A geographic index of physician practice costs

This paper develops a geographic index of physician practice costs. A Laspeyres index is derived for each Metropolitan Statistical Area and for the non-metropolitan portion of each state. Relative prices by area are obtained for four practice inputs: physicians' own time, employee wages, office rents, and malpractice insurance. Each input price proxy is weighted by the share of physician gross revenues spent on that input. The index is useful in explaining geographic variation in physician fees. It may be used in reforming the way Medicare pays physicians.