Hospital-physician affiliations and patient treatments, expenditures, and outcomes.

Hospital–physician affiliations diffused rapidly across the United States in the 1990s. Whether they took the form of hospital employment of physicians, physician–hospital organizations (PHOs), or an alphabet soup of other organizations, these affiliations had the potential to serve a variety of hospital goals (Burns and Pauly 2002). A hospital might establish an affiliation to strengthen bargaining power with payers, to control costs, to enhance the quality of care, or to generate admissions (through increases in physician loyalty or managed care contracting opportunities). Increased bargaining power, lower costs, and higher admissions will affect a hospital's financial status; previous work has explored the relationship between hospital–physician integration strategies and financial measures (Ciliberto and Dranove 2002; Stensland and Stinson 2002; Alexander and Morrisey 1988; Goes and Zhan 1995; Mark et al. 1998; Snail and Robinson 1998). But if these integration strategies change treatment patterns or quality, they will also have a more direct impact on patients. This study explores the extent to which affiliations are associated with differences in patient treatments, expenditures, and outcomes. There are several pathways through which an affiliation may affect patient treatment. One such pathway is through the incentive it may provide for greater quality monitoring. If an affiliation makes the reputations of affiliation partners interdependent, it will give each an incentive to monitor the quality of care of the other (Simpson and Coate 1998). If a patient knows of an affiliation between a hospital and physician, for example, the patient may impute one's reputation for quality to the other, or choose providers based on the quality of bundled services. To avoid losing patients, each partner must make greater effort to assure that the other offers high-quality services. The very existence of an affiliation may in this way provide greater incentives to improve the quality of care. If physicians perceive that higher-intensity treatment will contribute to higher quality, then they will have an incentive to increase intensity. These incentives are strengthened to the extent that the partners' interests are financially aligned, through global capitation, joint marketing, physician compensation mechanisms, or other arrangements. Financial alignment means that poor quality hospital care may harm a physician not just indirectly through damage to the physician's reputation, but directly through its impact on an organization of which the physician is a part. Alignment of hospital and physician interests is often cited as a potential advantage of affiliation (Haas-Wilson and Gaynor 1998; Simpson and Coate 1998). Physicians functioning independently of hospitals have little reason to be concerned about the financial impact of their activities on hospitals; affiliations that align financial incentives give physicians reason to change their behavior in such a way as to increase hospital revenues or lower hospital costs. Some changes, such as economizing on the use of supplies, may not affect care, but other changes may. For example, if performing procedures brings in net revenues for a hospital, affiliated physicians may have a greater incentive to perform them than unaffiliated physicians. This is a second pathway through which affiliations may affect care. Another pathway through which hospital–physician affiliations may affect patient treatment is through an effect on transaction costs (see Robinson 1997, or for a more general discussion, Williamson 1985). Affiliations may bring together physicians who did not previously have access to internal utilization review or other information or patient management systems, because of the large fixed costs involved in establishing such systems. More generally, the complex, dynamic, and relationship-specific nature of these systems makes them difficult to implement on the basis of arm's-length contracting. These contracting costs may be much higher than the coordination costs of achieving the same goals in an integrated setting. Affiliations may facilitate the development of mechanisms to monitor and coordinate care (Budetti et al. 2002; Dynan, Bazzoli, and Burns 1998). If these systems are indeed adopted, they may change treatment patterns and perhaps increase the continuity and quality of care. The goal of this study is to investigate the aggregate effects of affiliations on patient care, regardless of the pathways from which they emerge. Past studies have documented effects of traditional forms of hospital–physician interaction (such as physician participation in hospital decision making) on patient outcomes (Shortell and LoGerfo 1981). While modern forms of hospital–physician affiliation may also affect outcomes in theory, it is unclear whether they actually do in practice. Affiliations may have served more as vehicles for contracting with managed care organizations than as vehicles for integrating clinical activities (Burns et al. 2001). One study found that while some physician–hospital organizations accepted full risk and played a significant role in hospital quality assurance activities, others were more loosely organized (Kohn 2000). Budetti et al. (2002) chronicles the difficulties that hospitals and physicians have faced in achieving sufficient alignment to satisfy common goals. Although hospital–physician affiliations have the potential to change patient care, only empirical analysis can reveal whether they have realized this potential. Given the continued existence of affiliations and the debate over their appropriate role in health care delivery (Luke and Begun 2001), it is important to gain a better understanding of their effects on patients. A few recent studies have begun to examine patient care effects. Stensland and Stinson (2002), for example, find that in hospitals in uncompetitive rural areas of the Upper Midwest that had acquired physician practices, patients had shorter lengths of stay. Using data from three states from 1994 through 1998, Cuellar and Gertler (2002) examine the effects of affiliations on prices, utilization, and outcomes. Among their findings are that fully integrated organizations (such as medical foundations and integrated salary models) were associated with lower levels of surgical complications. This study expands on this previous work through the use of a nationwide dataset and different treatment and outcome measures. Specifically, it examines the relationship between hospital–physician affiliations and the treatments, treatment expenditures, and health outcomes of Medicare patients who have had a heart attack.