Why Physician Employment Is and Isn't the Answer

If you want an idea of where physician practice may be headed, listen closely to the comparisons of the best and worst providers in recent healthcare reform discussions.

In his widely-read New Yorker article, Atul Gawande contrasted the high Medicare spending in entrepreneurial McAllen, TX, with Rochester, MN, where the Mayo Clinic "has fantastically high levels of technological capability and quality, but its Medicare spending is in the lowest 15% of the country."

In his most recent press conference, President Obama chastised physicians who factor fee schedule financial incentives into clinical decisions, and then a few minutes later called the Cleveland Clinic "a role model for some of the kind of changes that we want to see."

We even found an anti-McAllen here at HealthLeaders Media. A couple of weeks ago Michelle Ponte wrote about Winona Health, which was named Most Wired-Small and Rural Hospital by Hospitals & Health Networks magazine for the last several years, and is also in a region that boasts the fifth lowest Medicare costs out of more than 1,300 hospital service areas in The Dartmouth Atlas.

What do these three role models have in common? They all employ physicians, for starters.

I wasn't sure if this was the case with Winona when I first read about its success, so I followed up with Mike Allen, CFO of the not-for-profit integrated system. Although Winona only formally began employing doctors in 2008, it "looked and acted more like an employed model" well before then by aligning closely with two practices that essentially contained all of the medical staff doctors.

"I do think that you will find that is one common theme among low-cost areas . . . There is a link between a well-defined, tightly-organized healthcare system in a community and lower costs," Allen says. "Except for cost of living differences, I bet you won't find high costs where there are well-defined systems."

The case for employing physicians is compelling:

• It makes it easier to reduce duplication of services and overutilization by taking some of the direct financial incentives out of medical care.
• The closer alignment helps hospitals implement uniform practice standards and other quality improvement initiatives.
• It can alleviate conflicts over ED call coverage and other sticking points between doctors and administrators.
• It can generally improve care coordination and the adoption of health information technology.

But in most places it's not that easy to implement.

While putting doctors on a salary works for an integrated health system, most physicians practice in small groups where revenue is divided up between five or fewer physicians. Salaries aren't really feasible in those situations. Although the number of small practices is declining, the majority of doctors aren't going to be working in integrated systems anytime soon.

And many have no desire to. Although physicians are becoming increasingly receptive to employment, many doctors are quite entrepreneurial and realize that they can earn up to four times as much in private practice. As long as the fee-for-service system rewards high volumes of certain easily-repeatable procedures, specialists will have incentives to practice privately and invest in ambulatory surgery centers, imaging equipment, and specialty hospitals.

Some states, such as California and Texas, don't even allow physician employment. Corporate practice of medicine laws take the view that it is when physicians are employed by an institution, not when they practice independently, that they could potentially be pressured to order tests or increase volume to boost the organization's revenue.

Finally, some physicians argue that employment removes all incentives to work hard and see more patients. While it's true that many hospitals got burned in the 1990s when they tried employing physicians only to see productivity drop dramatically, leaders have since learned to incorporate productivity and quality incentives into salaries to keep physicians motivated.

It's not that employing physicians doesn't work—it does for Cleveland Clinic, Mayo, and Winona Health, and it is worth learning from their successes and emulating their models when possible. But every hospital can't integrate into a system and every physician can't practice on a fixed salary.

Healthcare reform would benefit from a few role models that look a little more like the average provider.