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The Boomerang Effect: Hospital Employment of Physicians Coming Back Around

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 By Steven A. Eisenberg

“Doc are you telling me you built a time machine . . . out of a Delorean?  The way I see it, if you’re gonna build a time machine into a car, why not do it with some style.”  Exchange between Dr. Emmett L. Brown and Marty McFly, Back to the Future.

 

For lawyers representing health care providers, there are days where we feel like we are getting into our Delorean, ready to take a trip back in time.  Why?  Because the landscape is looking very much like the mid-90s, where health care systems moved to employ as many physicians as possible in as much of a defensive mechanism rather than an offensive strategy.  But like Marty McFly learned when he traveled from 1985 to 1955 and back, hospitals, physicians and health care lawyers have learned that many things are different in 2008 as compared to the mid-90s.

The early proliferation of hospital-owned physician practices was prompted largely by two factors, one predominately rural and the other predominately urban. The first motivating factor was cost-based reimbursed rural health clinics in the late 1980’s.  Cost reimbursement largely transferred the fiscal risk associated with such ventures to the federal government until cost containment efforts began in the 1990’s. 

The second and much larger factor, was the attempt by hospital systems to control and expand their market share in the 1990’s.  Hospitals wanted to vertically and horizontally integrate health care service delivery in response to the “managed care” threat.  Hospitals largely assumed they would be able to improve profitability of physician practices based upon three assumptions: (a) physician practices were grossly mismanaged, (b) improved economies of scale that hospitals could bring to the table, and (c) hospitals had lower costs of capital, especially in the case of non-profit hospitals.

Many of the early generation hospital-owned physician practices, which included a large proportion of primary care physicians, resulted in substantial losses for hospitals and healthcare systems.  Losses were frequently in excess of $100,000 per employed physician.  As a result, many of the practices were divested by hospitals within a few short years of their acquisition, often accompanied by bitter litigation. 

However, the long-term trend, at present, again favors continued growth of hospital-owned physician practices.  The basic character of the acquisitions is changing, however.  Physicians and physician practices are being acquired by hospitals and integrated delivery systems where they have both a strategic need for the physicians in their communities and the sophistication to manage physicians, financially and culturally.  And the compensation models are changing.  Rather than large salaries and bonuses that were not supported (and in some cases could not be supported) by productivity, compensation is now more focused on both strategy and productivity.

What is the cause behind this trend?  And what in the acquisition has changed to avoid the pitfalls of earlier practice employment and acquisitions?  There are many drivers, the most important of which is that both physicians and hospitals need each other more than ever.

Physician Drivers

The new trend toward hospital employment of physicians is different from the 1990s, when physicians approached hospitals about employment opportunities rather than the reverse. Today, physicians are becoming increasingly interested in the employment model.  Many physicians, specialists in particular, are seeking hospital employment to relieve the stress of administrative duties and the general risks and hassles of private practice.  There are many drivers, including:

(1)           Reimbursement.  Reimbursement has become stagnant for both government and commercial payors.  For instance, in 2007, the Centers for Medicare and Medicaid Services proposed a 10%, across the board, cut to physician reimbursement.  At the last minute, in December, 2007, Congress acted to instead provide physicians with a 0.5% increase.  Reimbursement uncertainties make practice management very difficult for independent physician practices.  And the more recent trend of uninsured and underinsured is making this issue worse.  Additionally, because hospitals typically employ a greater number of physicians then a private practice employs, it may be able to negotiate better reimbursement rates.

(2)           Curbing Ancillary Revenue.  Potential decreases in ancillary revenue, expansion of the Stark Law limitations, and the need for costly equipment to provide those ancillary services.  While at the same time many of those same ancillary services, if provided in a provider-based setting, yield greater revenue (at least temporarily).

(3)           Rising Practice Expenses.  Health care insurance costs are rising between 5-10% annually.  Cost of living is increasing between 3-4% annually.  When reimbursement is only increasing by 0.5% annually, something has to give. 

(4)           Greater Need for Scale.  The expectations for electronic medical records are growing, yet most independent practices, both large and small, lack the resources and skills to implement electronic records.  When implemented at a physician’s office site of care, the value of the electronic record is not optimized for the patient if the electronic physician record is not connected to the broader information network that includes all sites of clinical care.  As reimbursement introduces pay-for-performance, an electronic medical record system may become a necessity.  Besides electronic medical records, scale provides great benefit in terms of coverage, back-office support, purchasing power and, most importantly, frees the physician to provide patient care rather than run the practice.

Hospital Drivers

Unlike the 1990s, which was driven by financials as much as anything, physician employment is now symbiotic. Hospitals are recruiting physicians for employment not just so their competitor does not employ the physician, but because of the benefit the physician provides to the hospital.  The factors supporting this interest include:

(1)           Demand.  Hospitals need to employ physicians to help them keep up with demand, especially in areas experiencing population decline or little population.  Nationally, we are facing a shortage of healthcare providers. From 1980 – 2000, the U.S. population grew by 24% while the number of U.S. medical school graduates only grew by 12%. Today, there are not enough openings to create the number of providers needed to meet the needs of the population and the aging of the population. Although the federal government is beginning to seek ways to address these facts, experts are still predicting that by 2020, there will be a deficit of 150,000 to 200,000 physicians. Shortages are expected in the areas of critical care, radiology, endocrinology, allergy and immunology, psychiatry, geriatrics, neurosurgery, anesthesiology, cardiology and gastroenterology.

(2)           Quality; Access.  Employing physicians allows for a greater ability to control quality.  Current regulations make it very difficult to pay for quality improvement.  It is almost impossible to get an appraiser to value quality improvement.  Current programs value quality only as an afterthought.  Appraisers typically compare physician management contracts to standard management contracts to calculate fair market value.    Also, employment allows a hospital to ensure access to specialties where there is a critical shortage, such as neonatology.

(3)           Financial Improvement. Aligning incentives should produce improved financial performance for the hospitals.  Having physicians who have a vested interest in the financial performance of their hospital product line and the management clout to make changes should cause substantial positive impact on the bottom line.  The improvements should come from more judicious use of hospital recourses, reduction in duplication of services and the provision of services in the location that will yield the best reimbursement.

(4)           Specialist Trends.  Hospitals are being much more deliberative in their hiring of physicians, hiring specialists needed to balance medical staffs and meet community needs.  In the early 1990s hospitals focused on employing primary care physicians to meet managed care demands, as opposed to recognizing and promoting the synergies between the hospital and hospital using physicians.  The general shift to a more balanced complement of physicians, together with more rational compensation structures not linked to capitation payments, has allowed hospitals to reduce the loss on employed physicians from approximately $100,000 per annum per physician to $20,000 to $40,000 per annum per physician. It also makes it easier for the hospital to have the necessary call available to the community. 

Models

The compensation models used now differ greatly from the models used previously.  In the 90s, the physicians often profited from both the sale of the practice business and a compensation model that provided a high fixed compensation for a number of years.  Hospitals incurred losses and became frustrated with this model, because they were never able to recoup enough of their investment to justify the initial purchase.  Today, hospitals are employing physicians much more conservatively. 

The traditional hospital employment model in the mid-90s involved a 5-year income guaranty.  Today, the guaranty length is also much shorter, potentially just a year.  Instead, hospitals and physicians have moved to a more aligned model, using a combination of guaranty and productivity bonuses and, where appropriate, subsidies for mission-based practices.

Additionally, some operating models are different.  Whereas hospitals used to employ all physicians in a single entity, today the employed physicians often have significant input on the employer’s governance and providing significant operational controls.  In some structures, the hospital leases the existing practice’s space, equipment and employees, which provides the physicians who are becoming employees both an income stream and some comfort if the physicians want to separate employment. 

One thing is clear, hospitals and physicians have many options with respect to compensation and operational models, as critical thought should be given to what model will best allow them to achieve goals. 

Will It Work?

Only time will tell whether the new breed of physician employment will succeed.  It is clear that the relationship between physicians and hospitals has changed, with external factors other than competition and compensation supporting the employment relationship.  Also, counsel are approaching these relationship much differently, greatly streamlining the transaction process.  Let’s just hope the flux capacitor does not malfunction. 

Mr. Eisenberg is an attorney on the Health Care Industry Team of Baker Hostetler.

6 comments

  1. In our rural community almost all the physicians are hospital employees (145). Only a few private practicing physicians remain. It is a development that in my view has had a negative impact on the community and the doctors.

    It has concentrated enormous power in one organization which leads to many abuses. -It has driven taxpaying private businesses out which complete with its many enterprises. -It controls the healthcare market since its employees are obligated to refer within.
    -It has taken over $36 million of private property off the tax roles costing the county $2 million in taxes. -Since the hospital sets doctor fees, it is legal form of price fixing. -It has restricted choice to the consumer. -It has little cost restrains since it owns the entire market. -Since it is private non-profit it has no reporting requirements except Form 990s that are 18 months old.-Doctors are easily fired for simply disagreeing with managment.

  2. I have represented physicians concerning medical professional liability insurance purchase, claims management, risk management and related issues for 28-plus years.

    In addition to the prudent issues posted in responses to “The Boomerang Effect: Hospital Employment of Physicians Coming Back Around”, one absent matter is transfer of medical negligence protection and claims/litigation management to hospitals, including, but not limited to: consent to settlement; NPDB reporting consequences of settlements; selection of defense counsel; potential waiver of affirmative defenses against hospital-employed medical personnel guilty of medical negligence; absence of commercially purchased medical professional liability insurance coverage benefits like punitive damage coverage/defense; defense expense reimbursement; defense of HIPPA, Medicaid/Medicare alleged Fraud; defense of allegations of malfeasance outside the purview of normal “malpractice” allegations; defense of medical licensure disciplinary or similar hearings; coverage for outside “peer review” committee activities; specialty-specific risk management expertise; and of course what is the financial viability of the hospital’s “coverage”? Will hospital protection/coverage be available years into the future if a patient institutes a claim against the practitioner? And, as occurred in the mid-90’s when hospitals terminated physician employment relationships, will these physicians re-entering the commercial malpractice marketplace be eligible for coverage?

    I have seen many a hospital “…throw a physician under the bus…” in defending medical negligence claims. I don’t expect this trend to abate simply because the physician now works for the hospital.

    Profit at the expense of patients and physicians.

  3. This trend is deeply disturbing to me. In my area a very large non-profit hospital system has gone on a hiring binge over the past 3 years and now has 200 physicians employed by its wholly owned subsidiary and some directly employed. My concerns are these:
    1. While described as a multispecialty group, the physicians are placed in 90 practice loactions in the metro area. Each practice is given a different name and presented and advertised as if they were private practices. Patients have absolutely no idea they are IN the system which refers to itself. To me, that is dishonest and takes away the patients’ ability to make an informed choice, both initially and in subsequent referrals. The patient doesn’t know they are being referred from one system physician to another.
    2. Referring in system bypasses some of the best specialists we have. To test the system, I called the hospital physician referral line where all physicians with staff privileges are listed. I asked for a breast surgeon. I was given 5 names, ALL of whom were employed by the hospital system and all of whom were less experienced than the best know breast specialists in the same building, next door and in-between the two locations. These surgeons have loyally supported the hospital for years and are supposedly part of their consulting breast care team. The referral was made in the interest of the corporation, not in the interest of me, the patient.
    3. Statistics from the state show clearly the decline in volume of private surgeons and the rise of employed surgeon volume. Because there is no real need to hire surgeons and many of the other physicians it hires, no increased demand, no increase in population, no wait times for physicians, it is inevitable that as patients are steered to system physicians, it damages private practices.
    4. Patient steering of clueless patients allowed a completely unknown surgeon brought from out of state, placed in a building where there was already a successful surgeon, to surpass every breast surgeon in the metro area in volume of outpatient procedures in just 3 months. That was 2 years ago and now she regularly does double what some of our best private practice surgeons do. That kills private practice, the ability of a patient to choose someone outside a self-serving system seeking more revenue and market share, and prohibits new independent surgeons from establishing practices here because they could never compete with the system.
    I think there are major ethical issues with systems like the one we have and it astonishes me that no one in the medical or legal community seems to blink an eye. It concerns me just as much that the medical and legal community don’t seem to see or care. As patients we are having the wool pulled over our eyes, our choice compromised and decisions to send us to physicians in the system instead of those that are truly the best for us. And as for our best surgeons and physicians. . . .it’s just a matter of time before we don’t have them or much choice anymore.

  4. richard goldstein

    If the hospital needs you badly enough, your contract will be negotiable. If they don’t need you, then they won’t need you in the future either, and you will be expendable. If a physician goes this route, they must understand the hard realities of relocating a medical practice. Their contract must protect them: No restrictive covenants (unless counter-balanced by multiple six-figure severance packages), notification of at least one-year of non-renewal of contract, specified practice setting, benefits package identical to CEO’s package, specified grounds for termination with definitions of those grounds, occurrence type malpractice insurance (or an agreement that they will pay for tail-coverage under all circumstances) and unambiguous salary and clearly defined productivity bonus clauses. The contract should not bind the physician to performing any non-remunerative tasks that would serve to degrade her “productivity” and thus adversely affect her chances at a bonus. If the hospital doesn’t come close to this, don’t go there-you’ll only be leaving again in a few years. You will want your contract to specify a minimum level of staffing for your practice. Since the hospital will be biling and coding, but using your name, you must be indemnified against any penalties assessed by CMS or other agencies/organizations. Everybody is happy working for the hospital in the beginning. The bitter divorce rate is high as physicians usually seem to wind up feeling cheated as the hospital gets the authority and the money while the physician is left with the responsibility.

  5. Sir:

    I retired from the practice of Orthopaedic Surgery at a relatively young age because of the legal and economic climate that you are describing. Subsequently, I have been serving on a Board with my local not for profit hospitalto build an integrated health care system for the community. Over the last couple of years, I have interviewed many young physicians entering the work environment and almost none of the are interested in the “private practice of medicine” The general trend is to help them relocate, help service their debt-load, and provvide a good working environment. In the long run it creates a better environment in the physician-patient relationship than a practice where the practioners generate income from MRI scans, Physical therapy, facility fee for Amb. Surgery,all of which cause a conflict of interest in the present system and encourage excess utilazation for profit.

    Sincerely,
    John SamsellMD

  6. The problem is that hospitals have an agenda.
    There agenda is to make money, even the non-for-profits.
    As soon as it benefits the hospital to change to another doctor, because of any issue, they will do it and fire the doctor.
    For people who don’t mind moving during their careers, this is a possible option.
    For people who want to establish long term roots, signing something over as important as your autonomy is short sided for temporary gains. Physicians need to think this through. The younger generation likes this model, because they don’t want to take much call or work long hours. The older generation is tired of doing most of the work, and watching hospitals reward the young docs they hire for doing little work. That is why there is a temporary trend in hiring by hospitals. But when hospitals figure out it is very costly to hire young docs, and old docs figure out the hospitals will change the terms at any point, it will cycle back to private practice again…When physicians become employees, they lose the ability to price their time and hospitals control this last bit of autonomy, our time…sure they are singing you on now…one year contact, ha!!!!!

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