Numbers Don’t Tell All

Reports that hospital systems are losing as much as $100,000 annually on every physician they employ may be exaggerated. Nevertheless, hospital executives can and should take steps to help maintain the profitability and efficiency of the practices they acquire.

Reports on huge losses sustained by hospitals related to physician practices may not be as alarming as they look, says Peggy Naas, M.D. MBA, vice president, physician strategies, VHA, speaking with the Journal of Healthcare Contracting. Even practices that were profitable prior to the acquisition can look like money-losers, depending on how the bookkeeping is done. (Of course, physician practice management professionals should ensure that practices are run efficiently, she adds.)

If hospital or IDN administrators consider only the revenues the physician realizes from seeing patients, they may believe that a physician is losing money, says Naas. In other words, on paper, at least, the expenses associated with employing that physician may exceed patient revenues. Those expenses include salary, malpractice insurance, employee benefits, and all the other services offered for the convenience and care of patients, such as CT and Doppler services. Meanwhile, revenues from ancillary services provided in the office, such as imaging, may no longer be “credited” to the practice, but instead, to the hospitals’ radiology department. As reimbursement for physicians’ services flattens or even falls, the numbers look even worse.
What’s more, a physician practice may incur additional expenses simply by becoming part of the hospital system, including costs associated with unionized employees, increased liability coverage, or more support staff in the office.

“But the physician is doing other things besides, literally, seeing patient after patient,” Naas points out. Today, physicians coordinate care, teach and counsel patients, supervise nurse practitioners, and develop team-based-care systems. Payers and hospital systems are increasingly recognizing the value of these activities, and will continue to do so as accountable care organizations and pay-for-performance systems mature, says Naas. IDN boards of directors must do the same.

“Obviously, there are significant benefits to bringing physicians into a collaborative relationship with a health system,” says Naas. But caution is a must.

“There has to be a clear understanding of the value of the practice, and what is an appropriate competitive salary, so the health system is not overpaying [for the practice]. And there has to be a clear understanding of the IDN’s strategy to employ physicians, and a way to identify which ones bring value.”

Willingness and skill
IDNs have a number of options with which to build collaborative relationships with physicians, points out Naas. Employment is one. Clinical integration and co-management are two more. “Each is very appropriate, depending on the market and the skill sets of the health system and the physician.”

  • Employment. “Any IDN can employ a physician,” says Naas. “But to create a sustainable [solution] that delivers on the potential of a well-coordinated, single, employed group in an integrated system requires leadership skills on the part of physicians and administrators.”
  • Co-management. This approach can work provided two conditions are met, says Naas. “You need physicians who are willing to contractually take responsibility for management of the service line or department, and that takes physicians with the appropriate skill set and willingness.” Administrative leaders, in turn, must have the willingness and skill set to partner with physicians.”
  • Clinical integration. In this model, the cadre of physicians – who may or may not be employed by the hospital or IDN – work together to deliver efficient and high-quality care, and are recognized for doing so by payers and employers, says Naas. Again, two ingredients are needed – willingness to set up these kinds of structures, and solid leadership skills, on the part of both physicians and administrators.

Up to the challenge
IDNs and physicians are up to the challenge in a way they weren’t a couple of decades ago, during the last wave of physician-practice acquisition by hospital systems, says Naas.

“[In the 1990s], there was enthusiasm, even exuberance, that exceeded common sense,” she says. (That said, not all those experiments ended in disaster.) “But people learn, health systems learn, just as we do in our private lives. And circumstances are different today. Health systems have many more models [of physician collaboration] from which to choose. We have a better sense of the kind of leadership that is required. We know what good employment structures look like, because they are modeled across the country for us.”

Today’s administrators have better data to measure and benchmark such indicators as physician productivity, the overall value of a practice and quality of care, she adds. “So this is a different environment, and people understand what they’re trying to achieve by employing physicians.”

There’s another big difference today, says Naas. “Physicians coming out of training are expecting a more team-oriented, group experience than the physicians in mid-career who ended up being employed by health systems [in the 1990s]. We’re dealing with a different physician cadre, so expectations are different.”
Today’s IDN executives have the knowledge and ability to select the right physician leadership and administrative leadership to make collaborative relationships work. “One does not lead these groups like one leads a department in the hospital,” she points out. Today’s IDNs also know that newly employed physicians must be given a cohesive vision or strategy.

“It’s challenging,” she says. But with the right strategy, leadership, physicians, and salary or compensation structure; and with continual monitoring of compensation, quality and value that the physician practice brings the community, physician employment and other collaborative models can be a winning strategy.