Hospital-Employed Physicians May Drive Up Costs

August 22, 2011

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 News that 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 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


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