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Including quality attributes in a model of health care efficiency: A net benefit approach

Quality attributes have been incorporated in analyses of efficiency in health care (e.g., hospitals) in various ways. For example, as a utility enhancing output, as a utility reducing “bad output” or as an exogenous factor. In this paper we argue that these approaches are inconsistent with the net benefit criterion that is commonly used in cost-effectiveness analysis in health. As a solution we propose a method that involves including quality variables (framed from a utility reducing perspective) as input variables in the efficiency model. We then show that an appropriate transformation of the standard net benefit measure allows one to obtain economic efficiency measures that are consistent with maximising net benefit, and that these economic efficiency measures can be subsequently decomposed into technical and allocative components. An additional advantage of the approach is that shadow prices can be derived for quality when output prices (e.g., of public hospital services) are unavailable. The method is illustrated using data on treatments for respiratory infections in 45 acute care hospitals in Australia.