Hospitals Rush to Employ Physicians to Shore Up Referrals, Admissions

Improved Care Coordination Takes a Back Seat to Hospitals' Push for Market Share

News Release
Aug. 18, 2011

FURTHER INFORMATION, CONTACT:
Alwyn Cassil (202) 264-3484 or acassil@hschange.org

WASHINGTON , DC—While not new, the pace of hospital employment of physicians has quickened in many communities, driven largely by hospitals’ quest to increase market share and revenue, according to a study released today by the Center for Studying Health System Change (HSC).

To date, hospitals’ primary motivation for employing physicians has been to gain market share, typically through lucrative service-line strategies encouraged by a fee-for-service payment system that rewards volume, according to the study. At the same time, stagnant reimbursement rates, coupled with the rising costs of private practice, and a desire for a better work-life balance have contributed to physician interest in hospital employment.

While greater physician alignment with hospitals may improve quality through better clinical integration and care coordination, hospital employment of physicians does not guarantee clinical integration, according to the study. The trend of hospital-employed physicians also may increase costs through higher hospital and physician commercial insurance payment rates and hospital pressure on employed physicians to order more expensive care.

“The acceleration in hospital employment of physicians risks raising costs and not improving quality of care unless payment reforms shift provider incentives away from volume toward higher quality and efficiency,” said HSC Senior Health Researcher Ann S. O’Malley, M.D., M.P.H., coauthor of 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 findings are detailed in a new HSC Issue Brief—Rising Hospital Employment of Physicians: Better Quality, Higher Costs?—available online at www.hschange.org/CONTENT/1230/. The study, funded by the Robert Wood Johnson Foundation and the National Institute for Health Care Reform, is based on HSC’s 2010 site visits to 12 nationally representative metropolitan communities: 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 been tracking change in these markets since 1996.

Other key findings include:

• Across most of the 12 communities, hospital employment of physicians is growing rapidly. Exceptions are Orange County, where California law bars hospitals from directly employing physicians, but physicians tend to be tied closely to hospitals through other means; Boston, where physician organizations keep non-employed physicians tightly aligned with the dominant hospital system; and northern New Jersey.
• Hospital consolidation continues to be an important factor in physician employment by hospitals. In markets with high hospital concentration, physicians face pressure to align closely with one hospital system or another. And, while hospital employment of physicians is more pronounced in areas with higher levels of hospital consolidation—for example, Cleveland, Greenville, Indianapolis and Lansing—it is also taking place in less-consolidated hospital markets, such as Seattle, Little Rock, Phoenix, Syracuse and Miami.
• Hospitals usually negotiate health plan contracts on behalf of employed physicians, gaining higher rates to offer more attractive compensation than independent physicians could negotiate on their own.
• Numerous physician respondents noted that employed physicians face pressure from hospitals to order more expensive testing alternatives. In one market, at least two cardiologists declined hospital employment offers because they perceived the pressures to drive up volume were stronger than those in their mid-sized, independent cardiology group.
• Hospitals routinely charge facility fees for office visits and procedures performed in formerly independent physicians’ offices, where the physicians have converted to hospital employment. In short, it is possible for a physician practice to be acquired by a hospital, not change locations or even practice operations, yet the hospital now receives significantly higher Medicare payments.
• Following enactment of national health reform in March 2010, hospital executives also increasingly cited physician-hospital integration through physician employment as key to preparing for expected Medicare payment reforms, including bundled payments, accountable care organizations and penalties for preventable hospital readmissions.

The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is affiliated with Mathematica Policy Research.