Physician Opportunity Costs in Physician Practice Cost Functions

Estimation of cost functions for physician firms is problematic because many physicians are self-employed, and the marginal opportunity cost of physician labor is not observed. In this paper, the authors show how to recover marginal costs and conventional measures of economies of scale from cost functions that condition on the amount of physician labor input. In addition, they introduce the new concepts of marginal nonphysician input costs and behavioral economies of scale, which reflect the structure of costs when physician labor input moves along a utility-maximizing expansion path. The results could be useful in the design of resource-based physician fee schedules.