This Issue Brief, Number 136, published in August 2011 by the Center for Studying Health System Change (HSC), examines the accelerating trend of hospitals hiring physicians across the United States. Written by Ann S. O'Malley, Amelia M. Bond, and Robert A. Berenson, the brief draws on approximately 550 interviews conducted during HSC's 2010 site visits to 12 nationally representative metropolitan communities. The findings document how hospitals are employing physicians at an increasing pace, driven by competitive market pressures, while raising important questions about whether this trend will improve clinical quality or primarily increase health care costs.
Across most of the 12 communities studied, hospital employment of physicians was growing rapidly. Hospitals sought to shore up referral networks and capture patient admissions in an increasingly competitive environment. Exceptions to this pattern included Orange County, California, where state law prohibits hospitals from directly employing physicians; Boston, where physician organizations maintain close alignment with the dominant hospital system without formal employment; and northern New Jersey, where local practice culture supported independence.
Historically, most physicians practiced in solo or small group settings, with more than half holding an ownership interest in their practice as of 2008. Independent physicians served on hospital medical staffs voluntarily, providing on-call coverage and participating in committee work. Over time, however, several developments weakened community-based physicians' connections to hospitals. Advances in technology allowed more care to be delivered in freestanding outpatient settings, reducing physicians' dependence on hospital facilities. Hospitals responded by employing specialists to maintain market share in profitable service lines such as cardiac and orthopedic care, while the growth of hospitalist medicine further contributed to the expansion of hospital-employed physician workforces.
The current wave of hospital physician employment is not without precedent. During the 1990s, the expansion of managed care prompted hospitals to acquire primary care practices as a strategy for securing referral bases. That earlier effort largely failed financially. Hospitals typically guaranteed physicians close to their prior-year earnings under salaried arrangements, and productivity often declined. Many hospitals subsequently divested the acquired practices at a loss.
Contemporary employment arrangements differ in important respects. Hospitals now use productivity-based compensation models rather than flat salary guarantees. They purchase practice assets more selectively, often leasing office space rather than buying it outright. Hospital leaders reported being more discerning about which physicians and practices they bring into the system, emphasizing quality and strategic fit over volume of acquisitions. Hospitals also maintain tighter control over ancillary services performed by employed physicians, having learned from the earlier experience that allowing physicians to retain full control of ancillary revenue within their own offices undermined the financial rationale for employment.
Initially, hospital physician employment efforts focused on specialists to build targeted service lines in cardiology, oncology, and other lucrative areas. More recently, hospitals have aggressively pursued primary care physicians to generate referrals for their employed specialists. Market observers across multiple communities described this shift as a competitive rush, with one Greenville respondent characterizing it as a frantic competition to hire primary care physicians.
Following the passage of national health reform legislation in March 2010, hospital executives increasingly cited physician-hospital integration through employment as preparation for anticipated Medicare payment reforms. Bundled payment arrangements, accountable care organizations, and penalties for preventable hospital readmissions all create incentives for hospitals and physicians to coordinate more closely, and employment offers a direct mechanism for achieving that alignment.
Physicians' motivations for seeking employment extend beyond hospital recruitment efforts. Stagnant reimbursement rates coupled with rising overhead costs in private practice have made independent practice financially challenging, particularly for primary care physicians whose revenue depends heavily on office visit fees. The desire for better work-life balance, especially among younger physicians, has also contributed to interest in employment. Data from a 2008 survey of graduating medical residents showed that 22 percent identified hospital employment as their preferred first career setting, up sharply from 4 percent in 2003.
For physicians beginning their careers, employment offers relief from the substantial medical school debt that makes practice ownership difficult to finance. A Syracuse hospital financial officer observed that younger physicians recognize the impossibility of buying into a practice when carrying heavy educational loans, making employment by the highest bidder an appealing alternative. Among specialists, traditionally more attached to independence, reimbursement pressures and growing overhead have begun to erode resistance to hospital employment. An Indianapolis hospital chief executive noted that specialists earn substantially more than primary care physicians, making the financial sacrifice of giving up independence particularly significant for that group.
Market consolidation among hospitals has been a significant driver of physician employment trends. In communities with high hospital concentration, physicians face pressure to align with one of the dominant systems. Hospital employment of physicians is most pronounced in highly consolidated markets, including Cleveland, Greenville, Indianapolis, and Lansing, though the trend is also present in less concentrated markets such as Seattle, Little Rock, Phoenix, Syracuse, and Miami. In certain communities, the local culture of physician independence has slowed adoption, though even in those areas respondents reported growing movement toward employment arrangements. Some single-specialty and multispecialty groups of sufficient size have maintained independence by retaining enough leverage with payers to negotiate competitive rates without hospital backing.
Hospital employment of physicians carries theoretical potential to improve quality through better integration of care and communication among clinicians. Respondents across the 12 markets, however, indicated that clinical integration does not follow automatically from employment. Many hospital chief medical officers acknowledged that bringing physicians together under a common employer is only the first step and that building unified clinical processes, quality standards, and communication pathways across diverse practice sites remains a significant challenge.
At the time of the study, most clinical process integration efforts appeared focused on individual diagnoses or conditions rather than comprehensive management of patients' overall medical needs. Reducing preventable readmissions for conditions such as congestive heart failure represented the kind of targeted initiative that hospitals were pursuing, while broader coordination across inpatient and outpatient settings remained underdeveloped. Communication between inpatient and outpatient providers, even within the same hospital system, was repeatedly identified as problematic. Implementation of interoperable electronic health records varied widely, with the Cleveland Clinic cited as further along the spectrum of information exchange than most other systems.
While hospital-employed physicians may eventually promote efficiency through clinical integration, the evidence from the 12-community study suggested that the more immediate effect is upward pressure on costs. Several mechanisms drive this dynamic. Hospitals and their employed physicians continue to operate within a predominantly fee-for-service payment system that rewards volume. Productivity-based compensation reinforces these incentives. Physician respondents in multiple markets reported pressure from hospital administrators to order more expensive tests and treatments.
In at least one market, two cardiologists turned down hospital employment offers because they perceived the volume-driven pressures as stronger within hospital systems than in their mid-sized independent cardiology group. Additionally, hospitals routinely charge facility fees for office visits and procedures performed in physicians' offices after those practices are acquired, designating them as provider-based facilities. This reclassification produces substantially higher Medicare payments without requiring any change in the location or nature of services provided, effectively increasing costs without adding clinical value. Litigation has resulted in isolated cases where hospitals reimbursed insurers and patients for improperly assessed facility fees, and some institutions now disclose their pricing practices in response.
The growing alignment between hospitals and physicians also strengthens their combined negotiating leverage with health plans. In communities with particularly high levels of physician employment, such as Greenville and Indianapolis, insurers reported increasing difficulty constraining payment rate increases. Respondents in some geographic areas expressed concern that employment of specialists across multiple hospital systems was contributing to artificially high compensation through competitive bidding, with hospitals reportedly paying cardiologists over one million dollars annually in some markets.
Increased hospital employment of physicians generated mixed effects on access to care. From patients' perspectives, employment by a hospital may be largely invisible, as many employed physicians continue practicing in the same offices they occupied when independent. A potential benefit of hospital-physician alignment includes improved access to specialists for low-income patients and those with Medicaid coverage, who have historically struggled to obtain appointments with independent specialists. At the same time, when a major hospital system exits a health plan network, access to care can shift substantially for patients enrolled in that plan.
The report concluded that the existing fee-for-service payment system encourages hospital strategies that use employed physicians to increase referrals and admissions, and the resulting market power of hospital-physician combinations enables higher payment rates. These dynamics risk overshadowing any quality improvements that closer clinical integration might produce. Unless broader payment reform reduces incentives to increase volume and creates genuine accountability for cost and quality, the acceleration of hospital physician employment may primarily result in higher health care expenditures without corresponding improvements in patient outcomes.
The research was funded jointly by the Robert Wood Johnson Foundation and the National Institute for Health Care Reform, with site visits conducted between March and October 2010 as part of HSC's seventh round of Community Tracking Study field research. The 12 communities studied were Boston, Cleveland, Greenville, South Carolina, Indianapolis, Lansing, Michigan, Little Rock, Arkansas, Miami, northern New Jersey, Orange County, California, Phoenix, Seattle, and Syracuse, New York.
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This article was originally published in August 2011 by the Center for Studying Health System Change (HSC), which ceased operations on December 31, 2013. The research examines trends in hospital employment of physicians and implications for quality, cost, and access. For up-to-date guidance on health insurance topics, explore our current resources below.