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Defense vs. Offense: Hospital Employment of Physicians

John G. Larson, PhD, for HealthLeaders Media, May 2, 2008

The literature and industry observers are heralding the “return” of hospitals employing physicians, but the term “employment” does not convey the strategic opportunities and contextual differences in the current trend compared to the 1990s. Some hospitals are reluctantly hiring physicians again out of necessity, while others pursue it as an offensive strategy to gain economic and clinical advantages.

Defense
The Center for Studying Health System Change reported that the average physician’s net income, adjusted for inflation, declined 7% from 1995 to 2003. Traditional private medical practice models are failing due to poor financial performance and are not attractive to physicians who are seeking work arrangements allowing more time for family and lifestyle.

Poor financial performance of physician practices is a major factor in physician turnover in urban and rural communities. To counter that, hospital executives have been using direct employment to improve physician retention and recruiting performance. It is a surefire short-term measure to preempt market vagaries and inadequate third-party reimbursement.

To lessen the potential financial drain on the hospital, hospital compensation plans for physicians today are more likely to be based on physician productivity. Nevertheless, without other adjustments in the hospital direct employment model, hospitals generally may continue to subsidize owned-physician practice net losses.

Offense
Integration of hospital-employed physicians into high-performance practice organizations is considered “playing offense” to create value for hospitals and physicians.

At the beginning of this decade, physicians in many markets consolidated their practices into large, single or multi-specialty group practices. The Center for Studying Health System Change recently reported that the percentage of Physicians in practice sizes of 6 to 50 Physicians has risen from 15.9% (1996-1997) to 17.6% (2004-2005).

Although physician practices of six to 25 physicians felt large in the 1990s, today, groups with 100 or more physicians is the optimal scale necessary for exceptional financial performance.

Physicians will tend to resist the trend toward consolidation due to the perceived start-up costs, complexity of governance, and loss of professional autonomy. But large practices hold a number of advantages for both physicians and hospitals.

Integration of physicians into large group practices tied to a hospital can create structural advantages that yield:

  • Improved negotiations of fee schedules and agreements with health plans.
  • Reduced operating expenses particularly high cost volatile items such as professional liability insurance.
  • Acquisition of skilled human resources and technology to improve productivity and quality.
  • Acquisition of capital items, e.g., facilities and information systems.
  • More time for physicians to better balance professional and personal time by eliminating daily business oversight.

In the past, hospitals and the physician practice Management companies promoted the premise that they could deliver value to physicians through “better management” but this rarely materialized. Now the structural advantages of large group practice organizations can more quickly be delivered by hospitals with the start-up funds and technical resources, and incremental advantages of “better management” can emerge over a longer time period.

Multiple advantages for physicians and hospitals are derived from large (100+ physicians) practice organizations. Physicians practicing in financial peril as well as successful practices can be equally attracted with the right model.

Integrated Physician-Hospital Models
Many hospital leaders say their strategic goal is to achieve greater alignment with physicians. Generally speaking, high-performing health systems have achieved some level of integration with the formerly independent physicians by creating hospital-based, multi-specialty group practices.

Legal integration of formerly independent physicians and physicians with hospitals is the first step. Integrated physician-hospital models eliminate the zero-sum economic competition characteristic of most medical markets. Within integrated structures, physicians’ and hospitals’ financial security can be achieved, which facilitates the alignment of medical expertise, technical skills, and specialized facilities.

Two effective contemporary integrated physician-hospital models are:

  • Clinic Model: A legal integration of physicians, hospital, and ancillary services into an entity controlling a vertically integrated health system governed by clinical leadership.
  • Hospital-Based Group Practice: A legal integration of multiple physician practices into a group practice under the ownership or support of a hospital with operational management by clinicians.

The Clinic Model
In the clinic model, clinical leadership governs the entire patient services enterprise. Mayo Clinic, Cleveland Clinic, and many academic medical centers are long-standing examples of the clinic model. More recently, the Carilion Health System reorganized the Carilion Clinic in Roanoke, VA, to a clinic model.

A clinic’s mission may be solely the delivery of clinical services or it may include education and research. Hospitals and other institutional resources are simply ancillary assets clinically integrated to produce optimum patient outcomes. The governing body and leadership positions are populated by physicians. Private, independent practitioners are not excluded. Conceptually, the patient-physician relationship is the centerpiece, with all resources (i.e., hospitals and other ancillaries) arrayed to maximize outcomes. Education and research share the same focus.

To summarize, distinguishing characteristics of the clinic model include:

  • Patient care, education, and research missions are responsibility of single entity.
  • Hospital/health system facilities become resource inputs.
  • Governance and management positions are heavily populated with physicians.
  • Fragmentation and competition for revenue between hospitals and physicians is minimized.

Hospital Based Group Practice
Hospital Based Group Practice (HBGP) is created by consolidating many or most of the market’s physicians into a multi-specialty group practice owned or legally linked to a hospital. The primary task is to achieve alignment of interests among physicians overcoming the long-ingrained economic and professional separation.

The initial focus is integration of physicians into a single practice organization. Physician buy-in for a unified practice organization requires a careful balance between physicians’ maintaining operational autonomy at the practice site and a high level of physician-hospital collaboration in governing the group practice. Governance must be inclusive and balanced between all partners and responsible for clinical and financial performance.

Both the HBGP and clinic models share the following advantages:

  • Improved financial performance through increased reimbursements and cost lessens structure advantages.
  • Lessened financial insecurity reduces resistance to clinical integration and lessens resistance joint operation of ACC competition for revenue streams.
  • Recognition that success of the whole exceeds the past success experienced as an independent entity.
  • Attractive to both physician superstars and under-performing physician practices.
  • Operational management of HBGP is under direction of physician leadership.
  • Access to capital for improved facilities and technology.
  • “White-coat” branding and promotes product differentials based on clinical quality and value for patients.

Critical Factors for Success
Physician-hospital integration models require focus, determination, and a little luck. Both models will predictably meet resistance from physicians and hospital executives alike. Chances for success can be heightened with:

  • Physician leader(s)
  • Formalized strategic vision and objectives
  • Parity of group practice with hospital unit(s)
  • Financial discipline (‘show me the money’ focus)
  • Critical mass of physicians, inclusive of all specialties in market.

The take-away message is that hospitals of all sizes in urban and rural communities may have strategic opportunities not imagined in the immediate calculations of the need to employ physicians. Creating high-performing hospital-based group practice organizations can yield advantages to hospitals and physicians, but success requires imagination, planning and commitment.


John G. Larson, PhD, is CEO of Managed Care Options, Inc., which specializes in the development and integration of market strategies for physicians and hospitals and the management of provider-owned managed care organizations. Dr. Larson has over 30 years of experience as an academic, CEO of healthcare management firm, and as a consultant to physician groups, hospitals and health insurers.
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