Palmer and Torgerson’s (1999) definition of efficiency includes both health care inputs and health outcomes. The goals for measurement determine which aspect of efficiency is emphasized. They suggest that “allocative efficiency” should dictate policy decisions focused on resource distribution (Palmer and Torgerson, 1999). This aspect of efficiency requires that a specific outcome be defined in advance, after which a choice is made among alterative interventions or resources based on their relative costs. The resulting costs may not reflect the most efficient combination of inputs and outputs but it does allow for an allocation strategy. An example: If one is interested in promoting one of two surgical interventions, and the identified criteria for selection is a fixed minimum postsurgical mortality rate, then one can compare the relative costs of each to achieve a fixed mortality threshold.

To assess “productive efficiency,” one maximizes “health outcome for a given cost,” or minimizes “cost for a given outcome.” For example, one chooses different combinations of inputs to achieve the best health outcome for a given cost. “Technical efficiency” is achieved if the physical mix of labor and capital inputs achieves the maximum output. For instance, if surgical procedure A and surgical procedure B produce the identical defined outcomes of hospital discharge in 3 days, but procedure A uses less labor but identical amounts of capital, then procedure B is considered technically inefficient.

The measurement of the individual inputs and outputs in the efficiency function also vary by setting, goals, and the availability of data. The definition of costs or economic resources has been relatively consistent in services research: direct and indirect monetary resources that contribute to the institution’s costs of providing a service. However, as the goals of measurement change to incorporate an understanding of system resources, then the physician’s resource use is included, as are out-of-pocket direct costs, and even indirect costs of lost workplace productivity and reductions in general economic production. Such expansive cost constructs can inhibit practical solutions due to conceptual and data complexities. For the most part, this paper focuses on the service-related resource costs consumed in the delivery of medical care within the health care system.

Over a decade ago, the IOM defined quality as “the degree to which health services for individuals and populations increase the likelihood of desired health outcomes and are consistent with current professional knowledge” (IOM, 1990). But as many authors have noted recently, the definition of quality, as in quality care or quality improvement, has not reached national consensus (Berwick, 2002; McGlynn, 1995; McGlynn et al., 2003; McKee, 2001; Palmer and Torgerson, 1999; Wennberg et al., 2002). Complicating these efforts are the paucity of “gold standards” for health outcomes, definitive levels of health that are measurable, valid, and reliable.

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