The exclusion of indirect costs from efficiency benchmarking

Purpose – This study aims to evaluate the effects produced by a strategy aimed at neutralising one of the “disturbance factors” that may impede the focalisation on “real (in)efficiency” in relative efficiency assessments within the health-care sector: the exclusion of indirect costs from these comparative analyses. Design/methodology/approach – The empirical analysis is based on the statistical elaboration of data from a sample group of hospital sub-units within Italian health-care trusts. The analysis isolates the effect on efficiency indicator variability (dependent variable) of excluding indirect costs (independent variable). Findings – The analysis conducted has uncovered the likely manipulation of indirect costs to create the impression of having achieved approximately average levels of efficiency performance. The case analysed in this study shows how a defensive orientation in public organizations may arise even without the application of some form of compulsory benchmarking. Practical implications – The results observed highlight how the exclusion of indirect costs – potentially allocated to attain cross-subsidization among cost objects – may help to uncover actual cases of (in)efficiency and thus aid in identifying “true” best practices. Originality/value – Literature has presented a variety of strategies aimed at neutralising some of the “disturbance factors” that impede the focalisation on “real (in)efficiency” in inter-trust efficiency comparisons. However, until now no studies have supplied evidence of the efficacy of the strategies in question in isolating “real (in)efficiency”.