Efficiency of U.S. hospitals between 2001 and 2011

This study focuses on finding the trend of efficiency in the healthcare industry in recent years. We applied stochastic frontier analysis and data envelopment analysis methods to capture the efficiency of 1,471 hospitals and found a sign of the Baumol effect, which is detected by the decreasing trend of hospital efficiency with increasing trend of labor costs. Furthermore, we compared the results of both approaches (stochastic frontier and data envelope analyses) in capturing efficiency scores and suggest the U‐shaped curve of the size effect may indicate the practice of “cream skimming” by some small hospitals.