By J. Daniel Beckham
New Twist in Employing Physicians
The last time hospitals went through a wave of acquiring practices, they focused on primary care physicians. Now they're looking at other specialties.
Hospitals are showing renewed interest in employing physicians. They have, of course, moved down this path before. Many hospitals acquired physicians' practices in the early '90s and, after multimillion dollar losses, divested them before the end of the decade.
While the divestitures received a lot of attention, the bigger story didn't. Most health systems kept the physician practices they acquired and grew them. Indeed, some health systems consistently regarded as among the most influential and well integrated in the industry have substantial physician organizations. Sentara, Norfolk, Va., employs 200 physicians, and Advocate Health System, Chicago, employs a similar number. In Wisconsin, 800-pound gorilla Aurora Health Care has increased the number of physicians it employs to more than 600.
Focus On Specialists
The earlier wave of physician employment was almost entirely focused on primary care physicians. And most of it was done for defensive reasons. Health systems felt that owning a network of primary care physicians would put them in a strong position for negotiating managed care contracts. It was, of course, an era in which the experts said the primary care gatekeeper at the high end of the food chain was the wave of the future. Of course, things didn't quite work out that way.
Now, while many hospitals recognize that primary care physicians are important referral sources, they are also looking at the physicians who support their most profitable inpatient and outpatient services. This includes surgeons and other proceduralists, particularly cardiothoracic surgeons, neurosurgeons, orthopedic surgeons and general surgeons.
Hospitals are interested in employing these specialists for reasons beyond their profit potential. With demand in their emergency rooms at unprecedented levels, hospitals desperately need physicians to provide call coverage. The old method of relying on volunteers for call coverage is failing--physicians already have too many demands on their time and too much pressure on their income levels. One way to ensure ER coverage is to hire doctors to provide it.
Shift In Specialists' Needs
In the past, specialists had little interest in being employed. But that's changed as well. Specialists with high medical malpractice exposure are increasingly looking at hospital employment as a way out. The alternative is to stay in a vulnerable position in an increasingly hostile private practice environment. Today, it is more often the specialists than the hospital executives who are initiating discussions about employment.
The intensity of the malpractice crisis varies greatly from state to state and even county to county. In some places, the situation is so bad that private practices are rapidly collapsing. Within a period of two years in areas such as Cleveland, physicians have begun moving toward employment in large numbers. For some hospitals, the situation has created a near crisis because they are having a difficult time figuring out how to accommodate this wave of refugees.
In their honest moments, many hospital CEOs express concern over the prospect of employing large numbers of physicians. But given these specialists' ability to secure hospital margins, executives feel compelled to respond. In this way, the new wave of physician employment resembles the last. Hospitals feel obligated to pursue employment because they fear many of their most profitable physicians will knock on the door of a cross-town competitor.
Not Just Surgeons
Interestingly enough, some of the same specialists who lobbied a few years ago for their hospitals to stay out or get out of the primary care business are now worried about the vitality of their referrals and are encouraging the employment of more primary care physicians. Having rejected the gatekeeper concept, hospitals have realized that to build market share they have to secure primary care referrals in markets where they seek growth. And the only way to ensure those referrals is to employ the primary care physicians. So while primary care physicians may no longer be a cornerstone of a hospital-managed care strategy, they continue to play a central role in marketing strategies designed to increase utilization of high-margin specialists.
In addition to the specialists knocking on their doors, many CEOs find that their workforce now includes other physicians, such as growing numbers of hospitalists. The avenue to employment of hospitalists was paved in several ways: Physicians, because of time and income pressures, found themselves motivated to spend less time in the hospital, particularly rounding on hospitalized patients. They soon found that hospitalists allowed them to leverage their time and their incomes.
Hospitals found that hospitalists offer more consistency in care now that greater attention is being given to patient safety and length of stay. The hospitalists proved themselves to be of considerable help in both regards. Lately, the hospitalist trend has been shifting from generalists toward intensivists and specialists. Some hospitals are beginning to employ pediatric hospitalists and even surgical hospitalists.
For many hospitals, employing specialists responds to their escalating fears about niche competitors and specialty hospitals. If hospitals fail to answer specialists' concerns about declining incomes and rising workloads, these specialists may invest in services that compete directly with the hospital. A similar concern has driven much of the hospital activity related to joint ventures: Better to get half of something than all of nothing. Yet joint ventures can be enormously difficult to cobble together and even more difficult to manage, particularly if they produce losses instead of the anticipated high returns. Employment is cleaner. And it is often a much more direct route to mutual benefit.
Thinking of the Future
When hospitals think about their relationships with physicians, they quite naturally tend to think in terms of their current relationships, not their future relationships. As attractive as employment has become today, it is future fitness that may prove to be its greatest advantage. It is very difficult these days to find young physicians right out of training or in the midst of it who have much interest in entering private practice and battling the government, health plans, hospitals, colleagues and trial attorneys. They are interested, understandably, in making a good living with a minimum of hassles. They are happy to leave entrepreneurial glory to their predecessors.
The simple truth is that the hospitals without an employment option for physicians will, in the not too distant future, find themselves at a distinct competitive disadvantage. Even if they soon recognize this shortcoming, they will find it impossible to create the necessary infrastructure and culture they need overnight. While the shorter-term imperatives for employing physicians may be strong, they are overshadowed by the longer-term need.
As hospitals consider employing more physicians and forming more structured group practices, they may be tempted to view the initiatives as new ventures--an additional layer of organization and cost. This will, at best, be only half true because most hospitals have a wide variety of existing relationships, many of which already have significant dollars allocated to them. It is better to think of group practice formation as a restructuring of an existing set of relationships. And for most hospitals, these relationships can stand some restructuring: They are often distinctly lacking in accountability. Some are so varied and ad hoc as to be virtually unmanaged.
So many hospitals find that they already have a multispecialty physician enterprise of some sort on their hands. While assembling it may have been relatively easy, managing it may prove to be something else again. Ultimately, it will need to be transformed into a coherent and cohesive multispecialty group practice. In the remainder of this column, I offer some suggestions, based on a couple decades of experience, for creating successful, well-aligned multispecialty group practices.
The Role Models
When hospitals and physicians begin to consider forming multispecialty group practices, they understandably default to some of the best-known organizations as role models, particularly the Mayo Clinic and The Cleveland Clinic. There have been many times when I've heard it suggested that a hospital and a group of physicians have decided to put together a group "just like Mayo or Cleveland Clinic." I always appreciate their ambition, but they rarely understand, at even a basic level, what they are contemplating.
Arguably, Mayo and The Cleveland Clinic represent the most advanced form of medical enterprise in the world. It has taken them more than 100 years to reach their current state, and they are so culturally different from most hospitals and physician practices that they might as well be from another planet. Every physician in them has embraced a high level of personal commitment to organizational goals--a foreign concept to physicians in private practice and even in many group practices.
In the Mayo and Cleveland Clinic model, the hospital is subordinate to the physician enterprise. Indeed, it is not unusual at The Cleveland Clinic for physicians to comment that there really isn't a demarcation between physicians and hospital. At the heart of most sustainable multispecialty group practices, there is a mingling of incomes and collegiality that will make many currently independent physicians uncomfortable. Higher-earning specialists transfer income to lower-earning colleagues. Physicians contemplating being part of a multispecialty group practice need to understand and accept this reality.
In forming a multispecialty group practice, it is good to think of building a flexible federation rather than a tight, well-oiled machine. Many physicians are not well oriented to groupings beyond seven to eight individuals. And because they are shaped by the nature of their training and their work, their affinities tend to run along specialty lines. Further, many physicians have figured out how to make their practices work pretty well and have formed collegial relationships that don't warrant disruption.
The question is: How do you pull a variety of physicians in a variety of specialties together into something that yields a better result for all involved (hospitals and physicians)? The answer is to spend some time on the front end figuring out what the physicians must be exceedingly tight about--a set of fundamental principles and commitments. If they can be tight about what really matters, they can be loose about everything else. It's important, too, to think in terms of evolution rather than a "big bang" approach when you're developing a group and refining it. If you overstructure and overdefine it, you'll set yourself up for disappointment.
The Employment Trade-Off
It's long been suggested that physicians quit working hard once they are employed by a hospital. I'm sure that this is, to some degree, true. After all, they left private practice partly to escape the long hours. But an overlooked factor is the new organizational demands that are put on physicians. They are suddenly expected to do things they weren't doing before, like attend meetings and participate on committees. That time and energy has to come from somewhere and, not surprisingly, at least some of it must come from patient care. The key is to make sure that there is a real and meaningful return associated with that investment of time and energy: improvements in physician productivity as well as the market competitiveness of the group and the hospital. That is, after all, the primary purpose of management--to produce better returns from assets, be they tangible or intangible.
The reason some hospitals have been unable to achieve an acceptable level of profitability within the primary care practices they own probably has to do more with how well they have used physicians' time than with the time physicians have been willing to commit. There is a reason the Mayo Clinic describes itself not only as "physician led" but also as "professionally managed." The clinic learned decades ago that professional management results in better returns for patients and physicians. Thus, it has built management systems that demand a level of discipline, conformance and accountability that will be difficult for many physicians and hospitals to put their hands around. But they'll have to embrace this reality if they hope to evolve sustainable multispecialty group practices.
Readers of Jim Collins know he advocates that organizations be intentional in defining and then optimizing their economic engines. For hospitals, the economic engine is centered around high-margin, procedure-based specialties that require focused application of capital and technology--whether it involves a bed or not. This includes not only surgery, but also invasive and minimally invasive interventions as well as the full range of diagnostic capabilities, including radiology and pathology.
Defining a hospital's economic engine is difficult because it is a moving target. Unlike business lines and products in other industries where profitability is largely determined by market-based pricing levels and underlying costs, in the hospital both pricing levels and, to a lesser extent, underlying costs are subject to the whims and vagaries of reimbursement. Rapid technological change can also wipe out a once profitable service line. This possibility argues for maintaining a portfolio of service lines that is, like stock portfolios, diversified enough to smooth out sudden downturns.
For a hospital, the major benefit of a multispecialty group practice is its ability to focus resources, management and referrals on those specialties that yield the highest returns. At one medical center we have worked with, the contribution margin of the specialties at the core of its economic engine exceeded $60 million a year. This represented just the direct contribution of its orthopedic surgeons, neurosurgeons, general surgeons and cardiothoracic surgeons. (These specialties are identified because, based on our experience, they are the ones most likely to be interested in joining a hospital's multispecialty group practice. Invasive cardiologists and gastroenterologists are much less likely to be interested because they are less threatened by malpractice liability and income pressure.) A 5 percent improvement in the contribution margin of these specialties would result in a $3 million improvement without considering the spillover impact for their colleagues in other specialties.
While the improved economic contributions are fundamental, the most important contribution that a multispecialty group practice closely aligned with a hospital will make relates to quality of care. It's hard to argue that the current delivery system, fragmented as it is between hospitals and a still largely unorganized physician cottage industry, will be able to manage care better than one that has achieved a higher level of integration. If the lessons of other industries hold true for health care, and I'm confident they will, there will be a direct relationship between improvements in quality and reductions in cost.