A recent Moody's report contends that hiring physicians comes with a financial penalty. That may be true, but simple accounting misses the point entirely, some CEOs say.
Hiring doctors isn't a winning financial strategy.
So says a recent study by Moody's Investors Service, which contends that hospitals with high physician employment generate stronger revenue growth, but are less profitable than peer institutions with fewer employed physicians.
The agency's findings and the reasoning behind the contention that employing doctors doesn't pay, gave me pause, especially given the near universal belief among hospital and health system leaders that employing a significant portion of physicians is the only way to compete in a value-based world.
But it's a losing strategy, suggests the study.
Analyst opinions have a big impact on borrowing costs for healthcare organizations, and the ones who conducted this study are convinced based on the numbers that employing physicians isn't a lucrative proposition for health systems.
Moody's found that the median operating cash flow margin is 10.7% for hospitals with low physician employment, compared to 8.5% for hospitals with very high physician employment.
So who's right? Is it simply a case of long-term thinking versus short-term?
Maybe. The market (including the debt market, which Moody's serves) hates uncertainty, and the majority of institutions, are not really in the value-based world yet, with a few notable exceptions.
This study is a challenge to the widely held contention that employing a significant number of physicians is a necessity. And more than two full percentage points of margin is definitely significant.
But most leaders say they're looking at their long-term ability to compete.
Related: Employed Physicians Add Revenue, Trim Profits
Health systems don't always have a choice—or don't feel they have a choice—in employing physicians. This goes for the primary care side, but increasingly includes important specialists who are no longer able or willing to deal with some of the regulations and costs of running their own groups.
If I don't employ them, the reasoning goes, my competitor will, and we will lose referrals, and we won't have a viable heart, oncology, or ortho—choose your service line—program.
I asked several CEOs I know who have employed physicians strategically what important factors this kind of economic analysis is leaving out.
In an industry in such heavy transition, after all, it's possible that statistics could lead to conclusions about employing physicians that might be true for now, but false later, as reimbursement schemes become more accountable.
Problems with the Study
Ron Paulus, MD, the president and CEO of Asheville, NC-based Mission Health, sees a few problems with the study
First, he says clinicians are attracted to employment for only two reasons: Either they are intellectually and emotionally aligned to a group practice/integration model such as Mayo, Geisinger, Cleveland Clinic and many others, or they can't generate the income they want on their own, typically because of demographic and payer mix challenges.
He also says the more rural or demographically unfavorable a facility, the higher the ratio of employment because in the absence of employment, there wouldn't be physicians there (my emphasis).
"These facilities perform worse [financially] for the same reasons and therefore create a biased sample," he says.
"By contrast, I would be willing to bet that the 'low employment' facilities are overwhelmingly in more demographically attractive, suburban areas where the physicians can flourish on their own, and therefore the employment pressure is lower."
Paulus also contends that generally, organizations that are aggressively pursuing employment are also aggressively pursuing transformation from volume-based reimbursement to a value-based system.
That transition is difficult, especially in a short-term economic analysis, because the actions that push value today also harm the fee-for-service business model. "We are certainly experiencing that, and many others are also," he says.
The transformation isn't possible without a very high degree of physician engagement and alignment. And while he says it's not impossible, this could be accomplished without employment, what needs to be done for transformation harms physician incomes in a fee-for-service independent model.
"That means you are going to need to pay them to do the things that need to be done," he says. "Because of both thoughtful and less than thoughtful regulatory restrictions, that is far easier to accomplish in an employed model."
Finally, he says that the industry is still early in physician employment integration operations, and that much of what's gone on to this point has been building and investing.
There's also a significant learning curve for organizations bent on integrating if they've not previously managed physician practices.
He also believes there is a "price war" going on as various organizations try to employ physicians to support the transition to value. He says that over time, all healthcare participants' income, including physicians, should grow more slowly or even decline. But it's too early for that.
It's clear that although they don't dispute the numbers, many CEOs view the obsession with tracking profit against physician employment as myopic.
That's because the numbers obscure the benefits of clinical integration and cooperation, which show up in places other than line items on a financial report.
But while the study's conclusions may reflect a short-term window into an industry in transition, in fairness, investors view trends like this exclusively through a financial lens.
That's No Accident
That's how they evaluate the investment attractiveness of hospital or health system bonds, or in the for-profit world, bonds, stocks and other financial instruments.
Jerry Fedele, president and CEO of Boca Raton (Fla.) Regional Hospital has no problems with the facts about physician employment, and in those, the study seems accurate, he says. But he says in many cases, the increased overhead will pay off over time.
Even if it doesn't, it's just the cost of doing business going forward for many organizations.
"There is no question that health system employment of physicians carries increased overhead compared to physician private practice models, however, this is an apples-to-oranges comparison," he says.
"Many times physicians in private practice operate their practices as small businesses that economize on every expense possible because of the direct impact of expense minimization on bottom line physician compensation."
That model is no longer sustainable because the complexity of running a physician practice has risen dramatically, creating increased cost and management challenges.
So while physician costs rise in an integrated health system employment model, focus on this factor alone without consideration of the unsustainability of private practice in an increasingly complex business and coordinated care environment, perhaps distorts what's really going on.
Chuck Stark, CEO of Brookwood Baptist Medical Center in Birmingham, AL, part of a joint venture between Tenet Healthcare Corp. and Alabama's Baptist Health System, says the headline focusing on profitability overshadows statistics that make the case for employment.
"The higher three-year revenue annual compound growth rate for entities with higher physician employment rates likely reflects better alignment afforded through the employment model between management and physicians, with a resultant reduction in barriers to strategic deployments."
Fewer barriers and impediments give rise to sustained achievements in growth, comparatively speaking, he adds.
"While the margins may be lower for higher physician employment rate entities, the advantages of better alignment combined with higher revenue growth rates will lead to market share shifts in favor of… entities with better alignment."
Philip Betbeze is the senior leadership editor at HealthLeaders.