Cooperation for a competitive position: The impact of hospital cooperation behavior on organizational performance.

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JulyYSeptember & 2015

Cooperation for a competitive position: The impact of hospital cooperation behavior on organizational performance Vera Antonia Bu¨chner Vera Hinz Jonas Schreyo¨gg Background: Several public policy initiatives, particularly those involving managed care, aim to enhance cooperation between partners in the health care sector because it is expected that such cooperation will reduce costs and generate additional revenue. However, empirical evidence regarding the effects of cooperation on hospital performance is scarce, particularly with respect to creating a comprehensive measure of cooperation behavior. Purpose: The aim of this study is to investigate the impact of hospital cooperation behavior on organizational performance. We differentiate between horizontal and vertical cooperation using two alternative measuresVcooperation depth and cooperation breadthVand include the interaction effects between both cooperation directions. Methodology: Data are derived from a survey of German hospitals and combined with objective performance information from annual financial statements. Generalized linear regression models are used. Findings: The study findings provide insight into the nature of hospitals’ cooperation behavior. In particular, we show that there are negative synergies between horizontal administrative cooperation behavior and vertical cooperation behavior. Whereas the depth and breadth of horizontal administrative cooperation positively affect financial performance (when there is no vertical cooperation), vertical cooperation positively affects financial performance (when there is no horizontal administrative cooperation) only when cooperation is broad (rather than deep). Practical Implications: Horizontal cooperation is generally more effective than vertical cooperation at improving financial performance. Hospital managers should consider the negative interaction effect when making decisions about whether to recommend a cooperative relationship in a horizontal or vertical direction. In addition, managers should be aware of the limited financial benefit of cooperation behavior.

Key words: cooperation behavior, generalized linear regression models, hospitals, interaction effects, performance measurement Vera Antonia Bu¨chner, MA, is Research Fellow in the Hamburg Center for Health Economics, Universita¨t Hamburg, Germany. Vera Hinz, PhD, is Professor in the Hamburg Center for Health Economics, Universita¨t Hamburg, Germany. Jonas Schreyo¨gg, PhD, is Professor in the Hamburg Center for Health Economics, Universita¨t Hamburg, Germany. E-mail: Jonas.Schreyoegg@ wiso.uni-hamburg.de. The authors have disclosed that they have no significant relationship with, or financial interest in, any commercial companies pertaining to this article. DOI: 10.1097/HMR.0000000000000027 Health Care Manage Rev, 2015, 40(3), 214Y224 Copyright B 2015 Wolters Kluwer Health, Inc. All rights reserved.

Introduction Public policy initiatives, particularly those involving managed care, aim to enhance cooperation between partners in the health care sector because it is expected that such cooperation will reduce costs and generate additional revenue (Walston, Kimberly, & Burns, 1996). Hospital markets can be characterized by rising uncertainties and increasing complexity for several reasons, such as the introduction of hospital diagnosis-related groups. Consequently, it is increasingly difficult for single, noncooperating hospitals to remain in the market. One way for hospitals to transform this situation is to cooperate with other players in the health care sector (Mascia, Vincenzo, & Cicchetti, 2012; Zuckerman, Kaluzny, & Ricketts, 1995). From a management perspective, cooperation can help secure a hospital’s competitive position, and such integration

Copyright © 2015 Wolters Kluwer Health, Inc. All rights reserved.

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Cooperation for a Competitive Position

and cooperation behavior implies that partners in the health care sector along the value chain are prepared to pursue mutually compatible interests rather than act opportunistically (Harrigan, 1986). The foundation of hospital cooperative behavior typically is a long-term, purposeful arrangement among distinct but related organizations that allows hospitals to gain or sustain a competitive advantage with respect to their competitors (e.g., Jarillo, 1988; Mariti & Smiley, 1983). Cooperative behavior can be characterized by the form of cooperation (Granderson, 2011), that is, by criteria such as by contractual obligations or formal structures concerning their capital ties (e.g., strategic alliances; Smith, Carroll, & Ashford, 1995) or by single cooperation characteristics (e.g., patient sharing; Mascia et al., 2012). Moreover, cooperation behavior can be described by the direction of cooperation, that is, horizontal and vertical cooperation arrangements can be distinguished from one another (Appleyard, Wang, Liddle, & Carruthers, 2008; Smith et al., 1995; Vera, 2006). Horizontal cooperation includes cooperation arrangements with competing hospitals (Appleyard et al., 2008). This cooperation enables hospitals to share administrative or medical resources, such as consolidated purchasing or radiology. An expected benefit of these arrangements is the creation of synergy effects that may reduce costs (Pearce & Hatfield, 2002). Vertical cooperation behavior consists of interorganizational partnerships, with partners acting on different levels along the value chain (Porter, 1980), and may involve a broad range of patient care and support services (Conrad & Dowling, 1990). Therefore, vertical cooperation is typically differentiated in forward and backward cooperation behavior: for a hospital, forward cooperation consists of cooperation with long-term care facilities or rehabilitation institutions, and backward cooperation consists of cooperation with physician groups and outpatient services (Wang, Wan, Clement, & Begun, 2001). Hospitals form vertical cooperation arrangements under holistic views of patient treatment and may thus generate additional revenue. In addition, policy interest in vertical cooperation has been mainly concerned with whether integration results in anticompetitive effects (Williamson, 1971). It is common for hospitals to maintain both horizontal and vertical cooperation arrangements. For example, hospitals may share certain administrative resources for joint purchasing or may jointly offer certain services to patients as part of horizontal cooperation arrangements. Hospitals may also enter into vertical cooperation arrangements with rehabilitation institutions. However, little attention has focused on possible relationships between these two forms of cooperation direction. Therefore, it is unclear whether one type of cooperative relationship can positively affect hospital performance independently of the other type or whether it is advisable to pursue both directions simultaneously. Furthermore, hospitals may engage in intense cooperation activities (i.e., a high cooperation depth) or implement a broad bandwidth of activities (i.e., cooperation breadth). Research on which approach offers the greater financial benefits is scarce.

This study investigates the impact of hospital cooperation behavior on organizational performance by addressing the following research questions: 1. How does hospital cooperation affect organizational performance? We differentiate between horizontal and vertical cooperation and account for possible interaction effects between these types of cooperation. 2. Do the effects on organizational performance vary depending on whether cooperation depth or cooperation breadth is used as the measure of cooperation? This study adds to the scarce research on hospital cooperation in several ways. First, we focus on the cooperation direction of hospitals, and this study makes a special contribution to the underrepresented field of horizontal cooperation. Second, we use various measures of cooperation behavior to generate more detailed information about hospital cooperation behavior and to differentiate between depth and breadth of hospital cooperation. Third, to avoid singlesource bias, we use secondary data to measure hospital performance; thus, this study is the first to combine survey data on hospital cooperation behavior with objective performance measures. Fourth, we include the interaction effects between different cooperation directions within the study to illustrate the demands of cooperative behavior. To our knowledge, this study is the first to provide a more detailed view on cooperation behavior by analyzing interaction effects. Significant interaction effects for cooperation behavior would show not only that the type of cooperation behavior is important but also that positive or negative synergies must be considered as well. Finally, although interaction effects are commonly included in a regression analysis, most studies ignore the fact that including an interaction effect affects the interpretation of direct effects. We show that changing the scaling of independent variables by mean centering, for example, leads to a change in the regression coefficients of direct effects and their significance levels, and we focus on varied interpretations within moderated regressions.

Theory and Prior Research Williamson (1975) identified two major types of interactionsV ‘‘markets’’ and ‘‘hierarchies’’Vwhich represent the two polar forms of a continuum of governance structure that moves from loose to tight, from arm’s-length bargaining to total integration, and from spot transaction via standing relations to the internalization of markets (Thorelli, 1986). Depending on the circumstances, either polar form may be more efficient than the other (Ouchi, 1980). The transaction cost approach is frequently used to compare these two polar forms. Following the transaction cost approach, hierarchies can reduce transaction costs in a market, which might indicate that hierarchies are more efficient. In between the two polar formsVmarkets and hierarchiesVcooperation arrangements


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may be understood as intermediate or hybrid forms and are also called ‘‘third organizational form arrangements’’ that combine market, hierarchical, competitive, and cooperative elements (e.g., Mariti & Smiley, 1983; Powell, 1987; Williamson, 1991). On the basis of the concepts found in Coase (1937), Williamson further developed the theoretical elaboration and operationalization of the transaction cost approach in the early 1970s (cf. Williamson, 1971, 1973, 1975). In a subsequent study, Williamson (1991) noted that transaction cost economics has been criticized because it addresses the polar points markets and hierarchies of the aforementioned continuum to the detriment of cooperative intermediate forms. However, the identical argumentation can be transferred to hospital vertical integration or cooperation behavior (cf. hospital vertical integration: D’Aveni & Ravenscraft, 1994; Vera, 2006). In the hospital market, hospitals tend to behave opportunistically and to maximize their benefits, which may negatively affect upstream health care providers, such as primary care physicians, or downstream health care providers, such as rehabilitation centers. The benefit of vertical cooperation for a hospital thus lies in decreasing a partner’s opportunistic behavior (Williamson, 1975) by creating mutual benefits and shared objectives. Therefore, hospitals’ vertical cooperation reduces transaction costs and enhances hospital performance (Williamson, 1971). Regarding horizontal cooperation, cooperation arrangements are considered important strategic instruments that can create potential benefits that are rooted in economies of scale and scope (e.g., Dranove & Shanley, 1995; Olden, Roggenkamp, & Luke, 2002; Pearce & Hatfield, 2002; Vera, 2006). Thus, hospitals can generate synergy effects through the joint use of resources and service provisions (Pearce & Hatfield, 2002) and lower the costs of health service provision (Olden et al., 2002). With regard to the medical infrastructure, the joint use of medical equipment or range of services reduces redundancies (Dranove & Shanley, 1995), and fixed assets achieve a higher degree of utilization (Vera, 2006). Thus, the costs of health care provision can be spread over a greater number of hospitals, and average costs decrease. In addition to the single effects of vertical and horizontal cooperation, there may be positive or negative interactions between the two types of cooperation direction. Synergy effects can be generated by the learning effects of cooperation arrangements in which each single-cooperation partner contributes his or her core competency and potentially achieves an extensive transfer of expertise. A gain in knowledge from vertical cooperation may therefore enhance horizontal cooperation benefits or vice versa. Otherwise, because of the complexity of cooperation arrangements, comprehensive cooperation behavior may reduce a hospital’s strategic flexibility and decrease performance (Harrigan, 1985). Certain studies in the health care literature have analyzed health systems integration (cf. Bazzoli, Shortell, Dubbs, Chan, & Kralovec, 1999; Shortell, Bazzoli, Dubbs, & Kralovec,


2000). Referring to the markets and hierarchies typology, this type of integration does not include loose cooperation arrangements. Instead, it mainly consists of comprehensive formalized arrangements. Studies considering looser forms of institutional arrangements remain scarce. Previous studies have focused primarily on vertical integration in which cooperation partners along the supply chain are no longer legally autonomous. In general, there is evidence of a positive association between vertical integration and firm performance (D’Aveni & Ravenscraft, 1994; Rothaermel, Hitt, & Jobe, 2006). Four studies have analyzed integration and cooperation behavior in the hospital sector. Wang et al. (2001) conclude that backward-integrated hospitals perform better financially than forward-integrated hospitals. Goes and Zhan (1995) find considerable variation across three hospitalYphysician integration strategies in hospital performance outcomes. Kim et al. (2004) consider both horizontal and vertical integration strategies and reveal that both increase hospital revenues. Moreover, a horizontal integration strategy reduces hospital expenses. Vera (2006) finds that horizontal cooperation contributes to cost reductions, whereas vertical cooperation likely enhances revenue. However, none of these studies considered the relationships between horizontal and vertical cooperation in terms of possible interaction effects. In conclusion, empirical studies focus mainly on vertical integration, generate mixed results, and have several important limitations. First, most of the previous literature analyzes firms’ cooperation behavior by focusing on integration strategies. Accordingly, there are few studies that analyze hospital cooperation behavior in which cooperation partners retain their legal autonomy. Second, little systematic attention has been paid to analyzing the effects of the direction of cooperation on performance. Most studies in health care research barely differentiate between horizontal and vertical cooperation strategies. Research that has specifically focused on horizontal cooperation direction is scarce. Third, previous studies exclusively analyze the direct impact of horizontal and vertical cooperation behavior on hospital performance without focusing on possible relationships among the different types of cooperation. However, to achieve a deeper understanding of cooperation behavior and draw practical implications, it is important to consider possible interaction effects between different directions.

Methodology Data Sources Primary data were collected for cooperation behavior. The original hospital population was identified using the German hospital directory that lists all approximately 2,000 hospitals and that provides information on the type of care, hospital


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size, and hospital ownership. Hospitals that provided only psychiatric care or outpatient treatment, university hospitals, day or night clinics, and hospitals with fewer than 50 beds were excluded from the population to ensure hospital comparability. The basic population thus consisted of 950 acute care hospitals. The survey was sent to the responsible chief executive officers of such acute care hospitals in 2011. We asked the responsible chief executive officers to use December 31, 2010, as the date to which they should relate their responses. One hundred ninety-two hospital managers responded to the survey (response rate = approximately 20%). The response rate of our sample is consistent with previous research on hospital performance (Hinz & Ingerfurth, 2013; Vera, 2006). In addition to the survey data on hospital cooperation behavior, we used the proportion of unionists, politicians, and lawyers in hospital governing boards drawn from the same survey for a two-stage least-squares (2SLS) estimation with instrumental variables. The measurement of hospital performance is based on secondary data from annual financial statements for 2011. Thus, we followed the advice of Podsakoff et al. (2003), who stated that the independent and dependent variables should not be the same respondent’s views. Multiple sources help avoid common method bias. To measure the control variable rusticity, we used data provided by the Federal Office for Building and Regional Planning (INKAR).

Sample After plausibility checks and depending on the public availability of annual financial statements, we obtained a final data sample of 112 acute care hospitals. Of these 112 hospitals, 42% are public, 44% are private nonprofit, and 14% are private for-profit hospitals. In the German hospital market, 30% are public, 36% are private nonprofit, and 34% are private for-profit hospitals. Hence, hospitals characterized by private and for-profit ownership are slightly underrepresented. In our sample, 14% of the hospitals are located in urban areas, whereas 86% are in rural areas. In the German hospital market, 16% of the hospitals are located in urban areas, whereas 84% are in rural areas. With a mean of 373 beds per hospital, the hospitals in our sample are slightly larger than the general hospital population (population mean = 249 hospitals).

Variable Construction To measure hospitals’ cooperation behavior, we followed the classification of Harrigan (1984), which was originally developed to characterize the continuum of vertical integration according to different criteria (depth, breadth, stage, and form). Harrigan’s classification has been applied in the hospital sector (Conrad & Dowling, 1990). Consistent with Harrigan, we measured cooperation behavior as cooperation

depth and breadth. The criteria of stage and form were excluded because they are mainly based on contractual obligations or formal structures concerning capital ties. For cooperation behavior, we identified 27 items from the literature that represented possible cooperation activities (e.g., Dranove & Shanley, 1995; Goes & Park, 1997; Wang et al., 2001); we then conducted expert interviews with hospital managers to ensure the validity of the indicators. We used a 5-point Likert scale that extends from 0, indicating that cooperation is nonexistent, to 4, indicating that cooperation is very intense. To verify whether the 27 items can be grouped into different categories, a varimax-rotated principal component factor analysis was performed, which resulted in a three-dimensional factor structure with 24 items (three items were excluded because of their cross-loadings). Principal component factor analysis confirmed the existence of three factors with an eigenvalue greater than 1. Two factors represented horizontal cooperation behavior, that is, ‘‘horizontal administrative cooperation’’ and ‘‘horizontal medical cooperation.’’ The third factor reflected ‘‘vertical cooperation,’’ which implies that all the vertical cooperation itemsVindependent of whether they represented forward or backward vertical cooperation behaviorVare highly correlated and thus reflect the same latent variable. The factors with their respective items, the factor loadings, and the reliability are presented in Table 1. In line with Harrigan (1984), we defined cooperation depth as the intensity of existing cooperation activities, which we measured for each of the three cooperation factors. The cooperation depth of horizontal administrative cooperation, for example, was measured by the mean value of its 10 indicators. The range of cooperation depth was between 0 and 4. For the breadth of cooperation activities, we measured the number of actually undertaken cooperation activities (i.e., a score higher than 0 on the Likert scale) divided by the total possible number of cooperation activities for each form of cooperation. For example, the total number of vertical cooperation breadth was 7 (which is equal to the number of indicators in this dimension). Thus, the range of cooperation breadth was between 0 and 1. Moreover, we analyzed the interaction effects between the two different cooperation directions, that is, between horizontal administrative cooperation behavior and vertical cooperation behavior and between horizontal medical cooperation behavior and vertical cooperation behavior, by including the product of the respective factors. In measuring hospital organizational performance, we followed most of the prior research on hospital cooperation and focused on hospitals’ financial performance (Kim et al., 2004; Wang et al., 2001). The indicator of the operating margin was derived from the hospitals’ annual financial reports. Furthermore, we allowed a 1-year time lag with respect to the hospitals’ operating margin as a dependent variable (Greene, 2008).


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Table 1

Factor analysis Factor

Item

Standardized loading

Cronbach’s alpha

Horizontal administrative cooperation

Joint administration Joint controlling Joint operation of service facilities Joint storage Joint medical technology Joint price negotiation Joint budget negotiations with health insurance funds Nonmedical exchange Joint purchasing Joint pharmacy

0.824 0.821 0.698 0.772 0.603 0.770 0.765 0.556 0.661 0.646

0.68

Horizontal medical cooperation

Range of services harmonization of one specialty department Range of services harmonization of several specialty departments Creation of ambulatory healthcare center Medical postgraduate training Medical exchange Joint radiology Joint diagnostics

0.758 0.813

0.72

0.717 0.515 0.646 0.481 0.610

Resident physicians Outpatient nursing services Outpatient rehabilitation facilities Inpatient rehabilitation facilities Inpatient nursing services Retirement homes Hospices

0.655 0.865 0.821 0.834 0.827 0.855 0.763

Vertical cooperation

0.78

Note. Excluded variables: joint labor, nonmedical training, and joint sterilization. n = 165.

To achieve a better understanding of the extent of a potential reverse causality problem (cf. Greene, 2008), we ran a two-stage least-squares (2SLS) estimation with instrumental variables for the cooperation behavior to test for endogeneity. As instrumental variables, we used the share of unionists, politicians, and lawyers on the governing boards of our surveyed hospitals. There is a reason to believe that these variables affect the potentially endogenous variables for cooperation. Depending on the profession, governing board members may be more or less inclined toward supporting hospital cooperation and to exert influence over a hospital’s cooperation strategy. Meanwhile, there is no obvious link to the outcome variable operating margin. Reestimating our model with these instrumental variables, we identify the proportion of unionists, politicians, and lawyers as suitable instruments for addressing a potential reverse causality problem. The test for overidentifying restriction shows that all instruments are valid. The F statistic was greater than the rule of thumb of 10. However, the Durbin and WuYHausman tests were not significant, which indicates that we can assume that cooperation behavior is exogenous. Thus, we could not identify a problem of endogeneity in the model.

Estimation Strategy The impact of hospital cooperation on financial performance was examined using generalized linear regression models. Our dependent variable was the operating margin, which was truncated and gamma distributed. Thus, we employed a log link function between the dependent and independent variables and included the direct effects of horizontal cooperation (separated into horizontal administrative and horizontal medical cooperation) and the direct effect of vertical cooperation as independent variables. Rusticity (a dummy variable for urban regions with populations of more than 100,000), ownership (private for-profit, private nonprofit, and public), and hospital size (smaller and greater than 750 beds) were included as control variables. In addition, we included the interaction effects between horizontal administrative cooperation and vertical cooperation and between horizontal medical cooperation and vertical cooperation. We separated our results regarding cooperation depth and breadth. In our original data analysis, the independent variables horizontal administrative cooperation and vertical cooperation


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were scaled between 0 and 4, and the direct coefficient estimates can be interpreted as the effect of horizontal administrative cooperation (vertical cooperation) on operating margin when vertical cooperation (horizontal administrative cooperation) is absent (Irwin & McClelland, 2001). To illustrate how rescaling affects the direct coefficient estimates, we rescaled both variables in two alternative ways. First, we mean-centered the variables (by subtracting the mean value) and ran a new set of regressions such that the direct coefficients are interpreted as the effect of horizontal administrative cooperation (vertical cooperation) on operating margin when vertical cooperation (horizontal administrative cooperation) is at its mean value. Second, we subtracted the maximum value of each of the two variables and ran a third set of regressions such that the direct coefficients are interpreted as the effect of horizontal administrative cooperation (vertical cooperation) on operating margin when vertical cooperation (horizontal administrative cooperation) is highest (i.e., at its maximum value). Several sensitivity analyses using alternative model specifications were performed to confirm the robustness of the results. First, instead of a single imputation, we accounted for the missing values by using multiple imputations (20 imputations), which better reflects uncertainty stemming from missing values than a single imputation. We used the Monte Carlo Markov Chain as the imputation method. Second, we used standardized interaction effects for cooperation depth and breadth. Third, in addition to using operating margin as a dependent variable, we tested the impact of cooperation behavior on additional financial indicators, such as operating cash flow, annual net profit, and return on equity. In addition, we constructed an alternative model with a different dependent variable. Rather than using the 2011 operating margin ratio, we used the difference between consecutive years 2010 and 2011 to measure the change in operating margin over time.

Findings Table 2 describes the mean and standard deviation and the correlations of the single factors of cooperation depth and breadth. Table 3 summarizes the regression results using cooperation depth and breadth as two alternative cooperation measures. Beginning with cooperation depth, the results show that the interaction between horizontal administrative cooperation depth and vertical cooperation depth has a negative and significant effect on operating margin (p G .05), whereas the interaction between horizontal medical cooperation depth and vertical cooperation depth has no significant effect on operating margin. The latter implies that the effect of horizontal medical cooperation depth on operating margin does not depend on the degree of vertical cooperation. This coefficient can be interpreted without accounting for the scal-

ing of vertical cooperation. The results show that horizontal medical cooperation depth has no significant effect on operating margin. Meanwhile, the effect of horizontal administrative cooperation depth on operating margin is positive and significant (p G .10) when there is no vertical cooperation depth at all. Because the interaction effect is negative, the positive impact of horizontal administrative cooperation depth decreases with an increasing degree of vertical cooperation depth. The effect of vertical cooperation depth on operating margin is insignificant when there is no horizontal administrative cooperation depth. As horizontal administrative cooperation depth rises, the effect of vertical cooperation depth decreases and eventually becomes negative. Next, we analyze the effect of cooperation breadth on operating margin. Because the interaction effect between horizontal medical cooperation breadth and vertical cooperation breadth on operating margin is insignificant, the coefficient for the horizontal medical cooperation breadth can be interpreted without accounting for the scaling of vertical cooperation, which indicates that horizontal medical cooperation breadth has no significant effect on operating margin. The interaction effect between horizontal administrative cooperation breadth and vertical cooperation breadth has a highly significant negative impact on operating margin (p G .01). Horizontal administrative cooperation breadth significantly positively affects financial performance when there is no vertical cooperation breadth (p G .05). Again, the negative interaction effect between horizontal administrative cooperation breadth and vertical cooperation breadth indicates that this effect will decrease as vertical cooperation breadth increases. The effect of vertical cooperation breadth is positive (p G .10), that is, vertical cooperation breadth is positively associated with operating margin when there is no horizontal administrative cooperation breadth. Table 4 focuses on the regression coefficient estimates of the two direct effects for horizontal administrative cooperation and vertical cooperation after rescaling. Because we use the entire range of the other variable’s scaling (minimumY maximum value), the regression coefficients represent the entire range of possible direct effects. As reported above, the direct coefficient estimates for horizontal administrative cooperation depth and breadth are positive and significant when there is a total absence of vertical cooperation. Because of the negative interaction term, these estimates decrease as vertical cooperation increases. When vertical cooperation is at its mean value, the direct coefficient estimates of horizontal administrative cooperation depth and breadth remain positive but no longer significantly different from zero. When vertical cooperation reaches its highest possible value, the effects of horizontal administrative cooperation become negative. Analogously, depending on the scaling of horizontal administrative cooperation, the regression coefficient estimates for vertical cooperation depth and breadth change from positive to negative and exhibit changes in significance levels. Because of the high negative interaction term,


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Table 2

Descriptive and correlation statistics

(1) (2) (3) (4) (5) (6) (7)

Hor. adm. CD Hor. med. CD Vertical CD Hor. adm. CB Hor. med. CB Vertical CB Operating margin

Mean (SD)

1

2

3

4

5

6

1.332 1.376 1.552 0.395 0.427 0.427 5.704

.560*** .068 .954*** .456*** .149 .143

.222** .542*** .905*** .180* .090

.122 .196** .858*** j.173*

.475*** .187** .087

.1807* .072

j.125

(1.090) (0.715) (0.910) (0.279) (0.307) (0.307) (24.879)

Note. n = 112. CD = cooperation depth; CB = cooperation breadth; SD = standard deviation; Hor. = horizontal; adm. = administrative; med. = medical. *Significant at the .10 level. **Significant at the .05 level. ***Significant at the .01 level.

it is thus clear that cooperation leads to financial benefits only when hospitals focus their cooperation efforts in one direction. Several sensitivity analyses using alternative model specifications confirm the robustness of the presented results. First, we account for the missing values by using multiple imputation instead of single imputation. The coefficients have identical direction and significance throughout the dif-

ferent versions for cooperation depth and breadth. Second, we use standardized interaction effects for cooperation depth and breadth. Again, these changes have no effect on our results. Third, we test the impact of cooperation behavior on other financial indicators, such as operating cash flow, annual net profit, and return on equity. Most of the identified relationships between cooperation and financial performance are confirmed. In addition, we use the difference

Table 3

Results of the separate analyses of cooperation depth and breadth on operating margin Operating margin

Cooperation depth measure

Independent variables Horizontal administrative cooperation (if vertical cooperation is 0) Horizontal medical cooperation Vertical cooperation (if horizontal administrative cooperation is 0) Interaction effect: horizontal administration vertical cooperation Interaction effect: horizontal medical vertical cooperation Hospital size Private for-profit Public Private nonprofit Rural Urban

Cooperation breadth measure

0.83*

3.15**

0.49 0.40

1.06 1.24*

j0.50**

j5.13***

j0.17

j0.77

j1.14*** Reference j0.18 j0.73 Reference 0.33

j1.36*** j0.25 j0.52 0.49

Note. n = 112. *p G .10. **p G .05. ***p G .01.


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Table 4

Regression coefficient estimates depending on variable scaling Cooperation depth measure Horizontal administrative cooperation (if vertical cooperation is 0, i.e., minimal) Horizontal administrative cooperation (if vertical cooperation is average) Horizontal administrative cooperation (if vertical cooperation is maximal) Vertical cooperation (if horizontal administrative cooperation is 0, i.e., minimal) Vertical cooperation (if horizontal administrative cooperation is average) Vertical cooperation (if horizontal administrative cooperation is maximal)

Cooperation breadth measure

0.83*

3.15**

0.06

0.61

j1.17

j1.98

0.40

1.24*

j0.50***

j1.08***

j1.60***

j3.89***

Note. n = 112. *p G .10. **p G .05. ***p G .01.

between consecutive years 2010 and 2011 to measure the change in operating margin over time, and the coefficients again have an identical direction.

Discussion Our findings reveal that participation in horizontal administrative cooperation agreements enhances hospital performance (if vertical cooperation is absent). Kim et al. (2004) found that horizontal integration could be more profitable than vertical integration. Our study shows that this finding is also true for horizontal and vertical cooperation. Sharing administrative resources helps generate synergy effects and economies of scale (Pearce & Hatfield, 2002). Horizontal administrative cooperation helps avoid potential gaps in capacity that might lead to a loss in turnover. Cooperation partners’ mutual access to their specific know-how allows hospitals to optimize their internal patient treatment support processes. Moreover, a balanced cooperation partnership helps facilitate or reinforce mutual commitment (Pearce & Hatfield, 2002). A demarcation against noncooperating hospitals may be generated, and hospitals’ competitive positions can be improved. In summary, horizontal administrative cooperation behavior between hospitals can save expenses, enhance operating margin, and increase profitability (Dranove & Shanley, 1995; Goes & Park, 1997). However, these results are limited to horizontal administrative cooperation behavior. By contrast, our study does not support an effect of horizontal medical cooperation behavior on financial performance. With respect to vertical cooperation behavior, the results differ across cooperation depth and breadth and show that

vertical cooperation depth is not significantly related to financial performance (in the absence of horizontal administrative cooperation). By contrast, vertical cooperation breadth has a significant positive effect on financial performance (in the absence of horizontal administrative cooperation). Thus, it seems more advisable to invest in a broad range of cooperation activities rather than intensifying a limited number of activities. Past empirical studies concerning hospital cooperation do not address differences between cooperation depth and breadth while analyzing the impact of cooperation behavior on performance. The vertical cooperation behavior of hospitals guarantees a holistic view of patient treatment and minimizes interruptions during transfers by allowing shared access to upstream and downstream markets. Primary care physicians act as gatekeepers who are responsible for the control of patients’ hospital referrals. A broader range of cooperation activities with prehospital service providers (physicians) can help optimize inpatient referrals and improve patient access (Wang et al., 2001). Backward vertical cooperation (between hospitals and physicians) may thus help reduce unused capacities, which ultimately increases financial performance. Forward vertical cooperation allows the time of subsequent referrals to affiliated rehabilitation facilities to be optimized (Vera, 2006). Vertical cooperation with different partners can reduce transaction costs by internalizing activities along the vertical hospital supply chain (Rothaermel et al., 2006). In particular, a variety of collaboration arrangements with different partners can improve hospital productivity (Granderson, 2011). By engaging in collaboration, interorganizational trust can be built and transaction costs can be reduced (Zaheer, McEvily, & Perrone, 1998) because transaction costs consist of bargaining or monitoring costs


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(Barney & Hansen, 1994). The positive effect of vertical cooperation on performance is likely because of reduced transaction costs (Rothaermel et al., 2006). Collaboration in terms of a greater number of services allows hospitals to reduce their uncertainties (Burgers, Hill, & Kim, 1993). With the help of cooperation, relationships among hospitals and physicians or rehabilitation facilities can improve hospitals’ competitive positions (Kogut, 1988). On the basis of joint learning processes, organizational learning may help reinforce the competitive position of hospitals. A broader range of cooperation activities also facilitates the accumulation of core competencies, and an improved and comprehensive transfer of expertise and flow of information along the supply chain can be achieved. In contrast to this positive relationship, our results show that vertical cooperation depth and breadth can negatively affect financial performance (if horizontal administrative cooperation depth or breadth is at its mean value). The gatekeeper function of physicians also implies negative effects on hospital performance. One argument is that, when there is intense or broad vertical hospital cooperation with physicians, many patients may receive ambulatory care rather than inpatient treatment (Wang et al., 2001). The volume of inpatients thus decreases, which leads to a reduction in hospital productivity. As gatekeepers, physicians are responsible for patients’ hospital access. Because of financial incentives, physicians may restrict hospital admittance to the most costintensive cases, which decreases patient flows and may hamper hospital performance. Thus, even at their own expense, hospitals cooperate with physicians. Hospitals that engage in forward cooperation behavior cannot increase their performance through intense or broad cooperation with longterm care services. Patient transition along the hospital supply chain is costly (Wang et al., 2001). Coordination problems arise with patient transfer among partners, which potentially causes managerial inefficiencies (D’Aveni & Ilinitch, 1992). Because of high costs, vertical cooperation does not help enhance hospital financial performance. In fact, hospitals’ cooperation with rehabilitation facilities is mainly understood as a marketing instrument to increase their attractiveness to patients. Thus, hospitals capture patients who otherwise would be discharged. However, cooperation with long-term care services does not create a financial benefit. In fact, it is more likely that vertical cooperation behavior will be risky and unprofitable (Wang et al., 2001). Thus, assumptions based on the transaction costs regarding a performanceenhancing effect of vertical cooperation can only be partially confirmed by our empirical results. Simultaneous horizontal administrative cooperation and vertical cooperation negatively influence financial performance. Cooperation behavior, including both analyzed directions, can create administrative, coordination, and information costs, all of which impede financial performance. Cooperating partners operate in a nearly closed system in which all value chain activities are internalized and in which there


are few external linkages (Rothaermel et al., 2006). In this way, cooperating hospitals cannot adapt their input prices to market prices. Whereas stand-alone hospitals can use market prices as a baseline and lower their costs when there is competition, cooperating hospitals must provide higher input prices (Cuellar & Gertler, 2006). These higher prices may create entry barriers and reduce hospital performance (Salop & Scheffman, 1983). On the basis of the information asymmetry between cooperation partners, barriers to comprehensive cooperation can result in opportunistic behavior, which may reveal power differences between single partners and that hospitals may be playing a dominant role (Vera, 2006). Thus, it may be impossible to create a fair collaboration based on partnership because of the lack of transparency that leads to ambiguity in partners’ intentions. Ultimately, these uncertainties in simultaneous cooperation may hinder hospital performance. Moreover, comprehensive cooperation behavior can reduce hospitals’ strategic flexibility (Harrigan, 1985). An external perspective reveals that cooperation behavior may result in high exit barriers for partners seeking to leave the cooperative relationship. Cooperating hospitals act together as a nearly closed system, which reduces their ability to absorb external knowledge (Rothaermel et al., 2006). Inside cooperation arrangements, partners may experience blocked channels of information and knowledge exchange. These managerial inefficiencies induce coordination problems (D’Aveni & Ilinitch, 1992). Therefore, comprehensive simultaneous horizontal and vertical cooperation may lead to losses in productivity. Notwithstanding these crucial insights, this study has several limitations that also provide fruitful avenues for further research. First, the data sample is small. With the help of the described sensitivity analyses, we addressed the typical criticism regarding small sample sizes and confirmed the robustness of the results. Second, we only used measures of financial performance to reflect the competitive position of a hospital because other measures were unavailable. Further research may use efficiency, quality, or costs to measure the impact of cooperation behavior on organizational hospital performance. Third, in contrast to the two dimensions of horizontal cooperation behavior (administrative cooperation and medical cooperation), vertical cooperation behavior could not be divided into multiple dimensions. Further work might differentiate between forward and backward vertical cooperation (e.g., Wang et al., 2001). Moreover, future studies might consider exogenous variables, such as market competition, that may explain hospital cooperation behavior (Wang et al., 2001).

Practical Implications Our study has important policy and management implications. In particular, by including the interaction effects between horizontal and vertical cooperation behavior, our study has policy implications related to the degree and breadth of cooperation. Health policy initiatives aiming to improve the


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financial situation of hospitals should focus on fostering either horizontal administrative cooperation or vertical cooperation. Horizontal medical cooperation or a combination of horizontal administrative and vertical cooperation should not be enforced. With respect to vertical cooperation, cooperation breadth should be supported over cooperation depth. Thus, a broad range of administrative cooperation activities across the value chain is favorable. For hospital executives, our study shows the relevance of hospital cooperation and provides insights about the appropriate degree of cooperation and the areas in which cooperation is particularly fruitful. With respect to financial performance, horizontal administrative cooperation is more effective than horizontal medical cooperation or vertical cooperation. However, when combined with vertical cooperation, horizontal administrative cooperation negatively influences financial performance. Hospital managers should consider this negative interaction effect on financial performance when making decisions about whether to recommend a horizontal or vertical cooperation direction; otherwise, the number of possible interaction partners may become unmanageable, and transaction costs may rise. In addition, managers should be aware of the limited financial benefit of cooperation behavior. If managers engage in vertical cooperation behavior, they should invest in a broad range of cooperation activities rather than in intensifying those activities. Arrangements for initiating cooperation among different partners in the health care sector should be assessed carefully and according to their expected benefits. Acknowledgments

This study was supported by a research grant of the Federal Ministry of Education and Research (BMBF) in Germany (Grant number 01FL10055). The sponsor had no role in the study design, collection, and analysis of data; the writing of the report; or the submission of the article for publication.

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