Efficiency and administrative costs in primary care

We use a formal model to examine the implications of endogenous managerial effort for the interpretation and estimation of efficiency in health care organisations. The model is applied to investigate the doubling of the cost of administering primary care in England in real terms between 1989/1990 and 1994/1995. The main cost determinant was the number of general practitioners (GPs), and there were economies of scale but not of scope. Fund-holding had a positive but small effect on administrative costs, so that the recent abolition of fund-holding may do little to reduce primary care administrative costs. After allowing for changes in the numbers of primary care practitioners, the quality of primary care and the extent of fund-holding, most of the increase in costs was unexplained, and may reflect additional but unmeasured increases in the administrative burden associated with the 1990 reforms. There was little variation in relative efficiency across areas.