Many Kentucky hospitals and care systems are presently feeling financial pain from their strategy of hiring doctors by the thousands to adapt to compensation plans that reward them for effective treatment rather than for volume visits, tests, surgeries and procedures. Employee-physicians are generating millions of dollars in losses annually for their employers so far, according to successive Kentucky healthcare studies.
Despite today’s losses, the studies’ authors expect provider systems to continue integrating doctors into new, more-collaborative caregiving structures that will achieve better health outcomes for patient populations – and be profitable.
Hospitals had tried hiring physicians en masse in the early 1990s when national policymakers seriously debated then abandoned healthcare reform efforts during the Clinton administration. But the employee-doctor trend unfolding now is thought much less likely to unravel.
Actually, the future looks difficult at best for small private medical practices – technology, changing payment models and medical business complexity all present strong headwinds.
According to a 2014 study of Kentucky healthcare, soon to be released by Dean Dorton Allen Ford, a CPA, consultant and business advisory firm headquartered in Lexington, the industry is moving toward the formation of continuum-of-care provider networks at an increasingly rapid pace. Hospitals and healthcare systems are making strategic decisions to employ doctors and acquire group practices that will enable them to flourish in their respective markets.
However, four years into this trend, 92 percent of CEOs in the Dean Dorton study report their physician networks are losing “significant amounts of money,” according to David Bundy, president/CEO of Dean Dorton, and Gary Ermers, the firm’s associate director of Healthcare Consulting Services.
“Of that 92 percent, over half report losses of $100,000 and higher per physician,” Ermers said.
That financial picture, he said, isn’t unique to Kentucky. National studies by the Medical Group Management Association (MGMA), one of the leading organizations monitoring the U.S. healthcare industry, are similar.
Annual losses can top $100,000 per employed doctor
Bundy and Ermers said their 2014 report’s findings are parallel to those from studies Dean Dorton conducted in 2013 and 2012 on the integration of physician practices into the operations of hospitals and healthcare systems.
There is not a clear structural pattern to the losses, Bundy said. When hospital or health system size was used as a filter, those with fewer than 100 beds did seem to be losing less money; in fact, the 2013 study found 33 percent of respondents at that level reported no losses on their employed physician groups.
However, hospitals of under 100 beds employ fewer physicians and don’t offer the range of costly specialty services that larger regional and tertiary care counterparts do, Ermers said. Additionally, the smallest “are usually designated rural critical access hospitals, which operate under a more favorable reimbursement schedule than other hospitals.”
And despite those advantages, a majority still had significant revenue losses per physician, Ermers said.
Dean Dorton’s studies consistently show hospitals and health systems with over 200 beds all report significant losses ranging from $50,000 to well over $100,000 per physician.
The study did find that doctors who take hospital employment after selling their independent practices (usually to their new employer) are more productive and cost-effective than employee-physician colleagues who enter hospital contracts right out of residency. Physicians coming from the private sector, Bundy speculates, better understand the balance between providing quality service to their patients and operating a successful medical practice.
The advantage fades, though. According to the study, after several years of being employed even experienced providers can “lose their edge” and contribute to losses as much as their more inexperienced counterparts.
The study enumerates other factors that may contribute to the losses that owning physician practices inflict on hospitals. Given all that data, one might conclude that the strategy of building employed physician networks within a health system is a losing proposition.
However, Bundy said, neither he and Ermers nor the CEOs and providers surveyed consider current budgetary bleeding as a sign that integration of physician groups into health system operations is failing. It is still seen as the next logical step forward into a new, better health system. It is a challenge healthcare administrators and providers must work through.
Integration today for better outcomes tomorrow
“That’s not to say that the stakeholders in these health networks – the administrators, physician groups and boards – don’t have serious concerns. They do,” Bundy said. “They’re struggling with how to make physician integration work. But these stakeholders also feel that successful integration of physicians and physician groups into hospitals and healthcare systems is the way forward for practicing medicine in the United States, even though their investments right now are far from breaking even.”
Successful integration of physician practices into larger care-provider organizations is the key for health systems to flourish going forward, he said. But networks still must find the right balance in compensation models so they aren’t “funding the gap” between physician salaries and payer reimbursement.
“Many people compare what is going on now with healthcare reform in the 1990s under managed care,” Bundy said, referencing the last time large systems actively sought to employ physicians and groups. Doctors also became hospital employees or joined larger practices then to gain better negotiating power with insurance payers.
“However, when physicians realized they could negotiate reimbursement terms for services with insurance providers and that the costs to practice were still affordable, those acquisitions unwound,” Bundy said. “I don’t see that trend repeating itself today.”
The motivations are different.
“It’s a strategic imperative this time around,” Ermers said. “At this moment, physicians need to be integrated into the organization, and vice versa, because they collectively need to provide a full continuum of care.”
That is because the ACA lays out a planned system of reimbursement for healthcare services based on the quality of patient outcomes, Ermers said.
Patrick Padgett, CEO and executive vice president of the Kentucky Medical Association, described the change as “a growing trend among insurance and federal payers to base reimbursements on the global treatment of a patient, paying once for the entire treatment, rather than to pay each provider, the hospital and the physicians, separately for each aspect in the treatment of chronic illnesses and disease.”
Reinforcing this new approach of quality-based reimbursement for outcomes, the ACA pays now for wellness care. And it reduces payment when patients are re-admitted for the same diagnoses within a narrow time frame. The goal is to reward doctors and hospitals for improving community health, Padgett said, rather than for treating volumes of people in poor states of well-being.
Too many specialists spoil the budget broth?
Many hospitals and provider organizations reacted to this fundamental shift by employing physician groups as though they were in an arms race, Bundy said. And in trying to sign up as many doctors as possible, some have not monitored their primary care-to-specialist mix.
“A big reason health systems may be losing revenues is that they are over-employing specialties. We are finding that to be the case with some of our clients,” said Bundy, who believes these organizations may be underestimating the value of primary care providers.
He considers the role of primary care providers in population-based health management as very similar to their description as “gatekeepers” in the health reform conversations of the ’90s. A successful quality-outcomes-based system needs primary providers to manage the individual patient’s care, he said.
The best strategy for the quality-based reimbursement model, Bundy said, is to assemble large health system-based provider networks that include hospitals, treatment clinics, skilled nursing, technicians and a strategic mix of physicians and caregivers. While the personnel balance might not be correct yet, he expects the restructuring that is making doctors hospital system employees will be sustained.
The pitfalls many are now experiencing often are due to inadequate planning, according to Bundy. One common error in his view has been offering employment contracts to every physician who has admitting privileges at a hospital.
“The provider networks that will work are those that have a strategy behind them,” Bundy said.
Although they may be experiencing losses now, Ermers said, health systems that are deliberate and employ a strategy in building their provider networks “will be best poised to handle the future demands of healthcare.”
These networks will be far more stable and long lasting, he said, because of the same financial forces driving doctors and other providers toward employment models over private practice.
From the perspective of the physician, Padgett said, there are practical advantages for some types of primary care providers and specialists to move into employment models, whether with hospitals, health systems or large multi-specialty groups. Foremost among those reasons is that health systems are financially better able to endure the enormous administrative and technological costs of doing business in healthcare these days.
EMR adoption a private practice backbreaker
The costs and complexities of running a medical practice make it extremely difficult for physician groups to maintain their independence, Padgett said. Many point to continuously declining reimbursement from payers and the ACA as major drivers to the development of large physician networks. Underestimated as a factor driving healthcare operations toward integrated health systems, Padgett said, is the influence of the electronic medical health record.
“EMRs have been a huge change, and it has not happened quickly. We’re still in the middle it,” Padgett said. “I believe that the mandate to convert to EMRs started driving doctors to seek affiliations with larger providers and health systems well before the ACA ever became law.”
The Bush administration set this year’s deadline for EMR adoption.
The process looked fairly straightforward on paper when the mandatory transition to EMRs was being discussed, but KMA members questioned that view.
“We anticipated it was going to be a much bigger issue than people thought,” Padgett said.
The KMA wondered about achieving federal standards for “meaningful use” and ensuring that a provider’s system is compatible with those of their colleagues and the hospitals with which they interact.
“There is a huge cost factor involved,” Padgett said. “EHRs require intensive capital for acquisition of software and equipment not only to operate the system, but also to store and manage data. The upkeep of these systems requires contracting with IT specialists on either a full or part-time basis.”
To reach the larger goals of EMR implementation, it is far easier and probably more efficient for a private physician to join a health system and let the organization piece together the electronic network, he said. They are in a position to employ a dedicated IT division rather than contract with an unaffiliated service.
“But even among employed physicians, we’re hearing doctor complaints that the time spent inputting codes and data cuts into their ability to see patients,” Padgett said. EMR technology is not yet lending itself to the refined data-sharing system its proponents envision.
Systems offer efficiency and branding
The KMA chief and Dean Dorton executives all agree the current healthcare landscape does not favor solo or small partnership physician practices. It is too complicated and too complex, Bundy said.
“There are more business efficiencies to be enjoyed in a larger group. Being affiliated with a larger presence in the community makes branding services much easier. If it’s a respected brand known for quality care, patients will use the service and, therefore, utilize them,” Padgett said.
Most new physicians already go straight into an employed model of some sort, Bundy said. “Established groups are joining with larger health systems and we’re seeing a trend where most new physicians have joined through recruitment practices. Within a generation, we will have a population of physicians who have never worked privately or independently,” he continued.
That’s why Dean Dorton feels that independent groups may be much less a part of the healthcare landscape in the coming decade. “Healthcare is moving toward oligopoly, favoring the large employer, payer, provider network and population base,” Ermers said.
Bundy added that the ability providers have to negotiate with insurance companies and other payers is vastly more complicated than before. For that reason alone, it’s going to be far more difficult for these new acquisitions of group practices into health systems to be unwound.
“A practice group could possibly shift to another system in another market,” Bundy said, “but it is highly unlikely that physician groups would ever consider going independent.”
Padgett does not entirely agree with the assessment that healthcare is about to see the end of the independent physician practice.
“Everything goes in cycles,” he said. “We’re still several years away from the market and industry settling down into this new pattern of caregiving.”
The employment model will dominate, Padgett admits, if it doesn’t already. But that does not mean the pendulum will never swing the other way, he believes, and perhaps in another decade or two, when all appears settled, an entrepreneurial-minded group of doctors will propose something unique.
“They might say, let’s find a way to open our own practice,” Padgett said.
Josh Shepherd is a correspondent for The Lane Report. He can be reached at [email protected].
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