Physician Organization and Incentives in Childbirth: Evidence from Physician Practice Management Companies

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ABSTRACT: A challenge of mergers and acquisitions is how to align incentives between the target firm and the existing organization. In the health care industry, Physician Practice Management Companies (PPMCs) acquire physician practices to gain market power and leverage economies of scale. Physicians nonetheless retain control of the clinical and operational aspects of their practice. To achieve alignment while preserving physician autonomy, PPMCs use a combination of financial incentives, such as providing physicians with equity in the PPMC, and non-financial incentives, such as providing quality report cards. This paper studies how the integration of traditional private practice into a PPMC influences physician behavior. The analysis exploits the staggered entry of Obstetricians and Gynecologists into three PPMCs using administrative data from Florida. I find that when PPMCs focus on financial alignment, physicians provide lower quality care relative to traditional private practice. By contrast, if PPMCs achieve both financial and clinical alignment, there are large quality improvements. This research provides new insights into how the business strategies of physician organizations affect the utilization of medical treatments.