To succeed in the emerging value-focused world of health care, health systems must begin with a clear understanding of what constitutes high-performing medical groups and work with physician leaders to build such medical groups.


Little by little, a huge and perhaps not-well-recognized change is sweeping the healthcare industry: Virtually every U.S. health system, most of which began by operating hospitals, is now in the physician business. The traditional hospital voluntary medical staff model is on the road to extinction, and effectively managing employed physicians has become an integral part of the health system business model. Ambulatory care and physician services now encompass the majority of many health systems’ revenue, and as a result, the performance of employed medical groups is becoming a key driver of overall health system performance.

Moreover, the evolution of the healthcare economic model from fee-for-service to value will only accelerate this trend. At one time, health systems could afford to overlook under-performing medical groups, but in the future, building high-performing medical groups will be an increasingly important element in a successful health system strategy.

The Demise of the Voluntary Medical Staff

Independent medical practices have been on a slow decline for over a decade. With increasing pressure on such practices by health plans (e.g., patient-centered medical home certification and quality reporting) and government payers (e.g., meaningful use, quality reporting, and payment limitations on procedures), independent physicians are increasingly seeking refuge in larger organizations with the scale and expertise required to manage the growing administrative burden. New regulations under the Medicare Access and CHIP Reauthorization Act (MACRA) are scheduled to be implemented over the next several years, and tying physician payment to performance quality and efficiency could be the final nail in this coffin. The exhibit below highlights this trend.

Change in Employment of Physicians: Number of Hospital-Employed Physicians, July 2012 to July 2015

Change in Employment of Physicians Number of Hospital-Employed Physicians July 2012 to July 2015

The trend has a twofold impact on health systems.

First, health systems are losing their symbiotic, low-risk ability to rely on voluntary medical staffs for both referrals and medical services. The independent medical work force, health systems’ traditional partner, is simply disappearing.

Second, market forces are compelling health systems to absorb physicians into their business models, and as they do, the performance of theiremployed physician enterprises will increasingly influence overall system performance in countless ways, including productivity, influence on access to services, billing practices, clinical quality, patient satisfaction, use of health system resources, and pharmacy decisions. Building high-functioning physician enterprises will be a core strategy—and key to driving revenue, cost, and competitive edge—for the high-performing health system of the future.

The Rise of the Health-System-Based Medical Group

With growing numbers of employed physicians, many health systems are devoting new attention to an old model of physician organization—the medical group. For decades, and in a few cases, for over a century, a large handful of health systems have recognized the value of integrated medical groups, to the point that they built their business models around these groups. Kaiser Permanente, Mayo Clinic, Cleveland Clinic, Geisinger Health, Billings Clinic, Guthrie Clinic, Duke Health, and others have built highly successful health systems around medical groups. Successful hospital-centric health systems are increasingly recognizing the potential of the medical group as a vehicle for organizing, managing, and integrating physicians into the health system business model.

Many large health systems such as Sutter Health in Northern California, WellSpan in York, Pa., Baylor Scott & White Health in Dallas, BayCare in Tampa, Fla., and MemorialCare in Orange County, Calif., have organized their employed physicians into either wholly owned 501(c)(3) corporations or medical foundations, depending on state laws on physician employment, with sophisticated governance systems. Many of these alignments have been driven by the leadership of existing medical groups seeking the advantage of scale and economic security that comes from alignment with a financially stable hospital. They have formed partnerships involving hospitals and medical groups as part of the move toward value-based care.

Evolution of Employed Medical Groups

Although well-organized employed medical groups have evolved in many different ways, the process tends to follow a generally predicable path. The health system typically starts by employing individual physicians and small groups. It then forms a hospitalist service or recruits specialist physicians to fill coverage gaps.

The first-stage physician organization, which we call the docking station, includes individual physicians and small specialty-specific practice groups with widely ranging employment agreements and compensation models and varying reporting relationships.

The second stage, the federation model, is characterized by the employment of larger numbers of physicians in a broader array of specialties. It may include the acquisition of one or more larger medical groups, which tend to retain at least some of the employment and operational practices the group had in place when it was independent. Over time, there may be an effort to impose more consistency in compensation on the physician enterprise, typically in the form of a relative-value unit (RVU) or revenue-minus-expenses productivity-based model.

The third evolutionary stage is the fully integrated medical group, in which disparate physician arrangements are brought together into one or more integrated organizational structures, with consistent policies and operational practices. Many of these more-advanced organizations started with a medical group at the center that had a long independent history before joining with larger hospital organizations. They thrived because they had strong physician leadership and a culture of excellence driven by physicians. Now the question for health systems building fully integrated medical groups is how to emulate these organizations’ success.

As Robert Nordgren, MD, CEO of the high-performing Palo Alto Foundation Medical Group (discussed below), explains: “The challenge for a health system trying to build a high-performing medical group is really whether the hospital leaders are willing and able to hand over some of the reins of power. This can be both a philosophical and existential issue for leaders and their boards.”

Best Practices in High-Performing Employed Medical Groups

The results of actual experiences of dozens of health system medical groups, coupled with information gleaned from recent interviews with medical group physician leaders, point to six key characteristics of high-performing employed medical groups, which we examine here.

A medical group governance model and a culture of excellence that engages physicians in clinical, strategic, and operational decision-making for the group and the health system as a whole. Building an effective employed medical group requires development of a formal governance structure, a leadership team, and consistent practice policies. That said, no single model of governance will fit all organizations—a point underscored by the American Hospital Association’s Center for Healthcare Governance in a 2015 study of the governance of physician organizations: “No single evolutionary path or governance will work in all organizations and care systems. … [C]linical enterprise boards, expert boards, and enhanced community boards can all play a role.” The study also points out that “when clinicians, outside experts and stakeholders govern collectively the outcomes are more robust and sustainable.”

Sidebar: Case Study: Evolution of a Medical Group

The perception of the medical group as a cost center in an integrated clinical delivery model rather than as an independent profit center. To paraphrase the words of one health system executive, a medical group can seem to be a losing operation even as the overall system is solidly profitable; it depends on how the financial lines are drawn. “It is important for the group to understand how it contributes to the whole,” the executive says. “It can be demoralizing for the group to just hear how much we are being subsidized by the hospital every year.”

Elizabeth Vilardo, MD, CEO of the not-for-profit Palo Alto Medical Foundation, describes how her organization has addressed this concern. The foundation has four divisions and is a subsidiary of Sutter Health. It operates 114 different care sites with 6,000 employees, and contracts with the for-profit Palo Alto Foundation Medical Group as the exclusive provider for its patients. Vilardo notes that the key to an effective employed medical group is a governance structure that encourages physicians to take responsibility for the provider organization’s business success.

Within the Palo Alto Foundation Medical Group, clinical service-line responsibility cuts across all of the geographic divisions. Ten physician shareholders sit on the medical group’s board, and there is significant involvement in strategy and business development as well as operations. More than 100 physicians have operational lead roles in addition to the clinical leaders.

Vilardo explains her organization’s approach this way: “Physician performance is driven by physician engagement, and physician engagement is driven by the level of responsibility physicians feel for the organization’s success. If physicians are not completely understanding of the business success factors and driving the medical group performance, you are not going to be successful.”

Use of a dyad management model that links clinical and administrative leaders in a unified management structure at the clinic, regional, and corporate levels. A key challenge in aligning employed medical groups is determining how to secure operational physician input in the management of clinical service lines. The fixed operating cost for a provider system with a large employed medical group is higher than for a provider that relies primarily on affiliated community physicians. Managing clinical resource utilization, therefore, requires physician and administrative leadership to operate as an effective team, to communicate effectively, and to cut across clinical silos to provide coordinated care.

Increasingly, achieving such a team approach requires a dyad management model, pairing a physician as a clinical co-leader for change in each specialty with an administrative co-leader with management skills who is responsible for finance, staff, supply, and operations. This dyad structure is now accepted in provider organizations across the nation. (See the exhibit below.)

Dyad Model for an Employed Medical Group

Dyad Model for an Employed Medical Group

The key to a successful dyad approach to leadership is to have a clear delineation of clinical and administrative goals that complement each other, with both leaders having the decision-making authority to lead change in the areas they are responsible for. Physician leadership is critical for managing the quality of the clinical professionals’ work, building a cohesive group culture, and encouraging teamwork among physicians and multispecialty care teams.

Sidebar: Case Examples of the Use of a Dyad Management Model

A dyad partnership provides an efficient means for engaging physicians over issues of clinical productivity, clinical judgment, practice style, and application of specific diagnostic or treatment approaches without having a nonphysician administrator involved in clinical decision making. The model leverages the administrative leaders’ skill sets, including financial management, accounting and reporting, supply chain management, dashboard and performance scorecards, and leadership. The partnership also allows for more effective education of physicians around the potential clinical and financial impacts of healthcare reform.

Evolution of a compensation model that recognizes the importance of productivity-based compensation, while also embracing Triple Aim markers of quality, patient experience, and population health. Health systems often are uncomfortable with managing physicians, and most have sought to emulate the personal-productivity ethic dominant in private practice through productivity-based compensation, including RVU and practice-level revenue-minus-expense models. Interestingly, and in contrast, many physician-centric health systems with long-established group practice cultures—such as Mayo Clinic, Cleveland Clinic, and Geisinger Health—rely largely on salary-based compensation models.

Questions are being raised now about health systems’ pure productivity-based compensation models. As value-based payment models shift emphasis from volume to other performance measures—quality, documentation, patient satisfaction, and per-member-per-month (PMPM) cost of care—pure productivity compensation may be placing too much emphasis on volume and discouraging focus on the other dimensions of performance. The high-performing medical groups we interviewed report that between 12 and 18 percent of their compensation is based on quality metrics, patient satisfaction, and “citizenship” for participation in ACOs, clinically integrated networks (CINs), or other value-based innovations. For primary care, medical groups are beginning to compensate physicians based on panel size in addition to various quality metrics.

Compensation is the key driver of a collaborative culture, which can be achieved only if the compensation plan has a defined methodology and consistent principles for the entire employed group. Volume will remain important during the transition to a value-focused enterprise, particularly for commercial and Medicare Advantage contracts. Most systems will want to keep a significant portion of compensation based on productivity to ensure physicians stay busy and that primary care physicians continue to expand their panels, which will be important for later capitation. But the transition to an aligned group should be at a pace that the organization’s employed physicians can absorb. Changes in compensation plans are unsettling, and experience across provider organizations shows that plans cannot be changed overnight or adjusted every year.

That said, there are always outliers. Geisinger Health System, for example, has effectively shifted from a compensation model installed only a few years ago that was 80 percent straight salary and 20 percent performance bonus (the goal of many advanced systems) back to a straight salary where all physicians are paid at or above the national average. “We don’t have below-average doctors, so we don’t pay anyone below average,” David Feinberg, MD, Geisinger’s CEO, commented in announcing the change.

Use of human resource practices and policies that account for millennial physicians’ work-life needs, address critical physician burnout issues, and create a satisfactory work experience for physicians. Entrepreneurial baby-boomer physicians who wanted independent practices are being replaced by millennial physicians heavily burdened with medical school debt who have a clear preference for shorter work weeks than their predecessors were willing to accept. At the same time, there is a growing burnout among clinicians, which many healthcare CEOs see as a “public health crisis” threatening the nation’s caregiver workforce. Among respondents to one recent survey of more than 2,000 physicians, 88 percent reported they were moderately to severely stressed and/or burned out on any given day, and 45.6 percent stated they were experiencing severe stress and/or burnout. Poor work-life balance was identified as the primary reason behind the burnout.

A failure to address burnout can be expensive because, on average, the physician turnover in practices is 25 percent in the first three years of employment. With the costs to hire physicians averaging $30,000 and the typical revenue lost per day for an unfilled position averaging $5,000 to $6,000, physician turnover due to burnout is a significant drag on medical group performance. Another survey—reported by John Noseworthy, CEO of the Mayo Clinic, and CEO colleagues—put the cost of replacing a physician who retires early or leaves to pursue other career opportunities at between $500,000 and $1 million due to recruitment costs, training, and lost revenue. Burnout among advance practice clinicians (APCs), frequently paid comparably to primary care physicians, can be an equally expensive concern.

With increasing numbers of women choosing medicine as a career, the demands of physicians needing time to start families also have caused medical groups to reevaluate their HR policies. Innovative medical groups create flexible work-week options, shift patient schedules to ensure the patient whose condition is most difficult to treat is not seen at the end of the day before daycare pickup, and create daycare options on-site.

Professional satisfaction for physicians, according to Noseworthy and his colleagues, is driven primarily by physicians’ ability to deliver high-quality care in an efficient manner.

Meanwhile, dissatisfaction is driven by factors that impede this ability, such as excessive regulatory, clerical, and administrative burdens and inefficient practice environments. One of the main contributors to burnout, according to our recent interviews, has been the nearly universal spread of electronic health record (EHR) systems, which often are seen as disruptive and extremely time-intensive for all clinicians.

The Palo Alto Foundation Medical Group’s Nordgren explains: “Primary care physicians in our medical group spend in a one-to-one ratio the same amount of time documenting care in our EHR as they do in providing care face to face. Our own time studies in the group have documented that expansion of the EHR has been the major driver in the change of physician practice in the past 20 years, causing the loss of physician practice satisfaction and control. Our most expensive assets are physicians, and if they are spending 50 percent of their time charting in Epic, this is perhaps not the best use of your expensive resource.”

Use of team-based care models that both engage with patients and effectively leverage the capabilities of mid-level providers practicing at the full range of their licenses. The employed medical group should strive to become a model of team collaboration. A soon-to-be-released study of high performance of single and multispecialty group practices by the Peterson Center on Healthcare and Stanford University’s Clinical Research Center identified 11 primary care groups that deliver high-quality care at a much-lower-than-average total cost to commercially insured populations. All 11 groups exhibit the following common characteristics:
  • Patients have a sense their care teams are always available to them.
  • Clinicians encourage patient feedback and participation.
  • Tests are performed in-house rather than being outsourced.
  • The practices keep in touch with patients after specialty referrals, and follow up after hospital discharges.
  • The clinician compensation model balances productivity, Triple-Aim performance, and citizenship.
  • Clinicians work in “hived” team environments.
  • Nurse practitioners and physician assistants work at the top of their licenses to support primary care physicians.

In summary, the Stanford study concludes that an integrated team providing care coordination is key to referral retention, and that high-performing groups have an infrastructure that supports collaborative behavior and group cohesion.

To develop collaborative team-based models of care that both ensure physician expertise is optimally used for patient benefit and allow all professionals to practice at the top of their license, it is necessary to divide clerical work appropriately among members of the caregiver teams. Yet successful team-based care also depends on creating jobs and an environment where APCs are not simply relegated to performing work distasteful to physicians, but are given every opportunity available to deliver the care they are trained to deliver.

Moving Into Action

Nordgren suggests a goal that employed medical groups can coalesce around is to build and realize “collaborative team-based models of care where physicians’ expertise is maximally utilized for patient benefits.” He describes the challenge in humanistic terms as “creating an environment where physician leaders are leading with gratitude and being professionally supportive.”

New governance and management models must be developed to provide employed physicians meaningful opportunities to participate in governance and to have a voice in operations. Understanding physician needs, addressing those needs, and enhancing patient access through collaborative physician engagement will be the keys to sustainable performance improvement under value-based contracts. Through such actions, a health system’s medical groups can move beyond their current productivity plateaus and reach a higher level of performance in the emerging value-focused healthcare environment.

Key Questions to Inform Efforts to Develop High-Performing Medical Groups

As hospital and health systems move further toward developing high-performing employed medical groups, they should consider the following questions:

  • Do we need to make changes to physician governance, or management to provide greater involvement in decision making and to develop an effective group practice culture that is also aligned with systems goals?
  • Do we have the correct organizational structure in place to foster the most effective communication and cooperation between administrative and physician leadership?
  • Do we have an overall compensation plan for your employed physicians that aligns the need for volume with performance on value-based metrics?
  • Do our physicians have the care model, patient access, workflow management, and clinical resources in place needed to align treatment with the needs and expectations of patients?
  • Do we benchmark key medical group processes and performance and engage group leadership in continuous performance?
  • Do we have consensus on leadership goals for value-based contracting, and a communications plan in place to engage physicians in the process?

William T. Eggbeer, MBA, 
is managing director, BDC Advisors, Washington, D.C., and a member of HFMA’s Maryland Chapter.

Craig Ahrens, MHA, MBA, 
is director, BDC Advisors, St. Louis.

David Fairchild, MD, MPH, 
is director, BDC Advisors, Boston, and a member of HFMA’s Florida Chapter.

Publication Date: Wednesday, November 01, 2017