At a Glance

  • Physician employment is here to stay. The challenge for healthcare finance professionals is to make physician relationships work without the financial losses experienced by hospitals that tried physician employment in the past.
  • Capturing market share should be a key strategy in any physician employment effort.
  • Physicians who are engaged and actively involved in the process make great business partners because they understand the productivity, efficiencies, and cost controls needed to succeed.

Physician employment has fallen in and out of favor with hospital executives over the past three decades. Today, most hospitals find they have little choice but to offer an employment option to entice physicians.

The good news: As it turns out, physician employment was not a failed strategy in the 1980s and 1990s, as so many thought it was. It was just poorly implemented. 

The bad news: Unfortunately, many hospital executives and employed physicians are making the same implementation mistakes committed by their predecessors. Losses on hospital-owned practices are approaching $175,000 per physician per year, according to a 2012 report by MGMA-ACMPE (MGMA Cost Survey: 2012 Report Based on 2011 Data, September 2012). 

Healthcare finance leaders cannot afford to make those mistakes in today’s climate.

Then and Now

In the late 1990s, after more than a decade of hospitals owning medical practices, the average reported loss per hospital-employed physician was slightly more than $80,000 per year. 

Most of the employed physicians were primary care specialists hired as “gatekeepers” to control utilization in the anticipated world of capitation. By the end of the decade, however, the threat of risk-based payment for a specific patient population had not materialized in most markets, and many considered physician employment to be a failed integration strategy or at least no longer necessary. 

Some hospital executives divested their practices, while others tabled any further investment. A few understood the connection between primary care and market share and continued to pursue their primary care employment strategy. 

Just a few years later, physician employment was back as a broadly accepted integration approach. In the early 2000s, the focus was on subspecialty practices, particularly procedure-oriented specialties. Employing surgeons to build or preserve service lines became a common strategy. Often, this approach was simply an extension of the “build it and they will come” model all too frequently employed by hospital executives with little thought about capturing market share and actively attracting referrals. 

Because surgeons do not hold market share, they could not guarantee a flow of referrals coming from primary care physicians. Some of these very expensive subspecialty resources sat “twiddling their thumbs” as wiser acute care competitors employed primary care physicians.

Today, most hospitals are forced to offer a physician employment option just to recruit new primary care and subspecialty physicians coming out of training programs. Many hospital CEOs also have been approached by established physicians seeking an exit strategy from independent practice as payment levels continue to decline and risks of independent practice increase with healthcare reform. 

Even medium and large multispecialty groups want to more closely affiliate with hospital partners today, particularly with senior physicians approaching retirement and younger physicians preferring the safety of employment over entrepreneurship.

The Fallacy of Downstream Revenue

The tendency for senior executives to ignore losses on hospital-owned medical practices—many of which used to be financially viable private practices—in the name of downstream revenues would be considered ludicrous in most other business settings. 

Downstream revenue often becomes an excuse to justify inadequate negotiation and “bad deals” between hospitals and medical practices. It also is often used to justify poor operating performance.

Losses caused by low physician productivity, excessive physician compensation, poor coding practices, inadequate revenue cycle management, high facilities expense, and more—all in the name of downstream revenues—simply can’t be sustained in today’s climate. 

Lack of accountability also frustrates independent physicians and deprives employed physicians of incentives to achieving private-practice levels of productivity, which they might have achieved if allowed, engaged, and expected to do so. 

In many cases, downstream revenues are the same revenues previously enjoyed by acute care hospitals before owning the practices and incurring the additional operating losses. In some settings, the operating loss on hospital-owned practices exceeds the capital generated from all sources in the acute care setting, threatening the financial viability of the entire integrated system.

Certainly, anticipated downstream revenue or referrals are legitimate measures to support medical staff development planning. In preparation for healthcare reform, increasingly sophisticated medical staff planning starts with the placement of primary care physicians to capture market share, and then builds specialty capacity based on the anticipated primary care physician referrals and the resulting revenue. Such planning shifts from the “heads in beds” model of the past toward a population health management approach. 

When contemplating what should be deemed acceptable performance for hospital-owned medical practices, healthcare senior executives should keep in mind that controlling market share is a more important consideration than downstream revenue as a sustainable competitive strategy. If hospitals control market share in enough primary care practices, they can attract and retain all of the subspecialists they require to meet community need and to address competitive strategy. 

What Are CFOs to Do?

Hospital and health system executives will find it difficult to divest of their owned practices or to ignore requests for practice acquisition in today’s environment, unlike the late 1990s.

As payment continues to decline and business risk increases, more physicians are forced to leave independent practice. If a hospital fails to respond, physicians are likely to seek alternative arrangements with competing institutions—and take their patients with them. 

Hospitals also will find it difficult to recruit new physicians to the medical staff without offering an employment option. Ever fewer physicians are interested in starting an independent practice, and many do not want to work for an established medical group, preferring the perceived security of a large institution. Scarce specialties will demand higher compensation and a better quality of life than private practice can provide.

At the same time, hospital finance leaders understand that integrated systems cannot afford to enter the world of global risk for a defined population while dragging business units that are losing millions of dollars on operations. 

Wise finance leaders will ask hard questions and not be satisfied with soft answers. Here are six questions they should consider going forward.

Do we have a clear primary care/market share strategy? Few hospitals can survive only on admissions that come through their emergency departments. A geographically well-positioned network of affiliated (employed or independent) primary care practices is increasingly critical to capture families in neighborhoods that will positively affect the volume and payer mix of the hospital and its affiliated subspecialists. Attracting and keeping a population becomes essential in the shift to population health management.    

Do we have a solid ambulatory medical practice game plan? Although hospitals often can bring departments back to budget by reducing costs, the ambulatory medical practice business is won or lost on the revenue side of the income statement. Eight revenue factors affect the success or failure of ambulatory practices: 

  • Adequate patient volume for provider capacity
  • Viable payer mix
  • Appropriate pricing of services
  • Patient referrals driven by customer service
  • Physician productivity
  • Appropriate coding and documentation
  • Effective revenue cycle management
  • Service mix (such as availability of neighborhood-appropriate ancillary and other services)

Are our employed physicians engaged as partners in the success of our practices, or are they just employees? Even when they are on the payroll, physicians make terrible employees. They are what management expert Peter Drucker would have described as classic “knowledge workers” who are difficult to supervise even when they report to another physician.  Physicians do, however, make great business partners. They understand the productivity, the efficiencies, and the cost controls that must be achieved to succeed. They can set the example for younger peers. Alternatively, if employed physicians are treated like clerks, they will become frustrated and act like clerks.  

Do we have competent managers with the experience required to implement at the practice level? Most hospital departments are led by people with college degrees. Many managers of small group practices are people who started as receptionists and grew into this role because they are good at managing daily operations. These managers are used to taking their direction from the physicians as practice owners. They often lack the ability or experience, or are too timid, to engage the physicians as partners in problem solving or in process improvement, particularly if the physicians don't agree with one another. Supporting these daily operations managers with well-trained, experienced directors who can partner with the physicians in each location is essential to performance improvement at the practice level.  

Do we expect employed physicians to perform as well as their private-practice counterparts? Today’s business imperatives for medical practices require high clinical quality, excellent service quality, high physician productivity, and financial viability. These attributes become even more critical under global risk or capitation. Unfortunately, healthcare finance leaders often encounter employed physicians whose productivity is in the lowest quartile while their salaries are at the specialty median or above. Sometimes lack of new patient volume, barriers to productivity (such as not having enough examination rooms), or inadequate support staffing is to blame. Frequently, the physician compensation model is implicated because it does not allow a physician to earn a market rate of pay while maintaining practice viability.  

Returning to a productivity model that simulates the “eat what you treat” private-practice approach can produce dramatic results in short order. The right physician compensation model attracts physicians who want to build a practice and earn a respectable living. It repels those who just want a salary. 

Are we tolerating or removing “C” players from our ranks? Is it a privilege to be employed in our physician network? The risks of healthcare reform will require increased rigor in performance measurement and accountability. Those who do not want to play by more rigorous standards are a drag on performance, requiring more management. Such “C” players can become very costly. “A” players, on the other hand, tend to attract other “A” players even to communities where physician recruitment has proved difficult. Establishing clear performance expectations, being transparent in performance measurement, and holding everyone accountable are the hallmarks of greatness in any business. 

Going Forward

Given the current trends, it appears that physician employment is here to stay. Wise executives will engage employed, actively practicing physician leaders as partners in setting and achieving high expectations for clinical performance, service 

quality, and physician productivity. Financial viability and sustainability must be the expectation, just as in private-practice settings.

Engaged physician leaders will hold their peers and practice management accountable to achieving high standards as a condition of their continued employment. As partners, executives and physician leaders should embrace, rather than avoid, the rigor required to succeed. 

Marc D. Halley is president and CEO, The Halley Consulting Group, Inc., Westerville, Ohio, and a member of HFMA’s Northwest Ohio Chapter (


Publication Date: Friday, March 01, 2013

Login Required

If you are an existing member, please log in below. Username and password are required.



Forgot User Name?
Forgot Password?

If you are not an HFMA member and would like to access portions of our content for 30 days, please fill out the following.

First Name:

Last Name:


   Become an HFMA member instead