Impact of HMO Penetration and Other Environmental Factors on Hospital X-Inefficiency

This study examined the impact of health maintenance organization (HMO) market penetration and other internal and external environmental factors on hospital X-inefficiency in a national sample (N = 1,966) of urban U.S. hospitals in 1997. Stochastic frontier analysis, a frontier regression technique, was used to measure X-inefficiency and estimate parameters of the correlates of X-inefficiency. Log-likelihood restriction tests were used to test a variety of assumptions about the empirical model that guided its selection. Average estimated X-inefficiency in study hospitals was 12.96 percent. Increases in managed care penetration, dependence on Medicare and Medicaid, membership in a multihospital system, and location in areas where competitive pressures and the pool of uncompensated care are greater were associated with less X-inefficiency. Not-for-profit ownership was associated with increased X-inefficiency.