Over the past decade, hospitals have been busy acquiring physician practices. This article provides
an overview of this trend, considers
the reasons behind it, describes
some risk factors relating to this shift
toward physician employment, and
then suggests some safeguards for
health systems and physicians to
consider in structuring and monitoring
their employment relationships.
Hospital alignment with physicians
in existing practices can be achieved
through practice acquisition structures
such as asset or stock purchase
agreements, mergers, and joint ventures.
The hospital or a related health system
affiliate then typically engages the
physicians through employment,
professional service, or co-management
service agreements with physician
entities or individual physicians.
Hospitals hire physicians through
various employment models, depending
on state law, business issues, and other
factors. Many states permit hospitals to
employ physicians directly, which allows
for a high level of integration. Corporate
practice of medicine restrictions in
some states, however, prohibit hospitals
from employing physicians. In those
jurisdictions, hospitals may retain
physicians through the use of a “friendly”
or “captive” professional corporation
(captive PC) owned by a physician
(often a hospital employee) designated
by the hospital, or through a nonprofit
medical foundation, the board of which
is controlled by the hospital. A hospital
or one of its affiliates may own and
operate physician clinics and contract
with physician practices that employ
the physicians who staff the clinics.
In some cases, physicians are employed
through a separate entity that can be
structured as a group practice. If the
entity qualifies as a group practice under
the Stark Law, the physicians could share
in ancillary service revenue, unlike under
other hospital employment settings
in which that law prohibits physicians
from sharing in ancillary revenue.
Hospital employment of physicians
has become more prevalent in the
past 10 years, as widely reported in the
press. The magnitude of the shift is
uncertain, however, due to the lack of
comprehensive data for comparison.
A survey conducted in 2012 on behalf
of the American Medical Association
(AMA) found some evidence of the
shift toward hospital employment. 1
For example, the study found that 29
percent of physicians were employed
in practices owned wholly or in
part by hospitals, while 60 percent
of physicians worked in practices
that were wholly owned by practice
physicians. The hospital employment
figure excluded physicians who
were not employed by hospitals but
provided services on an independent
contractor basis under professional
service agreements or similar contracts.
As a result, the study may have
understated the degree of integration
between hospitals and physicians.
The survey indicated that physicians
in multispecialty groups (43.6 percent)
were more likely than their peers in
single-specialty groups ( 22 percent)
to be employed by hospital-owned
practices. More recent studies have
estimated higher levels of hospital
employment but appear to be more
narrowly based. Some observers have
even predicted that the proportion
of physicians in private practice may
shrink to less than 30 percent within a
few years, although the basis for such
a large change is unclear and some
uncertainty exists as to whether hospital
employment may be leveling off.
The timing, magnitude, and nature
of these trends can vary based on
geography, physician specialty, hospital
philosophy, and other factors. Some
geographic areas experienced a frenzy
of physician practice acquisitions
a few years ago and now see only
limited acquisition activity, while other
geographic areas are seeing higher
levels of acquisition activity as physician
groups there move toward consolidation.
Why the Shift?
Hospital employment of physicians
has increased for a number of
reasons. They include:
• A move away from fee-for-
service reimbursement to
alternative payment and delivery
models focusing increasingly
on results (quality and cost) and
thereby creating a greater need
for integration and cooperation
among healthcare providers.
• A hospital’s ability to increase
reimbursement for physician
and ancillary services by
shifting a medical practice
to hospital outpatient
department (HOPD) 2 status.
• Physician frustration with
the burdens and economics
of private practice.
• The need for adequate physician
coverage amid physician shortages
and an aging physician workforce.
• An increasing focus by physicians on
stable income and work-life balance.
• Access to physician referrals.
• The potential to expand
market share and clout in
negotiating payor contracts.
The ongoing transition from traditional
fee-for-service reimbursement (based
on quantity and intensity of services)
to payment models based on quality
and efficiency is a primary driver of the
trend toward hospital employment of
physicians and practice acquisitions.
These new payment models are
sometimes referred to as “value-based”
or “pay for performance (P4P).”
New Medicare value-based payment
models include accountable care
organizations (ACOs) that provide
the potential for participants to share
in savings realized in treating their
patients; bundled payments, which pay
collaborating providers a set amount
for their collective services; hospital
value-based purchasing, which sets
aside portions of hospital reimbursement
for reallocation to hospitals with high
quality scores; payment reductions for
poor results (e.g., hospital-acquired
conditions and readmissions); and
other innovative models being
developed by the Center for Medicare
and Medicaid Innovation (CMMI).
Private payors are also implementing