Beyond Traditional Inefficiency Measures: Quantifying Health System Waste Through a Hierarchical Model of Inherited and Self-Generated Persistent Inefficiency

Abstract

This study develops a hierarchical inefficiency model to quantify how persistent technical inefficiency is generated and transmitted through multi-tiered healthcare systems. Departing from conventional hospital-centric assessments, the model decomposes inefficiency into inherited (propagated from higher governance levels) and self-generated (locally produced) components across three administrative tiers: province, region, and hospital. By leveraging the nested structure of Canadian healthcare governance, the framework captures system-level inefficiencies embedded in institutional design rather than isolated provider-level performance.

Applied to panel data from hospitals in Alberta, Nova Scotia, and Ontario, the analysis shows that persistent inefficiency consistently originates at the top of the hierarchy, within provincial governance, where it is highest: 7.25% in Alberta, 7.02% in Nova Scotia, and 6.97% in Ontario. It then compounds as it flows downward, yielding total system inefficiencies of 16.45%, 14.63%, and 14.88%, respectively. These results demonstrate that hospital-level inefficiencies often reflect upstream structural constraints rather than solely local mismanagement.

While the decomposition provides a tractable diagnostic of how inefficiency propagates, it also raises a policy dilemma: Should reforms equip hospitals and regions to absorb inherited burdens, or should they target the persistent sources of inefficiency embedded in provincial governance? These findings challenge standard health economics approaches that localise inefficiency at the point of care. By reframing inefficiency as a cascading, structural phenomenon, this study offers a system-aligned perspective for identifying where meaningful reform must begin.