The Relation between Efficient Risk-Sharing Arrangements and Firm Characteristics: Evidence from the Managed Care Industry

This study examines contracts between HMOs and Primary Care Physicians. These contracts represent one important component of HMOs' management control systems. I argue that HMOs design contracts to minimize agency costs that arise from the physician moral hazard problem. The agency costs and resulting HMO-physician-payment arrangements depend on an HMO's organizational form, customer mix, and environment. Physicians can work as HMO employees or as independent contractors operating individually or in group practice. These features, together with the HMO ownership structure, determine the HMO's organizational form. The level of Medicare enrollment characterizes the HMO's customer mix. The empirical results presented in this study are generally consistent with the theory.