Agency costs and organizational structure in health maintenance organizations

R. B Drennan, University of Pennsylvania


There is considerable variance among HMOs in terms of organizational structure. Some HMOs are highly centralized, employ physicians directly, pay them on the basis of salary and rely upon informal mutual monitoring among these physicians as a device to "control" the behavior of physicians. Other HMOs have a structure which is much more decentralized. These might contract with many physicians, each of whom practice in individual offices and also maintain a substantial non-HMO practice. By nature of the compensation arrangements between physicians and HMOs, a substantial amount of financial risk may be shifted to physicians. Formalized monitoring procedures for inpatient and outpatient services may be found in some HMOs and absent or less developed in others. The purpose of this study is to determine to what extent some of this variation can be explained. Two specific aspects of organizational structure are examined--risk sharing for hospitalization among physicians and the presence and extent of formalized monitoring procedures for hospitalizations. The general approach used to explain these is one based upon agency theory and a consideration of agency costs first proposed by Jensen and Meckling (1976). HMOs and their organizational structure are examined using the nexus of contracts approach. Sources of agency costs and incentive conflicts are identified and hypotheses made concerning particular contractual provisions or elements of organizational form and their relationship to these agency costs. The use of risk sharing and formalized monitoring is examined empirically using logit analysis to test the theoretical implications. Many of the hypothesized relationships between agency costs and organization form are confirmed through empirical testing.

Subject Area

Management|Health care

Recommended Citation

Drennan, R. B, "Agency costs and organizational structure in health maintenance organizations" (1992). Dissertations available from ProQuest. AAI9235133.