The Economics of Group Practice

Abstract

The paper presents a theoretical and empirical discussion of how costs of outpatient medical practice vary with the size of the group providing services. It focuses upon the incentives facing the individual physician to keep the costs of his practice down and his work effort high. Cost and revenue sharing schemes are more prevalent as group size increases; therefore any individual physician is less likely to have to bear the financial consequences of his decision. Likewise, the reward he obtains from additional work effort falls. Thus, we would predict that total costs would rise as an individual physician's share of costs falls because of greater X-inefficiency, and that hours worked would fall as the individual physician's share of marginal revenue falls. Implications of our analysis for public policy is considered. The findings should give pause to those who believe that large clinics or large groups can give more efficient care than physicians working along or in small groups and hence that group practice should be subsidized.

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