Patient care effectiveness and financial outcomes of hospital physician contracting emphasis

• Author: Sachin B. Modi,Saurabh Mishra,Peter A. Salzarulo
• Date: 01 January 2020
• DOI: http://doi.org/10.1002/joom.1048
• Published date: 01 January 2020

RESEARCH ARTICLE

Patient care effectiveness and financial outcomes of hospital

physician contracting emphasis

Saurabh Mishra

1

| Peter A. Salzarulo

2

| Sachin B. Modi

3

1

School of Business, George Mason

University, Fairfax, Virginia

2

Farmer School of Business, Miami

University, Oxford, Ohio

3

Mike Ilitch School of Business, Wayne

State University, Detroit, Michigan

Correspondence

Sachin B. Modi, Mike Ilitch School of

Business, Wayne State University, Detroit,

Michigan, 48202.

Email: sachin.modi@wayne.edu

Handling Editors: Lawrence Fredendall,

Anand Nair, Jeffery Smith and Anita Tucker

Abstract

This study investigates the influence of hospitals' physician contracting emphasis

on patient care effectiveness and financial outcomes. It utilizes secondary data for a

comprehensive set of hospitals in the United States over a 21-year period

(1996–2016). Analysis confirms that hospitals with a greater emphasis on physi-

cian contracting have higher operating margins but also tend to have longer patient

length of stay—indicating lower patient care effectiveness. Lower patient care

effectiveness, in turn, is observed to attenuate some of the financial gains from

physician contracting. Further, post hoc analysis with other measures of patient

care, including experiential quality, conformance quality, readmissions, and mortal-

ity provide additional insights into the effect of physician contracting on patient

care. Theory and results also highlight teaching intensity and capacity utilization of

hospitals as key boundary conditions in these relationships, revealing a complex

set of findings related to these variables. Together, the findings yield practical

insights for hospital managers regarding their operations strategy.

KEYWORDS

financial performance, hospitals, mixed models, patient care effectiveness, physician contracting

1|INTRODUCTION

Contracting with physicians to deliver patient care is one of

the dominant forms of hospital-physician arrangements in

the United States (Abdulsalam, Gopalakrishnan, Maltz, &

Schneller, 2018). Indeed, according to the American Medi-

cal Association in 2016 only 7.4% of physicians were

directly employed by hospitals, 25.4% worked for a practice

with at least some hospital ownership (Kane, 2017), and

contracting comprised a significant portion of the remaining

percentage (Bazzoli, Dynan, Burns, & Yap, 2004). Despite

the prevalence of physician contracting, many hospitals also

opt to directly employ physicians (Saitani & Vaccaro, 2010)

as the result of their intent to create an accountable care

organization and as a hedge against the prospect of more

risk-based approaches to payments, among other reasons

(Kocher & Sahni, 2011).

The extent to which hospitals rely on contracted physi-

cians to deliver patient care is an important operations man-

agement decision and has complex implications for hospital

performance. In part, the complexity arises due to the diffi-

culty of integrating contracted physicians rather than

employed physicians into a hospital's processes (Chukmaitov,

Harless, Bazzoli, Carretta, & Siangphoe, 2015). In line with

this, the view emerging from research on physician contra-

cting and hospital financial performance has been mixed

(Bazzoli et al., 2004). While some studies have shown that

physician contracting leads to higher hospital expenses

(Mark, Evans, Schur, & Guterman, 1998) and payroll costs

(Abdulsalam et al., 2018), other work has found that contra-

cting has no significant effect on hospital costs (Bazzoli,

All authors contributed equally to the manuscript. Authors names are listed

in random order.

Received: 27 October 2017 Revised: 8 March 2019 Accepted: 6 June 2019

DOI: 10.1002/joom.1048

J Oper Manag. 2020;66:199–226. wileyonlinelibrary.com/journal/joom © 2019 Association for Supply Chain Management, Inc. 199

Dynan, Burns, & Lindrooth, 2000) and can improve supply

chain efficiencies in some cases (Nyaga, Young, & Zepeda,

2015). These divergent findings indicate a need forcontinuing

work in the area.

Moreover, in addition to focusing on financial perfor-

mance, hospitals face the mandate of delivering superior

patient care (Dobrzykowski, McFadden, & Vonderembse,

2016). However, delivering patient care is difficult as patient

needs are complex, idiosyncratic, and unpredictable, requiring

hospitals to access a wide network of healthcare professionals

with diverse sets of skills (Senot, Chandrasekaran, Ward,

Tucker, & Moffatt-Bruce, 2016; Shah, Goldstein, Unger, &

Henry, 2008). Since it can be difficult for hospitals to employ

different types of physicians, contracting can potentially pro-

vide a mechanism to deal with patient needs (Loughry &

Elms, 2006). In l ine with this, a mor e flexible suppl y of

healthcare professionals has been shown to improve patient

care as reflected in shorter length of stay (Berry Jaeker &

Tucker, 2016).

Further, in line with the previous discussion on integra-

tion, when a hospital directly employs a physician it is better

able to incentivize them to focus on quality, share informa-

tion systems, and ensure they follow clinical guidelines

(Scott, Orav, Cutler, & Jha, 2017). In contrast, there may

also be negative repercussions due to physicians having less

autonomy and being less able to provide customized care,

leading to a reduction in patient care effectiveness (Bishop,

Shortell, Ramsay, Copeland, & Casalino, 2016). Perhaps

because of this contrast, investigations of hospital-physician

integration have reported mixed results for patient care met-

rics. Some have reported no effect of integration on patient

outcomes such as mortality, length of stay, and readmissions

(e.g., Scott et al., 2017), while others have shown improve-

ments in process quality measures as a result of higher inte-

gration (Bishop et al., 2016). However, other than a few

studies, there is limited research on the topic highlighting

the need for more inquiry.

Following these observations, we provide an assessment

of physician contracting emphasis (PCE) and its relationship

with patient care effectiveness and financial performance.

We define PCE as the ratio of payments made by hospitals

to physicians on contract relative to their total employment-

related payments. We utilize the average patient length of

stay as our main measure of patient care effectiveness and

conduct post hoc analysis with additional measures of care

quality, including patient experiential quality, conformance

quality, readmissions, and mortality. To derive our concep-

tual framework, we build on transaction costs economics

(TCE) (Williamson, 1981) and the professional services

operations (PSO) literature (e.g., Heineke, 1995). TCE out-

lines the financial benefits of reliance on a competitive mar-

ket of outside agents, as well as alerts to the costs and risks

associated with contracting (Grover & Malhotra, 2003). As

such, extant literature on hospital-physician integration has

commonly evaluated hospital decisions from the lens of

transaction costs (Post, Buchmueller, & Ryan, 2018). The

PSO literature complements the insights available from TCE

with arguments relevant for professional services environ-

ments such as hospitals where physicians, as expert profes-

sionals, maintain high contact with patients and manage

service process variations arising from unpredictable patient

needs (e.g., Abdulsalam et al., 2018; Dobrzykowski

et al., 2016).

In understanding the focal relationships, we also recog-

nize that TCE underscores the role of organizational

resources in governing costs and risks arising from contra-

cting (McIvor, 2009). As such, we evaluate two hospital-

specific resource positions as boundary conditions. First,

teaching hospitals may offer more specialized care than non-

teaching hospitals and this can lead to a higher cost structure

(Ayanian & Weissman, 2002), yet lead to better patient care

outcomes (Rosenthal, Harper, Quinn, & Cooper, 1997). Sec-

ond, hospitals facing high capacity utilization encounter

resource challenges that can influence their performance

(e.g., Berry Jaeker & Tucker, 2016; Goldstein & Iossifova,

2012). These findings indicate that it is worthwhile to under-

stand how these two resource positions might govern the

influence of physician contracting on hospital performance

and patient care. Based on these observations, we consider

three questions in this research:

i. How does PCE relate to patient care effectiveness?

ii. How do PCE and patient care effectiveness relate to

hospital financial performance?

iii. What role do teaching intensity and capacity utilization

play in these relationships?

Empirical verification of these questions is based on longi-

tudinal data from the Centers for Medicare and Medicaid Ser-

vices (CMS) for the years 1996–2016. Overall, the analysis

reveals that a higheremphasis on physician contracting relates

negatively with patient care but positively with hospital finan-

cial performance, as reflected in operating margins. We also

observe that lower patient care, as indicated by longer patient

length of stay, is negatively related to hospital operating mar-

gins. In addition, results reveal that hospitals with both high

levels of teaching intensity and physician contracting derive

financial benefits but produce worse patient care. In contrast,

hospitals under high capacity utilization and physician contra-

cting garner lower financial gains but deliver better patient

care. Furthermore, we collect a dditional information on diff er-

ent measures of patient care effectiveness utilized in extant

research (e.g., Chandrasekaran, Senot, & Boyer, 2012; Nair,

Nicolae, & Narasimhan, 2013; Senot et al., 2016; Senot,

200 MISHRA ET AL.