A multi‐product cost function for physician private practices

This paper provides an empirical analysis of the production of physician services using a multi‐product cost function. Prior studies examine the physician production process in a theoretical setting and do not provide empirical insight. We expand upon the theoretical work in the literature by specifying a four‐product generalized Leontief cost function for physician services that recovers measures of marginal cost, scale, scope, and elasticity. Our study is based on physician survey data from the 1998 American Medical Association Physician Socioeconomic Monitoring Survey and motivates a scientific framework for advancing the existing reimbursement fee schedule. Our analysis indicates that physician office visits are generally priced above marginal cost, implying there may be evidence of market power in physician private practices. Furthermore, our analysis lends to the policy debate over whether the use of a Resource‐Based Relative Value Scale system is the most appropriate mechanism for facilitating Medicare reimbursements.