Estimating cost efficiency and determining the effect of specialization - A stochastic frontier approach on Finnish hospitals 2011-2013

This thesis estimated the cost efficiency and specialization of Finnish hospitals during 2011-2013 and determined how specialization affected hospital cost efficiency and what components of hospital output contributed most to hospital cost efficiency. A stochastic frontier model by Battese and Coelli (1995) with inefficiency effects was applied to a set of panel data to estimate the effect of exogenous variables on cost efficiency. The results indicate that Finnish hospitals are relatively cost efficient overall with a mean cost efficiency of 87% and have a relatively low degree of specialization. Specialization is associated with lower levels of cost efficiency. The results also suggest that university hospital status is not a significant determinant of cost efficiency in this sample. The findings contradict previous studies done on Finnish hospitals with regards to the effect of specialization on cost efficiency and as such prove a motivation for further research especially following recent studies done with new definitions of measuring hospital specialization with patient volumes instead of patient proportions. The findings are of current interest as Finland is in the midst of a health care system reform