Physician Employment 2.0

By Aaron DeBoer, Ryan Stattenfield and Anita N. Iyenger

There are many reasons physician employment will work better today than it did in the 1990s.


Aaron DeBoer	Ryan Stattenfield	Anita N. Iyenger

Recent data and anecdotal evidence point to a comeback: Physician employment by hospitals is increasing. The American Medical Association reports that the total number of physicians employed in community hospitals increased 24 percent between 2003 and 2007, while the number of physicians nationally increased only 8 percent. In addition, a recent survey by the Society for Healthcare Strategy and Market Development indicated that health care leaders across the nation believe the percentage of physicians on hospitals' active staffs who are employed will increase from 10 percent today to 25 percent by 2013.

The first wave of physician employment in the 1990s was a failure for many hospitals and health systems, and it caused a great deal of financial pain. So why is hospital employment of physicians making a comeback? Will it be more successful this time around? Is it indeed "physician employment 2.0," an upgrade from the version we saw in the 1990s?

Current Reasons for Physician Employment

The re-emergence of the employment trend is due to a variety of changes in the physician workforce, all enticing them to move under the hospital's umbrella.

Declining physician incomes. Employment models offer physicians the safety of guaranteed income in an environment where average physician income adjusted for inflation fell 7 percent between 1995 and 2003, and where recent CMS decisions have reduced payments to freestanding centers, which are often owned by physicians.

Changing physician demographics. Much has been written about the desire of younger physicians to work fewer hours for more predictable incomes. The entrepreneurial, "hang out your shingle" physician practice model is much less attractive to younger physicians than it was to their older colleagues. Escalating startup costs and high levels of student debt further dampen younger physicians' tolerance for risk.

Looming physician shortages. Anticipated shortages have created an environment where hospitals are very eager to "lock up" a referral base. Hospitals are faced with the decision between employing physicians and not having enough physicians on staff, particularly in certain specialties. Physicians are in a position to negotiate terms.

Increasing acceptance by hospitals and physicians. Significant growth of the hospitalist model, inpatient medicine and physicians actively seeking employment has collectively created an environment where physician employment is a common practice model.

Physician-hospital alignment. Health care reforms are incentivizing alignment. Hospitals and physicians need to align not only economically, but also on quality-of-care concerns.

Can hospital employment of physicians succeed this time around? Key differences in the structure of the employment relationship indicate why physician employment 2.0 is a true upgrade. Those differences are most reflected in the purchase price of physician practices, the hospital's approach to productivity management, the alignment of physician and hospital priorities, and organizational approaches to physician integration.

Why Physician Employment 1.0 Failed

Physician employment 1.0 failed for a number of reasons:

Purchase price. Last time, physician employment was driven by capitation and the desire to develop integrated health care delivery systems. Hospitals raced to purchase existing physician practices and build referral channels. The modus operandi was to purchase a physician practice after valuation and pay the physician a guaranteed income. In many instances, practices were overvalued, so hospitals paid an unwarranted premium to purchase them. Reports published by the Medical Group Management Association suggest that new practice owners realized losses in excess of $100,000 per employed physician.

Productivity management. Salary arrangements were focused on guarantees for physicians but often left hospitals unprotected. Many employment arrangements included no physician productivity incentives, and those that did often based a very small proportion of total compensation (5 to 10 percent) on physician productivity. As a result, many physicians spent less time seeing patients than they had in private practice, as their productivity incentives had little impact on their earnings.

Additionally, new physicians recruited into groups did not have incentives to bring new patients into a practice and often simply absorbed existing patients. Administrative difficulties also hurt physician productivity, as many practices experienced a bumpy transition to contracted billing and management services after acquisition. Few hospitals had expertise in physician practice management.

Aligning priorities. One of the greatest benefits of employing physicians is the opportunity to involve them in meaningful hospital decision-making. However, in the 1990s, few hospitals fully took advantage of this opportunity. Efforts to engage physicians concentrated on cost-cutting initiatives—a topic of limited interest to the physicians who were no longer practice owners but instead employees. Physicians perceived these as impingements on their professional autonomy. Worse, physicians often felt cost-cutting initiatives negatively impacted their patients.

Physician integration. "Don't upset the apple cart" was the physician acquisition motto of the 1990s, which often entailed letting those physician practices operate in a status quo, siloed fashion. Those organizations that tried to integrate multiple physician practices often found they did not have the internal expertise and/or were met with significant resistance from physicians. The decision by these organizations not to fully integrate their newly owned physician practices led to duplication of physician support services such as scheduling, billing, collections, etc., hindering the practices from providing the promised economies of scale and scope.

Why Physician Employment 2.0 is Different

Physician employment 2.0 is different in a number of ways:

Purchase price. Today, the practice of medicine is undergoing a generational shift. Baby boomer physicians are beginning to retire, and younger physicians do not want the risk and responsibility of owning medical practices. Younger physicians perceive that employment arrangements offer a better work-life balance. Hospitals have the opportunity to employ physicians without the hassle of purchasing practices, making purchase price essentially a moot point for these physicians. Hospitals that are purchasing practices are generally much more circumspect about practice valuation and growth projections when making offers to existing practices.

Productivity management. Productivity targets and incentives are also nearly a given this time around. These are built into contracts and represent a far larger portion of overall physician compensation, leading to a sharing of risk between the hospitals and physicians.

Additionally, data available from previous employment efforts are enabling hospitals and physicians to design "smarter" contracts. Examples of smarter incentives include both group and individual incentives, better calibrated productivity measurement (whether productivity is measured in patient volume, RVUs, gross charges, collections, etc.) and other measures designed to tightly align the hospital employer's goals with the physician's, such as quality outcomes. Hospitals that directly employ physicians have tighter control over productivity and tracking.

Aligning priorities. Today, in the most successful organizations, employed physicians are highly engaged in quality initiatives, instead of just cost-cutting efforts. Quality initiatives are common ground that both hospitals and physicians are passionate about. In addition, by finding this common ground, many organizations have been able to introduce those original cost-cutting initiatives with greater success.

Physician integration. The reason integration has a higher likelihood of success this time is part approach and part environment. Many organizations have learned from their previous actions and have developed approaches that more seamlessly integrate physician support services into newly acquired practices. Furthermore, many organizations are more selective about which practices they acquire. It is not unusual for organizations to pass on an acquisition that wouldn't be a "good cultural fit."

The environment has also changed for physicians. Running a physician practice is becoming ever more complicated. Aside from the typical business functions (billing, collections, scheduling, etc.), there are now a host of information technology issues to deal with. Many physician practices have realized they do not have the internal capabilities or financial resources to move toward an electronic health record environment. Many organizations have successfully leveraged their information technology capabilities to lure new physicians and further integrate previously acquired physician practices.

Keys to the Success of Physician Employment 2.0

If making good decisions truly does come from experience, the first wave of hospital employment can equip providers with the information they need to make better choices in physician employment 2.0. Employment of physicians (whether through practice purchase or direct employment) is a large investment to be carefully considered. By directly employing physicians, incorporating intelligent productivity incentives, pursuing alignment opportunities and ensuring physician integration, hospitals can avoid repeating past mistakes.

Aaron DeBoer, Ryan Stattenfield and Anita Iyenger are senior consultants at Noblis Health Innovation in Falls Church, Va.

This article 1st appeared on September 21, 2009 in HHN Magazine online site.

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