Heterogeneity and Share Contracting in Medical Group Practices

Abstract

This paper offers an empirical analysis of the relationship between income sharing rules and heterogeneity in medical group practices. The economies to group formation associated with risksharing, mutual monitoring, and internal referral are served by sharing at least a portion of group income equally. Sharing group income equally is problematic, however, when group members differ in their contribution to joint income, hereafter termed "productivity." Member physicians may differ in productivity because of differences in ability, effort, or specialty field. The analysis below is addressed to the question of how income sharing rules in physician groups are affected by variation in member productivity. The analysis finds considerable evidence supporting the argument that productive heterogeneity limits the use of equal income sharing. For example, less group income is shared equally in multispecialty groups relative to single specialty groups because the former include physicians from fields with widely different income-generating potential. The same holds for specialty groups where physician services can be characterized as differentiated reputation goods, and in relatively large groups where it becomes increasingly difficult to form around homogeneous physician attributes. No such group size effect is found in multispecialty groups, which suggests that most of the quantitative effects of heterogeneity are concentrated in relatively small multispecialty groups, which by their very nature can be expected to be heterogeneous because of productivity differences across specialty fields.JEL classification D23, L14, L84