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January 8, 2015

Hospital Employment of Physicians: A Look at the Past and the Future (article)

Over the last several decades, the employment relationship between hospitals and physicians has been in an ongoing state of flux. Trends have shifted from acquisiton, to divestion and back to acquisition, begging the question, “Have we reached a point of stability?”

What Happened in the '80s and '90s

To understand the future of the employment relationship between hospitals and physicians and the precautions that need to be taken when considering an employment relationship, it is important to understand the challenges these two groups encountered in the ‘80s and ‘90s, as well as the contributing factors that led to the divestiture of many employed physicians in the ’90s.

Economically, it was the new era of healthcare financing. The HMO was introduced as well as the concept of the primary care physician (PCP) as the gatekeeper for all healthcare services. The concept was that patients had a primary care physician who would manage their healthcare and share in the cost savings of the HMO. Since PCP gatekeepers controlled healthcare services, hospitals started aggressively acquiring PCPs to secure their patient base. This led to physician practice acquisitions with substantial amounts paid for goodwill and guaranteed compensation for long-term contracts, providing little incentive to produce and contributing to a significant decrease in productivity. The result: practices would always operate at a loss, without any chance for recovery.

From a management perspective, the challenges of managing physicians quickly became evident to the hospitals. Many of the physicians acquired were entrepreneurial doctors who were accustomed to being the sole decision maker. Before being acquired, these physicians were making the decisions regarding diagnosis and treatment of their patients, in addition to making daily operating decisions, such as hiring, scheduling and other practice responsibilities. Being someone else’s employee was foreign to this group.

In addition to economic and management challenges, cultural differences between the physician practices and the hospitals were vast. From the decision-making process to the timeliness of making those decisions, the differences were unconquerable for most hospitals.

The failure of the HMO as a viable healthcare model in most markets, physician practice losses, and the disgruntled physicians, led to the divestiture of many employed physicians in the '90s. In fact, a number of hospitals hired consultants to assist in the roll-out of employed physicians to private practice.

The Current Trend

Several years ago, we again began to see external pressures forcing hospitals and physicians to reconsider employment relationships. This time, however, the focus has not been solely on PCPs, but specialists as well. The driving force is private practice economics.

Many changes in Medicare reimbursement have led to significant declines in practice profitability, and hospitals have seen an opportunity to acquire specialists, as well as the ancillary services, and provide those services in an outpatient setting while billing at a substantially higher rate. However, even with the knowledge of history, physicians continue to push employment terms to the limit and practice losses are transferred to the hospitals, even with the opportunity for new found revenue. All of these new relationships have had to be carefully structured within the constraints of fair market value and commercial reasonableness as promulgated by the Stark Laws, IRS Regulations and Anti-kickback Statutes.

Future Issues

As the movement from private practice to employment reaches its peak, what is the probability of its future success? As hospitals and physicians continue to maintain and form these employment relationships, there are precautions hospitals need to take to avoid future problems and resolve the issues created. In future articles, we will dive further into these precautions, including compensation plan development, operation compliance with compensation terms and the ongoing need to ensure that the plans result in compensation that is in fact fair market value.

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This article is part of a series that delves into the economic, compliance and relationship issues that are relevant in hospital physician relationships. To view other articles in this series, click here.

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CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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