Physician employment by hospitals grew 49% between July 2012 and July 2015, according to the Physicians Advocacy Institute. Many formerly independent physicians have sold their practices and become employed. A high percentage of newly trained physicians are also signing with hospitals and health systems.


physician employment contract

“Let's call it quits.” I said. “We've been negotiating this agreement off and on for three years.”

The CFO looked at me: “I'd like to.”

He was frustrated because he knew that the only way the deal we were offering would work out for us was if everything went just right for the next five years:

  • The physician we were recruiting would have to remain highly productive, generating over 15,000 wRVUS per year;
  • He would have to remain healthy;
  • There couldn't be any unexpected crisis, like a death in the family or similar issue;
  • He would have to shift the work he was doing elsewhere to our facility;
  • His office would need to be run very efficiently;
  • Some of our employed PCPs would need to start referring to him; and,
  • Newly recruited physicians would have to accept his vision of the practice.

We were both concerned that we had spent hundreds of hours on this negotiation, which would seem a waste if we stopped now. But we were not as sure as the CEO that adding this physician to our already large network would be a good fit.

But, we scheduled another meeting for the following week. And we called our attorney to go over some of the latest requests from the physician.

What's Behind the Shift?

Hospitals have been recruiting physicians in order to:

  • increase market share;
  • maintain certain service lines like neurosurgery and cardiac surgery;
  • promote closer alignment with physicians to help reduce variations in care, meet CMS quality incentives and move toward bundled payments;
  • create leverage with insurers; and,
  • accelerate the development of accountable care organizations.

Physicians who sell their practices do so for some good reasons. They want to:

  • eliminate the hassle of running a practice;
  • generate higher income;
  • obtain better benefits;
  • get a nice lump sum for their practices;
  • arrange more consistent call coverage; and,
  • enjoy a more predictable work schedule.


Is Employment Sustainable?

However, I have to ask if this scenario is sustainable. I have noted several common threads among these transactions.

  • Due to a hospital's urgency to recruit, it will often pay a very generous salary.
  • The cash value paid for a practice is also often at the high-end of the reasonable range.
  • Physicians often optimize their productivity during the years leading up to a sale to increase the assessed value. Then they subsequently generate only a fraction of the pre-sale wRVUs ( wRVUs described here: More on Understanding RVUs).
  • Physicians who  kept their expenses down by running a streamlined office now require 2 or 3 additional staff once they are employed.
  • The same physicians that only took 1 or 2 weeks off each year, are now is entitled to 4 to 6 weeks of paid time off.

For these reasons, hospitals, on average, have consistently lost over $100,000 per employed physician. According to a report in Medical Economics (Hospitals Employing Physicians See Greater Losses), a recent survey commissioned by the Kentucky Hospital Association confirmed that 58% of hospitals reported losses of over $100,000 per employed physician. Primary care doctors posted lower losses, and specialists generated losses of over $200,000 per year.


A Scary Calculation for the CFO and Legal Advisers

Let's do a calculation of the financial impact of employing physicians, based on the following assumptions:

  • Your local health system employs a balanced mix of PCPs and specialists.
  • The losses per physician are slightly above average at $175,000 per year due to liability insurance and staff salaries.
  • Your system employs 100 physicians.

Running those numbers results in an annual hit to the bottom line for the practices (excluding the “downstream” revenues from imaging and admissions) of about $17.5 million. That's a hard pill for the CFO to swallow.

And that amount, albeit an annual hit, pales in comparison to what the OIG (Office of Inspector General) might confiscate if it decides that the $17.5 million exceeds fair market value (see Physician Salaries and OIG Risk). For example, it looks like Tuomey Regional Medical Center (now called Palmetto Health Tuomey), in Sumter, South Carolina, is going to be paying over $70 million in fines related to allegations of improper arrangements with its employed physicians under the False Claims Act.

Will History Repeat Itself?

At some point, hospitals will be forced to bring their physician practice income statements into some kind of balance. That means reducing expenses since fees and collections are basically capped and physicians are already too “burned-out” to see more patients. It looks like physician salaries will be going down at some point.

When salaries go down, physicians become unhappy and angry and tend to:

  • complain loudly,
  • look for a better position elsewhere,
  • organize and form new independent groups, and
  • retire or shift to a non-clinical career (see Is It Time for a Non-Clinical Career?)

Practice management companies like PhyCor went on a binge buying medical practices in the 1990s. It ended with many of the deals falling apart, physicians returning to independent practice and the company's filing bankruptcy. The circumstances are different now, but the end result may be the similar.

What do you think might happen with physician employment? Do you think that hospitals will divest themselves of physician practices as the management groups did in the late 1990s? Or will pressures from the federal government to align or integrate preclude this from happening?