Relative performance evaluation of the English acute hospital sector

Relative performance evaluation has been suggested as a means to overcome information asymmetry between regulators and organizations when assessing e ciency. By comparing similar organizations the relationship between costs and e€ ort can be better isolated. The English Department of Health (DoH) has undertaken relative performance evaluation in comparing the unit costs of acute hospitals using ordinary least squares (OLS) methods. After adjusting for exogenous in ̄uences in costs, residual unexplained cost di€ erences are deemed to represent ine ciency. This paper questions the o cial interpretation of the OLS residuals. The OLS model is re-estimated to calculate con®dence intervals around the residuals and as a stochastic cost frontier (SCF). It is concluded that English acute hospitals exhibit less in e ciency than is implied by o cial estimates.