Decomposing Cost Efficiency in Regional Long-term Care Provision in Japan

Many developed countries face a growing need for long-term care provision because of population ageing. Japan is one such example, given its population's longevity and low birth rate. In this study, we examine the efficiency of Japan's regional long-term care system in FY2010 by performing a data envelopment analysis, a non-parametric frontier approach, on prefectural data and separating cost efficiency into technical, allocative, and price efficiencies under different average unit costs across regions. In doing so, we elucidate the structure of cost inefficiency by incorporating a method for restricting weight flexibility to avoid unrealistic concerns arising from zero optimal weight. The results indicate that technical inefficiency accounts for the highest share of losses, followed by price inefficiency and allocation inefficiency. Moreover, the majority of technical inefficiency losses stem from labor costs, particularly those for professional caregivers providing institutional services. We show that the largest share of allocative inefficiency losses can also be traced to labor costs for professional caregivers providing institutional services, while the labor provision of in-home care services shows an efficiency gain. However, although none of the prefectures gains efficiency by increasing the number of professional caregivers for institutional services, quite a few prefectures would gain allocative efficiency by increasing capital inputs for institutional services. These results indicate that preferred policies for promoting efficiency might vary from region to region, and thus, policy implications should be drawn with care.