Objectives.The introduction of the Medicare Prospective Payment System and the more recent rise of managed care plans have greatly increased the importance of effective hospital financial management. Because physicians play a central role in directing hospital resource use, policies to influence physician behavior and to align physician and hospital interests more effectively are being advocated increasingly. This article evaluates the effect of nine strategies to facilitate physician involvement and integration into the hospital on hospital financial performance.Methods.Data came primarily from the Prospective Payment Assessment Commission's hospital-physician relations survey of 1,485 hospitals and the Medicare Cost Reports. Both ordinary least squares and first differencing models were used to evaluate the effect of physician integration on hospital financial performance.Results.Hospitals with lower margins and higher costs were more likely to have implemented strategies to integrate physicians and to modify physician behavior than their counterparts. Analysis using first differencing models indicated that making department heads responsible for the profits and losses had a significant positive effect on margins, whereas including medical staff on the hospital's board and offering physicians management services had a significant negative impact on average Medicare costs. In addition the number of strategies implemented was associated positively with financial performance. The paper also emphasizes the importance of model specification in evaluations of hospital-physician arrangements.Conclusions.Changes in hospital-physician relations may have been one reason why hospitals have been relatively successful at containing costs and retaining profitability in recent years. More research needs to be done on which specific arrangements affect hospital financial performance, as well as their effect on the quality of patient care.