Measuring Efficiency of Physician Practices Using Data Envelopment Analysis

Steven Andes, PhD, CPA
Research Assistant and Professor at the University of Illinois at Chicago, Director of Physician Information and Research, American Osteopathic Association, Chicago, Ill.
Lawrence M. Metzger, PhD, CPA
Professor of Accounting, Loyola University Chicago, Chicago, Ill.
John Kralewski, PhD
Wallace Professor of Health Research and Policy, School of Public Health, University of Minnesota, Minneapolis, Minn.
David Gans, MSHA
Survey Operations Director, Medical Group Management Association, Englewood, Colo.


Purpose: Medical-group practices are becoming increasingly commonplace, with more than a third of licensed physicians in the United States currently working in this mode. While previous studies have focused on physician practices, little attention has been focused specifically on the contribution of internal organizational factors to overall physician practice efficiency. This paper develops a model to help determine best practices of efficient physician offices while allowing for choices between inputs. Measuring how efficient practices provide services yields useful information to help improve performance of less efficient practices.

Design: Data for this study were obtained from the 1999 Medical Group Management Association (MGMA) Cost Report. In this study, 115 primary care physician practices are analyzed. Outputs are defined as gross charges; inputs include square footage and medical, technical, and administrative support personnel.

Methodology: Data envelopment analysis (DEA) is used in this study to develop a model of practice outputs and inputs to help identify the most efficient medical groups. DEA is a linear programming technique that converts multiple input and output measures to a single comprehensive measure of efficiency. These practices are used as a reference set for comparisons with less efficient ones.

Conclusion: The overall results indicate that size of physician practice does not increase efficiency. There does not appear to be extensive substitution among inputs. Compared to other practices, efficient practices seem to manage each input well.

This paper has undergone peer review by appropriate members of Managed Care’s Editorial Advisory Board.