A Two-Model Approach to Measuring Operating and Quality Efficiency with DEA

Abstract A serious problem in applying data envelopment analysis (DEA) to the study of service industries is the selection and application of quality output measures. Oftentimes, decision-making units (DMUs) are found to be efficient due to high operational output measures, even though they have low output quality. Furthermore, some of these DMUs are among the benchmark set for inefficient units. We present a Two-Model approach for including quality measures in DEA studies. This approach allows decision-makers to evaluate two models simultaneously, one measuring operational efficiency and the second measuring quality efficiency. This new method selects only DMUs that are efficient in both operational and quality measures to be members of the benchmark set. This paper demonstrates the Two-Model DEA approach using data from the nursing home industry. It can be applied to any situation in which either the DEA input or output measures can be represented as two distinct categories or objectives.