Literature

 HEALTH CARE EFFICIENCY ACROSS COUNTRIES: A STOCHASTIC FRONTIER

ANALYSIS / Applied Econometrics and International Development, Vol. 11-1
(2011), Authors: OGLOBLIN, Constantin

Abstract: Use of the stochastic frontier technique to estimate a health

production function where the inefficiency term is modeled as a linear function
of relevant explanatory variables.

The Stochastic Frontier Model: yit = x’itβ + vit - uit

Where,
yit: the logarithm of the variable that measures health outcome (output) in
country i at observation t.
x’it: the vector of inputs (health care resources) associated with country i and
observation t.
β: the vector of parameters to be estimated.
vit: the random component, assumed to be independently identically distributed
with a mean of zero and variance σν2.
uit: a non-negative random component associated with production inefficiency,
assumed to be independently distributed such that uit is obtained by truncation
(at zero) of the normal distribution with the mean z’itδ and variance σu2.

The production inefficiency for country i and observation t, can be expressed as:
uit = z’itδ + wit

The health outcome variable (y) used in this study is health-adjusted life
expectancy (HALE), which measures the equivalent number of years of life
expected to be lived in full health (as calculated by the WHO).

The following variables are included in the model as the inputs of the production
function (x):
Hlthexp: total expenditure on health care per capita in international purchasing
power parity (PPP) dollars
Eduyrs: average years of schooling of population over 25 years old
Smoke: percentage of smokers among adults (over 15 years old)
Alcon: alcohol consumption per adult person (over 15 years old), liters of
pure alcohol per year
The variables included in the inefficiency component (z) are:
Gnipc: gross national income per capita in international PPP dollars
Gini: the GINI coefficient
Pubshr: public health care expenditure as a percentage of total health care
expenditure
Pktshr: out-of-pocket healthcare expenditure as a percentage of total
healthcare expenditure

The data are drawn primarily from the WHO statistical databases and the World
Bank databanks. The data for most variables in our model are not available on a
consistent basis, but come from surveys conducted in different years for
different countries. Therefore, compiling a satisfactory longitudinal dataset for
the purposes of this study is hardly feasible. Thus, to obtain a sufficient number
of reasonably independent observations for our analysis, we pooled the data
from randomly selected three years of the current decade (2000, 2003, and
2007).

Results: The signs of all estimated coefficients, both in the production function
and in the inefficiency component, are consistent with theory. The positive
effect of per capita health care expenditure on the HALE frontier is statistically
significant. The estimated elasticity of HALE with respect to health care spending
is low, but given very wide variation in the level of per capita health care
expenditure across countries, it can be viewed is an important determinant of a
country’s health production outcome. Both coefficients in the quadratic term
reflecting the effect of education are also statistically significant, showing that
the elasticity of HALE with respect to years of education diminishes as the level
of education rises. As expected, the inefficiency component of the frontier
function (u) is inversely related with per capita GNI and directly related with
income inequality measured by the GINI coefficient. But perhaps the most
interesting finding of this study is that a greater share of public financing in
total health spending significantly decreases health care inefficiency. The same
is true about the share of out-of-pocket spending. These results support the
hypothesis that health care systems that rely heavily on private health
insurance are the least efficient ones.
 THE EFFICIENCY OF HEALTH PRODUCTION: RE-ESTIMATING THE WHO PANEL
DATA USING PARAMETRIC AND NON-PARAMETRIC APPROACHES TO PROVIDE
ADDITIONAL INFORMATION / Health Economics 12: 493-504 (2003), Authors:
Bruce Hollingsworth, John Wildman

Abstract: Use of parametric and non-parametric methods to measure efficiency

using the WHO data and then comparing the findings with the WHO ones.

The paper starts with an explanatory introduction of the WHO model for
measuring health-care efficiency and then criticizes it for not being agile enough
to capture some movements of countries performances at different times.

It then presents the Data Envelopment Analysis (DEA) model. For a country with
n outputs and m inputs it is:

∑𝑛
𝑟=1 𝑢𝑟 𝑦𝑟
Efficiency =
∑𝑚
𝑖=1 𝑣𝑖 𝑥𝑖

And it’s constrained to lie between unity (completely efficient) and zero.

Yr: the quantity of output r

Ur: the weight attached to output r
Xi: the quantity of input i
Vi: the weight attached to input i

Following this, it also presents the Stochastic Frontier Analysis (SFA) model.

Yi = xiβ + (vi – ui), i= 1,…..,n

Where,
Yi : the production of the ith country
Xi: a k x 1 vector of the input quantities of the ith country
β: an unknown
vi: random variables assumed iid (0, 𝜎𝑣2 ) and independent of the of the ui which
are non-negative random variables assumed to account for technical inefficiency,
assumed to be iid (0, 𝜎𝑢2 ).

Results (Parametric Panel Data): The results demonstrate that excluding those
countries that do not have complete observations has a small influence on the
magnitude of the ranks. The results were pretty much the same with those
published by the WHO. Parametric estimation ensures that at least one country
lies on the efficient frontier, but it gives no information as to movements of the
frontier.

Results (Non Parametric): After using DEA models and DEA-based Malmquist
indices to measure productivity changes, the results showed a productivity
regression over the panel, by 5% overall. This is due to technological changes
rather than the changes in a countrys’ efficiency estimates.