Separating Managerial Inefficiency from Influences of the Operating Environment: An Application in Dialysis

In any production unit, the ability to achieve technical efficiency is influenced by characteristics of the external operating environment. This study uses the Greek dialysis sector to employ a previously reported frontier procedure to obtain a measure of managerial inefficiency that controls for exogenous features. The sample consisted of 124 dialysis facilities. Two inputs —nursing staff and dialysis machines— and one output —dialysis sessions— were used in an input-oriented, variable-returns-to-scale DEA model. Input slacks were regressed against environmental characteristics such as ownership, location, operating years and facility size, and parameter estimates were used to adjust primary input data. New efficiency scores were generated to measure managerial inefficiency. Older, public, regional facilities were operating under unfavorable circumstances, whereas newer, private, Athens-based facilities under favorable conditions. This respectively generated lower and higher efficiency scores than would have been attained on a level “playing field”. After adjustment, scores reflected only management inefficiency and could be compared fairly. This study emphasizes the importance of efficiency comparisons, which take into account external conditions beyond the influence of management, as these have been shown to under— or overstate true management inefficiency.