We use a formal model to examine the implications of endogenous managerial effort for
the interpretation and estimation of efficiency in health care organisations. The model is
applied to investigate the doubling of the cost of administering primary care in England in
real terms between 1989r1990 and 1994r1995. The main cost determinant was the number
. of general practitioners GPs , and there were economies of scale but not of scope.
Fundholding had a positive but small effect on administrative costs, so that the recent
abolition of fundholding may do little to reduce primary care administrative costs. After
allowing for changes in the numbers of primary care practitioners, the quality of primary
care and the extent of fundholding, most of the increase in costs was unexplained, and may
reflect additional but unmeasured increases in the administrative burden associated with the
1990 reforms. There was little variation in relative efficiency across areas.q2000 Elsevier
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