Malaysian Journal of Public Health Medicine 2010, Vol. 10 (2): 35-43 HOSPITAL EFFICIENCY: CONCEPT, MEASUREMENT TECHNIQUES AND REVIEW OF HOSPITAL EFFICIENCY STUDIES Hossein Moshiri, 1 Syed Mohammed Aljunid 1 , Rahmah Mohd Amin 2 1 United Nation University- International Institute for Global Health, Kuala Lumpur, Malaysia 2 Department of Community Health, Faculty of Medicine, University Kabangsaan Malaysia, Kuala Lumpur, Malaysia ABSTRACT In a time of rising demands on hospital reimbursement levels, focus on efficient operations is becoming more imperative. In health care systems, the measurement of efficiency is usually the first step in auditing individual performance of production units, e.g. hospitals, health centers, etc. It constitutes the rational framework for the distribution of human and other resources between and within health care facilities. The term efficiency is broadly used in economics and refers to the best utilization of resources in production. Typical example of efficiency is technical efficiency, referring to the effective use of resources in producing outputs. In the Farrell framework, a hospital is judged to be technically efficient if it is operating on the best practice production frontier in its hospital industry. In general, there are two main frontier methods in measuring efficiency. The first is Data Envelopment Analysis (DEA), a linear programming method which enables the measurement of efficiency consistent with the theoretically based concept of production efficiency. DEA typically examines the relationship between inputs to a production process and the outputs of that process. The second technique for assessing efficiency that is employed is Stochastic Frontier Analysis (SFA). This is an econometric technique to estimate a conventional function; with the difference being that efficiency is measured using the residuals from the estimated equation. The error term is therefore divided into a stochastic error term and a systematic inefficiency term. Key words: Efficiency, Technical efficiency, Hospital Efficiency, DEA, SFA, Frontier method INTRODUCTION It is often argued that health care institutions are not expected to be efficient, as they do not adhere to neo-classical firm optimization behavior 1 . However, given the vast amount of resources that goes towards funding such institutions, there is a great and growing interest in examining efficiency in hospitals with the driving force for such concern being value for money. Recently the demand for better quality health care services, accordingly the medical costs have been increased tremendously, which build a sharp contrast with very limited government resource and fund could be allocated to cop with this challenge. Increasing healthcare costs has been one of the most hotly debated policy issues in developed and developing countries in recent years. In many countries, public pressure and executive interest for cost control have led to various studies of the organizational causes of excess resource utilization; leading governments to seek new approaches to confront these critical issues. Efficiency measurement represents a first step towards the evaluation of a coordinated health care system, and constitutes one of the basic means of audit for the rational distribution of human and economic resources 2 . Over the past two decades, efficiency measurement has been one of the most intensely explored areas of health services research 3 . ORIGINAL ARTICLE