At a Glance

  • Health system leaders should understand issues related to finance, compliance, human resources, quality, and safety in their employed physician practices to better support the success of these practices.
  • New business and payment models are driving operational changes in physician offices.
  • Catholic Health Initiatives (CHI) has added new system roles and responsibilities to oversee physician practices.

As the number of employed physicians continues to rise, hospital and health system leaders are facing pressure to learn more about the business of managing physician practices. Today, CEOs, COOs, CFOs, chief nursing officers (CNOs), chief medical officers (CMOs), and other members of the C-suite share some accountability for the value provided across their organization’s continuum of care, even at the practice level. This accountability is likely to grow as health systems become more integrated and form clinically integrated networks (CINs) and accountable care organizations (ACOs). 

The success of these models likely will depend on the degree to which they can successfully manage population health and coordinate care across ambulatory and acute care sites. It also will depend on the extent to which health system leaders understand issues related to finance, compliance, human resources, quality, and safety in their employed physician practices.

Financial Issues in Physician Practices

Health system leaders often find it difficult to precisely gauge the financial impact of their organization’s physician enterprise. On paper, many physician offices are incurring losses because the cost of running the offices exceeds their income. For this reason, health system leaders often describe the finances of newly acquired physician offices according to how much money a hospital “loses” per physician practice.

However, employed physicians contribute more to a health system’s bottom line than just the income from their office practice; they also generate income from hospital admissions, procedures, lab tests, and other services that stay within the system. According to a survey of 102 hospital CFOs by the physician consulting firm Merritt Hawkins, a full-time family practice physician generates approximately $2.07 million in net inpatient and outpatient revenue annually. An orthopedic surgeon brings in approximately $2.68 million in annual hospital revenue.

As new business and payment models drive changes in financial practices at the system level, they are also spurring changes in physician offices. ACOs, CINs, and value-based payment models require hospitals and physician practices to develop more robust revenue cycle processes. They will rely on appropriate and timely billing, coding, and collection of revenue to strengthen their organization’s cash flow. Systems that have already addressed revenue cycle efficiency in hospitals will need to do the same in their non-acute sites because they will be increasingly dependent on revenue from their outpatient enterprise. For this reason, systems with employed physician practices should hire specialists with expertise in physician billing and outpatient revenue cycle management, including charge capture, billing, and collections.

Compliance Concerns in Physician Offices

Thirteen years ago, the Office of Inspector General (OIG) offered guidance to “prevent submission of erroneous claims” and “combat fraudulent conduct” by office-based physicians. That advice still applies today: The OIG recommends that physician offices establish internal auditing programs with written compliance standards and designate an office compliance officer.

A compliance officer can help mitigate risks specific to physician practices. Some of these risks involve:

  • The reasonableness and necessity of services provided
  • The provision of advance beneficiary notices
  • Verification of the medical necessity for prescribed equipment, supplies, and home health services
  • Proper documentation

In addition to these risks, health system leaders should ensure that their employed physicians are ready for the implementation of the 10th edition of the International Classification of Diseases (ICD-10), which is scheduled to replace ICD-9 in 2014. ICD-10 will have new coding structures and conventions that physicians, coders, and billers should learn. For example, office staff should ensure that ICD-10 codes match the correct CPT codes, which describe particular services provided. Office billing personnel also should know whether codes are covered by Medicare, whether they are bundled or paid separately, and what level of physician supervision is required for specific codes (if the work or procedures are actually performed by other team members).

Human Resources at the Practice Level

Outpatient settings are more complex than many hospital and health system leaders may realize. Depending on the size and specialties included in a practice, employees may include, in addition to physicians:

  • Advance practice nurses (APNs), physician assistants, clinical nurse specialists, certified nurse midwives, registered nurses, licensed practical nurses, and medical assistants (MAs) 
  • Office managers, coders, billers, schedulers, quality managers, and compliance officers
  • Lab professionals, respiratory therapists, technicians, (including imaging and cardiology techs), dietitians, social workers, and others

Moreover, the salary and benefit structure for physician office employees often differs from that for staff members in the acute care world. As health system leaders plan to improve office efficiency and operations, they may consult benchmarked data on physician practice salaries, productivity, staffing, revenue, operations, and accounts receivable through organizations such as MGMA-ACMPE (formed in 2011 from the merger of the Medical Group Management Association and the American College of Medical Practice Executives). 

In their efforts to streamline operations, health system leaders may also uncover inconsistent standards. For example, some practices may employ medical practice billers who are not certified through an accredited program. Ultimately, health system leaders should decide whether certification is a requirement for each practice.

Health system leaders also should review each practice’s adherence to standard employment laws and examine scope-of-practice issues that could have legal and financial ramifications for the organization. For example, most healthcare leaders probably understand that licensed clinicians (like nurses) are responsible for their own clinical practice and are accountable for following their state board regulations. These leaders might be less aware, however, of the rules regarding MAs, who must practice under the direct supervision of a physician, licensed healthcare practitioner, APN, or clinician. There may be a misconception that MAs are not “responsible” for any actions they are directed to perform by one of those providers.

In fact, MAs are liable if their actions cause harm to a patient.c An MA or any other team member who performs treatments outside his or her scope of practice puts the team member, the provider, and the health system at risk. For example, in California, a physician who directs or allows an unlicensed person (such as an MA or a foreign-trained physician who is not licensed in the United States) to perform medical treatments that require specific licensure can be charged with aiding and abetting unlicensed practice.

Quality and Safety Issues

In 2003, Medscape Editor George Lundberg, MD, wrote that “the physician’s office remains a bastion of resistance to quality improvement in American medicine.”e He also observed that “no one really knows the scope and extent of medical errors in a physician’s office because so little research has been done and almost nothing has been reported in peer-reviewed literature.”

Since then, the federally mandated Physician Quality Reporting System (PQRS) has begun to offer incentive payments and payment adjustments to physician offices that report quality data. But we still have far to go, according to a report from researchers at Weill Cornell Medical College in New York. They state that current quality measures in outpatient settings fail to include all the domains suggested by the Institute of Medicine: safety, effectiveness, patient-centeredness, timeliness, efficiency, and equity.

Tara Bishop, MD, the lead researcher, said outpatient safety measures could be developed so they are similar to “never events” already defined in inpatient settings. Such measures could target areas of concern such as prescribing errors, hospital-acquired infections, diagnostic inaccuracy, and failure to inform patients of critical test results.

What might be surprising to acute care leaders is the finding from Bishop’s team that, in 2009, “about half of the nation’s malpractice claims were for adverse outcomes from errors made in doctor’s offices.”g As systems employ more physician practices, their risks may increase as well.

Managing the Physician Enterprise at CHI

At Catholic Health Initiatives (CHI), we have made several leadership changes over the past two years to improve quality and reduce costs in the physician enterprise, standardize the management of physician offices, and decrease fragmentation across the continuum. We added a system senior vice president for physician services and clinical integration to lead our ranks of employed providers, which have grown from 1,046 to 2,900 since 2005. Supported by a governing council composed of leaders from our regional and market-based employed physician groups, this new physician executive has helped implement programs to decrease variance in office business procedures. Among these is a recently announced management services organization (MSO) that will deliver key business functions and physician management services under a centralized national model. The MSO will bring operational scale and resources to standardized revenue cycle management, patient referral and scheduling solutions, practice analytics, and practice management for CHI-employed physicians across the system.

In addition, a physician vice president has been hired to focus on physician office quality. He works as a dyad partner with CHI’s vice president for quality, who is responsible for the acute care enterprise.

At the same time, CHI leaders have written a new job description for regional CNOs that states each is “responsible for the practice of nursing and nursing care throughout his or her region’s CHI continuum of care sites and programs.” Now, CNOs are accountable for ensuring that evidence-based nursing care is provided in both the inpatient and outpatient enterprises, with appropriate standardization of nursing processes and procedures. This is important because we are entering a transformation in health care in which systems will provide the full continuum of care for individuals. Patients will be better served with coordinated care, which includes evidence-based nursing practices, regardless of where that care is received. That means that nurses employed in hospitals and physician offices will be held to the same standards of care.

Delivering Value Across the Organization

Of course, it takes more than new leaders and job descriptions to move an organization into the next era of health care. It takes collaboration. As CHI’s inpatient and outpatient enterprises become more enmeshed, success will depend on its leaders working together to increase the value of the enterprise as a whole.

When an organization acquires physician practices, it becomes incumbent on all of its leaders—whether they started in the inpatient or outpatient world—to change what needs to be changed and retain what adds value. Only then can the organization begin to deliver better quality and lower costs for its customers while safeguarding its financial future. Such is the promise of integration.

Kathleen D. Sanford, RN, DBA, MBA, MA, FACHE, is senior vice president and chief nursing officer, Catholic Health Initiatives, Denver, and a member of HFMA’s Colorado Chapter.


a. Herman, B., “51 Statistics on Physician Salaries vs. Hospital Revenue Generated,” Becker’s Hospital Review, May 14, 2013. 

b. “OIG Compliance Program for Individual and Small Group Physician Practices,” Federal Register, Oct. 5, 2000. 

c. Buppert, C., “Understanding Medical Assistant Practice Liability Issues,” Dermatology Nursing, August 2008.

d. “Cosmetic Treatments—Frequently Asked Questions,” Medical Board of California, 2010.

e. Lundberg, G.D., “Improving the Quality of Care in Physician Office Practice (IQCPOP),” Medscape, Dec. 24, 2003.

f. Bishop, T.E., “Pushing the Outpatient Quality Envelope,” JAMA, March 21, 2013.

g. Lowes, R., “Physician Offices Nearly as Malpractice-Prone as Hospitals,” Medscape, June 14, 2011.

Publication Date: Sunday, September 01, 2013

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