How do payer mix and technical inefficiency affect hospital profit? A weighted DEA approach

As changes in the US health care system continue to evolve and change, maintaining the financial viability of hospitals is crucial to the system’s operation. Two lines of inquiry have been pursued in describing factors affecting financial viability. The first line relates to the external payer mix of patients focusing on patients who are unable to compensate hospitals for the care received. The second line of inquiry focuses on internal management. In this paper, we assess both these lines of research in order to determine if payment source by patients and/or managerial efficiency contributes to profits. By using a weighted DEA we measured the inefficiency of inputs to the production process on our sample of 138 hospitals operating in Florida during 2005. We used the derived inefficient use of inputs along with the number of days by payer group in order to explain their effects on total net revenue. To preview our results, we found that the inefficient use of beds and the provision of uncompensated care reduce significantly profits. We also demonstrate how our findings contribute to current policy debates both on the federal US and the state of Florida level.