Physician Employment, the Second Time Around

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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 Drivers

While 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 Mistakes

Moving 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