Is Bigger Better in Healthcare?

July 28, 2016

Physicians continue to merge with larger groups to gain economies of scale and offload administrative burdens, but often, professional satisfaction wanes.

More and more physicians have sold their practices, merged, or become part of a larger group - many of which are associated with a hospital system. You may have done so already. It is reported that the number of physicians who are independent went from 57 percent of all practices in 2000 to 37 percent in 2013 and will drop further to 33 percent by the end of 2016.

Our experience with physicians and physician groups point to a few motivations: First, there is a need to get rid of the management burdens that are taking physicians away from being doctors and turning them into small-business people with big headaches. Second, the pressure on revenue is squeezing the income of many physicians as reimbursements are not sufficient to make up for the growing costs of practice. Third, there is a continuing burden with information systems and the changing government regulations. Finally, there is a market for purchasing primary care and some specialty care practices driven by the growing vertically integrated delivery-system approach to Medicare.

One of the largest motivators continues to be the fact that the reimbursement rates are still better for larger groups than for smaller ones in this country. They negotiate better rates that are supported by government plans and regulations. In fact, government programs are starting to favor integrated larger groups.

But is bigger better?

Many physicians experience an increase in income when they join a group. But in many cases, the opportunity to earn more is only short lived. Guarantees can disappear after the initial contracted term of employment ends. Then what?

More overall income also does not come without some additional administrative burdens. Now there is greater pressure on the physician to use the resources that are captured as a part of the vertical structure of the group, like labs, ancillary services, and specialty referrals.  Decisions move further and further away from the doctor, as he is expected to "stay home" within the group.

The physician may have the idea that by becoming an employee, he is free of the business end of medicine and can become purely a provider of medical services. But while a change in his business environment will eliminate some frustrations, it will add a different set of frustrations.

Having worked with hundreds of physicians over the last decade, we have noticed that the enthusiasm of physicians who moved from smaller independent groups to larger entities tends to wane. Before long, most of those who made the move stopped experiencing the satisfaction they so eagerly anticipated.

This does not mean that physicians should not make the decision to aggregate. Given the new rules of the game, "larger" can work better than "smaller."  But for how long?  From our experience, the benefit of larger over smaller will not be long term. It is natural for the delivery system to morph as a result of external changes, but the days of advantageous payments to larger entities will inevitably disappear. And when there are just a few, dominant delivery systems in a geographical area, not only will patient choices be more limited, but physician opportunities will thin out as well. So, is bigger better in the long run? We certainly will see.

There are alternatives in consumer driven healthcare that can help balance the business demands practices face and physicians should be sure to explore all their options before they make important business decisions.