Cost efficiency and scale economies in general dental practices in the US: a non-parametric and parametric analysis of Colorado data

Abstract

This paper uses both the non-parametric method of data envelopment analysis (DEA) and the econometric method of stochastic frontier analysis (SFA) to study the production technology and cost efficiency of the US dental care industry using practice level data. The American Dental Association 2006 survey data for a number of general dental practices in the state of Colorado in the US are used for the empirical analysis. The findings suggest that the cost efficiency score is between 0.79 and 0.87, on average, and the cost inefficiency is mostly due to allocative rather than technical inefficiency. The optimal output level for a dental practice to fully exploit the economies of scale is estimated to be at $1.68 million. Average cost at this level of output is 50.6 cents for each dollar of gross billing generated. The DEA and SFA approaches provide generally consistent results.

Keywords:

• dental care
• cost efficiency
• economies of scale
• data envelopment analysis
• stochastic frontier analysis

Acknowledgements

The authors thank the ADA and especially Albert Guay for their kind permission to use their data set. We are also indebted to Dennis Heffley, Tryfon Beazoglou, and Jackson Brown for helpful comments. We are particularly grateful for valuable comments on the previous version of this paper from two anonymous referees. The usual disclaimer applies.

Notes

1 Source: National Health Expenditure Data from Centers for Medicare and Medicaid Services (CMS).

2 Essentially the same concept was defined earlier as the coefficient of resource utilization by Debreu (1951) and as the Distance function by Shephard (1953).

3 Because of proprietary restrictions, specific details of the practices are not disclosed.

4 http://www.simplyhired.com/a/salary/search/q-Dental+Receptionist/ (most recently accessed on 18 March 2011).

5 Note that lack of variation in one or more prices is not a problem in DEA cost efficiency models.