Hospital-owned physician practices continue to grow, but integration has issues

“The Affordable Care Act and changing economic conditions have encouraged an increase in the integration of physicians with hospitals,” according to a study conducted Marah Short, M.A., Vivian Ho, Ph.D., and Ayse McCracken, MBA, CPA for the James A. Baker III Institute for Public Health at Rice University. The Rice University study found that hospitals with physicians on salary rose from 44 to 55 percent between 2008 and 2013 and noted that a growing number of hospitals are employing primary and specialty care physicians, as well as hospitalists. The authors  concluded that the data showed an overall trend of increasing integration, but stated that many hospitals are transitioning to lower levels of physician-hospital integration. The study examined the trends in hospital integration over time designating four forms of integration based on the type of contractual relationship a hospital has with physicians.

Number and impact of hospital-employed physicians

The number of physician practices owned by hospitals/health systems rose 86 percent between 2012-15, with the percentage of physicians employed by hospitals or health systems increasing in every region of the country, according to a study prepared by Avalere Health and released September 7, 2016, by Physicians Advocacy Institute (PAI). This study also found that by mid-2015, one in four medical practices were hospital owned and 38 percent of U.S. physicians were employed by hospitals and health systems. In 2015, hospitals employed more than 140,000 physicians. In addition, from 2012 to 2015, hospitals acquired 31,000 physician practices. PAI noted that the acquisitions typically involve the acquisition of the services of multiple physicians through employment contracts, as well as the practice’s physical building and equipment.

Kelly Kennedy, PAI executive vice president, stated that “The shift toward more physicians employed by hospitals could mean higher costs for the entire health system. For patients, it impacts both where they receive and how much they pay for care.” Robert Seligson, PAI president and chief executive officer of North Carolina Medical Society, added that “Payment policies from governmental agencies and health insurance companies heavily favor large health systems and [that] makes it challenging for independent physician practices, especially smaller practices to survive.”

Accountable care organizations and payment innovations

“Through integration, hospitals could better control physician practices to increase efficiency and decrease costs,” by reducing duplication of services, providing clinical benefits, and improving communication and coordination of care between hospitals and physicians, the Rice University study explained. The authors further noted that the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) encouraged the integration of physicians with hospitals when it established accountable care organizations with the goal of reducing health care costs while encouraging  doctors, hospitals, and other health care providers to come together voluntarily to give coordinated high quality care to their Medicare patients. ACOs and medical homes will continue to spur integration in coming years, the study predicted.

Regulations mandated by the ACA have offered various payment innovations and opportunities for physicians and hospitals to participate in value-based contracting. These options provide better solutions with less operating and financial risks for hospitals and physicians, the study noted, perhaps allowing hospitals and hospitals to forgo integrating. Hospitals can form a successful ACO, while physicians can maintain their private practice and both benefit from the shared savings. However, hospitals seeking to participate as a Medicare ACO must build relationships with primary care physicians (PCPs) and will have better control of hospital referrals for inpatient and outpatient care if the PCPs are hospital employees, according to the Rice University study.

Conflicting interests in integration

Conflicting interests played a role in the choice to integrate or de-integrate, the study explained. Hospital employment of physicians is influenced by a variety of factors, including preparation for value-based contracting and the attraction of certain specialists that generated a significant patient volume. Hospitals studied were uncertain whether to employ highly compensated specialists or primary care physicians. Specialists considered the risk of declining incomes and sought partnerships with hospitals because reimbursement for ancillary services are paid at a higher rate when billed as the service of a hospital provider organization than when provided in private practice.

Other issues facing the integration of a hospital and an independent physician practice include payer contracting for Part B services; billing, coding, and collections process; staffing costs, policies, and procedures; and supply chain management. The differences in operation between the two may result in increased clinic operation costs along with pressures on physicians to contain costs. The differences in operation between the two may result in increased clinic operation costs along with pressures on physicians to contain costs.  The study recommends that hospitals create a governance structure with strong physician leadership and experienced practice administrators to address  and assimilate the practices into the hospital’s infrastructure.

The study noted that “a successful partnership requires physicians and hospitals to have aligned goals and strategies consistent across the organization.” When determining whether to integrate, the study recommended that hospitals and physicians consider whether there is both a cultural and financial fit and expectations of the physician and the hospital need to be clearly defined and aligned. While physician practices operate as small businesses, hospitals function as more sophisticated business entities, the study explained.While physicians may expect few changes in the way they do business, hospitals likely will expect physicians to operate their clinics in alignment with hospital systems, processes, and policies, and align referrals with its medical staff and outpatient services. .