Cover Story
Long-running trend intensifies because of recession, reform fears
Methodist Medical Center of Peoria, Ill., and its cross-town rival, OSF St. Francis Medical Center, already employ most of the primary care physicians in their market. Now they're going after specialists. Michael Bryant, Methodist's president and CEO, believes that in five to seven years, "Most of the doctors in Peoria will be employed by either our system or St. Francis."
Something similar is happening in Greenville, S.C. Local hospitals are snapping up specialists, and for certain disciplines, they employ nearly every local physician. "There are no private-practice general surgeons left in Greenville County," notes Jerry Youkey, M.D., vice president of medical services and dean of academic services for Greenville Health System University Medical Center. Other specialties in which a majority of doctors work for hospitals, he says, include cardiac surgery, colorectal surgery, neurosurgery, endocrinology, pulmonology and some pediatric subspecialties.
Peoria and Greenville are extreme examples of this trend, but they're not alone. In Cleveland, for instance, most primary care physicians work for one of the two dominant systems‚ the Cleveland Clinic and University Hospitals‚ and few large specialty practices remain independent. According to a survey by the Center for Studying Health System Change, 68 percent of hospitals in 12 markets across the country employ specialists, and 84 percent of those hospitals increased specialist hiring from 2005 to 2007. Primary care recruitment leveled off in the majority of institutions surveyed.
Nationally, however, recruitment of primary care physicians continues to increase, and hospitals are part of that. In a 2008-2009 survey of physician recruitment by Merritt Hawkins & Associates, the most sought-after categories were family physicians, internists and hospitalists. But general surgery was right behind those fields, and Tommy Bohannon, Merritt Hawkins' senior director of recruiting and development training, says that other specialties are in hot demand, as well. One reason hospitals are hiring primary care doctors, he adds, is to "feed" their employed specialists.
Data from the Medical Group Management Association shows that hospital employment of physicians has shot up in the past several years. In a poll of practices with three or more doctors, the percentage that were hospital-owned increased from 24 percent in 2002 to nearly 50 percent in 2008. The percentage of physicians employed by hospitals jumped from 25 percent to 37 percent in the same period.
The HSC survey, conducted before the recession was officially declared, found that many hospitals were employing physicians to compete with other hospitals. Some were hiring specialists to direct profitable service lines. Others decided that it was more cost-effective to employ specialists than to pay them large per diems to be on call. Some hospitals recruited outside physicians to fill gaps in their staff, "or to compete with physicians who were uncooperative with hospital initiatives." In some cases, they bought out specialists who might have otherwise built competing ambulatory surgery centers or specialty hospitals. They also hired physicians to increase hospital leverage with health plans. And many said they had to employ physicians to gain their cooperation in pay-for-performance and quality reporting programs.
Observers say that in the economic downturn, these remain valid reasons for hiring physicians. Some also note that the employment of specialists helps hospitals protect their revenues by warding off competitors and by preventing the loss of key service lines.
In addition, the need for alignment with physicians is perceived as increasingly important partly because many hospital executives believe payment bundling—combined hospital and physician reimbursement, perhaps categorized by diagnosis—is on the horizon.
"When you look at health care reform, it's hard to improve the quality of care with independent physicians because their incentives are different than yours," Bryant explains. "And as you begin to talk about bundled payment rates and about paying for quality, the best way to [handle] that is for doctors to be employed or strongly contractually aligned with you, so that their interests and your interests are going in the same direction."
Some hospitals are trying to build relationships with physicians by offering them electronic health records or management services. But employment has advantages because of government regulations that erect barriers between hospitals and indepen¬?dent physicians. The Stark self-referral regulations and the antikickback law prohibit hospitals from telling doctors where to admit or refer patients. And the Department of Health & Human Services Office of Inspector General forbids gainsharing, in which hospitals share savings with independent doctors who practice efficiently (although the OIG has approved gainsharing initiatives on an individual basis). When physicians are employed, these sanctions don't apply.
Recent changes in the Stark rules also encourage hospitals to employ doctors. By prohibiting restrictive covenants in employment contracts and severely limiting the amount of practice expenses that hospitals could fund, the 2004 Stark II regulations made it nearly impossible for hospitals to recruit physicians into private practices. In 2008, the rules were tweaked again, relaxing the prohibition against covenants. But lawyers say it's still difficult for practices to bring new physicians in with hospitals' help. So if a hospital needs to augment its staff in a specialty area, it's a lot easier to hire those specialists directly.
Many institutions employ their own hospitalists, and some hospital executives believe they have more control over these physicians if they're employees. But Ron Greeno, M.D., founder and chief medical officer of Cogent Healthcare, a hospitalist company that contracts with hospitals, points out that employed hospitalists who are paid on production‚ charges and collections that they generate‚ are not aligned with hospitals that want to reduce costs.
In a number of cases, hospitalists are filling the void left by specialists who no longer practice in a hospital. "There are hospitalists all over the country who are finding they are the primary providers for acute stroke care because the neurologists no longer come to the hospital," says Greeno. But that's not necessarily an ideal situation because hospitalists are not as well trained as neurologists to deal with stroke patients or gastroenterologists to deal with digestive problems.
The majority of specialists recruited by hospitals are either recent residency and fellowship graduates or physicians who are relocating from other areas, notes Bohannon. While some physicians prefer to remain in an area where they have a patient base and personal roots, there is an increasing amount of fluidity in the recruiting market, he notes.
David Scroggins, a health care consultant based in Cincinnati, cites a pair of orthopedic surgeons who moved from Hawaii to Iowa because compensation was higher there. A recent MGMA survey found that experienced physicians were migrating to Texas and Florida, perhaps because those states have no income tax.
Young physicians are going to work for hospitals partly for lifestyle reasons, notes James Bentley, senior vice president of strategic policy planning, for the American Hospital Association. They don't want to start practices or buy into partnerships, and they prize the stability of hospital income because of their high medical school debt. The predictable schedules of hospital employment are attractive to doctors who are raising families‚ and that remains particularly true for women physicians. Scroggins notes that today about half of all physicians are women.
Hospitals offer slightly higher starting salaries than private practices do in every specialty except the primary care fields, according to the MGMA. That doesn't necessarily mean hospitals pay experienced physicians more than they would earn in private practice, but many doctors have other reasons for accepting hospital employment.
William Jessee, M.D., the MGMA's president and CEO, points out that the growth in specialist revenues has consistently fallen behind expense increases over the past several years. The recession has made private practice even more precarious. "The specialists are just reaching the end of their rope a little later than the primary care physicians did," he says. "And they're saying to themselves, Instead of worrying about this stuff, I'm just going to go to work for the hospital and let them worry about it.'"
There are other factors in the specialists' new receptivity to hospital overtures. In certain specialties and regions, malpractice insurance costs have become intolerable, notes Bentley. Ancillary services also are not producing the profits they used to. Meanwhile, the federal government is pressuring physicians to acquire expensive electronic heath record systems.
But most of all, specialists are nervous about the new world of health care, especially with federal reform legislation looming. So, while hospital employment of doctors has been increasing for a few years, it is gathering momentum as physicians contemplate the likelihood that the future will be nothing like the past.
Having overpaid for many primary care practices in the 1990s, hospitals are being careful now to pay reasonable prices for specialty practices. Also, many hospitals sustained brutal investment losses last year, and some have seen their debt downgraded by rating agencies, notes Frank Marshall, chief operating officer of MedSynergies, a revenue cycle management firm. So they are determined to break even, at least, on the specialty practices they purchase.
Some observers say that hospitals no longer pay for the goodwill, or intangible value, of a practice. Both Bryant of Methodist Medical Center and Youkey of Greenville Health System maintain they will pay only for a practice's hard assets, and then only if the hospital plans to use the equipment. But Jessee says he knows of cardiology practices that receive some consideration for goodwill in the sales they negotiate with hospitals.
Because of the Stark regulations and Internal Revenue Service rules, hospitals cannot pay more than fair-market value for practices, and they must also compensate employed physicians at fair-market value. The result is that if hospitals pay more for practices, doctors receive less in salary and bonuses afterward.
"There's a direct correlation between the income to be paid over the first few years and the resulting practice valuation," notes Robert Wade, a health care fraud and abuse attorney in South Bend, Ind.
It's a Stark violation for employed physicians to receive any of the technical, nonprofessional revenue generated by ancillary services. But if physicians work for a subsidiary of the hospital and the ancillary equipment is in their office, it might be permissible for the physicians to share in ancillary income, as long as their earnings are not based on the value of referrals, Wade says.
While some hospitals are willing to provide deferred compensation pension plans to physicians joining them from private practice, that's not the normal arrangement, Wade says. Usually, when doctors sell their practices, they have the option of joining whatever retirement plan the hospital offers to all of its employees.
Employment models vary. While many states have corporate practice of medicine laws, they're particularly strict in California and Texas, notes Robert Holmchick, a health care attorney in Seattle. In California, it's common for hospitals to employ physicians through nonprofit foundations. Elsewhere, some hospitals employ doctors directly, but the most popular model is to have them work for a hospital subsidiary. This captive professional corporation buys practice assets but not the practices themselves. One reason for that strategy, suggests consultant Michael La Penna of Grand Rapids, Mich., is to shield the hospital from any malpractice liability issues or audits related to what physicians did when they were in private practice.
A new variation on the subsidiary theme is known as the enterprise model. Used mainly where physicians are resistant to employment, the enterprise model lets doctors continue to own their practice, which sells their services to the hospital. That makes it easy for them to return to private practice, Wade notes, if the employment arrangement doesn't work out.
In the long run, observers say, most physicians will probably work for large organizations, whether those be hospitals, multispecialty groups or some combination of the two. Specialists will find it increasingly difficult to remain independent as their referral sources dry up, says Lawrence Casalino, M.D., chief of the division of outcomes and effectiveness research at Weill-Cornell Medical College in New York.
"If eight or nine years from now, most physicians worked for hospitals or large medical groups, it wouldn't surprise me," he says. "That could happen, and it could happen quicker than people think."
Ken Terry is a freelance writer in Fanwood, N.J.
This article 1st appeared in the September 2009 issue of HHN Magazine.
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