Hospitals Accelerate Physician Employment to Bolster Referrals and Admissions

Enhanced Care Coordination Takes a Back Seat to Hospitals' Drive for Market Dominance

News Release
Aug. 18, 2011

FURTHER INFORMATION, CONTACT:
Alwyn Cassil (202) 264-3484 or [email protected]

WASHINGTON, DC -- Although not a recent phenomenon, the rate at which hospitals are bringing physicians onto their payrolls has accelerated across numerous communities. This surge is primarily fueled by hospitals seeking to expand their market presence and boost revenue, according to a study published by the Center for Studying Health System Change (HSC).

So far, the predominant motivation behind hospital physician employment has been capturing greater market share, often through profitable service-line approaches incentivized by a fee-for-service reimbursement model that rewards higher patient volume, the research found. Simultaneously, flat reimbursement rates, escalating overhead costs of independent practice, and physicians' desire for improved work-life balance have made hospital employment increasingly attractive to doctors.

Although closer physician-hospital alignment could enhance quality via improved clinical integration and coordinated care delivery, simply employing physicians does not ensure meaningful clinical integration, the study noted. The growing trend of hospital-employed doctors also has the potential to drive up costs through elevated commercial insurance payment rates for both hospital and physician services, as well as institutional pressure on employed doctors to prescribe costlier tests and treatments.

"The rapid growth in hospital physician employment threatens to inflate costs without delivering meaningful quality gains, unless payment reform redirects provider incentives from volume toward improved quality and greater efficiency," said HSC Senior Health Researcher Ann S. O'Malley, M.D., M.P.H., who coauthored the study with Amelia M. Bond, an HSC research assistant, and HSC Senior Consulting Researcher Robert A. Berenson, M.D., of the Urban Institute.

The study's results are presented in a new HSC Issue Brief -- Rising Hospital Employment of Physicians: Better Quality, Higher Costs? -- available online. The research, supported by the Robert Wood Johnson Foundation and the National Institute for Health Care Reform, draws on HSC's 2010 site visits to 12 nationally representative metropolitan areas: Boston; Cleveland; Greenville, S.C.; Indianapolis; Lansing, Mich.; Little Rock, Ark.; Miami; northern New Jersey; Orange County, Calif.; Phoenix; Seattle; and Syracuse, N.Y. HSC has monitored changes in these health care markets since 1996.

Additional key findings from the study include:

In the majority of the 12 communities studied, hospital employment of doctors is expanding at a rapid pace. Notable exceptions include Orange County, where California statutes prohibit hospitals from directly hiring physicians, though doctors tend to maintain close ties with hospitals through alternative arrangements; Boston, where physician organizations maintain strong alignment of non-employed doctors with the leading hospital system; and northern New Jersey.

Hospital consolidation remains a significant driver of physician employment. In markets with substantial hospital concentration, doctors face growing pressure to align with one hospital system or another. While physician employment by hospitals is more prominent in highly consolidated markets -- such as Cleveland, Greenville, Indianapolis, and Lansing -- it is also occurring in less consolidated areas, including Seattle, Little Rock, Phoenix, Syracuse, and Miami.

Hospitals generally negotiate insurance contracts on behalf of their employed doctors, securing higher reimbursement rates that allow them to provide more attractive compensation packages than independent physicians could obtain through their own negotiations.

Multiple physician respondents indicated that hospital-employed doctors experience pressure to order more expensive diagnostic alternatives. In one market, at least two cardiologists turned down hospital employment offers because they felt the incentives to increase volume were more intense than those within their mid-sized, independent cardiology practice.

Hospitals regularly impose facility fees on office visits and procedures conducted in formerly independent physician offices that have transitioned to hospital employment. In effect, a physician practice can be acquired by a hospital without relocating or altering its day-to-day operations, yet the hospital now collects substantially higher Medicare reimbursements.

After the passage of national health reform legislation in March 2010, hospital leaders also increasingly pointed to physician-hospital alignment through employment as essential preparation for anticipated Medicare payment changes, including bundled payment models, accountable care organizations, and penalties for avoidable hospital readmissions.

The Center for Studying Health System Change is a nonpartisan policy research organization dedicated to delivering objective and timely analysis of the evolving U.S. health system to help guide policy makers and improve health care policy. HSC, headquartered in Washington, D.C., is affiliated with Mathematica Policy Research.

Sources and Further Reading

AMA Physician Practice Benchmark Survey — American Medical Association data tracking the shift from independent physician practice to hospital employment over time.

Health Affairs: Hospital Market Consolidation Research — Peer-reviewed research on how hospital consolidation and physician employment affect health care costs, quality, and market competition.

CMS Hospital Inpatient Prospective Payment System — Medicare payment policies for hospital services, including facility fee structures that influence physician employment economics.

Robert Wood Johnson Foundation Research Library — RWJF-funded research on health system change, including the HSC Community Tracking Study findings referenced in this article.

Commonwealth Fund: Delivery System Reform — Research on accountable care organizations, bundled payments, and value-based care models that reshape physician-hospital alignment incentives.