The utility of returns to scale in DEA programming: An analysis of Michigan rural hospitals

In 1984, Banker, Charnes, and Cooper introduced the capability of using data envelopment analysis to assess increasing, decreasing, or constant returns to scale. This analysis would appear to make an important contribution to the health care field because of the regulatory environment within which the industry exists and the competition among hospitals for additional services and capacity. In many states, hospitals must submit a “certificate of need” to prove eligibility to add capacity or services. Agency administrators at the state level should analyze each hospital's production performance to determine the effectiveness of resource utilization. Residents of a state where hospitals are regulated need to know the effectiveness of agencies in allowing resources to be properly allocated to hospitals. Returns to scale analysis can help provide answers to these concerns. We examine Michigan rural hospitals and propose a simple, yet logical procedure for evaluating returns to scale for technically inefficient hospitals.