Employed Practices See Revenues — and Expenses — Rise: Report

Ken Terry

November 04, 2021

Revenues and productivity for employed physician practices hit their highest point in 2 years in the third quarter of 2021, according to the latest Physician Flash Report from healthcare consultancy Kaufman Hall. The median compensation of a full-time equivalent (FTE) physician also hit a new high, according to the report.

However, there are some dark clouds on the horizon for physicians employed by hospitals and health systems. Practice expenses increased faster than revenues, and the median subsidy that health systems paid to their own practices hit a head-spinning $231,654 per FTE physician on an annualized basis.

According to the report, third-quarter net revenue per FTE practitioner (including advanced practice professionals [APPs]) was $660,762 annualized, 4.4% higher than in the second quarter of this year and 11.4% higher than in the corresponding period the prior year. Revenues rose 11.1% compared to the third quarter of 2019.

The number of work relative value units (wRVUs) per FTE practitioner, a measure of productivity, increased 9.4% in Q3 2021 compared to the corresponding period the prior year and rose 6.3% compared to Q3 2019.

Primary care specialties saw revenue and productivity gains across the board, whereas for surgical specialties, revenue and productivity declined.

The COVID-19 wave caused by the Delta variant occurred in the third quarter. Although the Delta surge was felt in a few geographic areas, it had little impact on practice revenue or productivity at a national level, Matthew Bates, Kaufman Hall's managing director and physician service line lead, told Medscape Medical News.

Patients continued returning to physician offices, especially in areas where vaccination rates were high, he explains. In addition, "Healthcare providers have learned how to address COVID and have worked out their COVID protocols so they can see patients," Bates said. "Healthcare needs don't stop because COVID outbreaks occur."

Why Expenses Are Rising So Fast

Practice expenses climbed above prepandemic levels for the third straight quarter, the report notes. Total direct expense per physician FTE (including APPs) climbed to $914,024 annualized in the third quarter, up 4.4% from Q2, 13.2% from Q3 2020, and 10.8% from Q3 2019. Expenses increased for all specialties from the second quarter to the third quarter of this year.

The report attributed the rise partly to higher revenue cycle costs and growth in drug and supply expenses. Labor costs were not cited, but median paid physician compensation per FTE was $339,542, up 5% from the previous quarter. Support staff salaries also increased slightly, Bates says, as practices sought to compete with other businesses that offered higher pay to workers in a tight labor market.

The number of clinical and front office support staff remained fairly static in relation to the number of wRVUs. In the third quarter, this metric increased just 2.6% compared to the corresponding period the prior year and 2.3% compared to Q3 2019.

This indicates that "practices are coping with the patient volume increase utilizing fewer staff [in relation to the number of patients]," the report says. However, the report also notes that practices are having difficulty hiring and retaining staff, which suggests some of them could use more staff members.

Performance and Subsidies

Kaufman Hall's report draws attention to the widening gap between high- and low-performing practices, which differ in the size of the subsidies that they receive from their hospital owners. "Contributing factors likely include wide variances in the pace of COVID‐19 recovery, including how quickly patients are returning to physician offices across different geographic regions and specialties," the report states.

Another possible reason for the differences in financial performance, Bates suggests, is the degree to which particular healthcare organizations are restoring accountability to their reimbursement formulas. When the pandemic was at its height, he notes, many hospital-owned practices continued to pay physicians what they'd been earning before or a bit less, even though their productivity had fallen off a cliff.

Now that patient revenues are back and COVID-19 is on its way to becoming endemic, he says, the higher performing organizations are again telling physicians that they're accountable for their performance. What this means is that their reimbursement is again based largely on their productivity.

But even as some health systems do this, they're still in a financial bind because their practice expenses continue to rise faster than revenues, requiring ever-larger subsidies. The median subsidy per physician FTE of $231,654 in the third quarter was 9.8% larger than in Q3 2020 and 12.2% larger than in Q3 2019.

"The investment/subsidy level has climbed about $25,000, on average, since the third quarter of 2019," Bates notes. "So while revenue has gone up, expenses are climbing faster. And that's not a sustainable model."

Subsidies Could Affect Bond Ratings

Hospitals say these subsidies make up for their losses on physician practices through downstream revenues. However, Bates notes, the ancillary revenue generators — such as lab and x-ray services — that hospitals take out of practices when they're acquired cover only about 20% of the subsidies, and it's hard to measure other downstream contributions from employed physicians.

The increasing size of physician subsidies could have an impact on hospitals' bond ratings, Bates suggests. In some recent discussions about hospital bond issuance that he was involved in, bond ratings agencies expressed concern that hospitals were losing so much money on their practices, he says.

As Kaufman Hall's accompanying Hospital Flash Report notes, hospital volumes dropped in the third quarter relative to prepandemic levels. That plus rising expenses resulted in lower operating margins for hospitals, not including their income from federal aid under the CARES Act.

Ken Terry is a healthcare journalist and author. His latest book is "Physician-Led Healthcare Reform: A New Approach to Medicare for All."

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