The state of California has recently mandated minimum nurse-staffing ratios, raising concerns about possible affects on hospital efficiency. In this study, we examine how market factors and quality were related to staffing levels in California hospitals in 1995 (prior to implementation of the new law). We are particularly interested in the affect of managed care penetration on this aspect of hospital efficiency because the call to legislative action was predicated on fears that hospitals were reducing staffing below optimal levels in response to managed care pressures. We derive a unique measure of excess staffing in hospitals based on a data envelopment analysis (DEA) production function model, which explicitly includes ancillary care among the inputs and outputs. This careful specification of production is important because ancillary care use has risen relative to daily hospital services, with the spread of managed care and advances in medical technology. We find that market share (adjusted for size) and market concentration are the major determinants of excess staffing while managed care penetration is insignificant. We also find that poor quality (outcomes worse than expected) is associated with less efficient staffing. These findings suggest that the larger, more efficient urban hospitals will be penalized more heavily under binding staffing ratios than smaller, less-urban hospitals.