Abstract In this study we assess the performance of US teaching hospitals operating in 1995. Since teaching hospitals must increasingly compete with non-teaching hospitals for managed care contracts based on price, decreasing costs can only come from either reducing inefficiencies or decreasing the ‘public good’ production of teaching and research. We use a data envelopment analysis (DEA) approach to measure the relative technical and scale efficiencies on a sample of 254 US teaching hospitals. The next step of our research is to assess in a bivariate context the effect market competition has on the teaching hospitals in our sample. We find that competition (as measured by the number of managed care contracts per hospital and the number of patients covered by these contracts per hospital) has positive effects on the teaching hospitals. In other words, as competition increases so does the teaching hospital’s relative efficiency. We also regress each hospital’s relative efficiency scores on ownership form, organization structure, teaching effort, and competitive market variables. We find that increased competition leads to higher efficiency without compromising teaching intensity.