Skip to main content
SpringerLink
Log in

Profit efficiency of physician practices: a stochastic frontier approach using panel data

  • Published:
Health Care Management Science Aims and scope Submit manuscript

Abstract

While determinants of efficiency have been the subject of a large number of studies in the inpatient sector, relatively little is known about factors influencing efficiency of physician practices in the outpatient sector. With our study, we provide the first paper to estimate physician practice profit efficiency and its’ determinants. We base our analysis on a unique panel data set of 4964 physician practices for the years 2008 to 2010. The data contains information on practice costs and revenues, services provided, as well as physician and practice characteristics. We specify the profit function of the physician practice as a translog functional form. We estimated the stochastic frontier using the comprehensive one-step approach for panel data of Battese and Coelli (1995). For estimation of the profit function, we regressed yearly profit on several inputs, outputs and input/output price relationships, while we controlled for a range of control variables such as patients’ case-mix or share of patients covered by statutory health insurance. We find that participation in disease management programs and the degree of physician practice specialization are associated with significantly higher profit efficiency. In addition, our analyses show that group practices perform significantly better than single practices.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  1. Statistical Office of Germany (2015) Gesundheitsberichterstattung des Bundes

  2. Maudos J, Pastor JM (2001) Cost and profit efficiency in banking: an international comparison of Europe, Japan and the USA. Appl Econ Lett 8(6):383–387

    Article  Google Scholar 

  3. Villalonga B (2000) Privatization and efficiency: differentiating ownership effects from political, organizational, and dynamic effects. J Econ Behav Organ 42(1):43–74

    Article  Google Scholar 

  4. Berger AN, Mester LJ (1997) Inside the black box; what explains differences in the efficiencies of financial institutions? J Bank Financ 21(7):895–947

    Article  Google Scholar 

  5. Ali F, Parikh A, Shah M (1994) Measurement of profit efficiency using behavioural and stochastic frontier approaches. Appl Econ 26(2):181–188

    Article  Google Scholar 

  6. Battese GE, Coelli TJ (1995) A model for technical inefficiency effects in a stochastic frontier production function for panel data. Empir Econ 20(2):325–332

    Article  Google Scholar 

  7. Staat M (2011) Estimating the efficiency of general practitioners controlling for case mix and outlier effects. Empir Econ 40(2):321–342

    Article  Google Scholar 

  8. Rosenman R, Friesner D (2004) Scope and scale inefficiencies in physician practices. Health Econ 13(11):1091–1116

    Article  Google Scholar 

  9. Heimeshoff M, Schreyögg J, Kwietniewski L (2014) Cost and technical efficiency of physician practices: a stochastic frontier approach using panel data. Health Care Manag Sci 17(2):150–161

    Article  Google Scholar 

  10. Olsen KR, Gyrd-Hansen D, Sørensen TH, Kristensen T, Vedsted P, Street A (2013) Organisational determinants of production and efficiency in general practice: a population-based study. Eur J Health Econ 14(2):267–276

    Article  Google Scholar 

  11. Gaynor M, Pauly MV (1990) Compensation and productive efficiency in partnerships: evidence from medical groups practice. J Polit Econ 98(3):544–573

    Article  Google Scholar 

  12. DeFelice LC, Bradford WD (1997) Relative inefficiencies in production between solo and group practice physicians. Health Econ 6(5):455–465

    Article  Google Scholar 

  13. Reinhardt U (1972) A production function for physician services. Rev Econ Stat 54(1):55–66

    Article  Google Scholar 

  14. Ozcan YA (1998) Physician benchmarking: measuring variation in practice behavior in treatment of otitis media. Health Care Manag Sci 1(1):5–17

    Article  Google Scholar 

  15. Ozcan YA, Jiang HJ, Pai C-W (2000) Physician efficiency in treatment of sinusitis: do primary care physicians or specialist provide more efficient care? Health Serv Manag Res 13(2):90–96

    Article  Google Scholar 

  16. Pai C-W, Ozcan YA, Jiang HJ (2000) Regional variation in physician practice pattern: an examination of technical and cost efficiency for treating sinusitis. J Med Syst 24(2):103–117

    Article  Google Scholar 

  17. Angela Testi A, Fareed N, Ozcan YA, Tanfani E (2014) Assessment of physician performance for diabetes: a bias-corrected DEA model. Qual Prim Care 21(6):345–357

    Google Scholar 

  18. Liu X, Oetjen DM, Oetjen RM, Zhao M, Ozcan YA, Ge L (2015) The efficiency of ophthalmic ambulatory surgery centers (ASCs). J Med Pract Manage 31(1):20–25

    Google Scholar 

  19. Herr A (2008) Cost and technical efficiency of German hospitals: does ownership matter? Health Econ 17(9):1057–1071

    Article  Google Scholar 

  20. Zuckerman S, Hadley J, Iezzoni L (1994) Measuring hospital efficiency with frontier cost functions. J Health Econ 13(3):255–280

    Article  Google Scholar 

  21. Street A, Jacobs R (2002) Relative performance evaluation of the English acute hospital sector. Appl Econ 34(9):1109–1119

    Article  Google Scholar 

  22. Rosko MD (2001) Cost efficiency of US hospitals: a stochastic frontier approach. Health Econ 10(6):539–551

    Article  Google Scholar 

  23. Li T, Rosenman R (2001) Cost inefficiency in Washington hospitals: a stochastic frontier approach using panel data. Health Care Manag Sci 4(2):73–81

    Article  Google Scholar 

  24. Blank JL, Eggink E (2004) The decomposition of cost efficiency: an empirical application of the shadow cost function model to Dutch general hospitals. Health Care Manag Sci 7(2):79–88

    Article  Google Scholar 

  25. Besstremyannaya G (2011) Managerial performance and cost efficiency of Japanese local public hospitals: a latent class stochastic frontier model. Health Econ 20(S1):19–34

    Article  Google Scholar 

  26. Brown SIII (2003) Managed care and technical efficiency. Health Econ 12(2):149–158

    Article  Google Scholar 

  27. Skinner J (1994) What do stochastic frontier cost functions tell us about inefficiency? J Health Econ 13(3):323–328

    Article  Google Scholar 

  28. Schmidt P, Sickles RC (1984) Production frontiers and panel data. J Bus Econ Stat 2(4):367–374

    Google Scholar 

  29. Yasar A. (2014) Ozcan, health care benchmarking and performance evaluation an assessment using data envelopment analysis (DEA), 2nd edition. Springer, New York, ISBN: 978–1–4899-7471-6

  30. Akhavein JD, Berger AN, Humphrey DB (1997) The effects of megamergers on efficiency and prices: evidence from a bank profit function. Rev Ind Organ 12(1):95–139

    Article  Google Scholar 

  31. Kumbhakar SC (2006) Specification and estimation of nonstandard profit functions. Empir Econ 31(1):243–260

    Article  Google Scholar 

  32. Kumbhakar SC (2001) Estimation of profit functions when profit is not maximum. Am J Agric Econ 83(1):1–19

    Article  Google Scholar 

  33. Ali M, Flinn JC (1989) Profit efficiency among basmati rice producers in Pakistan Punjab. Am J Agric Econ 71(2):303–310

    Article  Google Scholar 

  34. Herr A, Schmitz H, Augurzky B (2011) Profit efficiency and ownership of German hospitals. Health Econ 20(6):660–674

    Article  Google Scholar 

  35. Rahman MA, Capitman JA (2012) Factors affecting profit efficiency of privat hospitals in Bangladesh: are urban hospitals more profit-efficient? J Health Manag 14(2):83–96

    Article  Google Scholar 

  36. Bradford WD, Craycraft C (1996) Prospective payments and hospital efficiency. Rev Ind Organ 11(6):791–809

    Google Scholar 

  37. Thurston NK, Libby AM (2002) A production function for physician services revisited. Rev Econ Stat 84(1):184–191

    Article  Google Scholar 

  38. Aigner DJ, Chu SF (1968) On estimating the industry production function. Am Econ Assoc 58(4):826–839

    Google Scholar 

  39. Aigner D, Lovell C, Schmidt P (1977) Formulation and estimation of stochastic frontier production function models. J Econ 6(1):21–37

    Article  Google Scholar 

  40. Meeusen W, van Den Broeck J (1977) Efficiency estimation from cobb-Douglas production functions with composed error. Int Econ Rev 18(2):435–444

    Article  Google Scholar 

  41. Coelli T, Rao DP, Battese GE (2005) An introduction to efficiency and productivity analysis, 2nd edn. Norwell, Dordrecht, Kluwer Academic Publishers

    Google Scholar 

  42. Kumbhakar SC, Ghosh S, McGuckin JT (1991) A generalized production frontier approach for estimating determinants of inefficiency in US dairy farms. J Bus Econ Stat 9(3):279–286

    Google Scholar 

  43. Huang CJ, Liu JT (1994) Estimation of a non-neutral stochastic frontier production function. J Prod Anal 5(2):171–180

    Article  Google Scholar 

  44. Humphrey DB, Pulley LB (1997) Banks’ responses to deregulation: profits, technology, and efficiency. J Money Credit Bank 29(1):73–93

    Article  Google Scholar 

  45. Deprins D, Simar L (1989) Estimation de frontières déterministes avec facteurs exogènes d’inefficacité. Ann Econ Stat 14:117–150

    Google Scholar 

  46. Fiordelisi F, Marques-Ibanez D, Molyneux P (2011) Efficiency and risk in European banking. J Bank Financ 35(5):1315–1326

    Article  Google Scholar 

  47. Fitzpatrick T, McQuinn K (2008) Measuring bank profit efficiency. Appl Financ Econ 18(1):1–8.40

    Article  Google Scholar 

  48. Escarce JJ, Pauly MV (1998) Physician opportunity costs in physician practice cost functions. J Health Econ 17(2):129–151

    Article  Google Scholar 

  49. Gunning TS, Sickles RC (2011) A multi-product cost function for physician private practices. J Prod Anal 35(2):119–128

    Article  Google Scholar 

  50. Pope GC, Burge RT (1995) The marginal practice cost of physicians' services. Socio Econ Plan Sci 29(1):1–16

    Article  Google Scholar 

  51. Staiger DO, Stock JH (1997) Instrumental variables regression with weak instruments. Econometrica 65(3):557–586

    Article  Google Scholar 

  52. Blank JLT, Vogelaar I (2004) Specifying technical change: a research on the nature of technical change in Dutch hospital industry. Q Rev Econ Finance 44(3):448–463

    Article  Google Scholar 

  53. Dayhoff DA, Cromwell J (1993) Measuring differences and similarities in hospital caseloads: a conceptual and empirical analysis. Health Serv Res 28(3):292

    Google Scholar 

  54. Zwanziger J, Melnick GA, Simonson L (1996) Differentiation and specialization in the California hospital industry 1983 to 1988. Med Care 34(4):361–372

    Article  Google Scholar 

  55. Hillner BE, Smith TJ, Desch CE (2000) Hospital and physician volume or specialization and outcomes in cancer treatment: importance in quality of cancer care. J Clin Oncol 18(11):2327–2340

    Article  Google Scholar 

  56. Busse R (2004) Disease management programs in Germany’s statutory health insurance system. Health Aff 23(3):56–67

    Article  Google Scholar 

  57. Berthold HK, Bestehorn KP, Janowitz C, Krone W, Gouni-Berthold I (2011) Disease management programs in type 2 diabetes: quality of care. Am J Manag Care 17(6):393–403

    Google Scholar 

  58. Pimouguet C, Le Goff M, Thiebaut R, Dartigues JF, Helmer C (2011) Effectiveness of disease-management programs for improving diabetes care: a meta-analysis. Can Med Assoc J 183(2):E115–E127

    Article  Google Scholar 

  59. McCall N, Cromwell J (2011) Results of the Medicare health support disease-management pilot program. New Engl J Med 365:1704–1712

    Article  Google Scholar 

  60. Simic D, Redaelli M, Altin S, Stock S (2014) Wie beurteilen Patienten das DMP Diabetes? Ergebnisse einer vergleichenden Befragung. Gesundheitswesen 76(8/9):596

    Google Scholar 

  61. Linder R, Ahrens S, Köppel D, Heilmann T, Verheyen F (2011) Nutzen und Effizienz des Disease Management-Programms Diabetes Mellitus Typ 2. Deutsches Ärzteblatt 108(10):155–162

    Google Scholar 

  62. Auquier AA (1980) Sizes of firms, exporting behavior, and the structure of French industry. J Ind Econ 29(2):203–218

    Article  Google Scholar 

  63. You JI (1995) Small firms in economic theory. Camb J Econ 19(3):441–462

    Article  Google Scholar 

Download references

Acknowledgments

This study was supported by Central Research Institute of Ambulatory Health Care in Germany (Zentralinstitut für die kassenärztliche Versorgung). The sponsor had no role in the study design, collection and analysis of data, the writing of the report or the submission of the paper for publication. The authors declare that they have no conflict of interest.

Author information

Authors and Affiliations

  1. Hamburg Center for Health Economics, University of Hamburg, Hamburg, Germany

    Lukas Kwietniewski & Jonas Schreyögg

Authors
  1. Lukas Kwietniewski
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Jonas Schreyögg
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Jonas Schreyögg.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Kwietniewski, L., Schreyögg, J. Profit efficiency of physician practices: a stochastic frontier approach using panel data. Health Care Manag Sci 21, 76–86 (2018). https://doi.org/10.1007/s10729-016-9378-y

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10729-016-9378-y

Keywords

Search

Navigation