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Using physician practice cost functions in payment policy: the problem of endogeneity bias
1Department of Medicine, School of Medicine, University of Pennsylvania, USA.
Summary
Estimating physician practice costs requires accounting for physician labor as an endogenous factor. Ignoring this endogeneity biases marginal cost estimates downward and scale economy estimates upward, impacting physician payment policy.
Area of Science:
- Health Economics
- Econometrics
- Physician Practice Management
Background:
- Physician payment policy relies on accurate estimates of practice costs, including marginal costs and economies of scale.
- Traditional estimation methods often treat physician labor as an exogenous input, potentially introducing bias.
Purpose of the Study:
- To examine the bias in physician practice cost function estimates when physician labor is treated as exogenous versus endogenous.
- To inform accurate econometric modeling for physician payment policy.
Main Methods:
- Utilized data from 207 general surgeons from the 1988 National Survey of Physicians.
- Specified a generalized translog empirical practice cost function.
- Compared estimation methods with physician labor treated as exogenous and endogenous.
Main Results:
- Marginal cost estimates are biased downward when physician labor endogeneity is ignored.
- Economies of scale estimates are biased upward when physician labor endogeneity is ignored.
- Significant scale economies were found with exogenous labor, but constant returns to scale were not rejected with endogenous labor.
Conclusions:
- Treating physician labor as exogenous leads to biased estimates of practice costs and scale economies.
- Accurate physician payment policy requires addressing the endogeneity of physician labor in econometric models.
- High-quality data collection is crucial for reliable physician practice cost analysis.