3665) Outpatient visits 440 971 (279 238)
2011 (N = 157), Mean (SD)
2007-2011 Difference
148 980 904 (108 229 374) 1785 (1126) 204 (210)
+34 244 870 +28 36
+29% +1.5% 1.5%
8442 432 +41442
14% 10% +9.3%
51 291 (58 597) 3833 (4887) 482 413 (319 339)
2007-2011 Percent Change
Data source: 2007 and 2011 American Hospital Association Surveys. Abbreviation: FTE, full-time employee.
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Table 2. Summary of Data Envelopment Analysis (DEA) Measures
N Average efficiency score Minimum score Maximum score Standard deviation Number of efficient hospitals Number of inefficient hospitals
2007
2011
165 0.81 or 81%
157 0.86 or 86%
0.47 1.00 0.12 25
0.23 1.00 0.11 21
140
136
Data source: 2007 and 2011 American Hospital Association Surveys.
The level of inefficiency in output is also measured by DEA. In 2007, DEA showed that the level of output in inpatient days was underutilized by 5, which increased to 65 in 2011. Surgical procedures were underutilized by 24 in 2007 and 1563 in 2011. Similarly, provided a given amount of input, inefficiency results show that outpatient visits were underutilized by 26 034 in 2007, which decreased to 20 121 in 2011. Table 4 is a case study for a federal hospital operating below the efficiency frontier for federal hospitals in 2011. As stated previously, health care leaders of less efficient federal hospitals can improve efficiency by analyzing
Table 3. Analysis of Inefficiency or Slack 2007 (N = 165)
2011 (N = 157)
Input inefficiency per hospital Excess beds 6 1 Excess operating $4 910 708 $11 409 269 expenses Excess FTEs 0 36 Output inefficiency Shortage:inpatient 5 65 days Shortage:surgical 24 1563 procedures Shortage:outpatient 26 034 20121 visits Data source: 2007 and 2011 American Hospital Association Surveys. Abbreviation: FTE, full-time employee.
Table 4. Case Study of Inefficient Federal Hospital 2011 Input inefficiency per hospital Efficiency score Excess operating expenses Excess beds Excess FTEs Output inefficiency Shortage:inpatient days Shortage:surgical procedures Shortage:outpatient visits
0.66 or 66% 0 18 0 10 024 0 0
Data source: 2011 American Hospital Association Survey. Abbreviation: FTE, full-time employee.
DEA results. For example, the DEA score of 0.66 or 66% is not on the efficiency frontier and is well below the average efficiency score of 0.86 or 86% in 2011. According to the analysis, to become efficient, the case study federal hospital should consider closing 18 hospital beds. In addition, the case study federal hospital should explore methods to increase inpatient days. If all the adjustments discussed previously are implemented, DEA suggests that this case study federal hospital could approach the efficiency frontier.
DISCUSSION This study shows that federal hospitals have made significant strides in improving operating efficiency from 2007 to 2011. This was supported by Ozcan and Luke,8 who also found that changes in organizational structure, adoption of information systems, and managing population shifts have resulted in increased efficiency. The present study found that by reducing hospital beds and in some cases closing underutilized facilities, federal hospitals have increased their organizational efficiency during the timeframe of analysis. The significant increase in outpatient visits from 2007 to 2011 shows major improvement in productivity. Management of unoccupied beds is required as the industry continues to focus on shorter lengths of stays and increased ambulatory care. This was supported by a reduction in beds and the
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Efficiency Among US Federal Hospitals lower level of slack. On a negative note, this study shows that the average excess operating expense per hospital has increased from $4 910 708 of slack in 2007 to $11 409 269 of slack in 2011. Similarly, federal hospitals have increased slack in FTEs from 0 in 2007 to 36 in 2011. At $36 000 per FTE, this represents an increased cost in staff of $1 296 000 per hospital. During the study period, federal hospitals have reduced inpatient days by 14% and reduced surgical procedures by 10%. More importantly, outpatient visits increased by 9.3% during the study period. This documents increased productivity and efficiency during the study period. The study results indicate that federal hospital efficiency has improved their average efficiency score from 81% in 2007 to 86% in 2011. This was supported by Ozcan and Luke,8 who also found positive shifts in the efficiency frontier, which they believed were caused by structural and technological changes. Whereas federal hospitals had increased efficiency, the number of highly efficient hospitals ( score = 1) dropped from 25 in 2007 to 21 in 2011. This shows that there remain additional opportunities for increased efficiency among federal hospitals. According to Clement et al,39 improving efficiency scores are important because they are positively associated with quality. They found that the best use of resources improves efficiency and leads to lower mortality rates. In addition, they found a positive correlation between efficiency and quality. As a result, federal hospitals can improve their operations by focusing on the efficiency frontier, which will also enhance patient care outcomes.
MANAGERIAL IMPLICATIONS From a management perspective, the results of this study suggest that the increase in federal hospital efficiency during the study time frame is a result of improved management efficiency. From a transaction-cost economics perspective, this study found that an integrated organizational structure, combined with coordination
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across the continuum of health care, has increased the efficiency of federal hospitals. The VA and DoD will continue to face future challenges. Both organizations face an increase in beneficiaries, legislative challenges, and constrained economic resources.4 With an increasing number of wounded service members from Iraq and Afghanistan, both organizations will need to ensure that a comprehensive and integrated system is in place for beneficiaries transitioning from the DoD system to the VA health care system.4 Although ensuring comprehensive transition assistance will be vital, cost containment will be another major challenge for both organizations. For fiscal year 2012, the VA has requested $50.6 billion in appropriations to provide timely health care delivery to the growing population of veterans (Office of Management and Budget, 2011). With an increasing budget, the VA will be able to continue expanding eligibility to nondisabled veterans and needs-based veterans. Such an expanded eligibility could increase the VA beneficiaries by nearly 550 000 in 2013 (Office of Management and Budget, 2011).40 The DoD continues to refine TRICARE by providing incentives based on customer satisfaction, managing cost, reducing fraud, and placing federal ceiling prices on pharmaceuticals, ultimately setting the precedent for future contracts.4 The DoD is making great progress in implementing the use of generic drugs and promoting the use of the TRICARE Mail Order Pharmacy system, which will reduce cost and improve the quality of pharmaceutical management by focusing on the elimination of waste. Health care fraud has been elevated to 1 of the top 5 categories being pursued by the Defense Criminal Investigative Service, representing nearly 8.7% of the 1825 open cases.4 The future of federal health care will rely heavily on health information technology. Health information technology will get the most current information to the right people and allow them to make informed clinical decisions for federal beneficiaries. Collaborative planning by the VA and DoD will support the following objectives: (1) the interoperability of health care information, (2) develop an integrated
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THE HEALTH CARE MANAGER/APRIL–JUNE 2014
electronic health record, (3) allow data sharing for program budget planning, (4) develop system-wide metrics to monitor performance, and (5) accelerate the exchange of health care information between DoD and the VA.41 Health care costs have continued to rise year after year. At the current rate of increase, health care costs will soon become unsustainable. As efficiency and cost containment have gained more emphasis within the VA and DoD health care system, both organizations have developed benchmark strategies aimed at reducing cost, improving quality, and expanding access to patients. Our research found that the strategies implemented by the VA and DoD are appropriate for large private health systems. Reducing operating expenses and labor will only support short-term improvements to the hospital’s bottom line. Efficiency gains as represented by higher productivity must be realized on a sustainable basis. As discussed by Harrison and Sexton,42 the efficiency frontier provides an opportunity for ongoing improvement. Benchmarking against the efficiency frontier will help federal hospitals to document their competitive position in the overall health care industry.
POLICY IMPLICATIONS Ozcan and Luke8 found that the federal health care system is reacting to the same trends as the nongovernmental health care sector. For example, they are experiencing a reduction in beds, declining admissions, and increasing operating expenses as well as FTE staff. As policy makers seek increased efficiency in the federal hospital system, they should monitor the access to federal health care within local communities. Dramatic changes in the availability of care may be affected by the closure of federal hospitals. Potential negative results include the loss of federal facilities and reductions in the range of clinical services available within geographic areas. Unfortunately, underutilized federal hospitals that need capital to continue to provide care may become a burden on the health care system and may be forced into closure. In summary, federal hospitals must clearly portrait their unique mission to Congress, the general public, veteran organizations, and the beneficiary population to ensure continuing support. As a result, federal hospitals must continue to enhance their image within the community and broaden their influence in government to ensure their long-term survival.
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