At a Glance

To improve the bottom line of owned physician practices, hospitals should:

  • Identify disparities between physician pay and performance, and understand the factors that are creating these disparities
  • Review fees to make sure they are aligned with insurer and Medicare fee schedules
  • Analyze the work load and job responsibilities of office staff and modify staffing levels and job descriptions, if needed

The cumulative impact of shrinking margins, rising costs, and continuing cuts has brought renewed focus on losses associated with hospital-employed physician networks. The Medical Group Management Association (MGMA) reports that hospitals lose, on average, nearly $200,000 per year for each full-time employed physician (Cost Report, MGMA, 2012). When hospitals that are not losing any money on their programs are excluded, median losses jump to close to $250,000 per physician. Despite these statistics, more than 68 percent of hospital executives indicated in a 2012 HealthLeaders survey that they intend to expand their employment programs over the next year (HealthLeaders Media Industry Survey 2012, CEO Report, 2012). Employing expensive specialists will only amplify the problem.

Under these circumstances, an increasing number of hospital leaders whose organizations employ physician practices are taking steps to bring losses on those practices into a more sustainable range. A profitable owned physician practice is like a three-legged stool, with each leg representing a factor potentially contributing to overall losses:

  • Physician compensation
  • Revenue cycle
  • Operational overhead

Avoiding losses requires adjustments on all three legs to keep the stool from becoming unstable.

Assess Physician Compensation Levels 

The healthcare system’s evolution from volume-based to value-based payment requires a corresponding evolution in the physician compensation model. This premise provides a sound and defensible reason for informing hospital-employed physicians of the organization’s intent to revaluate the physician compensation program.

Most hospitals currently use some form of a production-driven physician compensation plan, typically based on work relative value units. As physicians work more, they earn more. These plans are flawed, however, because although increased effort equals increased pay, less effort often doesn’t result in lower pay. The implication here is not that physicians with low levels of productivity should have their compensation slashed. It is possible that a critically needed specialist has not yet achieved his or her potential adequate market demand, or that the specialist is located in a community that has strategic value to the hospital but cannot generate the volume to cover the costs. The physician also might be struggling with a poorly designed office or inefficient staff.

Many physician compensation plans are based on data from the MGMA’s annual Physician Compensation and Production Report. One of the metrics included in this report ties median effort to median compensation: In essence, MGMA measures effort for all physicians within each specialty and does the same for compensation. This approach makes intuitive sense, but it doesn’t make statistical sense. Moreover, MGMA doesn’t correlate findings among specialties. Another, better metric included in the report is the ratio of work effort to compensation.

Before attempting to correct any disparity between effort and compensation, it is important to take the time to understand thoroughly the factors that are affecting productivity. Proceeding without this understanding is likely to create bad will within the physician group and, even worse, lead to the loss of valuable physicians.

Study the Revenue Cycle

It is surprising how many sophisticated organizations leave a sizable amount of revenue on the table. The reasons they do so are many, and considerable effort is required to adequately address them all. It is effort well spent, however, because the revenue cycle typically holds the greatest opportunity to build the bottom line.

Four factors, in particular, contribute to poor revenue cycle performance.

Technology. Few, if any, successful private physician practices use the same types of data systems as are used by hospital-employed networks. Moreover, hospital-employed physicians tend to use data systems that are more expensive and less effective. Why? The reason is that hospitals tend to adopt physician modules that work with their hospital data system, and hospital system vendors typically do not deal in the best physician practice management and electronic health records (EHRs).

Chargemaster. It is surprising how many physician fees are below the amount that insurance plans will pay. Few hospitals have a formal method for identifying fees that are allowed in full by payers and then adjusting them upward. The importance of having such a method in place is illustrated by the experience of a Midwest health system. A review of the health system’s reimbursement revealed that common CPT codes, such as CPT code 99213, were being paid in full by the health system’s largest commercial health plans. An analysis determined that the plans would pay more if the charges were adjusted upward, but revenue staff had not alerted management that this situation existed . 

Charge capture. Audits should be conducted to match office appointments with charges. Methods also should be in place to ensure that physician services performed at the hospital or in a nursing home are captured in the physician’s office.

Accounts receivable (A/R) management. Physician programs generate a large number of relatively small charges. Many hospitals use less experienced revenue staff members to manage the A/R of the physician program—but these newer staff members may not have a firm knowledge of how significantly these differ from hospital payments. To avoid this problem, hospitals should hire experienced physician revenue staff.

Analyze the Overhead

Hospitals often focus too much on the price of medical and office supplies. Of course, it is important to seek aggressive pricing, but a few cents less for gauze pads won’t make a meaningful impact on a $200,000 loss.

The major overhead factor in physician networks is the number of people employed and the cost of their salaries and benefits. Salaries and benefits are likely the single largest expense in network operations, possibly larger than the provider payroll. Many factors, both financial and nonfinancial, affect staffing levels in physician practices.

Here are a few aspects of staffing to review.

Practices. If the network grew through the acquisition of community practices, it is likely that the network includes a large number of small offices. These are inherently inefficient. Each office has a front desk that needs to be staffed, as well as a waiting room that needs to be rented, even if it isn’t full. Consolidating practices allows the most efficient use of both staff and space, and it is often less expensive to buy out a lease than to continue to operate an office in an inefficient location.

Staffing. Few practices are overstaffed, except in the area of clinical support personnel. If medical assistants or nurses are needed to manage a high volume of phone calls, it is likely that patient education or telephone medicine policies need to be modified. Although such circumstances may eventually become a measure of success following the shift to value purchasing, they currently represent an overhead consideration that requires attention.

When practices are overstaffed, it is typically the result of staffing to providers rather than to volume. For example, if two physicians in a given specialty are each only half as busy as a typical physician in the specialty, they might need fewer support personnel to manage the lighter workload, including fewer appointments and fewer patients checking in. The physicians could even use creative staff and patient scheduling to share clinical staff.

Benefits. To attract and retain scarce nursing and technical staff, hospital benefit structures are far richer than those found in private medical practices. Hospital-owned practices do not require such generous benefit structures, although exploring a leaner benefit model for clinic staff will likely require the practices to operate as separate entities.

Establish Acceptable Levels of Losses

It is unlikely that hospitals can turn physician practices into a profit center. As the supply of key physician specialists becomes more of a strategic issue, and as the salary expectations of physicians—especially in cardiology, general surgery, and orthopedics—often exceed their ability to generate revenue, hospital executives must address a key question: What is a reasonable level of subsidy for a physician program?

The answer to that question depends on the reason the hospital employs the physician: The measure of success will differ, depending on whether the physician’s area of expertise is in short supply or the physician is needed to support a hospital service line or protect market share. 

Community need. Market demand should be sufficient to make full use of the physicians, and as a result, revenue should cover most expenses. Of course, having to recruit two physicians when only one is needed, or when the practice itself is inefficient, can have an impact on the revenue-to-expense ratio.

Strategic need. This situation is more complex. If the local invasive cardiologist announces that he needs to be employed or else he will relocate, the expense becomes whatever it takes to support the program. The justification for the expense is the potential for lost revenue or lack of adequate care for the community. If a specialist is needed to initiate or support a clinical program, but the demand analysis can only justify a part-time specialist, then the support level needs to cover the other half of the specialist’s salary.

Understanding the difference between these factors and setting reasonable performance goals will allow hospital financial analysts to distinguish between an expected and acceptable level of financial support and an unacceptable level that exceeds the value reflected in poor program performance.

Identify Opportunities for Improvement

It takes a great deal of effort to assess the current operation, identify opportunities for improvement, and then make the necessary operational changes. 

By following three steps, hospital leaders can assess the current business model and determine the best ways to improve it.

Observe operations. Spend time in each clinical location; talk with staff about their jobs and what works and what doesn’t; trace revenue from the exam room to the bank; and see where processes could and should be improved. Watch as patients arrive at the front desk, are called to the exam room, and are processed out of the practice. Identify opportunities to streamline the process and improve patient satisfaction.

Evaluate physician compensation. Identify disparities between income and effort. Determine which physicians are paid a market-competitive salary, but are less productive than necessary to support that level of income. Then, explore with these physicians the reasons behind their low productivity, as highlighted during the analysis, and develop strategies with them to either correct the issues or quantify the best performance that can be expected.

Follow the money. Work with physicians to answer key questions about revenue cycle operations for the physician practice:

  • Is current technology adequate to assist in capturing charge data and efficiently billing patients?
  • Is the current fee schedule structured in the same way most commercial insurance plans pay providers—based on a percentage of Medicare?a
  • What is the lag time between when the patient is seen and when the charge is submitted to the insurer? If this process exceeds 48 hours, why?
  • Is cash adequately controlled at the practice and central business office level?
  • Is the adjusted collection rate (collections plus contractual adjustments divided by charges) at or above 96 percent?
  • Are days in A/R fewer than 35 days?

Answering these questions should provide a good picture of the health of the revenue cycle and identify areas that may require more attention. However, dramatically improving the financial performance of a physician network is not an easy undertaking. The financial performance of a physician network has many moving parts, and the potential for losing the trust of the physicians is a real concern. Healthcare finance professionals should not begin the process unless they intend to finish it. Otherwise, the physicians will learn that resistance can block change. 

Greg Mertz, FACMPE, is managing director of Physician Strategies Group, LLC, Virginia Beach, Va. (


a. Allowing a neurosurgeon to charge 200 percent of Medicare when no insurer pays more than 125 percent simply hurts self-pay patients; fees that are above or below the target should be identified and corrected. It is important to set fees above the reimbursement of major payers, but it is equally important to be sensitive to fees that are so high, they could potentially drive away business.

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