Physician Employment by Hospitals

MGMA Connexion

From July 2010 to July 2011 the percentage of physician-owned medical groups decreased from 80.7% to 76.9%, according to a survey published in the Medical Group Management Association’s January 2012 . Meanwhile the percentage of hospital-owned medical groups increased from 11.6% to 13.0% during this same time period.

The reasons for this trend toward hospital employment remain unchanged. For medical practices, decreasing reimbursements, increased administrative costs, the need to invest in new technologies (e.g., Electronic Medical Records), younger physicians preferring employment rather than ownership, the move toward integrated delivery systems (small medical practices don’t want to be left out in the cold) and uncertainty as to how health care reform will ultimately play out all contribute to the decline.

For hospitals, the increase in physician employment can be attributed to the need to maintain market share (e.g., referrals from both primary care physicians and specialists), having the ability to attract a stable pool of highly qualified physicians and being able to meet the new quality care initiatives under new payment models (e.g., bundled payments).

As is evident, very often hospitals have the “upper hand” in driving physician-hospital integration and can often provide the best option for physicians to ensure their long-term financial stability. This is due to a great extent the fact that hospitals have the financial capital necessary to compensate physicians at levels that many physician-owned practices can no longer afford to maintain. Also, most hospitals have already made significant investments in technology and infrastructure that many independent practices are not able to make.

Common Forms of Hospital Employment

Hospital employment can come in many forms, depending on the needs of each party, as well as specific federal and state regulatory requirements. For example, it can be through direct employment by the hospital where physicians simply become hospital employees.

In states allowing “corporate practice of medicine” a hospital-captive physician model is commonly used. In these models, a physician who has strong ties to the hospital becomes the sole shareholder of the “Captive PC.” In these arrangements, there is very often a hospital-owned management services organization that provides management and administrative services to the PC. In states where the “corporate practice of medicine” rules do not apply, a hospital may simply establish a physician practice subsidiary, which employs the physicians.

In any case, regardless of how an employment arrangement is structured, it is important for physicians to do their financial due diligence, along with their legal due diligence (not covered in this article) before entering into any agreement. It is strongly advised that an accountant or other qualified financial advisor well-versed in health care-related financial matters review the agreement.

The RVU Model

Many hospital-physician employment agreements require physicians to maintain certain annual productivity levels, commonly measured by their annual work relative value units (RVUs). A physician may be guaranteed a certain compensation only if they meet a certain annual RVU benchmark. It is not uncommon for the benchmark to be the RVUs generated during a recent 12-month period prior to the start of hospital employment. If RVU targets are not met, then compensation typically is reduced. Conversely, if RVU targets are exceeded, depending on the agreement, a “bonus” may be paid.

Perhaps most important regarding an RVU-based compensation structure is identifying which RVUs are excluded in determining the RVUs generated for a given year. For example, those generated from providing designated health services are generally excluded due to Stark and other federal and state regulations. A case in point, a gynecologist who does not personally perform a sonogram test may have the related RVUs from these services excluded from his or her annual calculation.

There are a myriad of other possible scenarios when a physician’s ability to achieve certain RVU levels might be impacted by other terms of his or her employment. For example, a physician may be required to perform certain administrative functions for the hospital as part of their employment contract. While the physician might receive additional compensation for these non-clinical services, this may also negatively impact his or her ability to meet annual RVU targets.

Conversion to the hospital’s electronic medical record (EMR) may also impact a physician’s ability to meet annual RVUs. This may be especially true if the hospital’s training and EMR support turns out to be sub-par.

Circumstances such as the ones just described should be discussed up front with the hospital and protections, whenever possible, should be written into the employment contract.

Other Financial Terms

Other financial issues are relatively straight forward, but nonetheless should be addressed and negotiated, where possible. Some concerns might include: What pension and other benefits will be provided? Are professional dues and CME included as part of the compensation package? How about other practice-related expenses incurred by the physician? What about malpractice coverage? Who pays for the “tail” if one is needed?

Other issues are more involved and, perhaps, more uncertain. For example, if a Captive PC becomes part of an accountable care organization, do the employed physicians of the PC participate in any shared savings? How about government subsidies for EMRs? If a practice paid for an EMR prior to joining the hospital, who keeps the subsidies, the physicians as additional compensation or the hospital?

Other financial issues have more to do with employment under the Captive PC or hospital subsidiary models. In these models, the physicians may be given an annual operating budget for its practice. Here the issue is what expenses will be included in the budget.

In one possible scenario, a practice may be required to use certain hospital diagnostic equipment. If the practice had recently acquired similar equipment (and is still paying monthly lease payments for this equipment) prior to hospital employment, are these payments included in the annual budget? If they are not and this causes the PC to exceed its annual budget, will this trigger a reduction in the physician’s compensation?

There Are No Guarantees, But…..

While there are no guarantees in any hospital employment agreement, an arrangement that “goes bad” is very difficult and expensive to unwind. Hospitals have deep pockets and extensive legal staffs that understandably draft agreements that protect the hospital.

Whether or not a physician or group of physicians will ultimately have the clout to change what the hospital deems non-negotiable will never be known unless questions and concerns are raised. Very often, other physicians who have come before you have raised similar concerns.

In the end, only a proper financial and legal due diligence of any employment agreement will reveal potential issues and help give the physicians direction and ammunition in their negotiations, as well as create safeguards after employment begins.

Lee Ferber, CPA, is a senior member in GMSL’s Health Care Group, a division of Gettry Marcus Stern & Lehrer CPA P.C., a New York-based accounting and consulting firm. Mr. Ferber specializes in new group formations, mergers and acquisitions, partner/shareholder agreements, succession planning, physician-hospital arrangements and developing physician compensation models. He can be reached at (516) 364-3390 ext. 206, or via e-mail at lferber@gmslny.com.