Moral Hazard and Hospital Physician Integration
Wang, Karen Florence
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Despite the importance of the hospital physician relationship, little is known about hospital physician integration. In this dissertation, I examine how integration solves moral hazard problems in a principal-agent relationship in the context of the hospital physician integration continuum. I build on the idea in agency theory that tradeoffs between the cost of measuring behavior and the cost of transferring risk to the agent influence compensation contracts and integration. I review theories on vertical integration in the strategy and economics literature and explore the existing empirical literature on hospital physician integration. The empirical portion of this dissertation is split into two studies. In Study 1, I focus on the circumstances that account for variations in hospital physician integration. Using a double-sided moral hazard model, where both the principal and agent contribute to production, I hypothesize that hospital effort and level of malpractice risk increases the degree of hospital physician integration, whereas physician effort decreases the degree of integration. I find partial support for the impact of hospital effort on hospital physician integration, and positive support for the impact of physician effort and risk on integration. The results suggest that integration occurs when risk is high and depends on the relative marginal contributions to production. In Study 2, I investigate the impact of hospital physician integration on hospital performance. Specifically, I hypothesize that integration will have a positive impact on hospital financial performance and health care quality. Additionally, I hypothesize that organizational factors, including coordination investment, physician leadership, physician governance, and quality improvement investment, positively moderate the impact of integration on performance. The results partially support my predictions. I do not find a significant direct impact of integration on financial performance, inpatient quality, or patient safety. However, I find evidence that coordination and physician governance are positive moderators of the relationship between integration and performance. The results also indicate that coordination investment, quality improvement investment, and physician leadership have direct positive impacts on inpatient quality. At the same time, these factors have a negative impact on patient safety. These results raise many questions and provide fodder for future research opportunities.