The Impact of the Prospective Payment System on the Technical Efficiency of Hospitals

In a longitudinal panel study design, 80 hospitals in Virginia were selected for analysis to test the hypothesis that the introduction of the prospective payment system (PPS) in October 1983 had helped hospitals enhance their operational performance in technical efficiency. A non-parametric method called Data Envelopment Analysis (DEA) was used to calculate and compare the efficiency scores for each peer group of hospitals (by bed size) between the year 1984 and the year 1993. Contrary to expectations, no significant difference in technical efficiency was found in each hospital peer group over the study period. Nevertheless, the case study demonstrates that if hospital managers use this analytical tool appropriately, they may spot where any organizational weakness lies and how they can improve it.