Physician Strategy News: August-September '07
The Cons and the Pros of Physician Employment
Boards and executives in many hospitals are struggling with the concept of physician employment. The arguments against such a move can be strong, and the memory of employment fiascos in the 1990’s is often very fresh. It is crucial for hospitals to carefully weigh the major advantages and disadvantages of employment.
On the Con Side
The financial commitment required by employment is a big issue. Building the infrastructure to run the practices takes a significant investment, and that investment is often dwarfed by operating losses.
Three issues generally drive those losses:
- poor management of the revenue cycle;
- physician salaries that exceed what can be reasonably justified based on productivity; and,
- hospital investments in the practice that an independent physician would not make.
Appropriately aligned compensation systems and strong management can help a lot with the first two issues, although supply and demand for some specialties will dictate that some be paid more than can be earned in private practice. The third issue, which will manifest itself as IT or facility investments, is a reality that the organization will have to accept.
A second related financial issue is that physician employment will compete for already scarce capital. In addition to capital needs for facilities and technology, physician employment emerges as a third major cash hog. This can complicate an already tough capital allocation process.
Another significant issue of physician employment is political. Incumbent physicians are will not be happy if they believe the hospital is competing with them. Our experience is that this issue can be controlled somewhat by a rigorous and transparent medical staff planning process. A documented need that cannot be met by incumbent private practitioners is often the best way to begin the process of building acceptance. And, if the economics do not support a new private practitioner, you will often find that the incumbents are not doing well either. Over time, they may request employment as well.
On the Pro Side
Despite the risks, hospitals are increasingly pursuing employment. There are three major issues driving decisions to move forward:
First is community service. In many cases, hospitals are unable to recruit physicians needed in their community if private practice is the only option. When faced with a choice of physician employment or failure to provide a needed service, many hospitals overcome their concerns about employment.
A second driver is the desire for alignment with physicians. Employment is the ultimate alignment strategy. Creating win/win solutions, influencing referrals, and controlling the level of ancillary service competition is easier in an employment model.
The third pro, related to the second, is that hospitals gain significant control over their growth strategies. Employment allows hospitals to:
- invest in primary care physicians where they are needed;
- employ doctors who have been splitters and flip their referrals; and,
- in specialty areas, invest in growing physician numbers and capabilities, and target growth in services that are high quality and profitable.
There is a basic risk/reward equation at play. Taking the risk requires investments and the possibility of producing political losses. These risks can be mitigated with an effective implementation plan. A focus on practice management capabilities, compensation arrangements, and ongoing physician involvement will minimize the risk of big losses.
But the potential rewards can be very high. The personality and appetite for risk in your organization might ultimately be the determinant of your approach.
