10.5465/AMBPP.2018.192 VERTICAL INTEGRATION AND HOSPITAL PERFORMANCE: EVALUATING PHYSICIAN EMPLOYMENT IN HOSPITALS E. DAVID ZEPEDA Northeastern University D’Amore-McKim School of Business 360 Huntington Ave Boston, MA 02115 GILBERT N. NYAGA Northeastern University GARY J. YOUNG Northeastern University INTRODUCTION The U.S. health care industry has been undergoing dramatic structural change as different types of providers join together to form new models of healthcare delivery. We investigated one of these structural changes, the integration of hospitals and physicians and its impact on hospital operational performance. We centered our attention on physician employment as a form of hospital-physician integration. This form of integration has become a significant development within the hospital industry (Berenson, Ginsburg & May, 2007; Casalino et al., 2008; Scott et al., 2016). While several factors underlie the trend toward greater hospital employment of physicians, a key factor is the growing use among healthcare purchasers, both health plans and government insurance programs, of pay-for-performance arrangements that link a hospital’s reimbursement to its performance on external metrics for quality and efficiency (Aston, 2013; Carr & Milliron, 2014; Alexander & Young, 2016). For hospitals, employment of physicians is potentially a means by which they can improve their performance on these metrics. At the same time, employment of physicians constitutes a substantial investment by hospitals in human assets given the compensation packages, office space, and equipment that such employment arrangements typically entail (e.g., Kocher & Sahni, 2011; Kutscher, 2014). It also is a departure from the traditional voluntary medical staff model whereby physicians are granted privileges to admit patients and use hospital resources but do not have an employment or exclusive contractual arrangement with the hospital itself. Indeed, physicians practicing under such voluntary arrangements often have admitting privileges at multiple hospitals. Yet, employment is not an ‘all or nothing’ strategy for hospitals when deciding where and to what extent to employ physicians. That is, hospitals look to employ physicians in areas where they can provide strategic benefits (e.g., cardiovascular vs. neurology). For example, a recent study of U.S. hospitals in California reveals extensive variation in physician employment arrangements across clinical service areas for the same hospital with an average of 32.8% of the entire medical staff, 40.1% of nonsurgical specialists, 26.4% of primary care physicians, and 20.2% of surgeons employed by hospitals (Young, Nyaga & Zepeda, 2016). We examined whether hospital employment of physicians is associated with better performance on external quality metrics for cardiovascular services, a clinical service area that