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Multispecialty physician practices: fixed and variable costs, and economies of scale
1Health and Hospital Services, Asheville, North Carolina, USA.
Abstract:
Medical Group Management Association survey data from 1955 to 1999 was to assess fixed compared to variable cost and the existence of economies of scale among single- and multispecialty groups. During these intervening 44 years, physician operating costs were estimated to increase roughly three times the consumer price index. Among the multispecialty groups in 1999 at least 85% of total medical revenues were considered fixed costs when including a physician's compensation and fringe benefits. On the basis of relative value units (RVUs), 10 practitioners provided the maximum economies of scale. However, for multispecialty groups, based on a physician's total compensation, optimal efficiency occurred between 26 and 50 doctors. Those multispecialty practices with 51 or more MDs are thought to be "less efficient" for several reasons: they deliver care on multisites, experience a higher percentage of managed care patients, and are less effective in controlling their peers' use of time and resources.
Insights
Physician operating costs significantly increased from 1955-1999. Multispecialty groups achieve optimal efficiency with 26-50 doctors, while larger groups face challenges in cost control and resource management.
Area of Science:
- Health Economics
- Medical Practice Management
Background:
- Physician operating costs have risen substantially, outpacing the consumer price index over four decades.
- Understanding cost structures and economies of scale is crucial for efficient medical group operations.
Purpose of the Study:
- To analyze fixed vs. variable costs in medical groups.
- To determine the existence and optimal size for economies of scale in single- and multispecialty practices.
Main Methods:
- Utilized Medical Group Management Association survey data spanning 1955 to 1999.
- Assessed cost structures and economies of scale based on practitioner numbers and relative value units (RVUs).
Main Results:
- Fixed costs, including physician compensation, constituted at least 85% of revenue in multispecialty groups by 1999.
- Maximum economies of scale were observed with 10 practitioners based on RVUs.
- Optimal efficiency for multispecialty groups occurred with 26-50 physicians, considering total compensation.
Conclusions:
- Multispecialty practices with over 50 physicians may be less efficient due to factors like multi-site operations and managed care.
- Identifying optimal practice size is key to maximizing economies of scale and operational efficiency in healthcare settings.