China Economic Review 31 (2014) 166184

Contents lists available at ScienceDirect

China Economic Review

The trade-offs between efciency and quality in the hospital

production: Some evidence from Shenzhen, China
Jinqiu YANG a,b,, Wu ZENG c
a
Medical College, Xiamen University, Xiamen, China
b
The Wang Yanan Institute for Studies in Economic, Xiamen University, Xiamen, China
c
Schneider Institutes for Health Policy, Heller School, Brandeis University, MA, USA

a r t i c l e i n f o a b s t r a c t

Article history: This study aims to examine the trends of productivity, efciency and quality changes of hospitals
Received 20 August 2013 in Shenzhen city over the period 20062010 and explore whether there is a trade-off between
Received in revised form 16 September 2014 efciency and quality in the hospital production. A three-stage data envelopment analysis
Accepted 16 September 2014
(DEA) based Malmquist productivity index is used to estimate the changes of productivity,
Available online 22 September 2014
efciency and quality. The results show that both public and private hospitals have experienced
a productivity growth and a negative evolution in efciency and quality changes between 2006
Keywords: and 2010. The average annual productivity growth rates of public and private hospitals are 4.1%
Data envelopment analysis (DEA)
and 2.8% respectively; the average annual reduction rates of efciency are 1.8% and 1.2%
Malmquist productivity index
respectively; the quality declines on average by 2.5% and 7.2% per year respectively. We may
Efciency
Quality not rule out the existence of efciency and quality trade-off in our study. This possible trade-off
is mainly found in the small and medium-sized hospitals. Our results are robust when varying
the specication of the DEA model.
2014 Elsevier Inc. All rights reserved.

1. Introduction

Inefciency and poor quality of health care have been a concern of China's health care system (Eggleston, Ling, Qingyue, Lindelow,
& Wagstaff, 2008 and Wagstaff, Yip, Lindelow, & Hsiao, 2009). The inadequacy and lack of access to affordable healthcare have forced
the government and healthcare providers to improve productivity, efciency and quality of healthcare production. However, with the
substantial cut in nancial support from government, hospitals in China have tended to pursuit revenue maximization (Liu & Mills,
2002). Facing the strong budgetary pressure, hospital administrators of take the strategy to expand the scale of production to increase
their market share, are confronted with pressure to improve quality and efciency simultaneously for the sake of meeting increasing
demands for health care.
It is reasonable to assume that, ceteris paribus, hospitals seek to maximize the quality of care for every patient so as to gain more
prestige; however, constraints on resources may force them to make trade-offs between the quality and quantity of care provided
within a diagnosis and across different diagnoses and patient groups (Ferrier & Trivitt, 2013). The classical notion has been that
when resources are constrained there is an inevitable quantity-quality trade-off (Newhouse, 1970). To promote efciency, measured
by cost minimization and output maximization, might lead to quality degradation. On the other hand, quality improvement may

Corresponding author at: Medical College and The Wang Yanan Institute for Studies in Economic, Xiamen University, Xiamen, China. Tel.: +86 592 2189613.
E-mail address: jinqiuyang@xmu.edu.cn (J. Yang).

http://dx.doi.org/10.1016/j.chieco.2014.09.005
1043-951X/ 2014 Elsevier Inc. All rights reserved.
 J. Yang, W. Zeng / China Economic Review 31 (2014) 166184 167

require for greater resources, which can result in a decline in efciency. Therefore, some policies or programs should be used to ensure
that health care providers do not compromise quality of care to improve efciency. The main research question addressed in this
paper is to determine whether there exists an efciency-quality trade-off in the hospital production, so as to provide policy implica-
tions for health care management. To the best of our knowledge, such work relevant to health care institutions in China has not been
previously performed. This study intends to contribute to a better understanding of the complex efciency and quality issues in the
Chinese health system. And it will also shed some fresh light on the study of the hospitals' efciency and productivity in China, espe-
cially from the aspects of trade-off between efciency and quality.
Although a considerable amount of research has been done with the efciency and quality in hospital production, no consensus
has been reached concerning the trade-off between efciency and quality. Arocena and GarcaPrado (2007) showed that an improve-
ment in hospital performance could be driven by quality increases along with an improvement in efciency. Nayar and Ozcan (2008)
analyzed the efciency of a sample of Virginia hospitals, comparing the results with and without quality measurements. The evidence
in their study indicates that improving technical efciency is not likely to compromise quality. Navarro-Espigares and Torres (2011)
detected a weak association between efciency and quality indicators and ruled out the existence of an efciency-quality trade-off in
the Andalusian hospitals. Chang, Hsiao, Huang, and Chang (2011) examined the Taiwan quality indicator project on quality and pro-
ductivity of hospitals in Taiwan. They found that the quality and efciency improvements can be achieved simultaneously without a
tradeoff. All of these ndings indicate that efciency and quality in health care production are not necessary to be incompatible.
However, studies that investigated the association of quality and efciency have provided mixed results. For instance, Laine et al.
(2005) explored the association between quality and technical efciency and found a signicant association between technical ef-
ciency and unwanted dimensions of quality. In contrast, Laine, Linna, Hkkinen, and Noro (2005) examined the association between
productive efciency and clinical quality in institutional long term care for elderly patients and found no systematic association
between technical efciency and clinical quality of care. Gok and Sezen (2013) also provided empirical evidence on the relationship
between quality and efciency. They found that the trade-off between quality and efciency varied depending on the hospital size.
There was a negative correlation between quality and efciency for small-size hospitals, but the correlation for large-size hospitals
was positive.
In this study, we employ the Malmquist productivity index developed by Fre et al. (1995) to evaluate the changes in efciency,
productivity and quality as well as explore whether there exists a possible trade-off between efciency and quality. An adjusted three-
stage output-oriented DEA approach is used to purge performance evaluation of environmental impact and statistical noise. The
strength of our study compared to previous investigations regarding possible trade-off between quality and efciency as well as
the relationship between quality and efciency is that our study employs a three-stage DEA approach to account for the impact of en-
vironmental effects and statistical noise; the robustness of the results has been tested as well. Meanwhile, the research ndings make
a contribution to reveal that scale inefciency is one primary source of inefciency of Chinese hospitals. It also contributes to strength-
ening controls on massive expansion of public hospitals. Additionally, the research ndings prove that an efciency-quality trade-off
could be avoidable in the hospital production. Creating a reasonable performance evaluation system and making great efforts to
improve the status of doctors with excessive workload will facilitate to prevent the possible trade-off between quality and efciency.
The rest of this paper is organized as follows: Section 2 describes the research data and the quality incorporated Malmquist
productivity index. Section 3 presents the empirical results. Section 4 provides an extended discussion of the results of this paper.
Conclusions are offered in the nal section.

2. Methodology and data

2.1. Denition of efciency and quality

According to the pioneering work of Farrell (1957), technical efciency is producing the maximum amount of output from a given
amount of input or alternatively, producing a given output with minimum input quantities. In the context of health, technical efcien-
cy can be described as producing a given level of health service outputs with the least health system inputs. When a hospital is tech-
nically efcient, it operates on its production frontier. Meanwhile, the technical efciency can be segmented into pure technical
efciency and scale efciency. Pure technical efciency measures the technical efciency that cannot be attributed to deviations
from optimal scale, whereas scale efciency measures whether a hospital is operating at an optimal scale.
By far, there is no comprehensive denition of health care quality and it is difcult to be measured in a generic way. Quality in
health care depends on several dimensions such as accessibility, effectiveness, efciency, etc. Navarro-Espigares and Torres (2011)
distinguished the health care quality into two components: technical quality and quality perceived by the patients. Technical quality
refers to the quality of health care delivery, that is, diagnosis competence and treatment outcome. Patient perception of quality refers
to patient satisfaction with health care. The hospital quality measurements such as risk adjusted mortality, hospital teaching status
and the number of re-admissions are frequently used in the literatures. In this paper, we use mortality rate and average length of
stay to measure the service quality, which belong to technical dimension of health care quality.

The calculation of the mortality rate is: the number of deaths in the discharged patients / the total number of discharged patients 100%. The calculation of the
average length of stay is: the total number of occupied hospital bed days of all discharged patients/the total number of discharged patients.
168 J. Yang, W. Zeng / China Economic Review 31 (2014) 166184

2.2. Inputs and outputs of health care

Inputs in the hospital production are classied as labor and capital. The labor input can be decomposed into a variety of profession-
al groups such as physician, nurse and administrative staff. The capital input is proxied by the number of hospital beds in most studies.
Outputs in the hospital production are particularly challenging to dene. Two views on measurement of the output of health care sec-
tor were in the dominant position, which were the process approach and the outcome approach respectively (Mersha, 1989). For the
process approach, the output is measured with services provided by the different units such as the X-rays, laboratory procedures, pa-
tient days, etc. The outcome approach takes the process approach as an intermediate step leading to the desired change in the patient's
health status. According to this approach, the output of health care sector should be measured on the basis of the outcome, which is
health improved. Theoretically, improved health status is the ultimate output of hospitals or the health care sector. However, the mea-
surement of health status faces difculties because health is multi-dimensional and has no readily available valuation. Because of the
difculties in accurately measuring improvement in health status, hospital output is measured by an array of intermediate outputs
(health services) that improve health status (Grosskopf & Valdmanis, 1987). The number of outpatient visits, the number of inpatients
and the number of inpatient days are the most commonly used intermediate outputs in the studies. Given the information of the avail-
able data, we employ two output and ve input variables in this paper. The number of outpatient visits and inpatients is used to mea-
sure the output of hospital. The input variables consist of the number of beds (used as a proxy of capital), the number of doctors, the
number of nurses, the number of administrative staff and the number of other staff (health professionals other than doctors and
nurses).

2.3. The Malmquist productivity index

The Malmquist productivity index was named after Malmquist, who initially put forward a quantity index for consumption anal-
ysis in 1953 (Malmquist, 1953). It was introduced by Caves, Christensen, and Diewert (1982) to evaluate productivity movements
among different production units. Nowadays, it has been widely used to measure productivity growth in various industries. In this
paper, we employed output-oriented Malmquist productivity index since hospital administrators may face a xed quantity of inputs
in any given period. Subject to this resource constraint, hospital administrators ought to schedule how many patients to treat. Fre
et al. (1994) dened the output-based Malmquist productivity index as:
2 t
t1 t1  t1
t1 t1 312

 Doc x ; y Doc x ; y
x ;y ;x ;y 4 5
t;t1 t1 t1 t t
Mo   t1  t t  1
Dtoc xt ; yt Doc x ;y

where the subscript o indicates output-orientation, the subscript c indicates the assumption of constant returns to scale (CRS), x Rn+
denotes inputs, and y Rm t t t t+1 t+1 t+1
+ refers to outputs. Do(x , y ) and Do (x ,y ) are the output distance functions measured at time t and
t t+1 t+1 t+1 t t
t + 1 respectively. Do(x ,y ) and Do (x , y ) are mixed-period output distance functions, measuring the maximum propor-
tional change in outputs required to make the observed inputoutput pair (xt + 1, yt + 1) and (xt, yt) are feasible in relation to the tech-
nology at time t and t + 1. The Malmquist productivity index could be decomposed into pure technical efciency change (PTEC), scale
efciency change (SEC) and technical change (TC), which can be expressed as (Fre et al., 1994):
2 t1
t1 t1 3 2 t
t t  t1
t1 t1 3 2 t
t1 t1  t
t t  312
Dov x ; y Dov x ; y Doc x ; y Doc x ; y Doc x ; y
4  t t  5  4 t  t t  t1  t1 t1  5  4 t1  t1 t1  t1  t t 5
t;t1
Mo 2
Dov x ; y
t
Doc x ; y Dov x ; y Doc x ; y Doc x ; y
PTEC  SEC  TC

where the subscript v denotes variable returns to scale (VRS).

To take account of the role of quality in productivity changes, Fixler and Zieschang (1992) initially introduced quality attributes in
productivity indices. Later, Fre, Grosskopf, and Roos (1995) incorporated quality attributes into (2) and dened the quality incor-
porated Malmquist productivity index as:
2 t
t1 t1 t1  t1
t1 t1 t1 312
t;t1
 Doc x ; y ; Doc x ; y ;
4 5
t1 t1 t1 t t t
Mo x ;y ; ;x ;y ;  t t t  t1  t t t  3
Doc x ; y ; Doc x ; y ;
t

Following the work of Fre et al. (1995), we assume that the distance function is multiplicatively separable in attributes and in-
  t  
puts/outputs, as Dto xt ; yt ; t1 D o xt ; yt =At t1 . In addition, the quality change index, which measures changes in quality attri-
butes from time t to t + 1, is dened as:

2 t
t t t  t1
t1 t1 t  312

 Doc x ; y ; Doc x ; y ;
Q o x ; y ; ; x ; y ; 4 t  t t t1  t1  t1 t1 t1 5
t1 t1 t1 t t t
4
Doc x ; y ; Doc x ; y ;
 J. Yang, W. Zeng / China Economic Review 31 (2014) 166184 169

Thus, the quality incorporated Malmquist productivity index can be rewritten as:

^ t;t1 Q 1  PTEC  SEC  TC

M 5
o o

In this work, the technology is assumed to be strong disposability of outputs and attributes; therefore, if t + 1 t then
Dto(xt, yt, t + 1) Dto(xt, yt, t) and Dto + 1(xt + 1, yt + 1, t + 1) Dto + 1(xt + 1, yt + 1, t). Thus, a value of Qo greater than one in-
dicates a reduction in quality, equals to one means quality unchanged, and less than one implies an improvement in quality. This paper
is an output-oriented evaluation, which means a value greater than one in Mo, PTEC, SEC and TC indicates an improvement in produc-
tivity, pure technical efciency, scale efciency and technology over time. A value less than one indicates deterioration in productivity,
pure technical efciency, scale efciency and technology. A value equals to one means that they remain unchanged.

Table 1
Descriptive statistics of inputs, outputs and quality attributes, 20062010.

Number Number Number of Number of Number of Number of Number of Mortality Average length
of beds of doctors nurses other staffs administrative staffs outpatient visits inpatients rate (%) of stay (days)

Panel A: public hospitals

2006
Mean 272 196 224 109 29 674,566 9581 0.74 7.50
St. dev. 262 177 220 98 28 559,145 9319 8.55 2.04
Min 20 10 11 17 6 21,209 147 0 4
Max 1090 771 949 495 139 2,005,345 40,901 1.54 13
2007
Mean 280 219 245 115 35 867,946 10,688 1.50 7.62
St. dev. 266 191 222 92 31 704,921 9930 12.16 2.45
Min 20 24 26 14 7 40,291 93 0.48 4
Max 1090 804 927 373 158 2,442,463 41,393 4.82 18
2008
Mean 303 237 267 125 45 1,013,973 11,788 0.66 7.77
St. dev. 281 199 229 98 34 806,735 11,016 8.07 2.30
Min 14 28 27 18 8 59,832 184 0 5
Max 1100 863 962 414 146 2,764,584 48,902 5.70 16
2009
Mean 323 253 286 132 44 1,123,525 12,230 0.63 7.38
St. dev. 295 208 247 96 36 883,915 11,731 7.92 1.76
Min 20 16 40 15 3 33,841 315 0 5
Max 1157 843 1021 377 139 3,074,746 53,781 1.93 12
2010
Mean 339 255 295 126 49 1,239,802 13,600 0.62 7.51
St. dev. 306 202 248 92 39 982,546 13,022 7.88 1.87
Min 20 24 21 20 1 10,458 258 0 4
Max 1167 846 1028 415 151 3,288,695 57,266 2.11 12

Panel B: private hospitals

2006
Mean 68 40 46 26 11 97,870 1460 0.38 6.79
St. dev. 67 25 25 19 11 74,595 1680 6.13 3.00
Min 10 8 11 6 3 4077 45 0 2
Max 300 110 120 89 48 266,056 6046 1.43 17
2007
Mean 65 46 50 31 13 133,006 2264 1.30 6.86
St. dev. 58 27 32 18 11 96,630 2314 11.33 2.20
Min 10 13 15 9 2 17,675 152 0 3
Max 230 127 143 89 53 377,352 8874 4.57 12
2008
Mean 77 49 58 31 12 141,177 2676 0.24 6.69
St. dev. 64 34 38 18 8 87,707 2574 4.88 2.58
Min 10 17 18 10 4 29,369 211 0 3
Max 259 170 164 83 40 328,435 9855 0.52 14
2009
Mean 86 49 65 33 13 146,457 2809 0.24 6.93
St. dev. 74 32 41 19 8 111,132 2744 4.89 2.41
Min 10 11 15 11 5 28,030 205 0 3
Max 259 140 182 81 42 534,544 10,334 0.71 13
2010
Mean 92 49 70 35 13 143,340 3159 0.25 7.04
St. dev. 77 28 44 21 7 106,837 3067 4.97 2.67
Min 10 15 15 9 5 9535 150 0 4
Max 277 113 178 79 37 448,917 12,115 0.66 16

Notes: 1. Data source: Shenzhen Health Statistical Yearbook 20062010. 2. Other staffs are health professionals other than doctors and nurses.
170 J. Yang, W. Zeng / China Economic Review 31 (2014) 166184

Table 2
Geometric means of 1st-stage overall efciency, pure technical efciency and scale efciency, 20062010.

2006 2007 2008 2009 2010 20062010

Panel A: Model 1
Public hospitals
Overall efciency 0.781 0.704 0.741 0.723 0.735 0.737
Pure technical efciency 0.849 0.823 0.830 0.806 0.829 0.827
Scale efciency 0.920 0.855 0.893 0.897 0.888 0.890
Private Hospitals
Overall efciency 0.506 0.579 0.640 0.624 0.587 0.585
Pure technical efciency 0.779 0.853 0.857 0.826 0.789 0.820
Scale efciency 0.649 0.679 0.747 0.755 0.744 0.714

Panel B: Model 2
Public hospitals
Overall efciency 0.829 0.783 0.804 0.782 0.802 0.800
Pure technical efciency 0.970 0.950 0.974 0.972 0.971 0.967
Scale efciency 0.855 0.825 0.825 0.805 0.825 0.827
Private Hospitals
Overall efciency 0.878 0.935 0.915 0.899 0.859 0.897
Pure technical efciency 0.987 0.970 0.994 0.995 0.991 0.987
Scale efciency 0.889 0.964 0.920 0.904 0.867 0.908

Data source: Shenzhen Health Statistical Yearbook 20062010.

2.4. Estimation of the Malmquist productivity index

For the purpose of this study, we estimate the Malmquist productivity index in (2) and the quality adjusted version in (3), which is
named Model 1 and Model 2 in the following sections. Estimations are based on solving the linear programming problems. Empirical
results are estimated by using the DEAP software package developed by Coelli (1996). The quality attributes used in this paper are
identied as undesirable outputs, that is, the quality level improves as the attributes decrease. In order to t the isotonity and convex-
ity relations in DEA application, we employ Seiford and Zhu (2002) to get a linear monotone decreasing transformation. That is to mul-
tiply each undesirable output by 1 and use a proper translation vector to change the negative outputs into positive.
We extended Fried, Lovell, Schmidt, and Yaisawarng (2002) to the adjusted three-stage output-oriented DEA approach to purge
performance evaluation of environmental impact and statistical noise. In the rst stage, the traditional DEA model with the original
unadjusted data was used to generate the slacks for each output. In the second stage, stochastic frontier analysis (SFA) is applied to
trace components of performance attributable to the operating environment of the unit, statistical noise, and managerial efciency.

m m
smi f zi ; vmi umi ; m 1; ; M; i 1; ; I 6

where fm(zi; m) are the deterministic feasible slack frontiers with parameter vectors m to be estimated and composed of an error
structure (vmi + umi). Consistent with a stochastic cost frontier formulation, it was assumed that vmi ~ N(0, 2vm) reected statistical
noise and that umi 0 stands for managerial inefciency assuming umi ~ N+(um, 2um). vmi and umi were distributed independently
of each other. The dependent variables in stage 2 are the total output slacks (radial plus non-radial) in stage 1. The independent
variables are dummies for ownership and bed-size categories. There are three bed-size categories: small (less than 100 beds), medium
(100499 beds) and large (more than 500 beds).
In the third stage, the regression results were used to adjust the observed output data for the effect of the environment and
statistical noise before we re-run the DEA model. In our study, the adjusted outputs were constructed from the results of stage 2
based on the following equation:

 m  m    
A
ymi ymi zi mini zi vmi mini vmi ; m 1; ; M; i 1; ; I 7

where yAmi and ymi are adjusted and observed output quantities, respectively. Thus, the evaluation emerging from stage 3 DEA is said to
represent managerial efciency only.

Hospitals in China are classied as belonging to one of three levels: primary, secondary or tertiary. Primary hospitals have 2099 beds, secondary hospitals have
100499 beds and tertiary hospitals have more than 500 beds (Yip, Hsiao, Meng, Chen, & Sun, 2010).
 J. Yang, W. Zeng / China Economic Review 31 (2014) 166184 171

Table 3
Stage 2 stochastic frontier estimation results.

Dependent variables

Independent variables Y1 slack Y2 slack

Panel A Model 1
2006
Constant 35,664.03(58,359.85) 240.95(6000.02)
Ownership 13,226.64(33,856.55) 296.25(420.61)
Secondary 110,505.10 (34,126.64)*** 1135.19(423.97)***
Tertiary 112,539.90 (47,338.63)** 1618.04(588.11)***
2 1.38E + 10 2.12E + 06
2.10E 13 2.56E 09
Log-likelihood function 916.40 609.23
2007
Constant 10,332.96(76,752.84) 12.42(6952.89)
Ownership 40,490.80(42,697.71) 763.61(467.43)
Secondary 131,646.50(42,412.11)*** 1383.20(464.31)***
Tertiary 192,486.80(61,583.17)*** 1498.63(674.18)***
2 2.36E + 10 2.83E + 06
1.22E 13 1.92E 09
Log-likelihood function 935.36 619.33
2008
Constant 22,964.19(71,328.36) 68.40(6511.70)
Ownership 22,789.90(39,113.62) 548.66(436.88)
Secondary 131,398.50(38,566.55)*** 1357.80(430.77)***
Tertiary 199,569.60(53,759.52)*** 1971.31(600.47)***
2 2.01E + 10 2.51E + 06
1.44E 13 2.16E 09
Log-likelihood function 929.71 615.09
2009
Constant 593.96(110,976.20) 78.14(8235.27)
Ownership 97,223.32(61,870.20) 896.48(559.81)
Secondary 129,508.50(60,979.93)** 1320.60(551.76)**
Tertiary 283,695.20(82,847.31)*** 2098.07(749.62)***
2 4.83E + 10 3.95E + 06
6.00E 14 1.37E 09
Log-likelihood function 960.35 630.98
2010
Constant 10,818.53(111,043.80) 266.73(8449.64)
Ownership 89,881.83(59,988.95) 568.01(555.39)
Secondary 115,592.20(59,090.60)** 1436.27(547.07)***
Tertiary 298,398.40(81,637.05)*** 2453.09(755.81)***
2 4.84E + 10 4.15E + 06
6.00E 14 1.31E 09
Log-likelihood function 960.42 632.66
Dependent variables

Independent variables Y1 slack Y2 slack Y3 slack Y4 slack

Panel B Model 2
2006
Constant 18,627.78(90,965.78) 43.96 (2447.83) 0.12(0.30) 1.13(1.51)
Ownership 10,804.87(26,191.19) 155.70(184.06) 0.14(0.09) 0.34(0.44)
Secondary 76,183.74(26,400.13)*** 75.89(185.53) 0.11(0.09) 0.26(0.44)
Tertiary 102,731.3(36,620.83)*** 990.66(257.35)*** 0.03(0.12) 0.33(0.61)
2 8.23E + 09 4.07E + 05 0.09 2.32
5.03E 13 1.34E 08 5.81E 05 8.33E 05
Log-likelihood function 898.43 551.37 15.60 128.71
2007
Constant 2880.94(48,192.37) 27.17(3077.35) 0.37(0.83) 0.93(1.22)
Ownership 17,167.05(26,796.69) 350.50(227.35) 0.75 (0.22)*** 0.63(0.44)
Secondary 51,616.02(26,617.45) 406.61(225.83)* 0.45(0.21)** 0.25(0.44)
Tertiary 137,511.20 (38,649.03)*** 150.96(327.91) 0.88(0.31)*** 1.04 (0.63)*
2 9.31E + 09 6.71E + 05 0.60 2.51
3.10E 13 8.10E 09 1.17E 04 1.57E 04
Log-likelihood function 902.75 568.88 81.62 131.58
2008
Constant 8038.92(74,573.52) 37.63(3009.66) 0.02(0.30) 0.47(1.00)
Ownership 11,880.81(40,933.33) 162.77(218.20) 0.14(0.06)** 0.17(0.37)
Secondary 89,191.62(40,360.80)** 261.71(215.15) 0.14(0.06)** 0.81(0.36) **
Tertiary 228,186.20 (56,260.61)*** 1108.36(299.90)*** 0.14(0.09) 0.98(0.51)*
2 2.20E + 10 6.26E + 05 0.05 1.80
1.31E 13 8.68E 09 4.20E 05 1.29E 04

(continued on next page)

172 J. Yang, W. Zeng / China Economic Review 31 (2014) 166184

Table 3 (continued)

Dependent variables

Independent variables Y1 slack Y2 slack Y3 slack Y4 slack

Log-likelihood function 932.89 566.49 4.31 119.89

2009
Constant 4336.49(802,784.60) 51.57(2112.00) 0.01(0.24) 0.75(0.87)
Ownership 38,966.58(54,055.93) 199.85(160.65) 0.15(0.08)* 0.46(0.37)
Secondary 78,391.92(53,278.11) 277.63(158.34)* 0.21(0.08)*** 0.68(0.37)*
Tertiary 260,139.90 (72,383.61)*** 541.50(215.12)** 0.13(0.11) 0.84(0.50)*
2 3.69E + 10 3.26E + 05 0.09 1.75
1.47E 13 1.67E 08 3.09E 05 1.16E 04
Log-likelihood function 950.90 543.60 14.49 118.85
2010
Constant 28,314.78(124,371.80) 14.39(1937.77) 0.05(0.24) 0.58(0.91)
Ownership 76,746.50(67,082.16) 289.22(136.30)** 0.17(0.09)* 0.17(0.46)
Secondary 93,716.21(66,077.58) 148.85(134.26) 0.10(0.09) 0.93(0.45)**
Tertiary 370,215.00(91,289.98) *** 367.19(185.49)** 0.01(0.12) 0.64(0.62)
2 6.05E + 10 2.50E + 05 0.11 2.82
4.80E 14 2.18E 08 3.74E 05 5.64E 05
Log-likelihood function 968.24 534.33 21.66 135.59

Notes: 1. Data source: Shenzhen Health Statistical Yearbook 20062010.

2. Y1 denotes the number of outpatient visits; Y2 denotes the number of inpatients; Y3 denotes mortality rate (%) and Y4 denotes the average length of stay (days).
3. The independent variables are dummies for ownership and bed-sizes categories. There are three bed-size categories: primary (less than 100 beds), secondary (100
499 beds) and tertiary (more than 500 beds). The private and primary hospitals were used as the benchmark groups.
4. Standard deviations are in parentheses,* signicant at the 10% level, ** signicant at the 5% level, and *** signicant at the 1% level.

The statistical noise from the managerial inefciency in the residuals of the SFA regression model (6) can be estimated by the follow-
ing equation:

m
E vmi jvmi umi  smi zi E umi jvmi umi ; m 1; ; M; i 1; ; I 8

2.5. Description of data

The sample hospitals used in this paper are extracted from the public statistic data of the health bureau website of Shenzhen (city)
in Guangdong province from 2006 to 2010. Shenzhen is the rst special economic zone in China and has become a rst-tier city with a
population greater than 10 million. Moreover, as a modern metropolis, it is one of the fastest-growing cities in the world. The sample is
limited to general hospitals in order to ensure greater homogeneity in performance evaluation across comparable units. There are 70
general hospitals, of which 46 are public hospitals and 24 are private hospitals. Although the sample size is relatively small, it concerns
the entire Shenzhen Prefecture's general hospitals. It is representative of the Shenzhen city as we include both the public and private

Table 4
Geometric means of the 3rd-stage overall efciency, pure technical efciency and scale efciency, 20062010.

2006 2007 2008 2009 2010 20062010

Panel A: Model 1
Public hospitals
Overall efciency 0.803 0.744 0.733 0.675 0.637 0.716
Pure technical efciency 1.000 1.000 1.000 1.000 1.000 1.000
Scale efciency 0.803 0.744 0.733 0.675 0.637 0.716
Private hospitals
Overall efciency 0.944 0.952 0.953 0.899 0.901 0.929
Pure technical efciency 1.000 1.000 1.000 1.000 1.000 1.000
Scale efciency 0.944 0.952 0.953 0.899 0.901 0.929

Panel B: Model 2
Public hospitals
Overall efciency 0.826 0.805 0.762 0.770 0.769 0.786
Pure technical efciency 1.000 1.000 1.000 1.000 1.000 1.000
Scale efciency 0.826 0.806 0.762 0.770 0.769 0.786
Private hospitals
Overall efciency 0.909 0.957 0.918 0.908 0.865 0.911
Pure technical efciency 1.000 1.000 1.000 1.000 1.000 1.000
Scale efciency 0.909 0.957 0.918 0.908 0.865 0.911

Data source: Shenzhen Health Statistical Yearbook 20062010.

 J. Yang, W. Zeng / China Economic Review 31 (2014) 166184 173

general hospitals in a ve-year period. However, as China has a huge geographical area and there are substantial economic and cul-
tural differences across regions, the results basing on Shenzhen may not be fully representative of the entire country. The data limi-
tation should be kept in mind when generalizing the research ndings to the whole country.
Table 1 provides descriptive statistics for hospital inputs, outputs and quality attributes. Generally, the means of inputs and outputs
were increasing while the means of quality attributes went up and down during the study period. On average, the public hospitals
have much more health inputs and outputs than private hospitals, but the proportion of administrative staff of private hospitals is
higher. Although the average mortality rate and average length of stay of public hospitals are higher than that of private hospitals,
there is no signicant difference on average length of stay between them. In addition, the average lengths of stay of hospitals
with more than 500 beds were signicantly longer than that of hospitals with 100500 beds and hospitals with less than 100 beds
throughout the study periods. There is no signicant difference between hospitals with 100500 beds and hospitals with less than
100 beds. Most of the time, hospitals with more than 500 beds had the highest average mortality rate, followed by hospitals with
100500 beds and hospitals with less than 100 beds. The only exception to this is that the average mortality rate of hospitals with
less than 100 beds was signicant higher than that of hospitals with 100500 beds and hospitals with more than 500 beds in 2007.

3. Results

3.1. Stage one: initial DEA

Table 2 summarizes the geometric means of overall efciency, pure technical efciency and scale efciency in the cases of exclud-
ing (Model 1) and including the quality variables (Model 2) before adjusting for variation in the operating environment and for the
inuence of statistical noise. The overall efciency is technical efciency measured with the constant returns to scale technology,
which can be decomposed into pure technical efciency (technical efciency measured with variable returns to scale technology)
and scale efciency. Model 1 predicts that, for the given amount of inputs, the outputs of public hospitals and private hospitals
could have an average potential improvement of 26.3% and 41.5% respectively during the period 20062010.
Thus, they could become efcient without taking the quality into account. Alternatively, for the given amount of inputs, the public
hospitals could have increased their outputs by an average of 20% in contrast to 10.3% for the private hospitals while maintaining the
same level of quality. According to the results of Model 1, the primary source of inefciency for public hospitals was pure technical
inefciency, while scale inefciency was the main source of inefciency for private hospitals. Model 2 indicates that scale inefciency
played a dominant role in the inefciency of both public and private hospitals. Nevertheless, both models predict a same evolution of
overall efciency of public hospitals, which manifested an up and down trend during the research years. As for the evolution of overall
efciency of private hospitals, both models show a rise rst followed by a decline.

3.2. Stage two: SFA regression

The results of the second stage of the SFA regression are summarized in Table 3. The impacts of the environmental variables are
investigated in stage 2. The positive (negative) coefcient has an unfavorable (favorable) inuence on efciency compared to the
benchmark group. In our study, we take the private and primary hospitals as the benchmark groups. According to the results of
Model 1, the bed-size dummies have signicant positive coefcients in all cases, which imply that the bed-size of tertiary and second-
ary hospitals have an unfavorable impacts on efciency compared with the primary hospitals. The public ownership also has positive
coefcients in all cases except for the slack of outpatient output in 2006, but the impacts are insignicant. Model 2 yielded the similar
results on the outpatient and inpatient output slacks, which suggest that the private ownership and the bed-size of primary hospital
appear to have a favorable inuence on efciency. The difference is that impacts of the bed-size dummies are not always signicant
and the ownership form has a signicant impact for the slack of inpatient output in 2010. Besides in the year 2006, the private own-
ership also has an unfavorable impact on efciency for the slack of outpatient output in 2008. In terms of the slack of mortality and the
average length of stay, the private ownership appears to have a favorable inuence on efciency most of the time except for the slack
of average length of stay in 2009 and 2010. The bed-size of primary hospital also has a favorable inuence on efciency in most cases,
while it demonstrates an unfavorable inuence on efciency for the slack of mortality in 2007 and for the slack of average length of
stay in 2006 and 2007. The estimated values of parameter in both models are all very small during 20062010. This implies that the
operating environmental variables and statistical noise explain the vast majority of variation in the output slacks, and that there is lit-
tle difference in the abilities of individual managers to accommodate the external environment.

The average mortality rates were compared with Pearson chi-square test; the results showed that the average mortality rates of public hospitals had signicant
higher than that of private hospitals throughout the study periods. An independent samples t-test was used for comparing the average length of stay between the public
hospitals and the private hospitals yearly. The results show that there is no signicant difference between them.

We performed a one-way analysis of variance (for means) to compare the average length of stay for the three groups.

The Pearson chi-square test was used to compare the average mortality rates for the three above groups.

The results in this study are obtained by pooling all samples together and displayed for public and private hospitals separately.

As = 2u/(2v + 2u) 0, which indicates that the impact of environmental and statistical noise dominates that of managerial inefciency in the determination of
output slack in maximization of the single output.
174 J. Yang, W. Zeng / China Economic Review 31 (2014) 166184

3.3. Stage three: re-compute efciency

3.3.1. An overview of hospital efciency

Table 4 presents the managerial efciency scores in stages 3 (after adjusting for variation in the operating environment and for the
inuence of statistical noise). Model 1 predicts that, for the given amount of inputs, the public hospitals and private hospitals could
have increased their outputs by an average of 28.4% and 7.1% respectively during the period 20062010. Thus, they could become ef-
cient without taking the quality into account. The results of Model 2 show that, for the given amount of inputs, the public hospitals
could have increased their outputs by an average of 21.4% in contrast to 8.9% for the private hospitals while maintaining the same level
of quality. Both models suggest that scale inefciency was the main source of inefciency for both public and private hospitals during
the research period, which is consistent with the results of Model 2 in the rst stage. However, the evolution of overall efciency of
public and private hospitals is inconsistent with both models. Model 1 shows that the overall efciency of public hospitals kept de-
creasing, while the overall efciency of private hospitals went up and down during 20062010. The overall efciency of public hos-
pitals in Model 2 displayed an overall downward trend and only appeared an improvement in 2009, while that of the private
hospitals rose rst and then fell.
Frequency distributions of mean technical efciency under constant returns to scale are given in Figs. 14. According to the results
of Model 1 (Fig. 1), the proportion of public hospitals with an efciency score under 0.80 kept increasing over the period 20062010.
This proportion was 39.1% in 2006, and it reached 78.3% in 2010. Model 2 displays a similar trend (Fig. 2). In 2006, 41.3% of public hos-
pitals exhibited a mean technical efciency under 0.80. This proportion increased to 67.4% in 2010. In contrast, a great number of pri-
vate hospitals exhibited a mean technical efciency in the range of 0.801.00. This proportion was 95.8% (Model 1) and 79.1% (Model
2) in 2006, and begun to decline from 2008. In 2010, this proportion changed to 83.3% (Model 1) and 75% (Model 2). Frequency dis-
tributions of returns to scale are shown in Figs. 58. The results show that decreasing returns to scale and constant returns to scale
prevailed in the public and private hospitals over the period 20062010. The result of Model 1 shows that nearly 90% of the public
hospitals operated under decreasing returns to scale over the period 20062010 (Fig. 5). This proportion was 89.1% in 2006; it
then increased in 2008 and 2010 but decreased in 2009. The same evolution was also witnessed by Model 2, but the proportion
was slightly smaller (Fig. 6). On average, the private hospitals were roughly equally split between decreasing returns to scale and con-
stant returns to scale.

3.3.2. Productivity and quality changes

The Panel A of Table 5 reports the empirical results of productivity analysis of public hospitals. Figures in Table 5 show that, public
hospitals had experienced a productivity growth between 2006 and 2010. The average annual growth rate predicted by Model 1 and
Model 2 was 6.7% and 4.1% respectively. After decomposing the Malmquist productivity index, Model 1 and Model 2 consistently iden-
tied the main source for productivity growth. The overall productivity growth of public hospitals stemmed mainly from technical
progress, which had an average annual growth rate at 13.1% (Model 1) and 6% (Model 2). On the other hand, the average efciency
of public hospitals dropped by 5.6% (Model 1) and 1.8% (Model 2) annually. The results from both models suggest that the leading
source of inefciency for public hospitals was scale inefciency. The quality change index of public hospitals exhibited an average

Fig. 1. Distribution of the technical efciency scores of public hospitals per year (Model 1). Data source: Shenzhen Health Statistical Yearbook 20062010.
 J. Yang, W. Zeng / China Economic Review 31 (2014) 166184 175

Fig. 2. Distribution of the technical efciency scores of public hospitals per year (Model 2). Data source: Shenzhen Health Statistical Yearbook 20062010.

annual reduction rate of 2.5% between 2006 and 2010. As shown in Table 5, public hospitals exhibited a deterioration of quality along-
side an improvement of efciency in 20082009, which implies that an efciency-quality trade-off via lowering quality in return for
boosting efciency might exist. Additionally, an improvement of quality came with a deterioration of efciency was found in 2007
2008 and 20092010, which suggests a possible existence of efciency-quality trade-off by sacricing efciency so as to raise service
quality. Between 2006 and 2007, the public hospitals exhibited a deterioration of quality and efciency simultaneously.
The geometric mean of Malmquist and quality productivity index and its decomposition for private hospitals are reported in the
Panel B of Table 5. The results of Model 1 show that private hospitals had an average annual growth rate of 10.2% in productivity dur-
ing 20062010, which mainly resulted from technical progress. On average, the annual growth rate of technical change was 11.5%. The

Fig. 3. Distribution of the technical efciency scores of private hospitals per year (Model 1). Data source: Shenzhen Health Statistical Yearbook 20062010.
176 J. Yang, W. Zeng / China Economic Review 31 (2014) 166184

Fig. 4. Distribution of the technical efciency scores of private hospitals per year (Model 2). Data source: Shenzhen Health Statistical Yearbook 20062010.

overall productivity of private hospitals kept increasing over the study period. Model 2 also revealed a productivity growth by a yearly
average rate of 2.8% and a reduced efciency at an annual rate of 1.2% between 2006 and 2010. The service quality of private hospitals
dropped on average by 7.2% per year. The year-to-year results imply that there might exist two patterns of trade-offs between efcien-
cy and quality. One is to increase efciency based on quality deterioration, which might have existed in 20062007. We found that the
service quality of private hospitals fell 19.5% and efciency improved by 5.3%. Scale efciency was enhanced in particular. The other
pattern is to decrease efciency in return for quality improvement, which could occur in 20072008 and 20092010. During the
above-stated period, it was found that the service quality of private hospitals increased 7.3% and 3.1%, while the efciency decreased
by 4.1% and 4.8%, respectively.
Next, we provide a further analysis of the performance of individual hospitals. The geometric mean of the 3rd-stage Malmquist
productivity index and its decomposition of each hospital over the period of 20062010 are shown in Table 6. As shown in the

Fig. 5. Distribution of returns to scale of public hospitals per year (Model 1). Notes: (1) drs denotes decreasing returns to scale, crs denotes constant returns to scale
and irs denotes increasing returns to scale. (2) Data source: Shenzhen Health Statistical Yearbook 20062010.
 J. Yang, W. Zeng / China Economic Review 31 (2014) 166184 177

Fig. 6. Distribution of returns to scale of public hospitals per year (Model 2). Notes: (1) drs denotes decreasing returns to scale, crs denotes constant returns to scale
and irs denotes increasing returns to scale. (2) Data source: Shenzhen Health Statistical Yearbook 20062010.

Panel A of Table 6, 46.7% of the public hospitals displayed a deterioration of quality alongside an improvement of efciency during the
study period. 42.8% of them were hospitals with a size between 100 and 500 beds, 38.1% of them were hospitals with less than 100
beds. The deterioration of quality varied from 0.1% to 9.2%, while the efciency improvements were in the range between 1.2% and
24.1%. Based on the ve-year average, there is only one public hospital that exhibited an improvement of quality alongside a deteri-
oration of efciency. 32.6% of the public hospitals presented a simultaneous enhancement in efciency and quality. The rest had a re-
duced efciency and quality simultaneously, which accounts for 19.6% of the public hospitals. Among them, 66.7% were hospitals with
a size less than 100 beds. The Panel B of Table 6 reports the performance of individual private hospitals. According to the ve-year
average, 62.5% of the private hospitals presented a deterioration of quality alongside an improvement of efciency. The efciency im-
provements were in the range between 0.5% and 14.6% with respect to the quality deterioration varied from 1.0% to 18.5%. Two-thirds

Fig. 7. Distribution of returns to scale of private hospitals per year (Model 1). Notes: (1) drs denotes decreasing returns to scale, crs denotes constant returns to scale
and irs denotes increasing returns to scale. (2) Data source: Shenzhen Health Statistical Yearbook 20062010.
178 J. Yang, W. Zeng / China Economic Review 31 (2014) 166184

Fig. 8. Distribution of returns to scale of private hospitals per year (Model 2). Notes: (1) drs denotes decreasing returns to scale, crs denotes constant returns to scale
and irs denotes increasing returns to scale. (2) Data source: Shenzhen Health Statistical Yearbook 20062010.

Table 5
Geometric mean of the 3rd-stage Malmquist productivity index and its decomposition.

20062007 20072008 20082009 20092010 20062010

Panel A: public hospitals

Model 1
Technical change 1.225 0.971 1.241 1.107 1.131
Efciency change 0.926 0.985 0.921 0.944 0.944
Pure technical efciency change 1.000 1.000 1.000 1.000 1.000
Scale efciency change 0.926 0.985 0.921 0.944 0.944
Malmquist productivity index 1.134 0.957 1.143 1.045 1.067
Model 2
Technical change 1.065 1.098 0.981 1.100 1.060
Efciency change 0.976 0.947 1.011 0.998 0.982
Pure technical efciency change 1.000 1.000 1.000 1.000 1.000
Scale efciency change 0.976 0.947 1.011 0.998 0.982
Malmquist productivity index 1.039 1.039 0.992 1.098 1.041
Quality change index 1.091 0.921 1.152 0.952 1.025

Panel B: private hospitals

Model 1
Technical change 1.197 1.001 1.252 1.030 1.115
Efciency change 1.008 1.001 0.943 1.002 0.988
Pure technical efciency change 1.000 1.000 1.000 1.000 1.000
Scale efciency change 1.008 1.001 0.943 1.002 0.988
Malmquist productivity index 1.207 1.001 1.181 1.032 1.102
Model 2
Technical change 0.960 1.127 0.971 1.119 1.041
Efciency change 1.053 0.959 0.990 0.952 0.988
Pure technical efciency change 1.000 1.000 1.000 1.000 1.000
Scale efciency change 1.053 0.959 0.990 0.952 0.988
Malmquist productivity index 1.010 1.080 0.961 1.065 1.028
Quality change index 1.195 0.927 1.229 0.969 1.072

Notes: 1. Data source: Shenzhen Health Statistical Yearbook 20062010.

2. For quality change index, a value of Qo greater than one indicates a regression in quality, equals to one means quality unchanged, less than one implies a progress in
quality.
3. A value greater than one in Technical change, Efciency change, Pure technical efciency change, Scale efciency change and Malmquist productivity index indicates
an improvement in technology, efciency, pure technical efciency, scale efciency and productivity over time. A value less than one indicates deterioration, and equals
to one means that they remain unchanged.
 J. Yang, W. Zeng / China Economic Review 31 (2014) 166184 179

Table 6
Geometric mean of the 3rd-stage Malmquist productivity index and its decomposition over 20062010.

Hospitals Bed size Technical Efciency Pure technical Scale efciency Malmquist Quality change
change change efciency change change productivity index index

Panel A: public hospitals

1 1121 1.055 0.999 1.000 1.055 1.055 0.994
2 981 1.008 1.058 1.000 1.008 1.066 0.987
3 917 1.034 1.018 1.000 1.034 1.053 1.017
4 525 0.867 0.951 1.000 0.867 0.825 1.088
5 382 0.934 1.099 1.000 0.934 1.026 0.999
6 58 1.022 1.217 1.000 1.022 1.243 0.999
7 510 0.912 1.118 1.000 0.912 1.019 1.002
8 84 1.000 1.127 1.000 1.000 1.127 1.092
9 126 1.011 1.062 1.000 1.011 1.074 1.069
10 820 0.919 1.085 1.000 0.919 0.997 0.947
11 430 1.001 1.069 1.000 1.001 1.070 0.982
12 212 1.000 1.241 1.000 1.000 1.241 1.043
13 649 0.950 1.097 1.000 0.950 1.042 0.960
14 258 1.000 1.183 1.000 1.000 1.183 1.011
15 434 0.933 1.161 1.000 0.933 1.083 1.001
16 612 0.945 1.090 1.000 0.945 1.030 0.960
17 550 0.983 1.114 1.000 0.983 1.095 1.038
18 238 1.000 1.047 1.000 1.000 1.047 0.989
19 312 0.995 1.097 1.000 0.995 1.092 1.021
20 512 0.889 1.035 1.000 0.889 0.920 1.089
21 186 0.981 1.060 1.000 0.981 1.040 1.022
22 380 0.931 1.049 1.000 0.931 0.976 1.024
23 170 0.960 1.084 1.000 0.960 1.041 0.993
24 704 0.943 1.039 1.000 0.943 0.980 0.991
25 200 1.023 1.019 1.000 1.023 1.043 0.978
26 336 0.961 0.981 1.000 0.961 0.943 1.049
27 49 0.959 0.955 1.000 0.959 0.916 1.135
28 271 1.001 0.997 1.000 1.001 0.998 1.064
29 48 1.037 0.954 1.000 1.037 0.990 1.061
30 64 0.969 1.072 1.000 0.969 1.039 1.056
31 66 1.000 0.970 1.000 1.000 0.970 1.042
32 182 0.992 1.012 1.000 0.992 1.004 1.079
33 82 0.965 1.019 1.000 0.965 0.984 1.056
34 22 1.000 0.893 1.000 1.000 0.893 1.086
35 213 0.970 1.007 1.000 0.970 0.977 0.990
36 70 1.006 0.985 1.000 1.006 0.991 1.037
37 210 1.054 1.083 1.000 1.054 1.141 0.982
38 91 0.909 1.016 1.000 0.909 0.924 1.076
39 453 1.004 1.132 1.000 1.004 1.137 1.005
40 25 0.992 1.057 1.000 0.992 1.049 1.026
41 80 1.015 1.128 1.000 1.015 1.145 1.038
42 20 1.010 1.095 1.000 1.010 1.107 1.053
43 107 1.076 1.059 1.000 1.076 1.139 0.922
44 79 1.002 1.079 1.000 1.002 1.082 1.079
45 57 1.045 1.287 1.000 1.045 1.344 0.946
46 53 0.966 0.990 1.000 0.966 0.957 1.103
Panel B: private hospitals
47 30 0.968 1.032 1.000 0.968 0.999 1.134
48 144 1.000 1.085 1.000 1.000 1.086 1.032
49 63 0.955 0.963 1.000 0.955 0.920 1.125
50 69 0.854 1.133 1.000 0.854 0.967 1.132
51 20 1.000 1.008 1.000 1.000 1.008 1.097
52 44 1.000 1.076 1.000 1.000 1.076 1.071
53 25 1.048 1.146 1.000 1.048 1.200 1.038
54 30 0.909 1.106 1.000 0.909 1.006 1.119
55 140 1.045 1.094 1.000 1.045 1.144 1.010
56 117 0.980 1.053 1.000 0.980 1.032 1.057
57 98 1.089 1.069 1.000 1.089 1.164 0.989
58 261 1.064 1.058 1.000 1.064 1.125 0.999
59 48 0.943 1.042 1.000 0.943 0.982 1.104
60 25 1.000 0.939 1.000 1.000 0.939 1.161
61 20 1.000 1.034 1.000 1.000 1.034 1.042
62 170 0.882 1.046 1.000 0.882 0.922 1.185
63 68 1.002 0.989 1.000 1.002 0.992 1.088
64 30 1.000 1.098 1.000 1.000 1.098 1.051
65 152 0.894 1.077 1.000 0.894 0.963 1.160
66 99 1.000 0.959 1.000 1.000 0.959 0.996
67 10 1.000 0.987 1.000 1.000 0.987 1.118
(continued on next page)
180 J. Yang, W. Zeng / China Economic Review 31 (2014) 166184

Table 6 (continued)

Hospitals Bed size Technical Efciency Pure technical Scale efciency Malmquist Quality change
change change efciency change change productivity index index

68 29 1.048 0.986 1.000 1.048 1.033 1.056

69 48 1.000 1.005 1.000 1.000 1.005 1.049
70 120 1.064 1.040 1.000 1.064 1.106 0.944

Notes: 1. Data source: Shenzhen Health Statistical Yearbook 20062010. 2. Bed size is the number of beds of each hospital (mean). Hospitals are classied as three bed-
size categories: small (less than 100 beds), medium (100499 beds) and large (more than 500 beds).

of them were small hospitals with less than 100 beds. Similarly, there is only one private hospital that displayed an improvement of
quality along with a decline in efciency. In addition, 20.8% of the private hospitals presented a decreased efciency and quality simul-
taneously; the rest 12.5% exhibited a good practice with a simultaneous improvement in efciency and quality.

3.4. Robustness of estimates

In order to test the robustness of our ndings, we conducted a sensitivity analysis followed Valdmanis (1992) by changing the
specication of the DEA model so as to see whether minor changes in the specication would fundamentally change the results. Spec-
ications of the models are presented in Table 7. The results are reported in Table 8. The public hospitals consistently displayed an
improvement of quality along with a decline in efciency during 20072008 in all these models and during 20092010 in Models
a, b and c. Models b, c and d exhibit an improvement of efciency alongside a deterioration of quality in 20082009, which were con-
sistent with the result of the initial model. The efciency and quality changes of private hospitals during 20062007 and 20072008 in
all these models and during 20092010 in Models a, b and c were consistent with the result of the initial model. Moreover, the leading
source of inefciency and the driving force of productivity growth remained robust throughout the models.
The results of most models were largely consistent in regard to the evolutions of productivity, efciency and quality changes of the
public and private hospitals. However, it should be noted that the difference between the initial model and Model d is the adminis-
trative staff as an input had been removed in the latter. This resulted in minor variations in efciency changes for the private hospitals,
but the efciency changes of public hospitals in 20062007 and 20092010 underwent a great change. This may be due to a wider
variation in administrative staff among the public hospitals.

4. Discussion

In the past three decades, the market-oriented reforms in China have brought dramatic changes to the health care system. The -
nancial decentralization has signicantly altered the delivery and nancing systems of health care. The public hospitals gain increas-
ing nancial autonomy, while government subsidies account for a small and decreasing share of their nancing. Liu et al. (2006)
mention that China's health services are primarily nanced by out-of-pocket spending (private nancing) for the public hospitals.
Even though the private sector plays an increasing role in the ambulatory sector, private services are not included in the social insur-
ance benet package, and thus, it primarily serves self-paying patients. Consequently, the bulk of patients continue to receive treat-
ment in the public hospitals.
The results from this study show that on average both public and private hospitals had experienced productivity growth with de-
terioration of efciency and quality between 2006 and 2010. Productivity growth was mainly attributable to technical progress. Sim-
ilar results were found by NG (2011) in Guangdong hospitals between 2004 and 2008. NG (2011) pointed out that it was the result of
adoption high-tech treatments. The level of medical technology is a key element of market competition. Technology-rst manage-
ment philosophy as a development strategy in modern hospital management was encouraged to maintain competitive advantage

Table 7
Model specication.

a b c d

Inputs
Number of beds
Number of doctors
Number of nurses
Number of other staffs
Number of administrative staffs
Outputs
Number of outpatient visits
Number of inpatients
Number of inpatient days
Quality attributes
Mortality rate (%)
Average length of stay (days)

Notes: Other staffs are health professionals other than doctors and nurses.
 J. Yang, W. Zeng / China Economic Review 31 (2014) 166184 181

Table 8
Robustness test of geometric mean of the 3rd-stage Malmquist productivity index and its decomposition.

20062007 20072008 20082009 20092010 20062010

Panel A: public hospitals

Initial model
Technical change 1.065 1.098 0.981 1.100 1.060
Efciency change 0.976 0.947 1.011 0.998 0.982
Pure technical efciency change 1.000 1.000 1.000 1.000 1.000
Scale efciency change 0.976 0.947 1.011 0.998 0.982
Malmquist productivity index 1.039 1.039 0.992 1.098 1.041
Quality change index 1.091 0.921 1.152 0.952 1.025
Model a
Technical change 1.133 0.989 0.999 1.287 1.096
Efciency change 0.977 0.978 0.996 0.956 0.977
Pure technical efciency change 1.000 1.000 1.000 1.000 1.000
Scale efciency change 0.977 0.978 0.996 0.956 0.977
Malmquist productivity index 1.107 0.967 0.995 1.229 1.070
Quality change index 1.025 0.954 1.176 0.804 0.981
Model b
Technical change 1.059 1.067 0.958 1.162 1.059
Efciency change 1.046 0.934 1.009 0.983 0.992
Pure technical efciency change 1.000 1.000 1.000 1.000 1.000
Scale efciency change 1.046 0.934 1.009 0.983 0.992
Malmquist productivity index 1.107 0.997 0.967 1.143 1.051
Quality change index 1.014 0.992 1.168 0.918 1.019
Model c
Technical change 1.089 0.966 1.019 1.243 1.074
Efciency change 0.983 0.974 1.007 0.941 0.976
Pure technical efciency change 1.000 1.000 1.000 1.000 1.000
Scale efciency change 0.983 0.974 1.007 0.941 0.976
Malmquist productivity index 1.071 0.941 1.026 1.169 1.048
Quality change index 1.017 0.945 1.172 0.878 0.997
Model d
Technical change 0.981 1.282 0.864 1.048 1.033
Efciency change 1.072 0.884 1.067 1.018 1.007
Pure technical efciency change 1.000 1.000 1.000 1.000 1.000
Scale efciency change 1.072 0.884 1.067 1.018 1.007
Malmquist productivity index 1.052 1.133 0.923 1.067 1.041
Quality change index 1.093 0.952 1.159 1.013 1.051

Panel B: private hospitals

Initial model
Technical change 0.960 1.127 0.971 1.119 1.041
Efciency change 1.053 0.959 0.990 0.952 0.988
Pure technical efciency change 1.000 1.000 1.000 1.000 1.000
Scale efciency change 1.053 0.959 0.990 0.952 0.988
Malmquist productivity index 1.010 1.080 0.961 1.065 1.028
Quality change index 1.195 0.927 1.229 0.969 1.072
Model a
Technical change 1.034 1.017 0.974 1.365 1.088
Efciency change 1.053 0.956 0.999 0.965 0.993
Pure technical efciency change 1.000 1.000 1.000 1.000 1.000
Scale efciency change 1.053 0.956 0.999 0.965 0.993
Malmquist productivity index 1.089 0.973 0.973 1.318 1.080
Quality change index 1.105 0.909 1.330 0.729 0.993
Model b
Technical change 1.016 1.066 0.982 1.235 1.071
Efciency change 1.072 0.956 0.993 0.991 1.002
Pure technical efciency change 1.000 1.000 1.000 1.000 1.000
Scale efciency change 1.072 0.956 0.993 0.991 1.002
Malmquist productivity index 1.089 1.019 0.976 1.224 1.073
Quality change index 1.062 0.929 1.295 0.839 1.018
Model c
Technical change 1.022 0.987 0.987 1.283 1.063
Efciency change 1.050 0.937 1.022 0.980 0.997
Pure technical efciency change 1.000 1.000 1.000 1.000 1.000
Scale efciency change 1.050 0.937 1.022 0.980 0.997
Malmquist productivity index 1.073 0.925 1.009 1.258 1.060
Quality change index 1.089 0.935 1.307 0.818 1.021
Model d
Technical change 0.910 1.246 0.947 1.100 1.043
Efciency change 1.087 0.942 0.999 0.958 0.995
Pure technical efciency change 1.000 1.000 1.000 1.000 1.000
(continued on next page)
182 J. Yang, W. Zeng / China Economic Review 31 (2014) 166184

Table 8 (continued)

20062007 20072008 20082009 20092010 20062010

Scale efciency change 1.087 0.942 0.999 0.958 0.995

Malmquist productivity index 0.988 1.174 0.947 1.054 1.037
Quality change index 1.219 0.996 1.204 1.006 1.101

Data source: Shenzhen Health Statistical Yearbook 20062010.

in the medical market (Zhao, 2011). The empirical results reveal that the efciency of public hospitals in this study leaves more room
for improvement than that of private hospitals. Meanwhile, scale inefciency plays a dominant role in the inefciency of public and
private hospitals. After adjusting the effect of the environment and statistical noise, the pure technical efciency turned into efcient.
This suggests that the pure technical inefciency was mainly attributable to the operating environment and statistical noise.
There were over two thirds of public hospitals employed decreasing returns to scale technology in this study, which implies that it
is necessary to control the large-scale expansion of public hospitals appropriately. One possible reason for the observed quality dete-
rioration of public hospitals is due to the continuous scale expansion. With the scale of hospital production continuously expanded,
the average daily outpatient visits per doctor and daily inpatient days per doctor of public hospitals exhibited an upward trend,
which may bring much quality and security hidden troubles (Xia & L, 2013). The average daily outpatient visits per doctor and
daily inpatient days per doctor of the sample public hospitals had increased 31.9% and 9% from 2006 to 2010, respectively. Studies
have shown that doubling the size of a hospital, the operational risks will be expanded four times (Song, Yao, & Yu, 2005). The guid-
ance on the pilot reform of public hospitals issued in 2010 had clearly put forward the demand for a moderate scale of public hospitals.
The continuous expansion of hospital size is due to a series of institutional factors in the transition period of China, such as the man-
agement system and operation mechanism of public hospitals. The guidance on the pilot reform of public hospitals had put forward a
series of measures on public hospital reform. However, the trend of large expansion still exists in the public hospitals (The State
Council Ofce of Health Care Reform, 2013). We herein make the following policy recommendations for better controlling the
large expansion of public hospitals: regional health planning should be further implemented in each specic medical institution,
meanwhile, government supervision should be strictly implemented; the government should build a reasonable nancial compensa-
tion mechanism and the rights of public hospitals on the allocation of economic surplus should have certain constraints and controls,
which will help to reduce or eliminate the hospital prot motive.
The observed quality deterioration of private hospitals could be due to the lack of talented doctors and medical personnel. The core
of healthcare quality is medical discipline construction and healthcare professionals. Currently, it is hard for private hospitals to attract
enough talented personnel. Thus, they can only hire retired doctors and new graduates with limited experience. Additionally, private
hospitals are facing a critical shortage of the young and middle-aged technology backbone, and lack of training for their existing doc-
tors to provide better service and large talent mobility, which all have a negative impact on the quality of healthcare (Wang, 2009 and
Xiao, Gong, Cheng, & Zhang, 2008). Although most of the private hospitals are small-size or medium-size, it is not suggested to carry
out a rapid expansion in a short time based on the weak personnel basis at this stage. However, the new health care reform plan im-
plemented in 2009 allows physicians to practice at multiple medical centers and removed restrictions on reimbursements for private
hospitals. This is a good opportunity to help private hospitals out of the dilemma of talent shortage and thus contribute to elevate the
level of medical treatment.
Although, on average, the evolutions of quality changes of the public and private hospitals were not consistent with all models. Most
models showed quality deterioration between 2006 and 2010 for the public and private hospitals. Moreover, the trends of quality chang-
es in each period were consistent. Both public and private hospitals exhibited quality deterioration in 20062007 and 20082009, and
showed an improvement in quality in 20072008 and 20092010. As shown in Table 1, there is a drastic increase in mortality of the sam-
ple hospitals in 2007, which could be the result of increasing workload. In 2007, the average daily outpatient visits per doctor of public
and private hospitals increased by 12% and 17%, respectively. The average daily outpatient visits per doctor of public and private hospitals
in 2007 are 15.8 and 11.1 respectively, which are higher than the national average level and the average level of Guangdong province.
Excess workload could adversely affect patient outcomes for not having adequate time to evaluate patients in person. According to
Michtalik, Yeh, Pronovost, and Brotman (2013), physicians could safely see 15 patients per shift if their effort was 100% clinical. Addition-
ally, the patient-to-nurse ratio of the public and private hospitals in 2007 had increased 0.7% and 38% respectively. Weissman et al. (2007)
reported that a 0.1% increase in the patient-to-nurse ration led to a 28% increase in the adverse events rate.
Besides, our empirical results indicate that an efciency-quality trade-off by lowering quality in return for gaining efciency might
exist in the public hospitals between 2008 and 2009. The same case might appear in the private hospitals between 2006 and 2007.
Ideally, hospitals tend to maximize both quality and efciency simultaneously. However, if the increase of the activity comes while
the staffs are overused maybe in fact they will gain efciency by reducing time devoted to their patients and, consequently, it can
have repercussions on the quality. This may be one reason for the existence of such a trade-off. It was found that the average daily
outpatient visits per doctor and the bed occupancy rate of the public hospitals in 2009 had increased to 17.5 and 89.2%, respectively.
Both of them are higher than the national average level and the average level of Guangdong province. As mentioned before,

The data is extracted from the Ministry of Health, China Health Statistical Yearbook, 2008. The average daily outpatient visits per doctor of the nation and Guang-
dong province in 2007 are 6.0 and 10.3, respectively.

The data is extracted from the Ministry of Health, China Health Statistical Yearbook, 2010. The average daily outpatient visits per doctor and the bed occupancy rate
of the nation in 2009 were 6.7 and 84.7%, respectively. The average daily outpatient visits per doctor and the bed occupancy rate of Guangdong province in 2009 were
11.8 and 85.7%, respectively.
 J. Yang, W. Zeng / China Economic Review 31 (2014) 166184 183

physicians could safely see 15 patients per shift if their effort was 100% clinical. Moreover, the bed occupancy rate above 85% has been
considered to have a negative impact on the safe and efcient operation of a hospital (Keegan, 2010). The bed occupancy rates be-
tween 80% and 85% have been proven to work best (Morton, 2011). The average daily outpatient visits per doctor and the bed occu-
pancy rate of private hospitals in 2007 was 11.1 and 71.9%, respectively. This may not be enough to explain that the staffs of private
hospitals are overloaded. However these two indicators have increased 16.8% and 41.5% in a year, respectively. And it is the largest
increase in workload between 2006 and 2010. One possible interpretation is that in the face of a sudden substantial increase in work-
load, if the hospital administrators only focus on how to effectively use the resources and ignore the quality, which might induce this
trade-off. From the hospital size perspective, this possible trade-off is mainly found in the small and medium-sized public and private
hospitals. In addition, an efciency-quality trade-off by increasing quality at the cost of losing efciency might exist in 20072008 and
20092010 for both public and private hospitals. However, based on the ve-year average, this trade-off may only exist in two hos-
pitals. The empirical results suggest that the healthcare authorities and hospital decision makers should be aware that there may exist
efciency-quality trade-offs. Nevertheless, our empirical results also provide evidence that a simultaneous enhancement in quality
and efciency can be achieved without a trade-off. Although this is really far from completing the debate on efciency-quality
trade-off, it should be noted that an efciency-quality trade-off could be avoidable in the hospital production. In this respect, it is
very important to build a reasonable performance evaluation system with a set of unied standards for quality and efciency. And
quality should be the priority of the performance appraisal. Strengthen the performance appraisal and take it as the guideline for hos-
pital management, which will help to improve service quality and work efciency. Additionally, standardizing clinical processes could
help to supervise and evaluate the processes of hospital services effectively; and ensure the quality of health care services and hospital
performance. Also, great efforts should be made to improve the status of doctors with excessive workload, which will facilitate to pre-
vent the possible trade-off between quality and efciency.
Finally, the ndings of this study suggest that great importance must be attached to strengthen the internal management of small-
size hospitals. It also conrms the advisability of introducing quality indicators into efciency measurement. There is an argument that
higher quality shows up as inefciency when it is not controlled for in the analysis (Ferrier & Trivitt, 2013). Our results showed that
incorporating quality indicators into efciency measurement improves the efciency of public hospitals in the third stage and narrows
the efciency difference between public and private hospitals. Nevertheless, our study has several important limitations. First, the
causal link between efciency and quality should be conditional on other factors remain constant. There were many other confound-
ing factors during the study period of 20062010. Thus, our empirical ndings may only provide the evidence regarding the existence
of the trade-off between efciency and quality. Second, the results basing on Shenzhen which is the rst special economic zone in
China may limit the generalizability of our ndings. Third, our study relies on inpatient quality measures; it would have been prefer-
able to take outpatient quality measures into account as well as adjust for the case mix for each hospital. These imply that our results
should be interpreted with caution.

5. Conclusions

In this study, we investigated changes in productivity, efciency and quality of the hospitals in Shenzhen city over the period
20062010 and explored whether there is a trade-off between efciency and quality in the hospital production. Our ndings show
that both public and private hospitals have experienced a productivity growth and a negative evolution in efciency and quality
changes between 2006 and 2010. The technical progress is the driving force of productivity growth during the research period. The
major contributing factor to the inefciency of public and private hospitals is scale inefciency. Based on the ndings of this study,
we may not rule out the existence of efciency and quality trade-off in the hospital production. This possible trade-off is mainly
found in the small and medium-sized public and private hospitals. Our results are robust when varying the specication of the DEA
model.
Further research is required to include a large number of hospitals in different areas so as to have a global view of the performance
of hospitals in China. The private hospitals in this study are all small and medium-size hospitals, it remains to be seen how the per-
formance of large private hospitals is. Additionally, the new health care reform plan provides a good opportunity to help private hos-
pitals out of the dilemma of talent shortage; it would be an important extension to evaluate its impact on the production of private
hospitals. Moreover, future research may also evaluate the impact of China's pilot public hospital reform on hospital performance.

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