Performance Measurement and Compensation Practices in Hospitals: An Empirical Analysis in Consideration of Ownership Types

Abstract

Against the background of regulatory initiatives that put hospitals under increasing financial pressure, we explore performance measurement and compensation practices in hospitals through a multiple case study. We extend previous research by comparing practices among different ownership types (i.e. public, non-profit, and private) and by providing initial evidence on compensation schemes for the clinical staff. Our empirical investigation is embedded in the ‘stewardship–agency axis’ that allows the development of theoretical arguments about the interdependencies between ownership and performance measurement systems (PMS). We distinguish two primary levels of analysis – the types of measures implemented and their linkage with compensation and decision-making. Our findings suggest that the types of measures are primarily affected by regulatory pressures, while powerful internal actors considerably influence the linkage between these measures and compensation. Consistent with our theorised patterns, cross-case analyses indicate differences between ownership types concerning the performance dimensions that are prioritised and the linkage of performance measures with compensation of the clinical staff. Together, these findings provide evidence on the interdependent effects of the regulatory environment, the type of ownership and internal actors on a hospital's PMS. We also provide some tentative explanations for these findings based on insights from institutional and behavioural theory.

Acknowledgements

We are grateful to Naomi Soderstrom and Eddy Cardinaels (the editors) and an anonymous reviewer for their insightful and constructive comments. In addition, we appreciate the valuable suggestions provided by participants at the 36th Annual Congress of the European Accounting Association (Paris, 2013), the 9th International Management Control Research Conference (Nyenrode Business University, 2013), and the 7th Conference on Performance Measurement and Management Control (Barcelona, 2013) on earlier drafts of this paper.

Notes

¹We consider PMS as a set of financial and non-financial indicators that reflect organisational objectives and provide information on their achievement (Franco-Santos et al., 2012; Malmi & Brown, 2008). In the hospital context, a PMS likely comprises resource-related (e.g. cost information, DRG revenues) and clinical-related measures (e.g. quality indicators) (Abernethy & Lillis, 2001; Pizzini, 2006). Because a particular PMS intends to guide decisions in an organisation towards its objectives (e.g. Franco-Santos et al., 2012), we consider budgets as specified targets as well as actual outcomes as part of the PMS (Abernethy & Stoelwinder, 1991, 1995; Pizzini, 2006).

²Because we focus on the conflict between administrators and the clinical staff, we neglect potential agency conflicts between managers and owners or a board of their representatives, as discussed by Caers et al. (2006). We argue that our scope is reasonable because agency conflicts between managers and owners have been the subject of previous research (e.g. Cardinaels, 2009; Eldenburg & Krishnan, 2008).

³This perspective corresponds to the underlying contractual relationships. In contrast to the USA (Eldenburg et al., 2010; Pizzini, 2006), the physicians working in all of the case hospitals are employed by the hospital. While all of these physicians receive a fixed base salary, some of them additionally earn a bonus payment in accordance with the hospital-specific compensation practices described in Section 5.

⁴This reasoning relates to the line of argument in Brignall and Modell (2000), suggesting that the level of goal congruence between professionals and managers impacts the professionals’ willingness to use financial controls. In fact, empirical evidence suggests that organisational goal orientation is positively correlated with the use of performance measurement devices among professionals (Abernethy, 1996; Abernethy & Stoelwinder, 1991).

⁵This approach to hospital funding contrasts with the soft budgets that public hospitals face in the USA (Eggleston & Shen, 2011). Under a soft budget constraint, a sponsoring organisation, for example, the government, bails out operating losses and reduces subsidies when surpluses are generated (e.g. Duggan, 2000; Shen & Eggleston, 2009). As improvement of financial performance is unrewarded in the context of soft budgets (Eldenburg & Krishnan, 2008), public hospitals operating under these circumstances are less likely to prioritise cost containment efforts as compared to public hospitals in the German regulatory context.

⁶We acknowledge that the ‘agents’ in the context of our study are themselves to some degree principals who rely on doctors and junior doctors as well as nurses, who contribute significantly to the provision of health care and to the achievement of organisational objectives. However, our exploratory study focuses on doctors with managerial responsibilities as they not only determine the directions for medical treatment and are therefore mainly responsible for resource consumption patterns, but also act as powerful interceders for the clinical staff, shape the professional culture of the respective department, and are likely to raise awareness among their subordinates on business issues.

⁷Case-splitting refers to the treatment of related diagnoses as separate cases to increase DRG revenues.