Gregory Mertz

The Medical Group Management Association reports that more than 50 percent of physicians are now employed by organizations affiliated with health systems. In some specialties, like cardiology, that is closer to 75 percent. Given the rapid increase in the number of physicians that have chosen this model does that mean this is the right choice? Are there alternatives? How do you decide?

Like everything else there are both pros and cons associated with employment. Briefly they are:

Pros and Cons

So how do you decide if it is right for you? Use the points below to help make the right decision.

 - Take time to talk with physicians that are currently employed, especially those that were in private practice. Learn about what works and what doesn’t. Would they make the same decision today?

Does your view of the future agree with the hospital?

 - The healthcare system is about to undergo a major change in incentives. Are you thinking the same as the hospital and, if not, what impact will that have on your practice style?

 - How secure is their current offer? What will they use to determine compensation if they move away from production? If you derived a significant portion of income from ancillary services what will they do if payers decrease payments for those services?

- What if you decide the arrangement isn’t right for you? They likely own the staff and furniture. Do you have to start over? Can you return to the starting point at some pre-arranged price? Is there a non-compete?

 - If you plan to retire over the next few years this might be a way to get paid for furniture and medical records that might not be possible otherwise. Very few physicians are buying the practice of other physicians.

My experience is that your ability to negotiate is very different if you approached them or they approached you. Regardless, don’t assume any deal is "take it or leave it," especially if you are in primary care. Hospital deals are constrained by "fair market value" rules and most systems will use an outside consultant to craft the offer (I know, because I’ve done this). Remember that the consultant is paid by the hospital and not you. Guess where the loyalty sits?

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What physicians should consider when choosing their path. 

The pros and cons of private practice versus hospital employment

The responses to surveys of senior hospital leadership reveal that 

, along with financial challenges. Not surprising, the two are actually linked. A term that is commonly used to describe this bonding process is "alignment." While hospitals have some clear goals for the alignment process, are they the same for the physicians they hope to align with and, beyond that, are the goals of physicians even remotely the same as that of the hospital? Complicate this further by introducing market initiatives of commercial and public payers. So where is this headed?

Gaining the cooperation of physicians in addressing issues such as care cost, quality, and efficiency is critical to hospital survival. A national consulting company I spoke with is advising its clients that cost reductions of 15 percent to 25 percent are needed to survive in the value-based environment. Changing vendors to get a better price on surgical sponges is not going to achieve that goal. Physician leadership in standardizing care, improving outcomes, and better managing the care process will.

Clearly cost is not the only important issue. A growing number of payers, led by CMS, are linking payments to quality measures and patient satisfaction. An active and focused medical staff is key to meeting these challenges as well.

The only thing certain in this environment is uncertainty. What, then, are the forces that will influence the future relationship of hospitals and physicians and what are the likely outcomes?

Hospital employment of physicians will increase

This is certainly not a surprise. Repeated surveys of physicians find that both young and old physicians simply do not find private practice attractive. Issues such as financial stability, quality of life, and size of paycheck are all part of this shift away from entrepreneurial medicine.

As hospitals increase the number and mix of employed physicians, they often end up competing with private physicians in their market and, at some point, these physicians will explore ways to return the favor.

These terms are not interchangeable. Simply because a physician is on the payroll does not mean that they will be a positive partner in achieving the cost reduction and quality improvement goals of the hospital. It is likely that some of those community physicians have the interests and skills needed and are the same ones that are being alienated by the employment process.

Physician care management sophistication will increase

The transition from volume to value will take time and it is still unclear what care models will survive the current exploratory process but the shift will take place. The market is demanding a better return for their care investment and the dollars will drive the shift. As this happens and incentives change, physicians will quickly refine their approach to patient care to support this change.

Physicians have always understood that they are the ones that drive hospital revenue through admissions, orders for ancillary services, and the introduction of new services. Regulations prevented them from directly benefiting from this support. Not so with care management. They will expect to share in cost reductions and quality improvements. Hospitals will not only need to reduce their operating costs but will need to factor in the share of revenue that will need to go to the physicians that drive that improvement.

Payers will seek to destabilize the hospital/physician partnerships

Both public and private payers realize that they need physicians as partners if they are to achieve the financial goals that customers, and the federal government, require. Commercial payers are already providing financial incentives for the use of freestanding imaging and ambulatory surgery centers and are directly informing their members about the cost advantages of these care settings.

In some markets, these payers are forming partnerships directly with physician organizations that are not hospital-affiliated. This model has proven very effective in cost management in markets such as California for many years. Hospitals become vendors to the care partnership rather than a dominant player.

Care management incentives will make private practice more attractive and reverse the hospital employment trend.

Innovative hospitals will make physicians true partners

Hospitals that understand they need to engage physicians in the redesign of the care process and the management of supply and labor costs will create joint ventures around service lines that provide a gain-share relationship with clear quality management goals. Physicians that do not buy into this process, employed or not, may find themselves looking for other opportunities.

The strength and value of this approach can be seen in many of the dominant health systems nationally. The Geisinger, Mayo, and Cleveland systems are good examples.

"Wait and see" might mean "get left behind"

Hospitals, physicians, and payers will continue to experiment with payment and delivery models as all three try and find the formula that provides the best care at the best price. The departure of many of the original Pioneer ACO sponsors demonstrates that not all of the models will have sustainability. What is clear, however, is that the role of the physician will be central to the success of any model. If hospitals don’t create collaborative environments for innovative physicians, payers will. If physicians don’t embrace the need to work together in care redesign and cost reduction, hospitals will find some that will. Payers will use the carrot and stick approach with their dollars to drive the changes that are needed to lower the total spend on care. Providers that respond to those incentives will do well financially and those that resist will find the future very challenging.

At the least, markets need to identify thought leaders from all three interest groups and begin a meaningful dialogue on how they can, together, achieve the goals required to thrive in the evolving care environment.

Here are six key forces that will influence the future relationship of hospitals and physicians and their likely outcomes.

The Future of Hospital-Physician Relationships

When hospital CEOs are surveyed about their major concerns, relationships with physicians always appears close to the top, along with concerns about financial viability. Since the care decisions made by physicians related to hospital-based care influences institutional operating costs, maybe these two concerns are really just one: how to engage physicians in addressing hospital issues.

Similar surveys that address alignment models reveal that the top reported option is physician employment. A 2013 survey conducted by HealthLeaders 

("Physician Alignment in the Shared Risk Environment,"

 Sept. 2013) found that 87 percent of CEOs expected employment rates to increase in the years ahead.

It seems clear, at least in the minds of hospital leadership, that the path to alignment is through employment. Put physicians on the payroll and alignment will be yours. Is this true? What is the goal of alignment beyond employment and is are there other ways to engage physicians? Another question should be: "What's in it for the physician?"

Curiously, I can find no surveys of physicians related to what they want out of the alignment process. It would seem, then, that the alignment process is really a hospital-centric process. The 

 asked about what were the expected outcomes of alignment. The results seem to support this theory:

• Improve clinical and financial performance: 68 percent

• Physician buy-in to quality initiatives: 56 percent

• Engage physician in care redesign: 45 percent

Only 23 percent reported that supporting physicians was an expected benefit.     

A major national hospital consulting company is advising their clients that operating costs will need to be reduced by 15 percent to 25 percent to assure continued viability in the value environment. This isn't going to be achieved by simply reducing the cost of surgical sponges. Physicians are the drivers of the cost and are the major partner needed to reduce those costs. If hospital costs go down and margins improve do physicians benefit? Perhaps not directly.

Years ago there was a financial model that was quickly attacked by federal regulators called "gain share." This process would have allowed physicians to directly benefit from the cost reductions that they were able to achieve. The feds called this "pay-for-referrals" and prosecuted when they found the opportunity. That has now evolved to "co-management" and adding a quality component has resulted in a federal blessing. Physicians should insist that their efforts be tied to some model that will benefit both the hospital and the physicians.

I've written before about excellent physicians that truly enjoy private practice and have no desire or intent to be on hospital payrolls. If hospital leadership assumes that control or beneficial outcomes can only be achieved through the paycheck then, it would seem, there is the potential for lost opportunity.

While the allure of a regular paycheck is certainly attractive to many physicians, innovative hospitals need to develop alternatives so that they can engage the private community. Programs like co-management and risk-friendly physician-hospital organizations allow hospitals to share the financial benefit that results from engaging physicians in the alignment goals listed above. While it is possible that some CEOs will perceive this revenue sharing as an example of greedy physicians it is really recognition that, without the active and creative support of talented physicians, the hospital will not get where the consulting company suggests they need to be.

The redesign of the care process and foundational changes to the financial model of care are not experiments that will pass into history. How we do it might be open to debate but the fact that we need to do it is a given. All value-based care models, like accountable care organizations, tie incentives to reduced cost and improved quality and those can only be achieved through the efforts of physicians. It is time hospital CEOs recognize this critical role.

My experience is that alignment discussions are initiated by hospitals. They develop the model, perhaps with the help of that consulting company, and present it to physicians; occasionally, as a take-it-or-else option. I recently met with a group of physicians that indicated the local health systems, rather than engage them in discussions, simply increased their employment efforts. Recruiting physicians from outside the market and increasing competition. Partnering with the local physicians, in a collaborative financial model, would help the hospital attain their goal while strengthening the financial health of their voluntary staff.

Physicians, at least those who find private practice an attractive option, should begin to develop their own proposals and present those to hospital leaders. Perhaps the outcomes will be more physician-friendly.

Physicians, at least those who find private practice attractive, should develop proposals and present those to hospital leaders when it comes to partnerships.

The True Meaning of Physician Alignment

If you have a LinkedIn account, you may have seen an article by Ken Alston, president of MedVision (a revenue cycle management company) that discussed 

 While the author neither supported nor rejected the premise in the title, he did suggest that recent federal payment reform efforts favored the larger physician organization. He did, however, point to the high number of very small practices in the California market that seem to survive a heavily managed care environment.

While I agree with the idea that there will always be a place in the healthcare environment for small physician practices, I question the use of California as support for the prediction of survival. While it is true that California is a very mature managed care environment and there are a very large number of small (less than four physicians) practices, a closer look would find that those small practices have banded together into large, and in some cases very large, practice networks or Independent Practice Associations (IPAs). These networks have sophisticated data networks, are clinically integrated, and manage the flow of patient care revenue in ways that reward cost-effective care. The size of the organization allows them to deal directly with payers and treat hospitals as vendors rather than partners.

Recently, a national insurer contacted me to help them identify similar physician networks, not affiliated with hospital systems, in key markets they had targeted for expansion. They believed that the California-style networks would have the best chance of managing the cost of care because the member physicians had no loyalty to any hospital or any incentives to utilize the more expensive care settings.

While Alston avoided predictions about the future of small practices, I’d like to weigh in with some ideas about what will, and will not, impact those practices:

• Small practices will continue to be the backbone of medical care in rural settings and in those specialties that either provide care on a cash basis (plastic surgery, laser vision correction, etc.) or those that are underrepresented in a market (i.e. neurosurgery, general surgery).

• Small practices that do not meet the profile above will lose any ability to negotiate rates with payers.

• As costs rise and reimbursement remains flat, the incentive to join hospital system networks will become critical.

• The demise of the small practice can be avoided through the development of either clinically integrated practice networks or the development of flexible merger models such as groups without walls.

• Even small groups need to look beyond the fee-for-service mentality of "do more, make more" and embrace patient management and cost-effective care. Historic investments in EHRs can pay dividends in supporting these initiatives.

CMS reported that the fasted growing alternative payment model is bundled payments. Under this model, a lump sum is paid to the sponsor of the program and they divide the money among care providers, including hospitals. Early adopters of this approach were hospitals who then got to influence how the money is paid and that included physicians. Again, the small practice will have limited bargaining power in this setting. If physicians were the sponsor, like the California examples, they would purchase needed services from the hospital without caring what it cost the hospital to deliver the service.

So what's the bottom line message? Physicians that want to remain in private practice need to be exploring collaborative models that will allow them to move up the financial food chain. This can’t wait until tomorrow because the speed with which payment models are evolving will eliminate the fence-sitters from playing a meaningful role in care management. While reports of the death of small practices are premature it is possible that critical care will be necessary unless those practices are open to the development of new and innovative relationships with their colleagues.

Physicians in small practice need to explore how they can survive in a changing financial environment.