This paper examines whether a Physician Compensation Program (PCP), which was based on the responsibility centers system, improved departmental efficiency in a large Taiwan teaching hospital. PCPs in Taiwan may have implications for staff-model HMOs. Monthly financial data and related information for 58 departments in the 5 months following the introduction of the program (the PCP period) and the corresponding 5 months before the introduction of the program (the pre-PCP period) were provided by the case hospital. The Data Envelopment Analysis (DEA) model is used to measure the operational efficiency of each department in the case hospital over the two periods. We first use asymptotic DEA-based tests to examine whether differences in efficiency scores between the two periods are significant. Then, a multi-factor tobit model is used to examine factors that might explain the observed differences in efficiency. The data of each month in the PCP period (November 1996-March 1997) and the pre-PCP period (November 1995-March 1996) are used to calculate efficiency scores and control for monthly effects. We find that average efficiency improves after the implementation of the PCP, with or without controlling for other related factors. Physicians' seniority and percentage of physicians' service time in the department are associated with improved efficiency. Finally, departments with higher profits and fewer numbers of employees are associated with higher efficiency. The findings suggest that to achieve an increase in hospital efficiency in Taiwan, responsibility centers should be integrated with formal physician compensation programs. Such results have implications for staff model HMOs in the US and their variants in countries with national health insurance.