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

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.