The measurement of efficiency in the hospital sector is particularly difficult given that there is no universally recognised objective function. A generalised neo-classical approach is adopted in specifying a hospital objective function which acknowledges the importance of transaction costs and property right holdings in this sector. It is shown that such an approach may be used to distinguish between technical and allocative efficiency, thereby aiding interpretation of the stochastic element contained in production models. Quantification of allocative inefficiency is also undertaken.