The Hidden Benefits of Owning a Physician Group

By J. Daniel Beckham

The Hidden Benefits of Owning a Physician Group

Hospital leaders who believe that divesting their physician groups will improve their operating margins should think again.

The operating margins of many hospitals have slipped precariously into the loss column. And well-identified in that column are the expenses associated with hospital-owned physician group practices.

Many executives and directors have been tempted to divest the physician groups. That temptation is often made greater by the difficulty of managing these organizations. Not only would losing the physician group make the financials look better, it would make life in the executive suite and in the boardroom easier.

Private physicians also have targeted hospital-owned group practices. These physicians deeply resent group ownership, which they see as subsidies for doctors often regarded as competitors. And the hospital's increasingly short-staffed employees feel that the expenses incurred in supporting a physician group could be better spent on additional FTEs.

Certainly, a hospital's decision to divest its physician group would be met with applause in many quarters. But there are many compelling, strategic reasons for a hospital to retain ownership of a physician group:

Attractive employment. Physicians coming out of training programs in the next decade will be overwhelmingly oriented toward employment rather than private practice. They will be looking for the organizational infrastructure that will let them practice medicine with minimal administrative distractions. They will trade the potential of a higher income in private practice for a predictable income and a better lifestyle. Those organizations that offer such infrastructure will have a decided advantage over those that don't.

Outpatient competition. Hospitals will face growing competition for outpatient services during the next decade, when surgery centers and diagnostic centers will proliferate. Over time, well-balanced, comprehensive outpatient organizations may emerge with little need for meaningful connection to local hospitals. If these enterprises can demonstrate sustainable profitability, they will attract capital. Hospitals without a group practice to serve as a nexus for outpatient development will suffer.

Market share. The best method of building market share in areas geographically removed from a main hospital campus is to place physicians in those areas. Although these physicians should be predominately primary care, many specialists also benefit from patient self-referrals. (Orthopedic surgeons, for example, often experience patient self-referral rates in excess of 50 percent.) Absent a group practice infrastructure, it will be more difficult to place physicians in those geographic areas that provide opportunities for growth.

Proximity. The most significant factor influencing physician utilization of hospital services is proximity. Physicians tend to use the closest hospital, and they prefer to use one hospital instead of two. The only way to overcome proximity is employment. An employed physician can be directed. An independent physician cannot. Hospitals that employ significant numbers of physicians are in a position to steer them.

Use of specialists. Without a sufficient base of loyal primary care physicians, the utilization of hospital-based services by specialists and subspecialists will be at risk. Such utilization is dependent on the referrals of primary care physicians and, to a lesser extent, the referrals of other specialists and subspecialists. There are legal constraints on the kind of influence hospitals can place on the referral patterns of independent physicians. Employed physicians who are compensated at market rates can be influenced to use particular specialists and subspecialists.

Physician influence. In the future, hospitals will increasingly be compelled to demonstrate results related to cost, quality and accessibility of the care they provide. It has often been suggested that up to 80 percent of the ability to influence cost, quality and accessibility of care flows directly out of a physician's pen. That would suggest that absent the meaningful involvement of physicians, a hospital can influence only 20 percent--despite its best efforts at continuous quality improvement, cost reduction and service excellence. When a hospital owns a physician group, physicians can become more continuously and consistently involved in addressing the hospital's most pressing challenges, not only for the 20 percent but for the 80 percent as well.

Launching initiatives. There are few major hospital-based initiatives today that don't benefit from physician involvement. Computerized physician order entry (CPOE) is a good example. Today, many hospitals struggle to involve physicians in the design and implementation of CPOE. The same challenge exists for defining core processes, practice standards and care pathways as well as for standardizing supplies. A hospital-owned group practice provides a viable laboratory, incubator and launch pad for such initiatives in an era when independent, private physicians are increasingly reluctant to come to the table because of constraints on their time and income.

Negotiations with managed care. A hospital-owned group practice of sufficient size and geographic distribution affords greater leverage in negotiations with managed care plans. Hospital-owned group practices often demonstrate superior financial performance when they are used for negotiating leverage. That leverage increases as the number and geographic distribution of physicians increases. Without a large number of closely aligned physicians, a hospital has significantly less negotiating leverage. Physicians who are organized into many small independent practices usually have diminished leverage compared with those who are organized in a group and can speak with one voice in negotiations.

There is still hard work ahead for hospitals that have decided to retain ownership of their physician groups. Those groups need to:

Diversify their physician mix. Most hospital-owned groups are composed predominantly of primary care physicians. There is a good reason for this. When most of the groups were formed in the 1990s, hospitals were seeking to protect the referral base for the subspecialists who concentrated their work in hospital ORs and used hospital diagnostic services. They employed the primary care physicians who exercised considerable influence over those referrals. But in creating group practices that were almost purely composed of primary care physicians, they "designed in" operating losses. Primary care practices are generally break-even propositions even in the best of circumstances. Healthy sustainable group practices are multispecialty in composition and have specialists and subspecialists who are willing to allocate some of their income to lower-earning primary care colleagues. Three specialties that always make a solid contribution include cardiology, general surgery and GI.

Provide incentives for group behavior. Physician compensation systems will need to be further adjusted. After forming hospital-owned group practices, many hospitals were unpleasantly surprised by low physician productivity. Many physicians, once they were employed, appeared to lose their drive. The response in most instances was to install productivity-based compensation systems. Unfortunately, although these systems may have increased individual physician productivity, they did little to incentivize "group" behavior. To fully realize the contribution physician groups can make, hospitals will have to change their management practices and compensate not only for productivity, but for group behavior as well.

Use physician extenders. Benchmark group practices, including Mayo Clinic, make good use of physician extenders--nurse practitioners, physician assistants and midwives--to leverage their physician manpower. With a model that uses physician extenders in support roles, physician productivity can be substantially increased.

Include hospitalists. A group practice mentality that accommodates hospitalists will allow the hospital to get the best return on its investment in group practice infrastructure. It also creates a higher level of integration among the various physicians who may be involved in the care of the same patient because it links hospital care with care provided in the practice setting.

It will be important for the hospital to be clear about the full range of its strategic expectations for its group practice. If a contribution to quality, cost and access is expected, that expectation must be communicated to group practice physicians along with the necessary authority, accountability and rewards.

Originally published in Hospitals & Health Networks Online