Clayton Harbeck

At a Glance  

  • Although the employment model was a bust in the 1990s, it can be successful today if hospitals:  
  • Allow physicians to shape health system strategy  
  • Engage physicians and offer opportunities for leadership  
  • Develop best practices to share across physician practices  
  • Use management services organizations to add efficiency and profitability  
  • Use technology wisely  

Hospital-physician alignment is becoming increasingly important, and health system administrators know it. Seventy-two percent of hospital executives surveyed by the American College of Healthcare Executives (ACHE) during the past summer said they would align more closely with physicians "to reap rewards for care coordination, better quality, patient safety, and lower costs" (ACHE news release, Oct. 8, 2010).

Health systems can align with physicians in many ways: The physicians can be included on hospital-based medical staffs or function as service line managers, or the health system can simply develop relationships with community physicians who have privileges at the system's individual facilities. But the physician-hospital alignment model undergoing the greatest expansion today is the employment model, in which a health system acquires physician practices and hires physicians throughout the communities it serves.

Veteran administrators are likely to remember the largely unsuccessful expansion of the employment model in the 1990s, when many health systems bought physician practices en masse, only to sell them back several years later, often at significant losses.

Despite the failures of the 1990s, health system administrators should not fear the latest move toward the employment model because the incentives are different now for both parties. As long as administrators avoid some of the mistakes they made in the past, they should be able to employ physicians to improve patient outcomes and reduce costs.

What Happened 20 Years Ago?

Payers actually set off the first round of large-scale physician employment in the early 1990s by consolidating, which created the threat of reduced payments to providers (a threat that never really materialized-more on that later). Physician practices responded by consolidating to increase their bargaining power. Hospitals, in turn, started acquiring physician practices to generate more referrals and admissions. Thus, the drivers of integration in the 1990s were purely economic.

Unfortunately, many health systems made two critical miscalculations that made their practice acquisitions financially unsuccessful. First, they assumed the physicians they employed would move patients through service lines supported by the health system. However, because physicians are not required to refer within their employers, their referral patterns did not change radically-physicians continued sending patients to the places they believed would produce the best outcomes. As a result, acquired practices did not significantly increase net new revenues for health systems.

Second, health systems paid substantial sums-which included large goodwill payments-to acquire physician practices. Not surprisingly, physician productivity declined in some cases. This decline was especially acute if physician salaries lacked sufficient performance incentives.

By the late 1990s and early 2000s, health systems realized their acquired practices were not providing the desired financial results and began divesting. In some cases, practices were sold for pennies on the dollar back to the physicians who had originally owned them.

Many physicians became dissatisfied with the employment model used in the 1990s, as well. In addition to money, one of the incentives for physicians to align was the promise of a greater voice in healthcare delivery-a promise on which health systems, by and large, did not deliver. Furthermore, health systems were largely unprepared to provide adequate management services to acquired practices.

Exhibit 1


What Is Different About Alignment Today?

Recent economic and legislative developments have made the employment model of hospital-physician alignment appealing to both parties again. In fact, physicians have more and better reasons to seek employment with health systems now than they did in the 1990s. For starters, the payment reductions that did not materialize in the 1990s are happening now. Medicare cuts have hit specialists such as cardiologists, orthopedists, and oncologists hard. Managed care and private-payer reductions traditionally follow Medicare cuts, so these specialists have begun looking for safe havens. The fact that they perform most of their work in hospitals has driven them toward the employment model.

Physicians have also been driven to health system employment by the economic downturn. Physicians who had planned to retire in their 50s or early 60s have seen significant decreases in their personal wealth, and many may have to work longer than they had anticipated. Some of these physicians are also weary of the challenges that come with managing the business side of private practices. Aligning with health systems could provide them greater opportunities to simply practice medicine.

The employment model also appeals to many young physicians entering the workforce, whose interest in a work-life balance exceeds that of their predecessors and who often lack financial resources to start a practice because of student loan debts.

It is clear, then, that there were factors driving the expansion of the employment model-particularly from the physician perspective-before the Affordable Care Act was passed in March 2010. But the legislation has definitely accelerated the trend for both physicians and hospitals in two ways. First, it has further increased the complexity-and therefore the cost-of operating a physician practice. Second, it has proposed changes that would shift payment away from the fee-for-service model and toward bundled payments.

Health systems are likely to become major aggregators and distributors of such payments, forcing physicians to focus on lower costs, higher quality, and reduced readmission rates. To achieve those goals, many health systems are forming, or contemplating forming, accountable care organizations (ACOs) and medical homes, and pursuing meaningful use of electronic health records (EHRs). Collaboration between health systems and physicians may be essential for such initiatives to succeed.

Best Practices for Aligning with Physicians

It has always made sense for hospitals and physicians to work together to provide a healthcare continuum for patients, but so far, alignment-particularly the employment model-has not been executed properly. That can change this decade if health system administrators take the following steps.

Seek physicians' input on strategy. Health systems should take inventory of their current physician relationships, look at the needs of their communities, analyze their markets, and reflect on their market competitors. Then, they should determine how they would like to deliver care in the future. What service lines would they like to build, and what would they like to outsource? Will they create a medical home, an ACO, or both? Or will they stay on a fee-for-service path?

After seeking help from physicians for their initial strategy development, health systems should meet with other key physician stakeholders in their communities to gain the physicians' support of the strategy. When physicians participate in strategy development, they are more likely to embrace less significant, but potentially divisive decisions down the road.

For example, a health system might want to reduce the number of hip-replacement devices available to physicians in an effort to cut costs. If physicians have bought into the formation of an ACO-and therefore have bought into cost containment-they are less likely to complain about the unavailability of a particular device. The physicians have an incentive to reduce costs, as they can share in the savings enabled by an ACO.

Fully engage physicians. Physicians' input should continue to be sought after they agree to a health system's strategy. Governance models should include employed physicians on boards, in executive leadership roles, and on committees focused on improving quality and reducing costs. In other words, physicians should be given the true voice in service-line management that they did not receive in the 1990s.

Sam Civello, vice president for operations at Texas Health Physicians Group (THPG), Euless, Texas, says their physicians are given a voice within the Arlington, Texas-based Texas Health Resources (THR) system in a variety of ways. As a 501(a) organization, THPG is a truly independent physician group, giving its practices a sense of autonomy. But THPG is also an entity on par with member hospitals in the THR system. THPG's president, Michael Stoltz, MD, is among THR's executive leaders.

"In a physician leadership role, [Dr. Stoltz] is able to build the relationship between physicians and build a support structure and trust between the physicians who maybe were part of that trend in the 1990s that went wrong," Civello says.

Furthermore, THPG physicians can serve on committees focused on EHR implementation, meaningful use, quality initiatives, and other aspects of healthcare delivery affected by the Affordable Care Act. "THR gives them the ability to be inside a group, participate on these various committees, chair them, and have a say," Civello says.

Lead physicians; do not manage them. Hospital administrators need to understand three typical character traits of physicians:

  • They are trained in the scientific method and have excellent critical-thinking skills.
  • They are competitive.
  • They are fiercely independent.

Considering these traits, it stands to reason that most physicians do not take kindly to dictatorial commands from administrators. However, administrators who give physicians empirical data demonstrating the negative implications of their behaviors are likely to see medical staffs motivated to improve or change. Sharing data engages physicians' scientific proclivities and represents one strategy for leadership to appeal to physicians.

Develop best practices across physician practices. As an example, consider revenue cycle management best practices (although health systems can and should develop clinical and process best practices, as well). To optimize their businesses, physician practices use five key metrics:

  • The time between the date of service and the date of charge entry, which should be two days or less
  • The amount of unreconciled visits, which should be 0.05 percent or less
  • The pre-bill rejection rate, which should be 4 percent or less
  • The first-pass denial rate, which should be 10 percent or less
  • The pass-through rate, which should be 3 percent or less

Physician practices should perform daily, weekly, and monthly measurements of such metrics, and they should compare them across practices. The comparisons are likely to appeal to the competitive nature of physicians.

THPG groups its practices into four buckets for comparing metrics: primary care, medical subspecialty, surgical subspecialty, and hospitalists. "Comparing like practices is the key," Civello says, adding that the comparisons are beneficial. "If you can show [one practice] that other people within the organization, within the same specialty, can accomplish and be successful at certain tasks, then there's really no reason that [the practice's physicians] can't do it."

Provide physician-specific services through management services organizations (MSOs). Hospital leaders should not assume hospital services that support hospital functions can be directly applied to acquired physician practices effectively. Physician practices traditionally have been run like small businesses, whereas health systems are large, bureaucratic organizations. MSOs mesh the two models by providing practices with the services they need to operate efficiently and profitably within the system.

MSOs provide financial management, business development, and IT support, among other services. Civello cites marketing as a function THPG's MSO can perform in a physician-specific manner. "Hospitals like to market their service lines," he says. "One of the things we want to do is help them get their practice name out, get their physicians' names out, and market their practice in conjunction with a hospital service line where applicable."

MSOs should serve not only employed physicians, but also affiliated physicians. Health systems have not developed the war chests to acquire all the practices necessary to meet the needs of their patients, especially with an additional 34 million Americans set to receive health plan benefits. Affiliated physicians are likely to remain the vast majority of the physician pool even after health systems achieve their current employment goals. Health systems should offer MSO services at market rates to affiliated physicians as a key component of their ACO strategy.

Whether MSOs are providing services to employed or affiliated physicians, they make physicians feel valued. As a result, MSOs help heath systems attract and retain the best physicians, which may be critical to providing low-cost, high-quality care amid the predicted physician shortage.

Do not try to solve every problem with technology. Although EHRs have the potential to help coordinate care, improve quality, and reduce costs, it is essential to remember that technology is not a solution; it is a tool that should be intelligently tied to a process. Health systems have deployed everything from EHRs to practice management to better link physicians to their organizations, but the bone yard is littered with health systems that have failed in such endeavors.

A Final Consideration

Although physician compensation in the employment model is a hot topic, the relationship of physicians to hospital leadership should not be ignored. For hospital-physician alignment to succeed, hospital leaders and physicians should be motivated by the same sets of incentives. The present economy and the reform legislation signed in March 2010 have given physicians good reason to want to collaborate with hospitals. Are hospital leaders equally motivated to help their employed physicians? They may not be unless their key performance indicators (KPIs)-and therefore their bonuses-are tied to the success of their acquired physician practices. Changing KPIs and bonuses for hospital presidents may, in fact, be the key to success in the latest expansion of the employment model.

Clayton Harbeck is executive vice president of MedSynergies, Inc, Irving, Texas ( 

Publication Date: Friday, April 01, 2011

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