Physician Employment, the Second Time Around
A new round of physician–hospital alignment is underway—this time, with a broader sweep, according to Craig E. Holm, senior vice president, Health Strategies & Solutions, Philadelphia, Pennsylvania, and D. Louis Glaser, JD, partner, Katten Muchin Rosenman, LLP, Chicago, Illinois. They presented “Employed Physicians: Improving Performance and Avoiding Excessive Subsidies” on June 23, 2010, at the Healthcare Financial Management Association’s ANI: The Healthcare Finance Conference in Las Vegas, Nevada.
An interest in clinical integration and accountable-care delivery models is driving the renewed hospital interest in physician employment, with a few key differences this time. “In the 1990s, the emphasis was on primary care,” Holm notes. In addition to acquiring primary-care practices, hospitals currently are seeking specialists in fields where it is hard to obtain coverage (such as orthopedics, trauma surgery, and neurosurgery), as well as referring specialists desired by the hospital community, such as endocrinologists, rheumatologists, and cognitive medical specialists, he reports.
A third category of specialists sought, according to Glaser, strikes close to home for radiologists: subspecialists within cardiology and radiology, “who have historically disdained hospital employment and are now feeling significant cuts on the professional as well as technical sides,” he observes.Employment DriversWhile recent data¹ from the Medical Group Management Association place 50% of practices surveyed in an employed model, Holm says that the actual number of employed physicians probably is still a minority due to the high number of single-physician practices included in the survey. Nonetheless, physician employment—whether by a large, stable medical group or by a hospital—is on the rise. “There are some markets where virtually all physicians are employed by hospitals or large practices, as they are in Milwaukee, Wisconsin,” he notes.
Since the last failed effort to integrate hospital and physician communities in the 1990s, separatism and competition between hospitals and physicians have been driven by the pursuit of supplemental income. Payor consolidation and regulatory changes, however, are causing some physicians to rethink independence. “A year ago, how many people had under-arrangement joint ventures with physicians or per-click leasing arrangements?” Glaser asks. “Nobody has them today.”
Economic and regulatory-policy decisions by CMS, including growing scrutiny of the in-office ancillary exception, are driving the trend. “Cardiology is the perfect example: payment cuts and the bundling of codes,” Glaser notes. “CMS is trying to regulate by changing the pricing of a service. When that fails, it steps in and says, ‘Thou shalt not.’”
Improved reimbursement rates are another factor driving physicians toward employment. Holm says that the typical uptick in commercial rates reported by physicians surveyed by Health Strategies & Solutions was 10% to 15%. The industry’s average subsidy for practices is approximately $70,000 annually, while hospitals’ best practice would be half that, according to Holm. “If a 150-physician group reduces its subsidy from $100,000 to best-practice levels, $5 million to $10 million savings could be the result,” he says.Future Uncertainties and Past MistakesMoving ahead, putting a number on physician income will become more difficult. “As you pull diagnostic and ancillary services out and put them into the hospital, you’re assured that the practice will lose money, but you may be gaining money somewhere else in the system,” Glaser explains, adding that unprecedented reimbursement cuts on both the professional and technical sides leave hospitals vulnerable to the mistake of locking physicians in at unsustainable salaries.
Holm notes that hospital–physician employment arrangements might be more viable in markets where professional fees, as a percentage of the Medicare Physician Fee Schedule (MPFS), are lower than the national average (which is about 115% of the MPFS).
He also cautions that physician employment, historically, has not created clinical integration. Independent physicians and independent practices with formal business relationships can be, and currently are, engaged in alignment strategies (see table) with hospitals and health systems. “Employment is typically for a minority of medical-staff members,” he says.
Some employment models, Glaser says, “do involve a high degree of alignment—and potentially, a lot of physicians—but the degree of challenge is very great. Medical directorships are easy to implement, but may not improve clinical integration.”
Glaser notes that many of the acquisitions that occurred in the 1990s were based on discounted cash-flow evaluations. Current practices are more asset based, incorporating values for intangibles such as workforce in place, medical records, and the physicians themselves. Personal goodwill is a new factor in asset valuations. “We’re seeing a lot of transactions where people are not calling it a signing bonus, but rather goodwill: We’ll pay you at closing to say you’ll stay on for five years,” Glaser explains. “Retention incentives are now structured as a payment if you’re here each year, or at the end of five years, and are used instead of qualified deferred compensation.”Compensation MethodologiesLikewise, hospitals are experimenting with new compensation methodologies. What began in the 1990s with fixed salaries guaranteed for 5 to 40 years was amended, after watching productivity decline, to include an incentive to produce either cash or net revenue. The next iteration went to a percentage of net revenue or a work RVU system, with pay based on productivity; this was subsequently further improved by bringing in incentives on the expense side. “If you beat the budget, we’ll give you some extra money,” Glaser explains. 
The current generation of hospital–physician plans, Glaser notes, is productivity based, sometimes with some support guaranteed on the front end (and perhaps including incentives), but now, with a focus on the quality/outcomes side. Hospitals are interested in partnering with physicians to reduce readmission rates, reduce lengths of stay, and achieve certain outcomes.
In order to protect themselves from the losses incurred in the 1990s, hospitals should proceed with caution when guaranteeing physicians an income based on current reimbursement rates; they should understand that the MGMA compensation surveys, while they are best data available, might not accurately reflect reality for all practices. They should also be aware that paying no more than fair market value is not just good business, but protection against problems covered under the anti-kickback statute.
Glaser recommends making up to 20% of clinical compensation available as a bonus, structured with an overarching trigger based on annually achievable goals for quality and outcomes. “As we think about the future of value-based purchasing, this is something I recommend you start thinking about,” he advises.Selection/Divestiture CriteriaImproving performance often begins with practice-selection criteria (frequently used as divestiture criteria as well), Holm says. Ideally, physician leaders will establish selection criteria that address compensation trends, such as bundled payments.
Referring physicians continue to generate a significant level of downstream revenue for hospitals (an estimated average of $1.5 million per physician in 2007), but there is always room for improvement, Holm says. Potential high-return initiatives for improving financial performance—and avoiding excessive subsidies—include revised medical practice delivery, operations improvement, revenue capture, elimination of redundant infrastructure, practice promotion, physician leadership, transition to private practice, and revised compensation plans.
Most systems that are successful in improving performance focus on avoidable practice losses, instead of worrying about unavoidable losses such as long-term leases or amortized acquisition costs, Holm says. According to a survey conducted by the presenters that including 25 hospitals and systems in 17 states, the most significant initiatives were changing compensation methodology (67%) and practice promotion (33%).
The current generation of hospital–physician plans, Glaser notes, is productivity based, sometimes with some support guaranteed on the front end (and perhaps including incentives), but now, with a focus on the quality/outcomes side. Hospitals are interested in partnering with physicians to reduce readmission rates, reduce lengths of stay, and achieve certain outcomes.
In order to protect themselves from the losses incurred in the 1990s, hospitals should proceed with caution when guaranteeing physicians an income based on current reimbursement rates; they should understand that the MGMA compensation surveys, while they are best data available, might not accurately reflect reality for all practices. They should also be aware that paying no more than fair market value is not just good business, but protection against problems covered under the anti-kickback statute.
Glaser recommends making up to 20% of clinical compensation available as a bonus, structured with an overarching trigger based on annually achievable goals for quality and outcomes. “As we think about the future of value-based purchasing, this is something I recommend you start thinking about,” he advises.Selection/Divestiture CriteriaImproving performance often begins with practice-selection criteria (frequently used as divestiture criteria as well), Holm says. Ideally, physician leaders will establish selection criteria that address compensation trends, such as bundled payments.
Referring physicians continue to generate a significant level of downstream revenue for hospitals (an estimated average of $1.5 million per physician in 2007), but there is always room for improvement, Holm says. Potential high-return initiatives for improving financial performance—and avoiding excessive subsidies—include revised medical practice delivery, operations improvement, revenue capture, elimination of redundant infrastructure, practice promotion, physician leadership, transition to private practice, and revised compensation plans.
Most systems that are successful in improving performance focus on avoidable practice losses, instead of worrying about unavoidable losses such as long-term leases or amortized acquisition costs, Holm says. According to a survey conducted by the presenters that including 25 hospitals and systems in 17 states, the most significant initiatives were changing compensation methodology (67%) and practice promotion (33%).