A Tighter Bond: California Hospitals Seek Stronger Ties with Physicians

Originally published by the Center for Studying Health System Change (HSC), a nonpartisan policy research organization that operated with principal funding from the Robert Wood Johnson Foundation.

California HealthCare Foundation Issue Brief -- December 2009

Authors: Debra A. Draper, Robert A. Berenson, Elizabeth A. November

Background: The CHCF-HSC California Market Study

In July 2009, the California HealthCare Foundation (CHCF), working in partnership with HSC, released six regional health care market reports based on site visits to California communities. The six markets examined -- Fresno, Los Angeles, Oakland/San Francisco, Riverside/San Bernardino, Sacramento, and San Diego -- covered a broad range of economic, demographic, health care delivery, quality, and financing conditions. In December 2009, CHCF published four additional reports that explored particular health system issues highlighted by the six-market study.

California Hospitals Pursue Tighter Physician Alignment

This issue brief examined the intensifying efforts by California hospitals to build stronger relationships with physicians. Across the six markets studied, hospitals were pursuing a range of strategies to bind physicians more closely to their institutions. These strategies responded to several pressures: growing competition among hospitals for patient volume, the need to improve quality and efficiency metrics, the desire to gain more control over clinical decision-making, and the anticipation that payment reforms under the Affordable Care Act would reward coordinated, integrated care delivery.

Strategies for Hospital-Physician Integration

Hospitals across California were employing multiple approaches to strengthen ties with physicians. Direct employment of physicians was on the rise, particularly in specialties where hospitals competed for patient referrals and needed to guarantee access to specialist services. Hospitals were also creating co-management arrangements, where physician groups shared responsibility -- and financial risk -- for managing specific clinical service lines. Other strategies included joint ventures, medical directorships, professional services agreements, and providing practice management support to independent physicians in exchange for closer operational alignment.

The approach varied by market. In areas where large, well-organized medical groups already existed -- such as parts of Southern California with a long tradition of delegated managed care -- hospitals often worked to forge partnerships with these existing groups rather than building their own employed physician networks from scratch. In markets with more fragmented physician landscapes, hospitals were more likely to pursue direct employment or to establish new physician organizations under hospital control.

Challenges in Building Tighter Bonds

The drive to align hospitals and physicians was not without obstacles. Many physicians valued their independence and were wary of arrangements that might limit their autonomy or subject them to institutional bureaucracy. Financial integration carried its own risks -- hospitals that acquired physician practices in the 1990s had often lost money on those ventures, and there was concern that history could repeat itself. Cultural differences between hospital administrators and practicing physicians created friction in many markets, and the legal and regulatory framework governing hospital-physician financial relationships -- including anti-kickback statutes and Stark Law restrictions -- added complexity to the structuring of any formal alignment.

Looking Forward: Reform as a Catalyst

At the time of the study, anticipation of health reform was accelerating the trend toward tighter hospital-physician bonds. The expectation that Medicare and commercial payers would increasingly reward coordinated care -- through accountable care organizations, bundled payments, and other integrated models -- gave hospitals a strong business rationale for investing in physician alignment. The brief raised the question of whether these new arrangements would produce better outcomes for patients or would primarily serve as a way for hospitals to secure referral streams and strengthen their negotiating position with insurers.

The full report was originally available on the CHCF website.

Sources and Further Reading

California HealthCare Foundation -- Funder and publisher of the California regional market studies.

AHRQ -- Federal health care quality research agency.

Health Affairs -- Peer-reviewed health policy research.

Robert Wood Johnson Foundation -- Health policy research and funding.