ISAS Working Papers

The main objective of this paper is to analyze the cost efficiency of the public and private hospitals in Karnataka State in India. This is estimated through the parametric and nonparametric methods by using the Hospitals Facility Survey (2004) in Karnataka State. The findings indicate that the choice of econometric approach did not make any significant difference in the results and they are robust. The analysis infers that (a) hospitals (both public and private together in the analysis) are cost inefficient in the State, which is due to technical and allocative system of resources of the hospitals; (b) the private hospitals appear relatively less inefficient than the public hospitals; and (c) the main determinants of the technical and allocative inefficiencies of the public hospitals are due to inappropriate interventions of inpatient days care, share of medical personnel, beds capacity, quality indices, and choice of the locations; while in the case of private hospitals, it relates only to beds capacity and quality indices. It means that the government hospitals will be out of voluntary health insurance schemes, (which are emerging with many options in the State), as a service provider as it lacks the cost efficiency in general and technical and allocative efficiency in particular. It calls for a standardization of public hospitals and improve the quality of healthcare services as an immediate attention in the State. Need based financing through "capitation fee" and an effective alternative payment mechanisms such as user fee with a protected social justice criteria for poor in the public hospitals are the worth considering options in the State. It is also suggested that the private hospitals need to maintain the quality of healthcare services under the emerging competitive environment; otherwise, it would be subject to financial vulnerability since it highly depends on the user fee payment of the patients in the State.