This article explores eight of the most challenging and interesting issues that hospitals are facing as they move into 2013. Such issues include physician alignment strategy, the ability of hospitals to stay independent, the development of accountable care organizations, the evolving priorities and concerns of CEOs and several other issues.
This article is written within the context of healthcare consolidation that is occurring at all levels. At the hospital level, hospitals are merging into other hospitals and independent hospitals are finding it more challenging to thrive on their own. At the hospital–physician level, the system has shifted toward one in which nearly 50 percent of all physicians are employed by hospitals and health systems, and nearly 80 percent of all physicians have some sort of financial relationship with hospitals. There is also increased consolidation among payors (although a great deal of this consolidation has already happened over the last 10 years). This has resulted in only several key payors existing in most markets. Finally, payors are increasingly re-entering the healthcare provider business, either as a hedge against provider market power in certain markets or in an effort to attempt investment in areas outside of insurance.
1. Physician alignment
The healthcare industry saw a wave of physician employment by hospitals back in the 1990s, and hospitals are again pursuing employment of physicians as a core strategy. Employing physicians tends to work in a fee-for-service environment and should also work as hospitals move forward into an ACO managed-care type of environment. The downside to a physician employment strategy is that it is expensive for the hospital, and there are increasing anecdotal discussions about the losses per physician that systems suffer as they employ physicians in larger numbers. Here, the average productivity of the employed physicians seems to be declining. Initially, as hospitals began to again employ physicians, there had been great focus on hiring the most productive physicians. Now it seems as though many hospitals have an “all in” strategy and have hired with less focus on the most productive physicians. Thus, the average productivity per physician has regressed to a more average level. This means the losses on professional fees are more significant, and it is harder to “make up the numbers” on the technical side. There are, of course, serious legal issues with attempting to make up the financial losses on the technical side.
Other physician financial relationships
Many systems, in contrast to a direct-employment strategy, focus on entering into co-management, joint ventures, call coverage, medical directorships and other financial relationships with physicians. Increasingly, hospitals are concerned about not having financial relationships with their admitting physicians. Many hospitals examine a top-25 admitter analysis or use a similar means to assess how dependent they are on their key physicians. Here, they examine whether or not key physicians are “free agents.”
Decreasing technical fees
It has been estimated that hospitals receive 5 to 10 times the technical fee revenues than the amount they invest on the professional employment salary side in certain physician specialties. (See Merritt Hawkins Inpatient/Outpatient Revenue Salary 2010 report). For example, the average orthopedic surgeon may have a salary of $400,000 to $450,000 and generate $2,117,000 in revenues. However, as the physician employment boom has expanded, this number is likely becoming much lower on average.
Successful hospital-owned physician practices mix a pro-physician autonomous culture with great competency in the way that the practice handles its affairs. The hospital also must make sure that it pays physicians fairly. This does not mean that the hospital must be the highest-pay alternative for a physician.
The financial sustainability of the employment model will play out over the next several years as hospitals face changes in revenues. However, for a variety of reasons, including the fact that there are likely to be significant physician shortages in many markets, doctors may retain significant market power in connection with their relationships with hospitals and other entities. This will be very market dependent. For example, according to Dr. G. Richard Olds, dean of the new medical school at the University of California, Riverside (a school that was founded in part to address the region’s physician shortage), “We have a shortage of every kind of doctor, except for plastic surgeons and dermatologists. . . . We’ll have a 5,000 physician shortage in 10 years, no matter what anybody does.” (“Doctor Shortage Likely to Worsen with Health Law,” Annie Lowry & Robert Pear, The New York Times, July 28, 2012; see also “Medical Schools Can’t Keep Up,” Suzanne Sataline & Shirley S. Wang, Wall Street Journal, April 12, 2012.)
As reimbursement becomes tighter for many hospitals, we see many more health systems very closely examine what they refer to as “leakage.” In essence, they examine statistics to see how many cases from employed and affiliated physicians are going to other systems. This is a very substantial issue from a financial perspective but also involves significant legal questions as to what can and cannot be required of physicians in connection with referral patterns.
2. Sustainability of independent hospitals
Many hospitals are examining whether they will be able to survive as independent entities over the next several years. A couple of studies have looked at the key factors leading to hospital bankruptcies and the key factors that can be used to assess whether a hospital is in a position to survive independently or not. One study, for example, shows that the three biggest causes of financial instability for a hospital and potentially leading to bankruptcy are mismanagement, increased competition and significant reimbursement changes. For an overview of issues impacting hospital viability, see “Factors Associated with Hospital Bankruptcies: A Political and Economic Framework” by Amy Yarbrough Landry & Robert J. Landry published in the Journal of Healthcare Management in July/August 2009. The article also notes that “bankrupt hospitals are smaller than their competitors. They are also less likely to belong to a system and more likely to be investor owned.”
Another study by Kurt Salmon and Associates explained six factors which can be used to help assess whether or not a hospital can survive independently. These included:
- Does it have geographic barriers?
- What does its payor mix look like — is it positive or negative?
- Does it have a substantial physician alignment strategy, or is it highly dependent on free agent physicians?
- What does its asset base look like? Does it need to make significant capital investments? Does it need to make significant renovations or build a replacement hospital? Does it have other significant obligations ahead that it can’t fund?
- What is its cost structure? Is it locked into long-term pension liabilities? Long-term lease rates? Or other long-term fixed costs that are not changeable?
- Does it have a high standard quality of care? Alternatively, is it the type of hospital that a board member would not take his or her family to?
These are some of the core questions that one examines in trying to assess whether a hospital must look for a partner.
3. Accountable care organizations
ACO formation is growing, but it is not yet clear how many beneficiaries ACOs will actually serve. The great majority of ACO development has come from hospitals, as opposed to physician groups or payors. According to a study by Leavitt Partners, 60 percent of ACOs are sponsored by hospitals, 23 percent are sponsored by physician groups, and 16 percent are sponsored by health plans (see graph below).
For graph, see “Can Accountable-Care Organizations Improve Health Care While Reducing Costs?,” Anna Wilde Mathews, Wall Street Journal, January 23, 2012.
Large physician groups can also be well-positioned to develop ACOs. ACOs, however, are very expensive to develop, with estimates of the real cost to develop them tending to be very high. Further, ACOs largely favor a tightly knit system where one can assure that patients are seen by physicians and providers at in-network rates, rather than out-of-panel and out-of-network rates. Thus, the development of shared savings agreements and ACOs is another institutional effort that favors the employed-physician model versus other models.
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Originally posted 2012-11-07 16:54:00. Republished by Blog Post Promoter