Physician division of labor and patient selection for outpatient procedures.
ABSTRACT Little is known about the ability of incentives to influence decisions by physicians regarding choices of settings for care delivery. In the context of outpatient procedural care, the emergence of freestanding ambulatory surgery centers (ASCs) as alternatives to hospital-based outpatient departments (HOPDs) creates a unique opportunity to study this question. We advance a model where physicians' division of labor between ASCs and HOPDs affects the medical complexity of patients treated in low-acuity settings (i.e. ASCs). Analyses of outpatient surgical procedure data show that physicians working exclusively in low-acuity settings (i.e. ASCs) treat patients of significantly higher medical complexity in these settings than do physicians who also practice in higher-acuity settings (i.e. HOPDs). This discrepancy shrinks with increasing procedural risk and with increasing distance between ASCs and acute care hospitals.
Physician Division of Labor and Patient Selection for Outpatient
The Wharton School
University of Pennsylvania
Mark D. Neuman
School of Medicine
University of Pennsylvania
Little is known about the effect of incentives on physicians’ choices of settings for medical procedures. We advance a model
where physicians’ division of labor between ambulatory surgery centers (ASCs) and hospital‐based outpatient departments
(HOPDs) affects the medical complexity of patients treated in low‐acuity settings (i.e. ASCs). Analyses of outpatient surgical
procedure data show that physicians working exclusively in low‐acuity settings (i.e. ASCs) treat patients of significantly
higher medical complexity in these settings than do physicians who also practice in higher‐acuity settings (i.e. HOPDs).This
discrepancy shrinks with increasing procedural risk and with increasing distance between ASCs and acute care hospitals.
JEL Classification: I11; I12; D8
Keywords: Outpatient Care; Patient Selection; Physician Behavior
We thank David Abrams, Charles Branas, Lee Fleisher, Alex Gelber, Amy Hillier, Andrea Millman, Daniel Polsky, John Rizzo,
Sandy Schwartz, and Jeff Silber for their helpful comments. Erin Quinn, Phil Saynisch, and Victoria Perez provided excellent
research assistance. Financial support from the Leonard Davis Institute of Health Economics, University of Pennsylvania is
The motives and ability of physicians to influence the medical services used by their patients has received much attention in
the health economics literature (Arrow, 1963; McGuire, 2000). Seminal work in this area has focused on demand
inducement, where financial incentives may increase the quantity of services recommended and delivered by physicians
beyond the point at which the medical benefits of such services justify their costs (Evans, 1974; McGuire and Pauly, 1991;
Labelle et al., 1994; Gruber and Owings, 1996). Prior work on referrals by physicians for office‐ versus hospital‐based care
has highlighted the effects of financial incentives on decisions regarding the utilization of resources for the care of acute
conditions (Marinoso and Jelovac, 2003; Blomqvist and Léger, 2005; Bain and Morrisey, 2007; David and Helmchen, 2010).
However, little attention has been paid to incentives that may influence decisions regarding the choice of setting for
otherwise identical medical procedures in cases where such choices may influence patient outcomes.
In the context of outpatient care in the United States, decisions regarding care settings are of increasing importance due to
the rapid growth over time in alternatives to traditional hospital‐based outpatient departments (HOPDs) for the provision
of diagnostic and therapeutic procedures. In particular, patient visits to freestanding ambulatory surgery centers (ASCs),
facilities physically separate from acute‐care hospitals, increased by 300 percent between 1996 and 2006 (Cullen, Hall, &
Golosinskiy, 2009) with the number of ASCs in the U.S. growing from 240 in 1983 to 5,174 by 2008 (Medicare Payment
Advisory Commission, 2009). The increased prevalence of ASCs has created distinct responsibilities for physicians related to
the choice of care setting (Lynk and Longley, 2002). Prior approaches to patient selection in procedural care have focused
exclusively on balancing the anticipated benefits of a given procedure with the probability of a complication as determined
by patient and procedural factors (Bryson et al., 2004). As ASCs and HOPDs differ in their access to hospital care, physicians
must also decide on the appropriate care setting based on the probability of a surgical complication and the accessibility to
hospital services that may be critical to the management of such a complication.
The decision of a physician regarding the location of care for a patient of a given risk profile should therefore be sensitive to
incentive structures that vary according to patterns of physician division‐of‐labor. More specifically, we identify two groups
of ASC physicians who differ in their access to HOPDs, distinguishing “splitters,” those who perform outpatient procedures
at both ASCs and HOPDs, from “non‐splitters,” those who work exclusively at ASCs. We advance a simple model of physician
agency, where physicians derive utility from both clinical appropriateness and monetary rewards, to show that the
opportunity cost of providing care in one location versus another depends on the physician’s division of labor. Non‐splitters
face a relatively greater opportunity cost of referring high‐risk patients to HOPD‐based care. As a consequence, splitters
would deliver care to higher‐risk patients overall, but to lower‐risk patients within ASCs, compared to their non‐splitter
counterparts. The first prediction stems from the appropriateness of HOPDs for patients with elevated surgical risk. The
second prediction stems from the higher profitability of a self‐referral compared with an out‐referral. Moreover, as the
consequences of surgical complications at ASCs may depend on their distance from the nearest acute‐care hospital, our
model demonstrates that, while patient‐level risk would decrease with increasing distance from hospital care, differences in
risk selection between physician types would diminish as a function of distance.
As a test of our model’s predictions, we examine the outpatient surgical risk profiles of 1,326,337 ASC and 464,568 HOPD
patient visits for two common outpatient procedures performed in Florida between 2004 and 2007. We use the patient‐
level Charlson Comorbidity Index, (Charlson et al, 1987; Quan et al, 2005), a common measure of medical severity, to
quantify the patient‐level operative risk observable to the physician. We use a rich set of area, facility, patient, physician,
and procedure variables to study the relationship between physician splitter status and patients’ setting selection on risk.
As risk selection behaviors may be endogenous to splitter status, we instrument for splitter status using an indicator
variable that equals one if the physician completed medical training in Florida and zero if the physician completed medical
training in a different state in the U.S. Medical training in Florida is highly correlated with retaining admitting privileges in
hospital outpatient departments, which we hypothesize may be due to preservation of professional networks and
affiliations established at the time of training. Hence, we observe a higher likelihood of splitter status among former in‐
state trainees. At the same time, controlling for foreign medical graduate status, completion of medical education in Florida
is likely to be uncorrelated with other variables affecting patient selection on risk, as we hypothesize the quality of medical
training within Florida will be similar to the average quality of training available in other U.S. states.
As expected, we find that, compared to non‐splitters, splitters treat more medically complex patients overall, with the
most complex patients being concentrated in the HOPD setting; within ASCs, we find risk profiles to be lower among
patients treated by splitters when compared to those treated by non‐splitters. We find case selection by splitters to be
related not only to the site of care (i.e., ASC vs. HOPD), but also to the distance between the ASC and the nearest hospital.
Finally, we find a growing similarity in case‐level risk for non‐splitters and splitters as the distance between the ASC and the
nearest acute‐care hospital increases.
All results are consistent for cross‐sectional regressions and for those using county fixed‐effects, which account for
potential confounding of the relationship between splitter status and risk selection by variation across individual ASCs in
given geographical regions. Our results persist under our instrumental variable strategy, which account for potential
endogeneity of risk selection to splitter or non‐splitter status. Further robustness checks include the use of alternate
definitions of splitting, the use of alternative dependent variables, and alternate instruments.
Our findings are consistent with the argument that patient selection by physicians for care in ASCs is sensitive to differences
in the opportunity cost of sending a patient to the alternate, more resource‐intensive setting of the HOPD. This effect
persists despite adjustment for procedure factors, secular time, physician factors, county fixed effects, and potential
omitted variable bias. Such observations provide a clear illustration of deviation from perfect agency in medical decision
making, which extends beyond the quantity of care.
The paper proceeds as follows: section 2 presents a simple model of physician choice, in which asymmetric information
regarding surgical risk and variation in division of labor for providers dictates the site of care for patients. Section 3
describes the data and estimation, section 4 discusses the results, and section 5 concludes.
2. Conceptual Framework
In this section we model a “downstream” medical decision, in which patients have already been determined to need a given
procedure. Rather than exploring induced utilization, as much past research has, we focus on the setting of care and the
context in which that procedure is provided. While physicians in our model act as agents for patients in that they help
patients make decisions regarding the site of care, they also posses superior medical information regarding each patient’s
risk of surgical complications and hence the most appropriate site for care. Information asymmetries allow physicians in our
model to act as imperfect agents for their patients, deriving utility from both the clinical appropriateness as well as the
monetary rewards associated with each setting. In particular, the opportunity cost of out‐referral in the case of non‐
splitters exceeds the cost of self‐referral in the case of splitters, as non‐splitters face lost income from the patients they
Patients generate a value, V(θ), from receiving an outpatient procedure as a function of severity level, θ (with large values
of θ corresponding to higher surgical risk). Assume that the distribution from which surgical risk is drawn is bounded by the
interval [θL, θH]. For simplicity, we assume that information asymmetry between surgeons and patients are such that
patients cannot observe θ.1 Nevertheless, all patients have θL < θ < θH, such that their corresponding value of surgery
exceeds the value of not getting the procedure at all. Classic demand inducement would suggest the potential for service
provision to patients for whom the benefit from the intervention is extremely low (i.e. θ < θL) and/or patients for whom the
surgical risk associated with the intervention is extremely high (i.e. θ > θH). This model ignores such extensive margins
expansions/deviations, as it focuses on incentives that influence decisions regarding the (intensive margins) choice of
setting for medical care.2 To the extent that the choice of setting is driven, in part, by non‐clinical grounds, it constitutes a
deviation from perfect agency that may influence patient outcomes through inappropriate patient risk selection.
Procedures in the interval [θL, θC], where θC<θH, are clinically appropriate for ASCs while all procedures in the interval [θL,
θH] are appropriate for HOPDs. The cost to a physician of performing a procedure in an ASC is lower than the cost of
performing the same procedure in a HOPD, (Casalino LP, Devers KJ & Brewster LR, 2003) i.e.
, where the
1 The model’s results are robust to the assumption that patients can imperfectly observe θ.
2 Alternatively, we can define θL to be zero surgical risk (i.e. no θ<θL), and θH to be sufficiently high, such that no physician would choose
to operate on a patient with such elevated surgical risk.