Hospital Ownership of Physician Practices on the Rise

The number of physician practices owned by hospitals has increased 86% over the past 4 years, which also resulted in a 50% rise in the number of physicians employed by hospitals, according to a recent study.

The report, conducted by Avalere and released by the Physicians Advocacy Institute (PAI), showed that nearly four of 10 physicians are employed by a hospital and one out of four practices is owned by a hospital.

Kelly Kenney, JD, PAI’s executive vice president, notes government and private payment policies create incentives for this type of integration. However, Medicare’s “site of service” payment differential—as documented in another study released by Avalere earlier this year—demonstrates how Medicare pays more for the same services delivered in the hospital outpatient setting versus the physician office setting.

“As drivers of this trend, the acquiring hospitals or health systems in today’s environment are responding to incentives from public and private healthcare payers to integrate vertically with healthcare providers,” Kenney says. “In integrated arrangements, the hospital/system can exert much greater control over the healthcare services patients receive as they move through their system.”

Kevin Fine, MHA, a director for the healthcare advisory services group at Miami, Florida-based Kaufman Rossin, notes hospitals and health systems have been aggressively acquiring medical practices in order to expand their networks.

“Everyone is fighting for market share and control of the patient,” he says. “By developing integrated delivery systems, the organization has the ability to provide the entire continuum of care. However, employing physicians becomes a significant expense in a business where the margins are slim.”

Hospital acquisition of physician practices also builds and protects the hospital’s patient base, and strengthens referrals within the system, which drives revenue, he added.

A physician’s choice

There are myriad factors driving physicians from private practices and into employment arrangements with hospitals or health systems. According to Kenney, a big one is physicians’ concerns about the financial viability of private practice, especially with the widespread belief that payment for healthcare will move increasingly to value-based systems that reward more highly integrated care models.

“Under emerging payment methodologies, the downside of private practice is significant for many physicians in today’s market,” she says. “[The Medicare Access & CHIP Reauthorization Act (MACRA)] and other emerging value-based payment methodologies favor entities that can manage risk effectively and afford capital-intensive technologies to support data-reporting requirements.”

Another factor is that health insurer consolidation has created significant additional barriers for physicians to negotiate with increasingly large private health insurers.

The result is often a “take it or leave it” contract that favors the insurer and affords the physician with little ability to dispute decisions made by the insurer relating to their patients’ clinical needs or to payment-related policies. When a physician becomes an employee of a hospital or health system, the negotiation over contract terms with insurers is handled by that larger entity, which has greater leverage.

“It’s also challenging for small physician practices to stay abreast of and remain compliant with the costly and time-consuming government regulations,” Kenney says. “These create intense administrative burdens for physician offices that already struggle with burdens imposed by private payers, including securing prior authorization for medically necessary treatment for their patients and fair and timely payment for services rendered.”

Mark A. Bogen, CPA, senior vice president and CFO for South Nassau Communities Hospital, Oceanside, New York, notes individual physicians are trying to remain financially solvent, causing many of them to join forces with hospitals and health systems to protect their incomes.

“Physicians recognize that with requirements for EHRs, they don’t have the funds and the support to install and manage those systems while the hospitals/health systems have an infrastructure to do that,” he says. “Small practices that operate in the community may not be able to develop a call-coverage process that allows them to have planned time off. When employed by a hospital/health system, they are able to live more regular lives so quality of life tends to improve.”

Cause and effect

Physicians who are employed by hospitals or health systems forfeit some level of clinical autonomy, which can be challenging, particularly for those who were previously in private practice. In addition, as employees, physicians often do not control purchases of equipment or technology, and in many cases, do not have a significant amount of input into decisions about clinical and administrative staff.

“Another downside is that they may have operated as independent entrepreneurs for their entire careers, so they are ceding almost all historical control and decision-making to their employer,” Bogen says.

In addition to these factors, employment contracts often give the hospital broad discretion to terminate physicians, even when there is no cause other than a financial motive. It can be very difficult for a terminated physician to practice in his or her area when this occurs since a lost job could appear as a warning sign to prospective patients.

For patients, the consolidation is supposed to allow them greater access to care because physicians no longer have to worry about the economics of medicine and can remain focused on the practice of medicine.

“One of the questions raised in this study is how does this shift affect where patients receive their medical care, and how does it affect the cost of care for patients?” Kenney says. “These are critically important questions, which PAI and Avalere plan to delve into over the next year.”

Of course, practices don’t need to sell to survive, particularly if they have strong business processes and good advisors.

Fine says that many physicians prefer not to turn over control and It’s simply a business decision based on their practice and lifestyle choices.

Marc Mertz, vice president of GE Healthcare Camden Group, El Segundo, California, noted that while the number of independent practices is declining, some private medical groups are very well positioned for success, and many physicians prefer the private practice model.

“Private groups have an advantage in that their physicians are typically more highly engaged and aligned with the group’s performance and success than their hospital-employed colleagues,” he said. “On the other hand, private practices often lack the infrastructure or the capital to build capabilities for value based payment models.  In response, there are a growing number of enablement firms that will partner with private practices and provide population health capabilities to support the group.”