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Reconsidering Physician Employment

ECG INSIGHT

After the bubble burst on the practice acquisition boom of the 1990s, hospitals understandably became very leery about physician employment. Now that the dust has settled, some of them are revisiting the strategy and deciding it is right for them.

Employed physicians can address some of the hospital's vital objectives, such as recruiting physicians in each specialty, controlling market share and carrying out new initiatives such as combating medical errors.

This approach is not for everyone. Hospitals that have very close working relations with physicians on staff may not need to hire. Also, making a profit on employed physicians is still not a sure thing.

Still, by applying lessons learned from the hard experiences of the 1990s, the hiring hospital can at least come close to break-even. To do this, it needs to make some basic changes in the old employment models that proved so disastrous. Hospitals have eliminated excessive payments for practices and have rethought hiring practices, upgraded management and improved incentives for physicians.

Why hire physicians?

Some of the old arguments for hiring physicians have become even more convincing than they were before. Hospitals' bottom lines are under even more intense pressure and shortages have worsened in certain specialties, such as orthopedics, general surgery and obstetrics.

Some hospitals now look to recruiting as a way to build primary care networks and capture market share. For example, a system in the South hired 100 doctors last year to expand its physician network in the area.

Hospitals traditionally relied on group practices for recruiting. But small practices ability to recruit has become more problematic for a number of reasons. The labor market is getting too tight. A well-trained physician may have ten or more job offers and a small practice is not at the top of the list. Also, the group's existing members might worry that a new physician will reduce their own incomes or internal strife may be distracting the group from recruitment.

The implications of not filling a needed position are staggering for a hospital. If primary care physicians are finding that it takes four months to get a gastroenterology consult, they may well start sending patients to GIs aligned with another health system.

Of course, hiring physicians is not the only way to go. If a hospital has close working relations with its medical staff, it might make more sense to work with the staff than to hire physicians. Some hospitals, however, are finding it more difficult to gain the cooperation of physicians on staff for a variety of important projects, such medical error initiatives or introducing computerized physician order entry. Staff physicians' goals may be different from the hospital's or even diametrically opposed to them. For example, surgeons on staff may invest in an ambulatory surgery center that takes millions of dollars of business away from the hospital.

There are cases where using hired physicians makes a lot of sense. For example, they might function better than independent physicians in close-knit cross-specialty teams such as in cancer treatment, where surgeons, medical oncologists, plastic surgeons and radiation oncologists are all involved.

A cautionary tale

When reevaluating physician employment, it's worthwhile to review why hospitals got burned the first time around. What went wrong with the 1990s boom?

The boom focused on acquisition of existing primary care practices. By 1995, according to a nationwide survey at the time, more than one-third of healthcare organizations had acquired practices in the previous five years. Publicly held practice management companies, flush with plenty of cash from Wall Street, pushed up the price of practices and forced hospitals to get into the game to defend market share.

The trend became a lemming-like rush, without enough thought given to strategy. When hospitals soured on employment and dumped their practices, mean losses came out to $97,000 per physician per year.

The mistakes are painful to list. Hospitals overpaid for practices, set up physician compensation structures not aligned with organizational goals and failed to hold physicians accountable for the practice's success. Some hospitals failed to adequately train management, provide enough organizational infrastructure, such as billing and collection processes, and failed to track physician performance.

Things have changed today. The for-profit practice management industry is virtually extinct and a new type of hospital-owned physician network has risen out of the ashes. Some of these networks still fail to break even, but they don't have much of a choice in many cases. If they hadn't hired their physicians, there would have been a yawning gap in their medical staffs.

Physician employment works when hospitals coolly consider their choices. In the go-go 1990s, everyone was being reactive. Some hoped that large networks of hired physicians would give them leverage in managed care contracting. Others were responding to a hiring spree by a hospital down the street.

Competing hospitals bid up the price of practices and provided generous acquisition payments, including “goodwill” – payment for a physician's list of patients. Often they were merely hiring physicians already in the community and there was just a change of employers with a new subsidy attached. These hospitals also failed to create long-term employment contracts. They offered fixed, guaranteed salaries at high levels that were at survey medians or better.

The rules of the game have changed now. Hospitals stay out of bidding wars and purchase assets only at fair market value. Contracts last one year with a 90-day out. Payment packages create a strong link between physician productivity and compensation.

Hospitals now realize that creating a successful medical group is only a first step. They must bring in strong management and cultivate physician input and leadership. The leadership team should establish financial targets based on realistic benchmarks and seek continual improvements, and the practice should periodically survey performance and provide feedback to physicians.

Ready to be hired

When hospitals begin to hire, they will find that physicians have a healthy appetite for employment. Primary care physicians' interest stems in part from financial problems. They have been losing money in recent years as reimbursements stagnated and expenses continued to rise. Specialists, on the other hand, have generally seen their incomes rise somewhat, but they share some lifestyle issues with primary care doctors that also draw them toward employment.

Younger physicians of many stripes prefer hospital or group practice settings because they can rely on a stable management structure and benefit from things like information technology that are not available at most private practices. Women physicians – a growing segment – tend to prefer shorter work hours, which hospitals are more likely to grant.

Kaiser Permanente, one of the most successful physician-hirers, representing physicians in the Kaiser Foundation Health Plan, reports that today's physician is looking for stable pay, manageable hours, a technology infrastructure and a respite from billing hassles. Permanente's Northern California group reports more than 14,000 physicians applied for employment since 1999, and 40 percent of new hires were lured away from local practices.

Competing with practices

A hospital may not have all the competitive advantages of a Kaiser but it can easily compete with small practices in both the hiring process and long-term management of the group.

For example, the hospital can introduce job candidates to its recently hired physicians to give them an idea of the work environment, whereas a small group may not have any new hires to meet with because it adds physicians very infrequently.

The typical small group usually can't promise a long-term fixed salary. After the salary guarantee runs out, a new physician's income will fluctuate depending on the income of the group that year. But a hospital can promise a new hire a salary and benefit package.

The hospital can also address some lifestyle issues. It can hire part-time physicians, which would be very unusual for a small group to do. With several physicians on hire, it could create a call schedule of one night in seven. But the small group can only say: “We hope you come so we can get back to one in four. One night in three is killing us.”

Unlike the small group, the hospital can draw from its considerable management experience. It can produce a seasoned executive director and experienced management team. Small groups, on the other hand, typically have an office manager who may be part-time, and physicians may be expected to take turns on management duties like negotiating managed care contracts.

Conclusion

While hiring physicians is not the only answer, it can be an effective response to physician shortages, downward income pressures and difficulty with recruiting. Hospitals that want to go down this road need to take advantage of the lessons learned from past experience and implement current best practices in physician employment. They need to think carefully about how employment can augment their physician strategy. If planning and implementation are done correctly, this strategy can be an effective way for hospitals to stabilize their medical staffs without sacrificing their bottom lines.

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