An Agency Theory Investigation of Medical Contractors versus Member Physicians

Abstract

Professional organizations increasingly utilize contingent labor such as independent contractors and employees of contract companies to provide professional services to clients (Matusik and Hill, 1998). Although there has been a growing research interest in contingent work, it has not been well studied among highly skilled occupations (Masters and Miles, 2002). In addition, the literature has not examined how organizations that use contingent labor manage their contingent workers (see Lepak and Snell (2002) for an exception). Agency theory suggests that organizations use governance mechanisms, such as monitoring and incentives, to ensure that workers act in the organizations' interests (Jensen and Meckling, 1976). Agency theorists specifically include professionals among the types of workers to which the theory applies (Fama and Jensen, 1983). Although agency theory has not been tested in the context of managing contingent versus core professional workers, the theory suggests that professional firms would use more intense governance mechanisms with contract professionals than with member professionals (partners or professional employees). It is important to understand the governance arrangements that professional organizations use with the professionals with whom they contract. These contractors provide critical services at the technical core of the professional firm where they can strongly influence the organizations' performance (Thompson, 1967). Furthermore, any incompetent performance (malpractice) on the part of contract professionals could damage the firm's reputation and create legal liability for the firm. In addition to having an economic impact on professional firms, the services that professionals provide are critical to their clients and society. It is therefore important for professional organizations to ensure that the people who provide professional services on the firm's behalf perform appropriately. Because contract professionals are not subject to the same selection processes, in-house training, socialization in the organization's culture, and long-term mutually committed relationships as are partners and employees, one might expect professional organizations to use stronger governance mechanisms with contract professionals. This study examines whether the performance monitoring, decision ratification and incentive compensation that professional organizations use with contract professionals differ from those used with member professionals. We develop hypotheses based on agency theory and test them in a sample of California medical groups. In doing so, we contribute to the agency theory literature, where much of the research involves CEOs and the boundary conditions of the theory have not been sufficiently explored. In addition, we extend the literature on contingent work to include the governance arrangements used with contingent versus member physicians. THEORY Professionals There is a large body of literature on professional organizations and the sociology of the professions (Freidson, 1984; Larson, 1977; Parsons, 1968; Scott, 1982). Much of this work has conflicting perspectives on the degree to which the professions are different from or the same as other occupations, and the degree to which professionals are altruistic and committed to service versus self-interested agents who exploit opportunities to maximize their powerful positions for their own benefit (Sharma, 1997; Van Maanen and Barley, 1984). Much of the sociological theory on professionals has pertained to the mechanisms of control over professionals, including socialization in the profession, a sincere desire to serve others, control by professional peers within and outside of the employing firm, reputation in the community, bureaucratic controls from the hierarchical supervision within firms, and client control (Hodgson, 2002; Sharma, 1997; Tolbert and Stern, 1991). Although collegial control is thought by many researchers to be of utmost importance in the professions, research questions its effectiveness (Van Maanen and Barley, 1984). …

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