By focusing exclusively on consumer benefit, previous studies of the effects of managed care have ignored important hospital efficiency gains. This study uses data from the 1992-1996 US Health Care Cost and Utilization Project, National Inpatient Sample to estimate a stochastic frontier model of hospital technical efficiency. After controlling for hospital and market area variables, the study finds strong evidence that increased managed care insurance in any given market is associated with improved technical efficiency in area hospitals. Using a two-stage estimation technique (Battese and Coelli 1995), the estimates are more efficient than for two-stage methods found in most of the literature
