Physician Employment by Hospitals

The stock of American doctors may be reaching an all-time high as hospitals across the nation scramble to acquire physician practices in what has become the latest wave of provider consolidation. Yet it remains to be seen whether this trend will produce any real improvement in our dysfunctional health system, or simply mark a painful and costly repeat of past missteps.

We’ve Been Down this Road Before:

The last great push to integrate physicians and hospitals occurred in the early 1990s, when capitation was momentarily in vogue as a method of reimbursing health care providers. Under capitation, providers received a fixed, per-member, per-month payment to provide all the care that enrollees required. Primary care physicians emerged as the gatekeepers in this model, since they largely determined the type and volume of care patients received. Hospitals executives concluded that controlling primary care physicians would allow them to control and direct the flow of patients to expensive services and specialists. Whereas providers in the past had always been rewarded for providing more services, now capitation rewarded them for providing less.

But hospitals forgot to account for patient preferences, and it didn’t take long for consumers to vigorously reject the idea of gatekeepers limiting their access to medical services. Capitation quickly died an ugly death and the value of primary care physicians plummeted. Hospital executives subsequently found themselves working feverishly to extricate their organizations from often costly physician employment agreements.

What’s Different About Today’s Healthcare Environment?

After such a painful and embarrassing miscalculation, one has to wonder why hospitals are once again competing so relentlessly to see who can employ the most doctors. What has changed in the American health care landscape to cause hospitals to add millions of dollars in expense to employ their medical staff? Perhaps more importantly, what does this powerful trend portend for the patient?

From the hospitals’ perspective, four primary factors are driving physician employment today: First, by employing a wide array of physicians, hospitals hope to create a closed system that allows for all of a patient’s needs to be managed by employed doctors, thus stemming “leakage” to competing providers. Second, hospitals can gain a tremendous market advantage by locking in the premier specialists in a market. Third, as the breadth of the hospital or health system’s network increases, so too does its clout when negotiating with payers. And fourth, once a physician is employed, the hospital no longer needs to compete with him or her for the lucrative revenue associated with delivering many office-based procedures.

Physicians, too, have concluded that there is much to be gained by abandoning private practice. Medicine has become enormously complex, both from a clinical perspective and also in terms of managing regulations and payer requirements day to day. In addition, physicians that wish to remain compliant and competitive must make substantial investments in electronic medical records and other technology.   Reimbursement continues to be ratcheted down by both the federal government and private payers. The result is that practices find it increasingly difficult to maintain historic levels of cash flow and compensation.

So Why is Physician Employment a “Bad” Thing?

So if consolidation works for hospitals and physicians alike, why should patients be concerned about the employment status of their doctors? Most significantly, it signals the further progression of our health system from one driven by the needs of the patient to one focused primarily on profit. Physicians who were once the overseers of this system and protectors of its core values increasingly are pawns leveraged to benefit the bottom line.

Experience has shown that once physicians are employed, they’re under pressure to produce. One of the major problems surrounding the first wave of physician employment in the 1990s was that once physicians were guaranteed a salary, they simply started working less. Productivity and profit fell, and some hospitals experienced catastrophic losses. Today’s employment agreements are designed to mitigate that risk for hospitals by tying compensation to productivity standards. Yet the practical effect of these agreements can be to incentivize churning of patients. According to Marty Makary, M.D., surgeon and associate professor of health policy at Johns Hopkins, “One doctor I know received an e-mail from his department head that read: `As we approach the end of the fiscal year, try to do more operations. Your productivity will be used to determine your bonus.’”

There also is clear evidence that hospital-employed physicians are being pressured to limit referrals only to other employed physicians within their system. Referral decisions should be predicated on objective information and not coerced due to employment obligations.

By employing physicians, hospitals and health system gain more clout when negotiating rates. That means rates charged to payers and ultimately to patients could continue to rise. Hence, employers should be every bit as concerned about provider consolidation as the employees they cover with health benefits.

And because physician employment enhances the viability of some facilities, it inevitably impairs the competitive stance of others. As such, it accelerates hospital consolidation within the market and further reduces the number of options available to consumers over time. As consolidation occurs and markets become oligopolistic, hospitals are free to charge even more.

We cannot easily turn back the clock on physician employment, but we can acknowledge the tremendous cost that may ultimately result from this trend. We can also mourn the loss of independence among the former stewards of the industry.


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