Abstract
This paper provides an empirical analysis of the production of physician services using a multi-product cost function. Prior studies examine the physician production process in a theoretical setting and do not provide empirical insight. We expand upon the theoretical work in the literature by specifying a four-product generalized Leontief cost function for physician services that recovers measures of marginal cost, scale, scope, and elasticity. Our study is based on physician survey data from the 1998 American Medical Association Physician Socioeconomic Monitoring Survey and motivates a scientific framework for advancing the existing reimbursement fee schedule. Our analysis indicates that physician office visits are generally priced above marginal cost, implying there may be evidence of market power in physician private practices. Furthermore, our analysis lends to the policy debate over whether the use of a Resource-Based Relative Value Scale system is the most appropriate mechanism for facilitating Medicare reimbursements.
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Notes
http://seniorjournal.com/NEWS/Medicare/6-07-19-ReductionInMedicare.htm. See the 2006 American Medical Association report on Medicare physician payments.
See Haas-Wilson and Gaynor (1998) for an examination and summary of competition in physician markets.
“Medicare physician fees geographic adjustment indices are valid in design, but data and methods need refinement.” Washington, DC: Government Accountability Office, March 2005. Publication GAO-05-119.
See Hsiao et al. (1988).
Escarce and Pauly (1998).
Escarce and Pauly (1998) note that their analysis is purely illustrative and should not be relied upon for empirical purposes.
Examples of non-physician inputs include nurses, clerical support, malpractice rents, and office supplies.
We refer the reader to Escarce and Pauly (1998) for a formal derivation and a detailed discussion.
See McFadden (1978).
We note these are true zero measures and not missing values.
See McFadden (1979) for a summary.
The globally flexible Symmetric Generalized McFadden proposed by Diewert and Wales (1987) was also considered. However the authors found its “flexibility” was distorted by the need to impose global concavity. Moreover, with the presence of several categories of outputs, the Symmetric Generalized McFadden produced estimates of technology that were unstable as well as economically unmeaningful without the restrictions. We opted instead for a generalized Leontief flexible functional form which circumvented the issues we encountered with the Symmetric Generalized McFadden.
We use office visits as physician output. There are other measures of physician output that are more comprehensive but less easily observed and measured. For a discussion of these alternatives, health outcomes that can be constructed for these alternatives, and their use in static and intertemporal models of health production see, for example, Sickles and Taubman (1997), Behrman et al. (1998), and Sickles and Yazbeck (1998).
The authors note that hospital visits may be endogenous if physicians can accurately plan the time they commit in a hospital setting. We performed a Durban-Wu-Hausman test to examine the endogeneity of the hospital visits. Our results indicate that hospital visits are exogenous. This is most likely attributable to the unpredictable nature of the time required to consult with patients in a specialized setting, due to the potential complications that often arise in hospital visits.
However, it is important to note that T is a representation of physician labor and does not satisfy the traditional properties of a cost function, hence there is no need to impose restrictions.
This category represents only 7% of the sample.
Malpractice insurance may include legal fees associated with malpractice cases.
The method by Pope and Burge (1990) is rather problematic, since it precludes measurement of share equations, economies of scale and scope, and the interaction of second-order prices. The result is a functional form that does not adhere to economic theory.
One of the demand equations is excluded to avoid singularity.
3SLS was selected due its notable history in simultaneous equation models. It is also worth noting that in our case, 3SLS is asymptotically equivalent to the Generalized Method of Moments estimator.
A regression test of the overidentifying restrictions found that these restrictions could not be rejected (χ2=2.60; p=0.63).
Standard errors are calculated by taking the square root of the variance for all four measures of output and then dividing by the square root of the sample size. An alternative methodology is to interact the coefficients derived from the cost function against the statistical means of the data to derive a marginal cost “at the mean”, with standard errors derived by way of the Delta Method. We note that this approach produced roughly the same results.
The limited sample size and inflexibility of the Escarce and Pauly (1998) specification is most likely a contributing factor in the reported differences.
In theory, physician private practices exhibit returns based on outputs and practice size. Our study focuses on the former.
See Elbasha and Messonnier (2004) for a summary.
It is well-known that these measures, as ratios of terms whose denominator is not bounded away from zero, do not have finite moments. We use a standard trimming proportion of 2.5% in each tail of the empirical distribution in calculating the mean and standard deviation of the sample statistics for scale.
We note that values of zero are within the range of outputs.
This result is most likely attributable to long-term contractual obligations on office rent and office equipment, in addition to a high demand for specialized assistants.
The existing survey lacks the necessary data to examine this.
For example, see The United States of America vs. The Marshfield Clinic.
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Gunning, T.S., Sickles, R.C. A multi-product cost function for physician private practices. J Prod Anal 35, 119–128 (2011). https://doi.org/10.1007/s11123-009-0167-1
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DOI: https://doi.org/10.1007/s11123-009-0167-1