Employers of Choice

Economy, lifestyle, reimbursement changes are driving doctors to seek hospital employment

Does this describe any of the physicians who practice at your facilities?

  • They’re seeing practice expenses rise, but reimbursement remain flat.
  • They’re working hard, trying to be more productive, but they’re at their wit’s end trying to squeeze more volume out of the hours of the day.
  • The young ones are worried about paying off the debt they incurred in medical school, while the older ones are wondering how they can get full value for their share of the practice when they cash out.
  • They recognize the value of implementing electronic medical records, and are aware that in a few years, the government will penalize them for failing to do so. But at the same time, they wonder how they’ll afford it, master it, and ensure that the staff know how to maximize its value.
  • They resent the hours they spend on administrative duties, instead of doing what they were trained to do, namely, improve people’s health.

In short, they eye with envy their colleagues who have sold their practices to the local hospital system. Yes, they realize those colleagues are no longer the captains of their ship. But, they have to admit, their colleagues seem content, and focused on providing medical care instead of filling out paperwork and insurance claims. They can’t help but notice that their colleagues have access to outstanding, modern medical technology; have managed to make a big dent in their student loans; and, yes, have their evenings and weekends free.

The employers of choice?
News stories of hospital systems buying physician practices are abundant these days. Indeed, statistics indicate that more physicians are breaking out of the mold of the independent, lone medical providers of yesteryear, and opting to punch a time clock instead. The employers of choice aren’t physician practice management companies, which were swallowing up physician practices 10 or 15 years ago but later imploded. (Remember PhyCor and FPA Medical Management?) Instead, today’s employers of choice are IDNs.

It’s true that hospitals and hospital systems were part of the buying frenzy of the 1990s. It is also true that many of those systems turned around a couple of years later and sold off the practices they had acquired, unable to make the new arrangements work. But in 2010, IDNs believe they have their act together…and doctors apparently agree.

In 2003, 8 percent of the medical groups belonging to the Medical Group Management Association were hospital-owned. In 2008, 10 percent were. While the vast majority of practices (81 percent) were still physician-owned, the jump from 8 percent to 10 percent was, in fact, a 25 percent increase, points out Dave Gans, MSHA, FACMPE, vice president of innovation and research, Medical Group Management Association. “What we’re observing is a major shift in the relationship between doctors and hospitals,” he says. “Physicians are looking at the option of being part of a hospital-based integrated delivery system. So what we have is a realignment of how healthcare is being delivered.”

“There is rarely a hospital we talk to that doesn’t already have or is in the process of acquiring a physician practice,” says Deborah Holzmark, RN, senior manager, Dixon Hughes, a CPA and consulting firm headquartered in High Point, N.C. She estimates that 65 to 70 percent of the firm’s workload these days consists of consulting with hospitals and their owned physician practices.

In Ohio, several hospital systems, including Health Alliance of Greater Cincinnati, TriHeath and others, own physician practices. “It is occurring throughout the state, and it is both an urban and rural issue,” says John Callender, senior vice president, Ohio Hospital Association.

“I think we’re seeing a growth in the number of physicians who are becoming employees of hospitals and hospital systems,” adds Brent Mulgrew, executive director, Ohio State Medical Association. “It’s a trend nationally, and I believe it is occurring in Ohio.”

Driving forces
Some believe that the union of hospitals and physicians isn’t just a marriage of convenience, but of necessity, particularly as the government and private payers move toward bundling the reimbursement of hospitals and doctors for episodes of care or chronic disease management. And it’s a win for patients too, they say.

“What it’s really all about…is clinical integration,” says Ken Bertka, MD, FAAFP, CPHIMS, chief medical information officer for the Northern division of Catholic Healthcare Partners in Toledo, Ohio, and board member of the American Academy of Family Physicians. “Increasingly, people are appropriately focused on patient-centered care.” And the integration of hospitals and physicians can help make that happen. Bertka spent 20 years in a five-physician family medicine practice prior to taking his current position.

One of the primary drivers behind the trend is the simplest one: “Revenue is flat but expenses have continued to go up significantly, especially in the last three years,” says Holzmark. From the solo practitioner to the 20-doc practice, all are feeling the squeeze, she says. “I think that puts them in a position in which they’re more susceptible to considering these arrangements.” The current economic downturn may be accelerating the trend, she says, but it “might be more of the straw that broke the camel’s back than anything else.”

Medical Group Management Association studies show that physician payment is a mere 1.1 percent greater today than it was in 2001, primarily because Medicare payment levels have remained flat, according to Gans. Meanwhile, expenses have gone up over 50 percent since then, and the cost of living has jumped by 25 percent or so.

“Doctors in private practice have to be more efficient and more productive, and they often lack the resources and capital to purchase the newest technologies,” he adds. “When they are part of a health system, they have that access to capital. They’re part of a larger system that can afford the technologies they need to practice state-of-the-art medicine. But they give up their autonomy – a substantial amount of it – to do that.

The need to follow the patient
According to Bertka, concepts such as the patient-centered medical home are prompting family practitioners and others to make their offices more efficient, with an emphasis on the patient instead of the doctor and her staff. But truly patient-centered care must follow the patient wherever he or she is cared for, including the hospital. And payers are thinking the same way.

Rather than parcel out payments for a single episode of care – e.g., for a knee replacement – among a bevy of physicians, therapists, inpatient and outpatient facilities, payers are increasingly insisting that everyone involved in that patient’s care be held responsible for the outcome, says Bertka. It is then the providers’ responsibility to divvy up one payment among themselves. “Payers are saying, ‘We shouldn’t be paying piecemeal,’” he says.

Such payment methods – which are being piloted in Medicare demonstration projects, using so-called “accountable care organizations” – are strong drivers of physician/hospital integration, he says. “One of the most direct routes [to clinical integration] is for the physician to sell his or her practice and become an employee of the health system. If all are employed by the same organization, they’re all one team, though it still takes a lot of work” to coordinate care effectively.

That said, employment isn’t the only avenue to achieving integration, Bertka points out. Recent legislation has opened the door to closer cooperation between hospitals and physicians without fear of running afoul of antifraud and antikickback statutes.

Generational issues
Though difficult to quantify, so-called “generational issues” are also driving physicians – primarily younger ones – to seek employment by a hospital system.
“Lifestyle expectations are different today,” says Bertka. “This generation works hard, but they want a better balance in their lives. In an independent, privately owned practice, the doctor works hard all day taking care of patients, and all night taking care of business. This generation doesn’t want that responsibility and perceived hassle of running a business, and they want to focus on taking care of patients.”

“The physicians I see interested [in selling their practices] are either at one end of the spectrum or the other,” notes Holzmark. “There are the physicians who are closer to retirement, who suddenly saw their retirement fund decrease significantly [because of the economic downturn]. Their thought is to go into a stable situation in which they can be pretty confident about their revenue and personal income. At the other end of the spectrum, you have those not long out of medical school. They don’t have quite the entrepreneurial spirit; they’re not quite as interested in ownership of a practice and a building. They’re much more interested in quality of life. [They’re saying], ‘Let me work 8 to 5 Monday through Friday, and don’t give me the headaches of running a practice.’”

Mulgrew believes that the need to reduce debt is a big factor driving physicians to seek employment today. “For younger physicians, a significant motivator for [selling their practice] is the tremendous debt load they face when they finish their residencies,” he says. “With that kind of pressure, they believe they have to establish a regular income to pay down that debt. Hospitals can in many cases guarantee several years of income; and in some cases, they can actually provide debt reduction or support.”

Hospitals’ perspective
If physicians are drawn to hospitals and health systems, the feeling is mutual. Rural hospitals face a continual uphill battle attracting physicians, says Callender. One reason is, physicians from urban areas don’t want to move to small town America. Besides, most medical schools are in urban areas, so living and working in the city are part of most young physicians’ psyches. So, for most rural hospitals, directly employing physicians “is essentially a survival tactic,” he says. “Without physicians, hospitals can’t survive, and without a hospital, the community suffers.”

Meanwhile, urban hospitals and health systems want to lock in referral patterns and volume, continues Callender. Employing physicians is one way to do so.
But employment is a win for the doctors too, he adds. “Doctors are extremely frustrated with all the things they have to do to practice medicine,” he says. “When they go through college and medical school, nobody teaches them about renting space, personnel issues, how to evaluate equipment. They learn to practice medicine – to diagnose and treat illness and injury. Then they have to be a business person.” But if they choose to become employees, the health system assumes the responsibility of working with insurers, renting space, hiring staff, providing malpractice coverage, etc.

Observers believe that, unlike those of 15 years ago, today’s hospital/physician marriages are for real. They will last. That’s because both parties are going into such arrangements a lot smarter than last time.

“In the past, the deals we saw between hospitals and physicians involved much larger payouts to physicians” than were warranted by the value of the practices, says Holzmark. “Now, these buyouts are typically centered on the value of the assets of the practice, and much less on things like good will. We’re also seeing very structured compensation arrangements.”

“You learn from history, and history repeats itself, if you’re not careful,” says Bertka. “My hope is, we’re going about it differently this time. [In the past], it became a bidding war. People were paying prices [for physician practices] that were outrageous. There was no way practices were going to generate that much income, because the payment side wasn’t changing.”

In years past, hospitals overpaid for physician practices for fear that the doctors would go to competitive institutions, says Callender. “They didn’t do it for the right reasons – improving patient care, reducing administrative hassles, forming a working relationship where both could gain through economies, efficiencies and better operations. It didn’t surprise me they failed.”

Today, hospitals have more resources at their disposal to help them make good buying decisions, he adds. “There’s a lot more information regarding the value of a practice and its potential benefit to the hospital. And we have better data about how productive a physician can be.”

“You saw a couple of mistaken assumptions in the ’90s during that period of significant acquisitions,” says Mulgrew. “Assumption No. 1 was that a hospital could run a physician practice more efficiently and effectively than a physician could, across the board. They discovered that was inaccurate. That’s not to say they can’t do a good or even better job. But across the board, they found it wasn’t plug-and-play.”

Assumption No. 2 was that the physician practice management companies were every bit as good as Wall Street believed them to be. “They were the darlings of Wall Street, because healthcare was a darling,” says Mulgrew. “But so were subprime loans. I don’t look at Wall Street’s endorsement as a good housekeeping seal.”

Better management
Indeed, once they acquired practices, hospitals didn’t necessarily know how to operate them efficiently and profitably 15 years ago.
“Hospitals then – and it’s still a problem – didn’t know how to run practices,” says Bertka. “They think like hospitals. But increasingly, they know that.” And they’re making changes.

Gans recalls the story of one hospital that purchased a number of practices in the late 1990s, then divested them later. The 50 to 75 doctors never really gelled with the larger organization, he says, and the hospital never pursued any economies of scale after the acquisitions. What’s more, the hospital didn’t differentiate its own employed physicians from non-employed physicians on staff. That led to some resentment.

“What has happened today is that the management aspect of the physician practice as part of the hospital and health system is much better understood,” says Gans. “There’s a recognition you need physician leadership and administrative leadership working together in the organization.” Health systems have figured out how to build an infrastructure that supports the doctors, giving them varying degrees of autonomy and responsibility. Today’s physician managers understand that physician practices must be managed very differently than brick-and-mortar hospitals.

Still, hospitals face several challenges trying to incorporate physician practices, says Holzmark. “They’re trying to manage people who have come from a very different environment than…the hospital environment.” On a more concrete level, billing and collecting payment for physician services are much different than billing and collecting for hospital services. “We spend a lot of time as consultants helping our clients plan and manage this better. It’s still a struggle, but some have really caught on, and they have the systems in place to make it happen.”

Productivity and pay
Conventional wisdom has it that once hospitals bought physician practices in the 1990s, physicians’ productivity declined, causing hospitals to lose hundreds of thousands of dollars and forcing them to sell off the practices they had recently acquired. It’s not true that physicians eased off the throttle once they became employees, says Mulgrew. “But what you’re seeing today are requirements for productivity, which may or may not have arisen out of that experience.”
In the past, it was not unusual to see hospitals pay physicians a flat salary, regardless of production, says Holzmark. “Now they’re tending to bring in components based on productivity.”

Indeed, hospitals appear to be more adept at handling the subtler issues associated with physician practice ownership. “Is the lay administrator of the hospital trying to tell doctors how to practice medicine?” asks Callender. “If so, there will be a culture clash. I think we’re smart enough not to do that. We’re not telling physicians how to diagnose and treat patients. We’re helping them be more efficient. And the younger doctors I talk to are happy to be spending 90 percent of their time taking care of patients, vs. those who have set up their own [practice], who are spending 50 percent of their time taking care of patients and the other 50 percent running their business.”

In the end, hospital administrators will have the same kind of discussions with employed physicians as they traditionally have had with physicians on staff, says Callender. Only today, those discussions are backed by more data. “We have so many ways to measure the quality of physician care,” he says. With today’s information systems, it’s easy to compare one surgeon’s OR time with that of another, or one surgeon’s rate of infection and readmission vs. that of his or her peers.

A world of employed physicians?
So, what will a world of employed physicians look like? First of all, it’s not likely to happen soon.

“I don’t see any time soon that the majority of physicians will be employed, though in primary care, we estimate that in two years, 40 percent of primary care physicians will likely be employed by hospitals or health systems,” says Bertka. What’s more, different relationships will emerge.

“Employment is the most common scenario, but there are other models of collaboration,” says Holzmark. “Some are intricately designed, and they usually focus on varying degrees of direction and oversight and management. There are situations in which a hospital and physician collaborate with each other, and the physician retains a fair amount of control over the practice. At the other end of the spectrum, they become a direct employee of the hospital.”

“If you’ve seen one physician/hospital relationship, you’ve seen one physician/hospital relationship,” says Mulgrew. “Over the next five years, healthcare lawyers will have their hands full designing and redesigning relationships between hospitals and physicians, as the impact of healthcare reform [is better understood] and new alignments come to the forefront.”

Regardless of the structure, however, it’s likely that the new physician/hospital relationship will result in closer coordination of care.
Patients’ welfare is at risk during the so-called “handoff,” that is, when the patient is transferred from one facility or caregiver to another, says Gans. For example, changes in medication may be misunderstood by the patient, or may not be communicated to all caregivers. “But when the doctor and inpatient facility are part of the same system, you’re more likely to have systems in place that improve communication,” he says.

“I would focus on the necessity of cultural adaptation on both sides, from the physician’s and hospital’s point of view, in order to have a successful relationship,” says Mulgrew. Physicians hold dearly their approach to patient care, while the hospital or hospital system wants to create an efficient economic model of healthcare delivery. “There needs to be a way to resolve that tension,” he says.

It seems like both sides are intent on finding it.

About the Author

Mark Thill
Mark Thill is the Editor of The Journal of Healthcare Contracting and has been reporting on healthcare supply chain issues since 1985. He is a graduate of Dominican University in River Forest, Ill., and he received a master's degree in journalism from Northwestern University in Evanston, Ill.
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