Estimation of a physician practice cost function

Objective The goal of the present paper is to provide evidence on the behavior of physician practice cost functions. Data sources Our study is based on the data of 3686 physician practices in Germany for the years 2006 to 2008. Study design We apply a translog functional form and include a comprehensive set of variables that have not been previously used in this context. A system of four equations using three-stage least squares is estimated. Principal findings We find that a higher degree of specialization leads to a decrease in costs, whereas quality certification increases costs. Costs of group practices are higher than of solo practices. The latter finding can be explained by the existence of indivisibilities of expensive technical equipment. Smaller practices do not reach the critical mass to invest in certain technologies, which leads to differences in the type of health care services provided by different practice types. Conclusions This is the first study to use physician practices as the unit of observation and to consider the endogenous character of physician input. Our results suggest that identifying factors that influence physician practice costs is important for providing evidence-based physician payment systems and to enable decision-makers to set incentives effectively.