The 'de-employment' of physicians by hospitals
December 1, 1997 3 minutes read
The de-employment’ of physicians by hospitals
By Elizabeth Gallup, MD, JD, MBA
After a decade of feverish and sometimes illogical acquisitions of primary care practices, the "bull market" may be over. Now hospitals are reconsidering their strategies and pulling back. Hospital administrators have operated on the premise that there is a strong correlation between buying practices and filling up hospital beds. Staffing up with doctors was also a way to market physician-hospital organizations (PHOs) and vertically integrate hospitals with local HMOs and insurers.
Although the opportunities seemed bright, the red ink has flowed. However well-intentioned, most hospitals were ill-equipped to manage physician practices, especially primary care. Hospitals are used to the bureaucratic method of management in which decision making can take days or weeks. Physician practices, on the other hand, need flexible and timely decision making. Billing problems also have cropped up, resulting from efforts to apply the schematics of a hospital billing system to a physician practice which have mixed about as well as oil and water.
One rationale used by doctors who sold their practices was that they needed the hospital’s capital and staff to bring about efficiencies in their offices. They were feeling the heat from managed care organizations, including a ratcheting down of payments, with little or no training in how to manage the business side of their practices. Typically, they believed hospitals could help cut overhead. But they discovered that overhead can increase with volume. Volume does not equate with efficiency.
Another obstacle hospitals face is the difficulty of coaxing independent groups and multiple practices to become part of a larger group. Prior to employment, doctors aggregated based on collegiality and choice. Now they are thrown together in a large organization with expectations that they should know and understand group dynamics and act accordingly. This evolution does not happen without a great deal of effort and hard feelings, and change often is incremental.
Yet another challenge for hospitals has to do with how they entice doctors monetarily and what happens to compensation after they win doctors over. When purchasing practices, hospitals sometimes promise salaries that are overinflated relative to the work performed. In response to receiving a salary, doctors are prone to reduce their productivity by as much as 20%, and this causes salaries that were already overinflated to become even more so. Initially, hospitals were willing to bear this loss in the hopes that the revenue from new patients would offset this loss. However, most hospital-affiliated physicians are loyal to their hospital, and consequently, already admit to their affiliated hospitals. Therefore, the hospitals do not see any increase in inpatient revenue because the revenue was already in their pockets.
Losses from high salaries, low productivity, and high overhead are mounting. Many hospitals are now scrambling to sell off the practices they once coveted. Staff-model HMOs also are looking to sell their employed-physician practices. Insurers that sprinted into the buying spree are limping out.
One of the biggest purchasers of "pre-owned practices" likely will be the large physician practice management (PPM) firms like PhyCor and FPA. (See story in November 1997 Physician’s Managed Care Report, p. 146, on PhyCor’s efforts.) These firms have demonstrated that they can grow practices by aligning with other groups, assisting practices in becoming more efficient, achieving a positive "group think," and negotiating and managing better managed care contracts.
While many independent physician practices resist entreaties from PPMs the same way they have resisted entreaties from hospitals, the physicians in pre-owned practices are predisposed to "working for somebody else." For those physicians who have succumbed to the loss of control, a PPM might look like welcome relief from hospital employment in which attempts at practice management were unsuccessful. For those who have rebelled against relinquishing control to the hospitals, a PPM may be only slightly more palatable.
[Editor’s note: Physician’s Managed Care Report is interested in hearing your experiences, both good and bad, with hospital ownership of physician practices. If you’d like to share these experiences for possible inclusion in a future issue of the newsletter, please contact Francine Wilson at (404) 262-5416 or via e-mail: [email protected].]
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