Doctors and hospitals: Not quite a love story

Nov. 18, 2019 / By Steve Delaronde

The relationship between physicians and hospitals has changed. Gone are the days of the hospital serving as the “physician’s workshop.” Advances in technology, different payment structures and the rise of profitable service lines such as orthopedics and cardiology, has changed the relationship between doctors and hospitals. This has resulted in the acquisition of physician practices by health systems, which is having a direct (though not necessarily positive) impact on physicians and hospitals, as well as the patients they treat.

A 2014 Healthcare Financial Management Association (HFMA) survey of hospital and health system executives revealed that 64 percent were pursuing a more integrated delivery system with an emphasis on physician employment. This is exactly what happened between 2012 and 2018 when the percentage of physicians employed by hospitals nearly doubled from 25 percent to 44 percent. The theory is that this type of vertical integration would lead to better coordination of care and efficiency, thereby improving quality and reducing costs. This has not happened.

Many will point to the emphasis the Affordable Care Act placed on accountable care organizations in 2010 that led to the merger of hospitals and physician practices. However, this trend started earlier. In the 1990s, the Clinton administration proposed a model of “accountable health plans” that would employ physicians and own hospitals similar to the staff model HMO. Even though the Clinton healthcare reform did not move forward, the acquisition of physician practices by hospitals was launched.

Hospitals benefit from owning primary care practices, as well as specialty physician groups. Hospitals benefit from a more secure and direct flow of patients to their facilities for inpatient admissions, diagnostic tests and procedures that are ordered, as well as performed by, hospital-affiliated physicians. Additionally, the acquisition of specialists protects hospitals from the bargaining leverage that results from single specialty consolidation. 

While supporting a physician’s salary is a large expense for hospitals, many realize a significant return on their investment. One study released in February 2019 revealed that both specialists and general practitioners generate revenue multiple times their salaries. Family physicians generate $2.1 million in net revenue on behalf of their affiliated hospitals, which is nine times their $241,000 average annual salary. Orthopedic surgeons generate $3.3 million in annual revenue, which is six times their $533,000 average annual salary. The average annual revenue generated by eighteen physician specialties increased by 52 percent in just two years from 2016 to 2018.

If physician ownership by hospitals resulted in better value and higher quality for patients, then higher costs may be reasonable.  However, this is not the case.  A study published in September 2019 suggests that greater service utilization contributes to higher costs but no improvements in care quality for patients treated by doctors in hospital-owned versus physician-owned practices.  The trend towards hospital-physician consolidation is neither benefiting the patient financially nor medically.

Higher service utilization is not the only factor that contributes to higher costs. Historically, services have been reimbursed at higher rates in hospital outpatient departments compared to physician offices. However, there are signs that this arrangement will not persist. Although a 2019 site payment rule was recently struck down in the courts, an appeal is likely, and the push towards site neutrality is likely to continue.

Although patients have not benefited from the merger of hospitals and physician practices over the last few decades, there are other types of hospital expansion that may be more favorable to patients. The push towards patient convenience through urgent care centers, telemedicine and virtual primary care will create additional opportunities for hospitals to engage patients. However, hospitals that do not follow this trend may find themselves on the outside looking in as patients and payers opt for convenience and value that exists outside the walls of the traditional hospital-based healthcare system.

Steve Delaronde is director of consulting for Payer and Population Health Services at 3M Health Information Systems.

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