Kentucky hospital study finds mounting losses on physician ownership

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While the integration of physician groups into hospital operations is expected to achieve more efficiency and quality of care, doing so effectively remains a top challenge and strategic imperative for hospitals and health systems, according to a recent report from the accounting and business consulting firm Dean Dorton Allen Ford.

The report is based on a survey of physicians and administrative executives from hospitals in and around Kentucky and was a follow-up to a similar survey conducted in 2013.

The latest survey results found that 92 percent of respondents reported losses (compared to 87 percent in 2013) and that 58 percent of respondents reported annual per physician losses of at least $100,000, compared to just 41 percent in the 2013 study.

The losses reported in the study didn’t correlate with hospital size, but the survey did find that—consistent with 2013 findings—the longer physicians have been employed by a hospital or system, the greater the probability there will be higher operating losses. 

According to the authors of the report, the reason for the larger losses could be that those hospitals have a higher percentage of direct recruited physicians compared to acquired practices. Accordingly, it’s possible that direct recruited physicians wouldn’t have private practice experience and could have a less favorable payor mix.

Fory-two percent of respondents reported that they are more likely to employ physicians straight from school rather than through acquisitions (with 60 percent of these respondents experiencing losses greater than $100,000), while 33 percent of respondents attained thier employed physicians primarily through the acquisition of existing groups (with 75 percent of these respondents reportng losses of $101,000-$200,000).

There has also been an increasing trend in employing specialists. And while practice losses are likely to be greater for specialists, they also provide higher revenues. The survey found that the physician specialties that best offset practice losses with increased hospital revenues were hematology/oncology, cardiology (invasive), cardiac/thoracic surgery, general surgery, neurosurgery, and orthopedics.

The survey also found that 30 percent of the responding organizations are participating in accountable care organizations (AC0) and 60 percent are either developing or have plans to develop a clinically integrated network (CIN).

Some key challenges

Compensation models —The most common compensation model used by the survey respondents is an RVU productivity-based method. Sixty-seven percent of the respondents use such a model, and 63 percent of those organizations reported losses of between $100,000 and $200,000 per physician per year.

Dean Dorton maintains that one way to meet the challenge of these operating losses is to utilize alternative arrangements with physicians. Over time, the report suggested, the use of alternative models such as professional service agreements, joint-operating agreements, and co-managements “may stem the tide from the increasing operating losses incurred from a direct employment model.”

Survey respondents also reported that a majority of their organizations are transitioning towards bundling physician compensation with metrics such as quality outcomes, patient satisfaction, and organizational goals. “We believe that this transition will guide improved future results,” the report stated.

Physician underperformance—As for the question of physician underperformance, survey respondents took courses of action that were fairly evenly spread among employment termination, reduced pay, changing the compensation model, and audit documentation. Annual physician losses weren’t a determining factor in which course of action these healthcare organizations took.

“The results lead us to conclude that this topic—underperformance—is a very difficult one for hospitals and\systems to address,” the report stated. “ There appears to be some discomfort in addressing this. We believe as integration continues to mature, that underperformance needs to be addressed consistently and directly.”

Physician leadership—According to the survey, 80 percent of respondents have added physician leadership to their systems’ executive and management teams as a way to better integrate physicians into their organizations.

And the survey results suggest this has been effective. The annual physician losses for these organizations range from as low as $0-$50,000 to $101,000-$200,000. On the other hand, for the other 20 percent, half have physician losses exceeding $200,000 and half have losses of $101,000-$200,000.

“While the benefit of integrating physicians in health systems would be in the efficiency and quality of care across the system, it is also interesting that physician practice losses are larger in organizations that keep physicians and hospitals somewhat separate,” the report stated.

The report concluded that while the survey confirmed a commitment to “building integrated networks as part of the transformation of the healthcare delivery system; it also highlighted the breadth and depth of challenges that must be faced.”

The losses on physician practices won’t be disappearing anytime soon, the report suggested, and are part of the overall cost of investing in systems of the future under healthcare reform. Initiatives such as including physician leadership within the healthcare system, developing ACOs and CINs, and incorporating quality, satisfaction and other metrics into compensation models are steps organizations can take to help effectively integrate physician groups into their systems.

Click here to see the full report, “The Challenges of Integrating Physician Group Operations.”