According to data from Avalere, 74% of physicians in the United States are employed by hospitals, health systems or corporate entities. Private practice and entrepreneurship, of course, is not for every physician. Since the 1990s, a model of health system physician employment has grown, subsided, and then grown again based on a variety of factors. But given current economic conditions and the emergence of new healthcare models such as value-based care, the health system employment strategy may be in need of a review.
The Growth of the Employed Physician Model
The employed network model has grown because many physicians lack interest in running a business or partnering in one, and because it’s an effective way of monetizing the practice asset. Health systems have deployed a strategy of building networks of physicians, primary care doctors and specialists to control the programming consistent with their mission.
Interestingly, after almost thirty years of building these employed networks, the per physician operating loss has not decreased. In fact, in many specialties it has increased. The argument can be made that health systems make up the direct losses with income derived from procedures and other technical revenue. This was very true until 2022.
A Changing Equation
Beginning in 2022, the growth of value-based care Medicare Advantage contracts and hospital post-Covid operating losses have changed the calculation. Medicare Advantage plans and subsequent private and investor-owned primary care groups like Oak Street, Village MD, Cano Health and Agillon are pushing to change the delivery model from fee-for-service to a care delivery shared savings model (fee-for-service with bonus, capitation, quality bonus, etc.). If the delivery model changes to value based with specialist costs and referrals being measured, or one that pits the ‘cost of the referral to a specialist or an emergency room’ against the ‘cost of a home visit, telehealth or a hospital at home model,’ should the strategy change?
When organized primary care practices in value-based savings agreements 1) understand chronic care and 2) have a developed Advanced Practice Provider (APP) teams whose approach results in low costs per patient, they can earn over $100,000 per physician more than their fee-for-service counterparts. The models provide good data on cost per patient, referral costs, total patient costs, and pharmacy costs to the providers. Quietly – or maybe not so quietly – this model and its sophistication have grown.
On the flip side, the economics for hospitals, especially in non-growth markets, took a turn for the worse in 2022. Most hospitals are reporting operating losses post-Covid, and the majority of organizations are reviewing their expenses, slowing investments, and reviewing strategic plans.
Rethinking Your Employed Network Strategy
So given this context, it’s time to ask: What is the strategy for your employed network?
If the premise is an employed physician network covering operating costs by higher reimbursement (managed care contracting strength), charging a facility or technical fee, or revenue from tests performed by the facility to ensure quality, you are entrenched in a fee-for-service strategy. Is this sustainable in a Medicare Advantage value-based market or a managed Medicaid model when cost per case are scrutinized by the referring physician?
If the health system has invested in a solid primary care base, can it manage a shift in culture from fee-for-service to a chronic care and savings model? Can culture be changed in part of the health system network, primary care vs. specialists? Consider physician compensation models. Does a wRVU productivity model or a base salary model incentivize or support the strategy the system is deploying? Can you effectively use APPs and still reward employed physicians for moving patients to the new model of care?
You can start evaluating your physician strategy by answering these questions:
- Do we consider the financial performance per physician? Is the analysis on direct costs or total cost?
- Is our strategy to continue in the fee-for-service model?
- Do we know the cost of care for our physician network?
- Is the concentration of large organized primary care practices in our market enough to attract payment models that can change the health system’s employment model?
- How much are we willing to lose per employed physician to support our strategy?
- Is our compensation model congruent with our physician strategy?
- Do we need all of the physicians we have hired into our panel? Are their schedules full?
- Are the correct benchmarks for us to focus on private practice benchmarks or health system benchmarks?
- Is it economically feasible in 2022/2023 to own our network?
- Can we be creative with partnerships of private practice groups versus ownership?
- Can our practice model survive a different payment model?
Should health systems employ physicians? The answer depends on the strategic plan and mission of the system. Huge amounts of investments are being made in new delivery and payment models. And while the amount of investment into a delivery model does not always guarantee success, it does require us to review our strategy and ask hard questions.
The real question is not “should health systems employ physicians?” It is instead, “Should your system employ them?”