ANALYZING OPERATIONAL AND FINANCIAL PERFORMANCE OF U.S. HOSPITALS USING TWO-STAGE PRODUCTION PROCESS

We determine whether hospitals that have better operational efficiency also exhibit better financial performance. Utilizing data envelopment analysis (DEA), we examine the performance of 90 U.S. hospitals for the year 2013 via a two-stage hospital production process that evaluates operational performance in the first stage and financial performance in the second. The effect of hospital location and size on operational and financial performance was revealed by evaluating technical and scale efficiencies. Relatively few of the hospitals were efficient in financial performance compared with their efficiency in operational performance. Only a few hospitals were efficient in both stages, which suggests that a few hospitals are able to efficiently generate profits from their operations. In both stages, the majority of the hospitals were found to be in decreasing returns to scale (DRS). Furthermore, DRS was found among most of the hospitals, irrespective of their size and location in both stages. The results provide important insights to governments, insurers, and employers, especially those struggling with rising healthcare costs, who are increasingly looking to purchase care from efficient and low-cost producers.