Physicians Employed by Hospitals

Gregory J. Mertz, MBA


January 01, 2018

Which Physicians Seek Employment?

A typical reason for practicing physicians to seek hospital employment is to find shelter from the ups and downs of running their own practice. Employed physicians can have income security, more predictable work hours, less involvement in practice management, and less exposure to increasing government regulations.

These goals, however, suggest that once these physicians become employed, they may not feel the same sense of urgency they had when they ran their own practices, and as a result, they may not be as productive.

Employed physicians can also be become less productive owing to poor staff training, inefficient work processes, and other factors tied to the hospital and not to them.

On the plus side, employed physicians don't get financially rewarded for ordering ancillary services, because that income goes to the hospital and doesn't go to them. Also, they are thought to become more comfortable working in teams with other physicians and nonphysicians.

Two Groups of Employed Physicians

Employed physicians can be generally divided into two groups, on the basis of career path, and each has significantly different attitudes and expectations about the job. Middle-aged physicians typically had their practices acquired by hospitals, and young physicians joined the hospital out of training.

Older physicians tend to have fewer problems being productive. In general, their younger counterparts were not trained as residents to be productive, whereas the older physicians developed at least some techniques on the job.

On the other hand, older physicians tend to have strong opinions on how medicine ought to be practiced and may resist doing things the hospital's way. Many of them were in small practices, where they set their own rules.

In contrast, new doctors are very familiar with large, bureaucratic institutions, because most of them just finished training in large academic medical center. Furthermore, they generally do not yet have strong feelings about how medicine should be practiced and are more willing to try new approaches.

Drawbacks of Hospital Employment

The many advantages of physician employment have already been laid out, but there are also a few potential disadvantages.

Having to deal with a lot of rules. In a 2016 Medscape survey, 42% of employed physicians indicated that they disagreed with their organization about patient care issues, and 57% disagreed over workplace policy. The most common disagreements were about deadlines for submitting medical records, inflexible work schedules, and dealing with staff.[1]

Having to deal with a large bureaucracy. Physicians who want to change a certain policy often have to go through multiple levels of management before they can get an answer. This can be particularly objectionable to physicians who were used to deciding their own policies in their practice.

Physicians who want to change a certain policy often have to go through multiple levels of management before they can get an answer.

Not having a staff under your control. Problems dealing with staff were an issue in the Medscape survey, probably because hospital-employed physicians typically aren't able to hire, fire, or manage staff. Staff are managed by a practice manager who is chosen by the hospital and may not have much contact with each physician. One practice manager often supervises three or four separate offices.

Having little control over compensation models. The hospital picks the compensation model for physicians, and changing any aspect of that model is very hard to do.

Hospitals May Lose Money on Employed Physicians

Hospitals have been reducing their losses on employed physicians, but on paper, at least, they are still losing a great deal of money per physician. A report by the Medical Group Management Association (MGMA) found that median losses for hospitals, as measured by net operating costs before subsidies, were $183,000 per employed physician in 2012; that figure had been reduced to $128,000 by 2015.[2]

How Much Money Do Hospitals Actually Lose?

Anecdotally, hospitals' median loss is now at about $100,000 per employed physician. But that is still an incredible burden for hospitals to have to carry, year in and year out.

As operating margins shrink, hospitals may reconsider these losses and cut back on employed physicians, as they did in the 1990s. But the reason hospitals continue to put up with these losses has to do with why they acquired practices in the first place.

Hospitals have acquired practices, mainly in primary care, because they wanted to create a whole network of care, both inpatient and outpatient. Therefore, the value of employed physicians is not only how much they earn in reimbursements, which is what the above figures measure.

Rather, the value of employed physicians also involves how many ancillary services they order from the hospital, how many referrals they make to specialists within the hospital system, and how many patients they admit to the hospital.

This income, known as "downstream revenue," is hard to calculate because it involves gathering charges all over the system and assigning them to a particular doctor. But many hospitals do it in-house, and the resulting figure makes direct losses from doctors more acceptable to the hospital C-suite. In a 2015 survey of 23 hospital executives, 22 said that their expectations for practice acquisitions were either fully or partially met.[3]

Breaking Even Will Take Some Time 

Even if hospital executives expect to lose money on doctors' direct income, the figures are still troubling. Employed physicians still don't have the earning power of independent physicians.

Employed physicians still don't have the earning power of independent physicians.

As already indicated, employed physicians' direct income doesn't include ancillary services, which independent physicians can count in their earnings. But if you factor out ancillary income, employed physicians should earn just as much in reimbursements as independent physicians earn, and this is not happening yet.

This isn't actually true. Although the ancillary income doesn't directly benefit them, the salaries are based on national or regional data that includes physicians who do get to keep their ancillary revenue.

Private practices, which can't depend on hospital subsidies, have to balance their budgets to survive. Why shouldn't hospital-employed physicians have to do this? There are many reasons why this is not happening, and some of them are out of the employed physician's control.

Reasons Why Hospital-Based Practices Lose Money

Expecting to work less. In 2012, hospital-employed physicians generated 29% fewer relative value units on average than doctors in physician-owned medical groups, according to an MGMA survey.[4] This lower productivity is in part due to expectations that they would be able to work less than before. For example, some of the older physicians often want to wind down their work before retiring.

Not having enough work. When hospitals acquired practices, they often did so in a reactive way that wasn't based on demand for more physicians. As has been shown, they often bought practices because doctors wanted them to, or to head off the competition. As a result, some employed physicians didn't have enough work to do when they were hired and may still not have enough work.

Not learning to be efficient. Hospitals are hiring more physicians directly out of training, but residency programs often have not trained them to be efficient. In private practices, these new physicians are often paired with a seasoned partner who shows them how to be productive, but hospital-owned practices may lack this arrangement.

Not being familiar with managing practices. Even when hospital executives hire seasoned practice managers, they may not understand a manager's needs because they are unfamiliar with running practices. Similarly, hospitals' billing departments may let payments go because they are not used to dealing with a practice's charges, which tend to be smaller than those of hospitals.

Having inflexible policies. Hospitals often set policies that are the same across all of their practice locations on the assumption that this is most efficient, even when circumstances call for differing policies.

Having a money-losing payer mix. On average, hospital-owned practices have twice the percentage of Medicaid charges, five times the charity care, and 10% less commercial insurance that private practices have, according to the 2012 MGMA survey.

Having higher overhead. In many hospital organizations, the practice network is assigned a percentage of the total institutional overhead, which includes higher salary levels for nurses, richer employee benefits, and more expensive IT systems than in practices.

Not consolidating practices. When hospitals acquire small, money-losing practices that have one or two physicians, they don't consolidate them into larger sites where they could benefit from economies of scale.


For most physicians, having the security of working in large organization usually means making less money than their colleagues in private practice. Employed primary care physicians (PCPs) earn 9% less than self-employed PCPs, and employed specialists earn 22% less than self-employed specialists, according to the 2017 Medscape Physician Compensation Report.[5]

Compensation for New Physicians

Hospitals often lure new physicians by paying them more in guaranteed salary and one-time bonuses than they could earn in private practices. But as these physicians transition from a salary in the first year or two to a production-based payment, their income may often decline.

Payment Formulas

Employed physicians tend to have a different arrangement regarding being paid than partners in private practices. Whereas practices tend to pay physicians on the basis of collections, hospitals tend to pay at least in part on productivity.

Whereas practices tend to pay physicians on the basis of collections, hospitals tend to pay at least in part on productivity.

Unlike collection-based payments, productivity-based payments reward the physician's work regardless of the reimbursement. Employed physicians are paid no more for treating a private-pay patient than for treating a Medicaid or nonpaying patient.

This arrangement suits hospitals well, because they tend to have a lot more Medicaid and nonpaying patients than private practices have, but it can add to the financial losses of hospital-owned practices.

Emphasis on Productivity

Many hospitals often place a high share of a physician's income under productivity measurements because they want to make sure the physician is productive.

In 2016, 41.59% of hospitals and health systems paid one half or more of compensation in production plus an incentive, according to the MGMA. Meanwhile, 31.46% paid one half or more of compensation in a salary plus incentive formula, 16.42% paid all of compensation in productivity, and 8.18% paid all of compensation in a salary.[6]

Impact of Productivity Targets

Some physicians complain that the productivity targets to earn added income are set too high for them to reach without skimping on care. The right level may be subject to debate. There are nationally published benchmarks, but the actual work required by each hospital may be different. For instance, it might include more data reporting or committee work.

Hospital administrators are rightly concerned about making sure their employed physicians are productive, but for targets to have an effect, they need to be set at a reasonable level that most doctors could reach if they put their minds to it. Otherwise, a high target is just a form of punishment.

Demands for more productivity also have to address concerns that making physicians reduce time for face-to-face encounters with patients could reduce quality of care and create more expenses in the long term. This would lead to penalties if payers reimbursed hospitals on the basis of overall expenses.

Dissatisfaction With Productivity Targets

Productivity targets face a great deal of pushback from employed physicians. In 2016, only 44% of employed physicians indicated that they were satisfied with their productivity targets, according to the Medscape survey.[5]

The figure indicates a high level of dissatisfaction, but the good news is that the number of satisfied physicians was five percentage points lower in the Medscape survey 2 years earlier. The rising satisfaction rate could mean that administrators are starting to listen to employed physicians' concerns, or it could mean that employed physicians are better able to meet productivity targets.

Other Payment Incentives

Increasingly, hospitals have been tying payments to other measurements besides productivity, such as patient satisfaction, patient outcomes, and even serving on hospital committees and organizational initiatives.

According to a 2015 survey of management-based organizations, mainly hospitals, many of them were using these measures to evaluate performance, including setting payments, and many more were able to track these measures.

For example, 82% of these institutions were tracking patient satisfaction measures, and 38% of them were using them to evaluate performance. Meanwhile, 76% were tracking outcomes, and 32% of them were using outcomes to evaluate performance.[7]

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