According to HFMA's Healthcare Financial Outlook 2009, 45 percent of CFOs believe it is highly or extremely likely that nearly all hospitals will employ a majority of their physicians in the next 10 years.
This does not mean the industry is planning to do a U-turn and reprise its behavior in the 1990s. Quite the contrary. Among the chief differences between then and now is that the physicians are approaching hospitals today, rather than the other way around.
There are a lot of reasons for this role reversal, including the fact that younger physicians are seeking a more balanced work life, older physicians are anticipating a decline in revenues, and all of them would like more leverage in managed care negotiations.
It's not that they're desperate. Well, OK, some of them are desperate.
What Hospitals Need and Want
Hospitals and health systems have their own reasons for wanting to bring physicians into the fold, of course, most of them having to do with the changed (read: episodic) reimbursement environment the industry expects. As Sue Cejka, managing partner with the executive search firm Grant Cooper & Associates in St. Louis, puts it, "you can only accept bundled payments if you employ the physicians."
Furthermore, says Cejka, if you don't employ the physicians, "your ability to do anything that we would think of as bonding is very limited." And bonding, aligning incentives, is looking like the only reliable way to enhance clinical outcomes and boost cost efficiency at the same time.
For this reason, hospitals are playing by a different rulebook these days. Unlike the 1990s, they are paying book value for physician practices, sans goodwill. They are guaranteeing income for a year, rather than three or five years. They are adding incentives to base pay, based on quality as well as production.
And they are looking for a more balanced workforce. Instead of simply gobbling up primary care physicians, they are seeking out specialists and subspecialists, especially surgical specialists. (Think cardiovascular, orthopedics, urology.) The idea, says Cejka, is to reflect the distribution that exists in medicine in general: 60% PC, 40% specialists.
Because another facet of this building wave of physician employment is the desire to create an enterprise that is a strategic asset, rather than simply a collection of whatever individual physicians come knocking on the door. The most progressive organizations, says Cejka, are aggressively acquiring local practices and also recruiting new physicians in an effort to put together a group that will constitute a comprehensive system of care delivery in a range of market-responsive delivery sites.
Simple, Transparent, Inclusive
One of those progressive organizations is Adena Health System, Chillicothe, Ohio, whose vision is to be nothing less than the best healthcare system in the nation. Unlike many other organizations that ventured into physician employment in the 1990s, Adena has stuck with it and today employs the vast majority of its physicians. Those who are not employed, like emergency department physicians and radiologists, have exclusive contracts with the system.
"If you look at the best systems, they're typically highly vertically integrated - Mayo Clinic, Johns Hopkins," says President and CEO Mark H. Shuter, FACHE. "And that has really been the major driver of our accelerated recruitment efforts - to be the best. Our strategy is not so much a hospital strategy as a community strategy, one that requires everybody to be together inside a common organization so we can meet a broad-based, regional need."
A major tool for doing that is a completely integrated electronic medical record (EMR), which Adena is in the middle of deploying and which should be in the last physician office by the end of 2010. "All the inpatient, outpatient, and physician offices are on the same platform, so it will be a longitudinal record, one that goes with the patients wherever they go in the system."
Currently, says Shuter, contracts are paid on WRVUs, using federally approved surveys to come up with the appropriate dollar amount per WRVU. New physicians have a guaranteed base salary, one year for PC physicians and two years for specialists; after that, they are all paid solely on the basis of production. "But once the EMR is up and running, we will be using outcome criteria, as well as patient satisfaction.
"We try to keep things simple, transparent, and inclusive. We don't have any fancy joint ventures. Our physician leadership positions are not political appointments. We work together to appoint a CMO, who reports to me with a dotted line to the board, and then the physicians work for the physicians."
Perhaps the key consideration for hospitals in creating a physician enterprise is deciding whether to directly employ the physicians or to house them in a separate corporation or foundation. The consensus is that the latter is the better course, fostering shared standards and a shared brand identity along with a shared infrastructure.
The Beckham Company, strategic consultants in Bluffton SC, encourages its hospital clients to think about evolving into a health system that has three fundamentally different businesses, says president Dan Beckham: an inpatient enterprise, an outpatient enterprise, and a physician enterprise.
"I would argue that these are not only different businesses but radically different cultures, and that trying to operate the physician enterprise out of the back pocket of the hospital doesn't work." Right now organizations may get away with it, says Beckham, because the physicians are so needy.
"But from a structural standpoint, it's much better to create a separate organization that has its own physician leadership, its own committee structure, and its own governance, even if that governance structure is technically advisory to the health system board. People tend to own what they help create, and giving physicians lots of involvement in designing the organization and making it work creates ownership."
Don Seymour, president, Don Seymour & Associates, Winchester, Mass., agrees. "The best approach for the long term is to build a multispecialty group (MSG) that really acts like one to the extent possible -- physician governed and professionally led. Ideally, you set it up as a subsidiary of a parent corporation with the hospital as a separate subsidiary."
It's a harder sell, he says, if the organization chart shows that the physicians are just a department of the hospital.
Before You Buy, Analyze
Even before you make this decision, experts caution, you need to do a rigorous financial analysis. For the most progressive hospital organizations, says Cejka, this includes quantifying downstream revenue. One of her clients determined that the 150 physicians it employs represents about 6 percent of the total medical staff but more than a third of the hospital's revenue, due to direct referrals.
"The hospital could argue that it would get that money anyway, but the truth is they don't get all the revenue from any physicians but the employed ones. If you don't employ them, they're splitters."
While there may be no payment to acquire a practice, especially if no hard assets are being transferred, there is unlikely to be a significant boost to the bottom line, either. So any analysis of a potential employment model must take into account:
- physician-related costs (including malpractice premiums)
- risks (including uncertain physician payments and poor ROI)
- competitive positioning
- investments in IT
And when it comes to evaluating physicians' past productivity, don't take their word for it - get a rigorous appraisal from an independent third party to make sure there is alignment with the compensation the hospital intends to pay.
Another question is whether to bring ancillary services into the hospital or leave them in physicians' offices. Opinions vary. Cejka favors the former, primarily because it is more efficient and avoids competing with the physicians, but with a caveat:
"One of the biggest pitfalls for hospitals employing physicians is stripping out ancillaries, which are 40% of the income in a PC practice, and then pointing your finger at the physicians and saying 'Look how much money we're losing on you." That makes physicians very angry. They only look like they're losing money because you've stripped out such a big piece of their revenue stream."
No matter how many times you explain this to the board, says Beckham, there is a tendency for them to forget - which is why he prefers leaving ancillaries in the physicians' offices."
Negotiating the Pitfalls
Failing to properly calculate the effect of ancillaries is just one of the potential traps unwary hospitals may trip into. Here are some others.
Failing to realize the importance of team players. The MSG culture is different from that of a loose confederation of individuals; it's more collegial. Even if physicians have great clinical skills, says Seymour, an experienced, physician-led organization like Mayo Clinic isn't going to bring them in unless it thinks they're team players.
"This is especially true with established entrepreneurs who have been making judgments on behalf of their patients on their own for 10 or 15 years. That's why you need a physician at the top of the enterprise who understands MSG culture and can be tough-minded and drive the group in that direction over time."
Trying to manage a physician group using hospital management skills. This is a lesson that many hospitals learned the last time they took on physicians as employees, says Seymour. "Even the brightest hospital administrator is going to have a steep learning curve. What you really need is someone running things who has both interest and proven skills in MSG management."
Failing to provide the necessary technology. When push comes to shove, technology can be a deciding factor for some physicians - particularly if the competition isn't offering as comprehensive a package. Experts recommend four solutions: An EMR, physician portals, digital imaging/picture archiving, and sophisticated communication systems. Hospitals that come out ahead may be those that also hire preceptors to train new physicians in these technologies.
Giving short shrift to members of the medical staff who want to remain independent. Some physicians can't be won over by rational arguments and will threaten to leave rather than be employed. The question then becomes, says Seymour, do those physicians have somewhere else to go?
"The research says that about 85 percent of the time, they won't leave. But even so, the hospital should go out of its way to try to work with them and treat them fairly. If you want to develop an ambulatory surgery center and the independent group of orthopedic surgeons you need to make it a success doesn't want to be employed, maybe you need to consider a joint venture."
Beckham recommends allowing reluctant physicians to remain independent and continuing to provide them with support in order to engage them in collaboration and communication.
"One of the motivations for employing physicians is to create leverage with the managed care plans. The FTC has provided favorable opinions to several clinically integrated networks that include independent physicians. And it has just approved joint contracting for independent physicians in a case involving a physician-hospital organization (TriState Health Partners in Hagerstown, Md.) that demonstrated ample levels of collaboration, consistency, and collaboration, a robust EMR, and a high-speed web portal for communication.
"I think a mixed model, offering employment to those who want it and support for those who want to remain autonomous, might offer more vitality and innovation in the long run."
One for All, All for One
This is the model Adena Health System has adopted. As Adena Regional Medical Center is the only game in town -- and it is a small town at that, its service area beginning right where Appalachia starts -- it has little to lose and everything to gain by offering new recruits a choice between joining or remaining independent.
Either way, the system is able to keep expanding access. "Our physicians submit a clinical plan to our board every year," Shuter explains. "Part of the plan has been to keep growing the subspecialties. Another part has been to extend our reach to the larger community. We're collaborating with the federal government to put in a fiber optic network, so we can take our EMR to the entire region."
The key is to have a solid clinical vision, says Shuter, "something bigger than ourselves. For our physicians, it's community first, Adena second, individual needs third. The whole dynamic is something that gives us energy rather than taking it."
Clearly, there is a lot to consider and calculate before taking on physician employees in bulk. But with shortages looming, competition heating up, and payment reform barreling down the highway, taking a long time to deliberate may be a luxury hospitals can't afford.
The best advice may be to act with caution - but act.
Publication Date: Wednesday, May 20, 2009