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Keywords: Health System efficiency, Allocative efficiency (AE), Technical efficiency (TE)

READ TIME: 12 minutes

Table of Contents

• Any prerequisites to understand this blog?
• General preface
• 1.1 Why is health sector efficiency important? 
• 1.2 What is inefficiency?

Any prerequisites to understand this blog?

None, this blog is created with the intention that people with beginner, intermediate and expert level knowledge can easily understand the paper. The attempt has been to break down the paper for easy use of knowledge.

General preface

This is the first chapter of the book titled, ‘Health System Efficiency- How to make measurement matter for policy and management’. This book and the chapter is an essential read in many courses concerning public health, healthcare management and health policy making. In the following sections, I will explain and break down the paper in the pattern that has been followed by the authors. Also, I have explained only the first half of the paper in this blog and the next section of the paper will be covered in a different blog.

I hope this provides a comprehensive guide to all those interested in the subject or who just want to learn in this domain.

1.1 Why is health sector efficiency important?

In many different sectors of the economy, the demand and supply of goods are shaped by what the consumers need or demand. Imagine walking down the cereal aisle at the supermarket. You’re faced with a dizzying array of choices – different brands, flavors, and even whether or not you want nuts. This variety is actually a good thing for us as consumers. Why is this so? First, it gives us the power to choose. We can compare prices, ingredients, and find the cereal that best suits our needs and budget. This competition between brands pushes them to improve their products, offer better prices and come up with new and exciting flavors to keep us coming back for more. Secondly, this competition is great for the economy as a whole. Companies are constantly striving to outdo each other, leading to innovation and better products for everyone. It encourages them to be more efficient and find ways to improve their processes. So, the next time you’re faced with a wide range of choices, remember that this variety is actually a good thing. It empowers consumers, drives innovation, and benefits the economy as a whole.

However, more often than not, the healthcare sector, despite being one of the most essential parts of the economy, often doesn’t function like a typical market. In most markets, buyers and sellers come together to decide the price and quality of goods or services. But healthcare is different, it frequently doesn’t follow these usual rules. This is what’s called ‘market failure.’ Refer to this link to understand in-depth about, Market Failure: What It Is in Economics, Common Types, and Causes https://www.investopedia.com/terms/m/marketfailure.asp.

Market failure in healthcare happens for several reasons, making it harder to balance costs, quality, and access in the same way other markets do. Let’s explore why this is the case. 

1. Information asymmetry; (For an in-depth understanding refer to this article, Information Asymmetry in Hospitals: Evidence of the Lack of Cost Awareness in Clinicians pmc.ncbi.nlm.nih.gov/articles/PMC9126693/) wherein healthcare professionals have much more knowledge about medical conditions and the treatment options than the patients because of which patients have to rely on and trust healthcare providers to think for their best interest. 
2. During urgent and emergency situations; often healthcare decisions need to be taken in a haste and patient and family members are left with little or no choice to compare quality and prices between hospitals. 
3. Hospital price and quality transparency; people rely on health insurance to cover their medical costs and expenses however there can be a disconnect between the actual cost of care and the cost of care patients receive. For example- On knowing that insurance will cover the expenses, healthcare providers might suggest expensive medications to patients when alternate options are available at lower prices leading to inefficiency and waste of resources.

These issues contribute to inefficiency, high costs, waste of resources, and low- quality care in health care products and services. Therefore, the authors in the chapter argue that ‘efficiency’ in healthcare should be a central aspect for policymakers and the government. It is important to add here the definition of efficiency by Cambridge dictionary which means – ‘the quality of working well in an organised way, without wasting time or energy’ and I want you to hold on to this definition until the end of this blog (Cambridge Dictionary, 2019). 

Question- Why is inefficient use of health system resources problematic? 

Consider the following below:

1. A lot goes into maintaining a healthy society. For example, the healthcare sector does not work in isolation. To support people’s overall wellbeing, sectors like housing, nutrition, and education are equally important. Therefore, when resources are wasted in healthcare, other areas are forced to operate with fewer public funds. This means that not only healthcare but other areas of health and wellbeing also suffer.

2. Wastage or inefficiency in healthcare can erode public trust and they may be reluctant to fund healthcare through taxes. People begin to question whether their hard-earned tax money is being used wisely. Ultimately, this erosion of trust affects everyone. Healthcare providers face tighter budgets, patients experience diminished services, and the broader public health suffers. Restoring and maintaining trust requires a commitment to transparency, efficiency, and demonstrating that all money is spent with care and purpose.

Hence, ‘accountability value’ (to further explore this concept follow the link, https://www.ahcstaff.com/the-pillars-of-accountability-in-healthcare-a-higher-standard/) is an important concept which basically means healthcare providers and organisations must be fully responsible for their actions and performance, thereby bringing trust and fairness in the health system. All taxpayers have the right to know how and in what ways the money they contribute through taxes, insurance premiums and even out-of-pocket money is being utilised to provide the best healthcare. Moreover, efficiency becomes an even pressing concern when health systems face financial pressure. This is because the demand for healthcare is ever increasing and we have limited resources, Hence, policymakers and the government should ensure that resources are used wisely and every penny allocated in healthcare is made to good use. The chapter suggests usage of tools like efficiency indicators. Think of efficiency indicators as a report card for the health system which aid decision makers see and evaluate where resources are being underutilised, where improvements are needed and where it has been used wisely. 

1.2 What is inefficiency?

By now, you’ve likely grasped the importance of efficiency in healthcare. But what does “inefficiency” really mean in this context?

We might be tempted to think the concept of ‘inefficiency’ is just the opposite of efficiency. This is true in a common notion but there is far more to inefficiency that we will learn through a real-life example:

After experiencing severe chest pain, a patient was promptly referred by their general doctor to a cardiologist for urgent evaluation. Recognising the critical nature of the situation, the cardiologist swiftly recommended surgery to address a potential life-threatening cardiac issue. The hospital acted quickly, scheduling the surgery for the very next day. The medical staff efficiently coordinated the patient’s admission, preoperative tests, and preparation, ensuring there were no delays in providing care. However, while the speed of care seemed exemplary, the surgical team relied on outdated techniques and equipment for the procedure. For instance, they did not use  minimally invasive methods that could have reduced recovery time and complications. This decision, driven by either resource limitations or resistance to adopting newer methods, resulted in significant postoperative challenges for the patient. The patient faced a longer hospital stay, more pain during recovery, and a higher risk of infection compared to what might have been expected with more advanced techniques. While the hospital was ‘efficient’ in addressing the urgency of the situation, the use of outdated methods ultimately led to poor recovery outcomes, highlighting ‘inefficiency’ in the overall quality and effectiveness of the care provided.

Hence, a part of inefficiency is also to look at how time-consuming it is for the patients to actually see their specialised doctor from their first point of contact in a hospital, how many resources are wasted in unnecessary diagnostic tests, so on and so forth. In simplest form what it is trying to say is that the health system is quite complex where some parts may be working optimally while some areas may be underperforming and it is often hard to measure the performance of everything together. It is in this regard that specific measurements and indicators are put in place to ensure the effectiveness of different aspects of healthcare. Example: one measure might see how patients are treated in outpatient care, while another might track how effectively diabetes patients are managed over time to prevent complications. These specific and focused measurements help us to make sure whether the various areas of healthcare are functioning well even when we can’t measure everything together. So, while these indicators can highlight certain inefficiencies, they usually lack the ability to provide a complete, unified view of the health system’s overall efficiency.

Therefore what we can understand from the above said is that the concept of health system efficiency might seem simple in theory but understanding it fully requires digging into the details of a very complicated system.

Question- ‘why exactly might a health system not perform as well as it could?’ (Cylus, Papanicolas and Smith, 2016)

Two distinct but interrelated reasons as to why health system processes may be inefficient are: Firstly, resources like budget, manpower (staff) or equipment are used for things that do not align with the biggest priority for the society. For instance, society might believe that instead of spending millions of money on specialised end of life care for cancer treatments which may or may not save the lives of people who are suffering it, spending that money on efficient cancer screening could save a far higher number of people.The core idea behind this thought is to try and touch millions of lives as possible and using the same money to address broader health needs instead of serving a small fragment of the society. Definitely the question of how ethical it is will surely cross our mind but we will not explore that here. But yes, with limited funds for money in healthcare choices are often difficult, which means money needs to be used optimally to achieve best healthcare.  

Secondly, inefficiency in health systems often stems from wasteful use of resources during care delivery. Waste occurs when resources are not utilised to their fullest potential, resulting in the system delivering significantly less than it could with the same investment of money, staff, or equipment. Let’s consider a few scenarios to illustrate this:

1. When purchasing new and essential healthcare equipment, a hospital fails to negotiate with their seller to get better deals. So, now the hospital has less money to improve other services including critical services. Ultimately, the overall quality of care will suffer.

2. Due to poor operational planning, operating rooms are unused during peak busy hours. This underutilisation means that, despite having the necessary resources, fewer surgeries are performed, leading to delays and inefficiencies in patient care.

The above two concepts are what economists refer to as Allocative Efficiency (AE) and Technical Efficiency (TE). These two fundamental concepts are essential for a well-functioning system wherein the former ensures whether resources are being used in the best way to meet society’s priorities whereas the latter is concerned about whether we are making the most of our resources, no matter what we are producing. 

A quick glance into these two concepts will help you understand it better-

Allocative Efficiency (AE) focuses on two aspects, output (what we are producing, example- more people want better access to mental health counseling but resources are spent more on building new cosmetic surgery facilities) and inputs (what we are using to produce, example- if hospitals are relying on manual paperwork for keeping patient records rather than an electronic health record system than it is more time consuming and increases the chances of error). These examples will be considered as inefficient from an AE perspective. 

Technical Efficiency (TE) will revolve around the question of ‘Are we making the most of our resources?’ Imagine a clinic that has 30 beds available, but due to poor scheduling and mismanagement, only 18 are occupied at any given time when there is the need to use all beds. This means the clinic isn’t fully utilizing its capacity, leaving 12 beds empty while patients who might need care could be turned away or delayed. This is a classic TE issue, the system isn’t reaching its full potential, even though it has the resources to do more.

The next part of this blog will explain in detail the concepts of AE and TE as mentioned in the book chapter.

Figure 1: Outlining the difference between Allocative Efficiency and Technical Efficiency

Aspect	Allocative Efficiency	Technical Efficiency
Definition	It is about aligning resources to meet societal needs and demands.	It is the ability to maximise output from available resources.
Focus	Are we spending resources on the right priorities?	Are we using our resources to the fullest potential?
Key considerations	Societal needs, resource allocation, equity	Resource utilisation, productivity, minimising waste
Goal	Achieving the right mix of healthcare services to match population needs.	Fully utilising resources to deliver maximum possible outcomes.

References

Cambridge Dictionary (2019). EFFICIENCY | meaning in the Cambridge English Dictionary. [online] Cambridge.org. Available at: https://dictionary.cambridge.org/dictionary/english/efficiency.

Cylus, J., Papanicolas, I. and Smith, P.C. (2016). Health System Efficiency : How to Make Measurement Matter for Policy and Management. Copenhagen, Denmark: World Health Organization.