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Weekly UpdatesWithin the channel framework, several dimensions are pertinent to the structure of the channel dyad. Legal contracts, power, conflict, and inter-firm communication are primary elements inherent in the channel relationship. We rely on interviews with healthcare administrators and prior channel research to demonstrate how these variables correspond to the physician-insurance provider alliance.
The Relevance of Transaction Cost Analysis
The channel relationship succeeds because the benefits exceed the costs. Legal contracts, monitoring effort, and relationship-specific investments are the primary costs inherent in the relationship. Transaction cost analysis (Williamson, 1975, 1985) has been adapted as a framework for explaining the environmental characteristics in which the channel partnership thrives (c.f. Rindfleisch and Heide, 1997; Frazier, 1999; Cannon et al., 2000). Theory underlying transaction cost analysis assumes that the channel relationship persists because the costs are lower than they would be if the manufacturer performed all of the distribution services internally. Transaction cost analysis is not unique to distribution channel research but it is particularly applicable given the context in which the channel dyad operates.
In the traditional channel setting, a manufacturer chooses to continue with the distributor arrangement because it is more efficient than performing these services internally. The distributor often has economies of scale and retailer alliances that can move the manufacturer's products to the end consumer efficiently from both a time and money perspective. Similarly, in the healthcare funding system, the insurer arrangement persists because the insurer offers the physician practice one central billing point where the cost of collection is expected to be less than billing each patient for the entire cost of the medical procedures. In addition, the insurer provides access to patients, without which the physicians would need a marketing or outreach program to attract patients to the physician practice. To the extent that the transaction costs exceed the perceived benefits, there are incentives to change the nature of the relationship. At the extreme, channel collapse occurs where one exchange partner leaves the relationship and structures the transactions internally. Dell Computer switched from selling their products in retail stores to selling them direct to consumers. This is one example of channel collapse where the costs of the distributor-retailer network exceeded the benefits. Likewise, the growing trend whereby smaller physician practices have restructured their organization to become fee-for-service is motivated largely because the transaction costs, tangible and intangible, inherent in the insurer relationship outweigh its benefits. The physicians choose to accept fewer patients, seek out patients using their own resources, and accept greater fee collection risks in return for less bureaucracy and more decision-making autonomy.
Transaction costs include both the ex ante contract negotiation costs and ex post coordination, monitoring and governance procedures. According to Williamson, "... any problem that can be formulated, directly or indirectly, as a contracting problem can be investigated to advantage in transaction cost terms" (1985: ix). The transaction cost analysis begins by examining the context of the relationship. The transaction cost framework identifies frequency, asset specificity and uncertainty as three fundamental environmental conditions that influence an exchange relationship (c.f. Williamson, 1985; Cannon et al., 2000). This framework serves as the starting point to investigate how the relationship structure drives the cost structure.
Frequency refers to transaction repetition and assumes that high repetition will motivate organizations to manage them internally (Williamson, 1985). This hypothesis has not been empirically supported in the channel literature (Rindfleisch and Heide, 1997) and is rarely a component in the channel transaction cost model.
Asset specificity or relationship-specific adaptations tend to create dependency and build switching costs (Cannon et al., 2000). When one exchange partner must acquire assets (human or physical) primarily to adapt to the needs of the other exchange partner, these relationship-specific assets are defined as transaction costs. For example, in healthcare when a physician practice must acquire software tailored to interact with one insurer or hire personnel with the skills to interact with one insurer, then relationship-specific assets have been acquired and they are included as part of the total transaction costs of the relationship.
Environmental uncertainty exists when conditions that affect the transaction cannot be known in advance (Cannon et al., 2000). This makes it difficult to create ex ante contracts that define the relationship. The exchange partners must then create extensive contracts to cover a range of eventualities or rely upon ex post governance to interpret and enforce the spirit of the contract. In the healthcare industry, contracts between physicians and insurers cannot anticipate the needs of every patient; hence, the conditions for payment of services are based on the average patient and diagnosis. Therefore, when patients do not fall into the average range for a particular diagnosis, negotiation and monitoring procedures are necessary to insure adherence with the contract.
We employ the assertions from transaction cost analysis to provide a framework for assessing the environmental characteristics in which the healthcare-insurer relationship thrives. Channel researchers have identified asset specificity and uncertainty as transaction cost drivers in typical channel partnerships (Rindfleisch and Heide, 1997). We expect then to find these transactions costs in the physician practice as one type of evidence that the channel framework can be applied to the physician practice--insurance company arrangement. In this way, transaction cost analysis provides an ex post identification of those environmental conditions that characterize surviving physician-insurer partnerships.
Research Method
Our primary goal is to assess the applicability of a proven theoretical framework to a new domain, If deemed applicable, this framework will serve as a rich foundation upon which optimal solutions to the healthcare funding problems can be formulated. In such circumstances, it is appropriate to use a single case approach to serve as the basis for demonstrating the correspondence (Aherns and Dent, 1998; Atkinson and Shaffir, 1998). Accordingly, our investigation utilizes one physician-owned practice with 8.5 FTE physicians (full time equivalents) who each see approximately 18-22 patients daily. They are one of the largest physician groups in the community. Six insurance providers--half are preferred provider organizations (PPO's) and the other half are health maintenance organizations (HMO's)--represent the majority of their patient base that utilizes employer-provided insurance. Over a two-year period, three in-depth and numerous informal interviews were conducted with the practice manager and Chief Financial Officer. The first round of interviews defined the environment in which the practice operates and assessed the correspondence between public discussion related to problems in healthcare funding and the practice's experiences. Further in-depth interviews elicited discussion surrounding the key channel variables and their importance in the physician-insurance provider relationship. Data from individual patient billing records were collected and several interviews were conducted to insure feasibility of our collection methods and calibrate the conclusions drawn from the data.
The transaction cost analysis framework demands a micro-level analysis with data directly reported from one exchange partner. Secondary data sources cannot provide the necessary transaction cost analysis measures (Calfee and Rubin, 1993; Joskow, 1991; Williamson, 1985). Previous discussion provided an overview of the healthcare channel, suggesting the presence of both asset specificity and environmental uncertainty. We build on this overview by investigating these two dimensions at the individual patient-transaction level. Because the exchange point between the physician and insurer is payment for services, the billing and collection cycle is the focus of this initial investigation. In addition, a major complaint from physicians has been the interactions surrounding reimbursement (Sharpe, 1998a, 1998b; Washington State Hospital Association, 1999), providing additional support for assessing the two environmental dimensions within this cycle.
Asset Specificity
As noted previously, relationship-specific adaptation or asset specificity in an exchange relationship exists when one partner must acquire assets (human or physical) primarily to adapt to the needs of the other exchange partner. Healthcare providers have reported an increase in the number of individuals devoted to billing and claims and noted that they are having to choose between hiring a direct patient-care provider (i.e., a nurse) or an administrative staff person in billing, coding or claims processing (Washington State Hospital Association, 1999). We assessed relationship-specific adaptation by interviewing personnel at the physician practice to determine whether any resources within the billing and collection cycle were necessary to accommodate one or more of the insurers.
Environmental Uncertainty
Recall that environmental uncertainty is the condition where the events surrounding the relationship are dynamic, preventing precise ex ante contract specification. Therefore, transaction costs are incurred to assess contract compliance. Continuing with our focus on the billing and collection cycle, patient services are assessed during billing to determine the contractual coverage amount. Typically, the insurer pays a fraction of the billed charges to the physician. Because patient treatment is not homogeneous, it is difficult to predict the reimbursement fraction. This procedure creates uncertainty for the physician practice, creating additional transaction costs to justify the charges, as well as cash management challenges (Washington State Hospital Association, 1999). If the reimbursement fraction varies by insurer, transaction complexity is magnified as it becomes difficult to predict accurately required procedures and ultimate cash flows. Receivable age is contractually determined. However, the contractual limit is specified for a "clean claim" with no missing information or data errors regardless of whether the error emanates from the physician practice or the insurance providers system. Identification of errors resets the clock. Hence, receivables collection is not always predictable. In the billing and collection cycle, therefore, we assessed environmental uncertainty by examining receivable age and reimbursement fraction.
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