Hospital-Employed Physicians May Drive Up Costs

August 22, 2011 — The push by hospitals to employ physicians risks driving up healthcare services and costs without necessarily improving quality because these providers still operate in a largely fee-for-service environment, according to a new study published online August 19 by the Center for Studying Health System Change (HSC).

In this fee-for-service environment, hospital-employed physicians not only are paid on the basis of productivity but are also pressured to order more expensive care, write authors Ann O'Malley, MD, MPH; Amelia Bond; and Robert Berenson, MD.

"In one market," they write, "at least two cardiologists declined hospital employment offers because they perceived the pressures to drive up volume were greater than those in their mid-sized, independent cardiology group."

The authors base their assessment on interviews between March and October last year with hospital executives, physicians, insurance company officials, and other industry players in 12 metropolitan areas from coast to coast.

What they found — doing more to earn more — is exactly what healthcare reform intends to eliminate by paying providers for the quality of their work, particularly when it comes to care coordination. Since the passage of the Affordable Care Act in March 2010, hospital executives have increasingly viewed physician employment as a way to prepare for a world of accountable care organizations and bundled payments.

Nevertheless, the primary motivation for hospitals to hire physicians so far has been to "gain marketshare, typically through lucrative service-line strategies encouraged by a fee-for-service payment system that rewards volume," the authors write. Two examples of service lines that hospitals want to foster through their MD and DO employees are cardiac care and cancer care.

Avoiding the Coasting Syndrome

Specialists, as well as primary care physicians, have gone to work for hospitals in greater and greater numbers, the authors write, to escape the long hours and shrinking income of private practice. For their part, hospitals have learned some lessons about managing these refuge-seekers since their last physician hiring spree in the 1990s. Back then, physicians did not work as hard once they signed a contract, which often encouraged coasting by guaranteeing them 100% of their previous year's earnings during the transition to hospital employment.

Today, fixed salaries are out, and productivity-based compensation formulas are in. Clinicians typically find themselves rewarded for how many relative value units (measures of work in the industry's resource-based relative value system) they generate, said Tony Stajduhar, president of the healthcare recruiting firm Jackson & Coker.

Stajduhar told Medscape Medical Newsthat he has not heard of hospitals going so far as leaning on employed physicians to liberally order laboratory tests, diagnostic imaging, or specialty consults to boost their bottom line. A different perspective on that issue comes from Tommy Bohannon, vice president of hospital-based recruiting at a rival firm called Merritt Hawkins.

"Whether it's overt pressure or covert pressure to order additional tests and studies, I don't think that dynamic will ever go away in the current compensation scheme we have," Bohannon told Medscape Medical News.

Hospitals Negotiate Better Insurer Contracts for Physicians

By employing physicians, hospitals can better secure their referral base and capture admissions, the authors of the HSC study write, but the alignment of these providers has the potential to increase healthcare spending at a time when policy makers and politicians alike are yelling "Whoa."

In addition to the fee-for-service incentive to drive up volume, the authors write, other cost escalators rev up when hospitals hire MDs and DOs:

• Hospitals can negotiate more lucrative contracts on behalf of their physicians with private insurers than the physicians could negotiate independently.


• Third-party reimbursements, especially those from Medicare, are higher when physicians practice in an office that is technically a "hospital-based facility."


• Bidding wars over highly sought specialists in some markets result in "artificially high compensation."

"Clinical Integration" Is Not Automatic

One potential up side of hospitals hiring physicians is improved coordination of care and communication: Instead of working in their own insular practices, physicians belong to a big team. However, the authors of the HSC study discovered that this kind of "clinical integration" does not occur automatically or easily in a fee-for-service system.

"Communication between inpatient and outpatient providers, even those employed by the same hospital system, continues to be a problem," they write. They quote a hospital administrator in Michigan as saying: "Being able to bring all physicians together with a unified focus on quality, service, and access is a challenge." Employed physicians are more likely to be on the same page, however, when they use the same electronic health record system.

The key to achieving physician teamwork as well as controlling costs, the authors write, is broad payment reform that "reduces incentive to increase volume and creates incentives for providers...to achieve real efficiencies and higher quality."

Center for Studying Health System Change. "Rising Hospital Employment of Physicians: Better Quality, Higher Costs?" Published online August 19, 2011. Full text

Majority of New Physician Jobs Feature Hospital Employment

June 13, 2011 — Primary care physicians remain in high demand, although the majority of job openings are for hospital employees, not in private practice, according to a new survey by Irving, Texas–based national physician search firm Merritt Hawkins.

For the sixth consecutive year, family practice and general internal medicine were the top 2 most-requested physician search assignments. They were followed by hospitalists, psychiatrists, orthopaedic surgeons, emergency medicine physicians, obstetrician/gynecologists, neurologists, general surgeons, and pediatricians.

Reimbursement cuts and declines in elective procedures have reduced the volume of search assignments for radiologists, cardiologists, and anesthesiologists. Those specialists, which were among the most requested searches 4 to 5 years ago, are now ranked 17th, 18th, and 19th.

The majority of physician search assignments (56%) were for hospitals, up from 51% a year ago and 23% five years ago. Only 2% of the firm's search assignments featured openings for independent, solo practitioners, down from 17% five years ago.

Healthcare reform, which enhances the role of primary care physicians by encouraging new delivery models such as accountable care organizations, is one factor driving the need for additional family physicians and internists, Travis Singleton, senior vice president of Merritt Hawkins, said in a news release.

"The era of the independent physician who owns and runs his or her practice is fading," said Singleton. "Doctors today are more likely to be employees working for increasingly large health systems or medical groups."

Hospital acquisitions of physician practices have "to some extent replaced traditional recruitment in the past year, as health care organizations have focused on preparing for new delivery models," the survey found. "As this trend plays out, there has been a nationwide lull in the traditional physician recruiting market, which is only now showing signs of returning to its customary vigor."

Although "pay for performance" rather than volume has become the new mantra under healthcare reform, the survey found that physicians are still compensated on volume-based formulas such as the number of patients they see, the amount of revenue they generate, or the number of work units they accrue. More than 90% of searches in the 2011 review that featured physician production bonuses reward physicians for fee-for-service style volume. Less than 7% reward physicians for meeting quality or cost objectives.

"Quality and cost rewards may be the physician compensation standards of tomorrow," Singleton notes, "but patient volume, revenue or work units remain the standards of today."

Average salaries continue to increase. Family physicians were offered an average salary of $178,000 for 2010 to 2011, up from $161,000 in 2006 to 2007. Internists averaged $205,000, up from $174,000 five years ago. Urologists saw their salaries increase to $453,000 in 2010 to 2011, up from $400,000 just a year ago. Orthopaedic surgeons, earning an average of $521,000, saw an increase of just $2000 from a year ago.

Salaries have almost entirely replaced income guarantees as a compensation model. Only 9% of physician search assignments over the past year featured income guarantees, down from 21% in 2006 to 2008, and down from 41% in 2003 to 2004.

Signing bonuses, relocation, and continuing medical education allowances remain standard in most incentive packages. Housing allowances are a new form of recruitment incentive. Because of the volatile real estate market, some physician candidates are unable to relocate without such help.

The 2011 review is based on the 2667 permanent physician and advanced allied professional search assignments that Merritt Hawkins/AMN Healthcare's physician staffing companies were engaged to conduct during the 12-month period from April 1, 2010, to March 31, 2011.