Hospitals are buying up medical practices at a feverish pace. According to data from the American Hospital Association, the number of physicians employed by hospitals grew by 34 percent between 2000 and 2010, and the pace shows no signs of slackening. In reviewing its data for the past decade, a large physician recruiting firm found that in 2004 only 11 percent of physician searches were conducted by hospitals, but by 2013 that figure had risen to 63 percent.
There are a number of reasons hospitals want to employ physicians. A major aim is to funnel patients to the hospital’s facilities. By law, it is illegal for hospitals to offer physicians inducements to refer patients to their facilities unless the physicians are hospital employees. A term that some hospitals use to describe the referral of patients to providers and facilities outside their system is “leakage.” Such leakage represents lost revenue, and by employing physicians hospitals hope to plug up the holes.
Of course, there are other factors. One is the ability to hospitals to charge more for a variety of procedures than independent physicians, by tacking on “facility fees.” By buying a physician practice, a hospital can charge more for the same test or procedure, even though it is performed in the same place by the same physician. In some cases, such facility fees can raise prices to Medicare by as much as 70 percent compared to what would be paid to an independent physician.
Another factor is negotiating clout with healthcare payers. When a hospital employs a greater proportion of physicians in a healthcare market, it can often negotiate more favorable payment rates with health insurers. The Federal Trade Commission has taken an interest in this trend, lodging complaints against hospitals for employing too high a percentage of local physicians. In some cases, the FTC has even filed lawsuits against such hospitals.
Hospitals also argue that by employing physicians, hospitals can achieve greater integration of care. For example, they say they can reduce needless variations in practice, including the use of different medical devices for the same procedure, such as knee joint replacement. They also argue that they can ensure better coordination of care between different medical specialties, as well as between physicians and other hospital-employed health professionals such as nurses.
This is not the first time that hospitals have gone on a medical practice buying spree. Something similar took place in the 1990s when the rise of managed care made it appear that hospitals needed to exert more control over patient referral patterns. But widespread public revolt against managed care quickly led to the opening up of such network restrictions. Moreover, as physicians became employees, their productivity fell. Before long, hospitals began divesting themselves of physician employees.
Hospitals hope that this time will be different. For one thing, more sophisticated information systems enable hospitals to do a better job of tracking physician behavior. Even if hospitals lose money on a per-physician basis, they hope that more favorable payment rates and control of referrals will enable them to make up the difference. If successful, they would both get more patients and generate more revenue per patient.
But there is another pitfall in physician employment. Compared to the independent physicians of 20 years ago, today’s employed physicians often exhibit poor morale. It is easy to see why. When physicians become employees, they forfeit a substantial degree of professional autonomy. They are subjected to more institutional rules and regulations, feel increasing pressure to practice according to prescribed patterns, and often labor under escalating productivity quotas.