Comparing organizational structures in health services

This paper investigates the optimal contracts for a hospital and a physician, in a model where both agents jointly participate in the production of health services. The contract design deals with two-sided moral hazard: the hospital's investment is not observable by the insurer, and the physician's effort is observable neither by the insurer nor by the hospital. We analyze the circumstances under which an insurer rather contracts both the hospital and the physician instead of contracting exclusively the hospital, delegating to the latter the power to contract the physician. These circumstances are related to the importance of each agent in the production. © 2002 Elsevier Science B.V. All rights reserved.