The Hospital Employment Shuffle

June 6, 2013

Hospitals make decisions in reaction to threats and trends, rather than broadly creating growth and opportunity. Physician network development is a prime example.

Students of history have always understood that nothing that happens is new.  If one looks back, everything has happened sometime before. This theory is particularly applicable to the business of healthcare in America, especially hospital administration. Hospitals, by virtue of their size and complexity, tend to make business decisions in reaction to threats and trends, rather than by broadly creating growth and opportunity. Nowhere is this more evident than with physician network development.

At one time, hospitals were able to keep physician referrals in line by offering stipends and country club memberships. Anti-kickback regulations put a kink in this mechanism. Physician group practices then evolved, absorbing ancillary service profits despite Stark regulations. Hospitals reacted to this trend by directly employing specialty physicians, particularly cardiologists, in an effort to secure their downstream revenue.

Managed care and physician practice management (PPM) companies became the next growth opportunity for hospital revenue by securing patient referrals from the source, primary-care physicians (PCPs). A feeding frenzy then ensued with PCPs selling their practices at a premium to either large scale practices or hospital systems. When Wall Street lost interest in supporting the PPM industry in the mid-90s and the hospital threat faded, the bottom fell out on the value of PCP practices and employment. The downward pressure on compensation to employed primary-care physicians accompanied upward pressure on productivity as the hospitals came to understand the truer cost of these employees. All of a sudden, the anticipated lifestyle advantage of hospital employment came to an end for those who needed to make a living.

Well, it’s simply happening again, as historians would say. Primary-care physician practices are being aggressively courted by merging hospital systems. This is in reaction to the accountable care organizations’ concept of capitation in the form of "managing health" and compensating "outcomes" rather than paying for services provided. This has forced hospitals to revisit their marketplaces, recognizing that enlarging their population base both geographically and demographically would be important to their survival and success. They are once again offering significant compensation packages to PCPs in their primary geographic area with favorable patient bases, as well as those in areas targeted for growth of the integrated healthcare system.

So, what can primary-care physicians learn from history? Will the past replicate itself in the future and, if so, when? Is it possible that this time it will be different and current physician employment terms will sustain?

If the past is any indication, then it is clear that the current trend is not sustainable. Hospital systems believe they own the downstream revenue from the services physicians prescribe. While they may temporarily accept the increased cost associated with physician employment as justified by their global value, ultimately someone will press back.  The terms of most employment contracts with hospitals are one year to three years, rarely more. After this time comes a renegotiation of terms, a process that has generated great conflict for many physicians and job relocation for some. As hospital revenues get further and further squeezed in the years to come, these phenomena will likely escalate.

With the increase in hospital mergers recently, some physicians have also been approached by neighboring hospital systems interested in expanding their normal geographic reach. They offer favorable terms to physicians in return for having their inpatient and outpatient services used by the physician’s patients. Where the hospitals are within the same marketplace this can work, but traditionally patients prefer to use nearby services. EMS goes to the local facility and the inconvenience of having to travel for imaging or labs becomes onerous for those who need to access the system regularly.  It’s one thing to travel to a tertiary center for unusual or life threatening disease; it’s another thing to have to travel a distance to have one’s cholesterol checked or to visit a hospitalized loved one daily.

Primary-care groups are often composed of both older physicians who may be facing retirement in the near term and younger physicians who are just getting started. The economic health of any group practice is based upon its ability to attract younger physicians. Often physician mergers/acquisitions are mediated by these senior physicians when it is the more junior physicians who will be impacted in the future.

Perhaps senior primary-care physicians with saturated practices should consider concierge care as an alternative to hospital employment to both ensure lifestyle while protecting the futures of the younger physicians in their practices?