Resource misallocation and market inefficiency: Investigating the healthcare sector when considering undesirable output

Numerous scholars have integrated the consideration of undesirable (bad) outputs into data envelopment analysis methods for evaluating environmental efficiency or productivity. However, there has been limited application of this approach to assess the operational performance of hospitals that involves bad outputs. This study specifically focuses on the mortality of hospital patients as a bad output, and the underlying assumption is that patients with severe medical conditions tend to choose higher-tier hospitals with better medical conditions for treatment. These critically ill patients may inherently exhibit elevated mortality rates. Moreover, when a surge of such patients inundates a hospital, constraints in equipment, staffing levels, and quality may impede the continuity of medical care. Essentially, insufficient resources to attend to patients can result in an upswing in the number of deaths. Therefore, utilizing provincial-level hospital data in China, this paper analyzes how resource misallocation affects patient mortality. Furthermore, it explores potential strategies for optimizing resources in order to enhance the overall efficiency and effectiveness of healthcare delivery. JEL: I12; I18; H51.