Healthcare costs are higher in the U.S. then anywhere else in the world. A significant portion of the costs are generated in hospitals. We investigate both the efficiency and the effectiveness of U.S. community hospitals using the Agency for Healthcare Research and Quality’s Healthcare Cost and Utilization Project 2009-2011 Nationwide Inpatient Sample, a data set which contains all discharges from an approximate 20% sample of hospitals.
Here efficiency is the productivity of the hospital measured relative to the most productive hospitals and effectiveness is how closely the hospital produced relative to the forecasted services needed. We find the effectiveness levels are slightly higher than the efficiency levels in both 2010 and 2011 indicating that hospitals are producing closer to the forecasted level than the actual service level needed. Further, both efficiency and effectiveness levels are low indicating a large variability in the level of resources hospitals use to provide the same set of services. The low effectiveness scores indicate that many hospitals have a high level of resources even relative to the forecasted demand providing some evidence for a medical arms race.