By Lisa Goldstein and Lisa Martin

Under effective alignment, physicians are highly engaged in hospital strategies for improving quality, creating operating efficiencies, and ensuring financial viability.

Over the past couple of years, many hospitals have pursued new or renewed strategies to more closely align with their physicians. Alignment has allowed many hospitals to secure referrals, increase market share, and negotiate better rates with commercial payers. Hospitals are also able to drive quality initiatives through evidence-based medicine developed by physician leaders through alignment.

Under reform, these hospital-physician alignment strategies will be particularly important given the possibility of bundled payment methodologies and emphasis on accountable care organizations (ACO). An ACO is a multidimensional provider of healthcare services that includes primary care physicians, specialists, and hospitals; the ACO's members will coordinate care for the patients with the goal of meeting and improving on quality benchmarks and sharing in any costs savings. Even before ACOs were developed, hospital-physician alignment had become increasingly critical for hospitals to recruit and retain physicians and improve clinical outcomes.

We expect the leaders in this new era will be successful at creating more effective alignments with physicians that go beyond contractual arrangements. Many hospitals have aligned with physicians through employment or joint ventures, but such economic arrangements do not necessarily translate into the desired benefits of true alignment. Under effective alignment, physicians are highly engaged in hospital strategies for improving quality, creating operating efficiencies, and ensuring financial viability. For many health systems, employment is only a first step in a multiyear migration to true physician integration.

What Has Changed in Physician Alignment Strategies?

Many hospitals are employing physicians as a first step toward integration. In some cases, hospitals are revisiting this strategy much more carefully after suffering through previous failed attempts in the 1990s that only saddled them with the high cost of employed physicians and little additional revenue growth (see the exhibit).

Today hospitals appear to be more methodical in their negotiations with physicians, using more in-depth financial analysis and integrating strategic, capital, and financial planning. Most hospitals are offering employment contracts with productivity measures clearly articulated up front. Unlike the 1990s, when physician acquisition prices typically included goodwill as a sign of market power of leading physician groups, most systems can now be more selective and prudent in acquiring physician practices for a more affordable price that reflects the increased operating pressures on independent practices. Also different today, many physicians are actively seeking hospital employment to avoid the burdens of managing a practice and strive for a work-life balance.

Hospitals that have achieved true physician alignment have been integrating with their physicians for many years. In these cases, the physician division is usually managed by a physician leader. Aligned physicians are heavily involved in clinical quality initiatives and participate on the board committee on quality. Physicians are also involved in driving operating efficiencies such as length of stay management and materials management.

Credit Implications

Positive credit factors related to hospital-physician alignment include:

  • Greater efficiencies and potential for improved financial performance through aligned incentives to increase standardization and control costs
  • Creation of a more cohesive culture and greater buy-in of hospital strategies
  • Greater leverage with payers
  • Better preparation for and management of bundled payments
  • Potential for greater advances in quality initiatives and improved outcomes

Negative factors include:

  • Ongoing costs associated with physician employment or the loss of income to physician joint ventures
  • Risks of start-up losses with creation of new practices
  • Challenges integrating employed and independent physicians and creating unified culture and strategy

This article is excerpted with permission from Transforming Not-for-Profit Healthcare in the Era of Reform, a May 2010 special comment by Moody's Investors Service.

Lisa Goldstein is senior vice president and team leader, Moody's Investors Service, and a member of HFMA's Metropolitan New York chapter ( Lisa was also a national HFMA board member from 2007 through 2009. Lisa Martin is senior vice president, Moody's Investors Services.


Publication Date: Tuesday, June 15, 2010