Physician-Hospital Alignment: Strategic Insights for Regional and Community Hospitals

For most organizations, the physician-hospital relationship has been severely strained by the competitive stance taken between physician groups and hospitals over the past decade and a half.  This competitive stance has arisen from two converging factors:

  • Declining ability to maintain physician incomes with professional fees alone.
  • Technical fee arbitrage opportunity resulting from the differential profitability of healthcare services and rapid advances in technolog.


Together, these two factors have encouraged physicians to segment the services they provide and withdraw the most profitable services from the hospital realm. The response from hospitals has been to view most physicians as competitors.

Fast-forward to 2010: The technical fee arbitrage opportunity has been fundamentally reduced and in many places eliminated. Congress has either outlawed or regulated out of existence many of the strategies used to capture the most profitable specialty inpatient cases. New reimbursement structures, especially the advent of MS-DRGs in October 2008, have dramatically normalized the profitability of services. However, physicians’ inability to maintain incomes on professional fees alone has not changed.

Physicians are seeking additional avenues to supplement declining incomes, such as:

  • Ancillary investments, which are popular due to greater restrictions and changes in reimbursement.
  • Cash payments, beyond fee-for-service, such as boutique and/or concierge practices that demand an access fee of anywhere between $1,500 to $10,000 for special services.
  • Greater leverage, including use of extenders and technology.
  • Employment by a larger entity, whether payor, provider, hospital or employer, to provide stability.

None of these avenues have been a successful panacea for most physicians, although more and more are leaning toward employment (see below). Many physicians continue to view their future as in crisis, which sets up a dangerous situation for the hospitals that depend on private practice physicians in the market today. There is the real potential for physicians to use their scarcity and patient influence to create an arbitrage opportunity with the hospitals, playing one hospital against another to support their incomes.  Moreover, hospitals are becoming increasingly dependent on physicians to achieve the operational efficiencies needed to survive in the tight reimbursement environment. Additionally, future reimbursement schemes such as bundling, pay for performance and third-party payor initiatives around quality are all dependent on functioning collaborative relationships between hospitals and physicians.

To date, the solution seems to be to simply employ the physicians. Nevertheless, simply employing physicians does not create alignment beyond potential financial alignment. As we show, financial alignment is just one piece of the puzzle. However, without an alternative strategy, hospitals have begun to once again rapidly start to employ primary care and specialty physicians. As of 2009, 10 percent of all physicians were employed by hospitals, up from 7.5% in 2001.

Statistics indicate that physicians are increasingly interested in employment. The preference of final-year medical residents to become hospital employed has jumped from 3 percent in 2001 to 22 percent in 2008.

Hospitals must refocus the relationship between hospitals and physicians beyond pure employment and move toward closer collaboration than they have in the last decade. To do so, a framework, tools and preferred models need to be articulated, which expand beyond just economic alignment and includes clinical activity elements — quality, operations and market — as well as engagement elements — vision and strategy. Additionally, the culture of the physician-hospital collaborative relationship needs to be remade.

Physician-hospital alignment framework

Most markets are in a stage of transition from one paradigm to another. Historically, successful hospitals were the efficient workshops of the best physicians in a market. Together, through collaboration and “friendly” competition, the partnership created access to high-quality care. The emergence of private practice regional referral centers is just one example of this. Today, however, we find most markets in a period of transition. How the organization reacts to this period is a good indicator of the long-term success of the hospital.

Within each market position there are nonstrategic, strategically reactive and strategically proactive decisions that can be made. We classify the continued use of competition as nonstrategic in that the current marketplace will increasingly require hospitals and physicians to collaborate to capture efficiencies, deliver quality and potentially be paid through a bundled payment approach.

Being strategically proactive, on the other hand, allows an organization to actively manage the tools and approach to creating collaboration with physicians. But most organizations fall into the strategically reactive category. With the speed at which the environment is changing, it is difficult to stay ahead of the market curve. As such, many organizations find themselves in a mode of responding to physician needs and requests rather than systematic leadership of physicians. If a hospital has a multitude of directorships, call coverage contracts, different ad-hoc forums for working with physicians and employed physicians cobbled together from opportunistic practice acquisitions, it will most likely fall into the all-too-common unmanaged collaboration position.

What is needed is a framework for strategically engaging the physicians and forming a durable, long-term partnership.

Definitions

In order to fully discuss the topic of physician-hospital alignment, we must first be clear on two key definitions: alignment and integration.

Most of what we discuss focuses on creating the alignment with physicians that will allow integration to occur over time. By definition, parties cannot be integrated unless both parties are fully aligned. The first step is often defining the elements upon which the parties want to be aligned.

Therefore, it is important to note that other definitions, such as “financial integration” or “structural integration,” are not the same as integration. When we mean something different from “integration” as defined above, we will specify accordingly.

Clinical activity alignment factors include:

  • Market presence. This is defined by the location in the market and the position of healthcare assets. Being in the same market or community as physicians gives some level of alignment, especially in outlying and rural areas.
  • Quality. The existence of specific quality standards or reputation aligns physicians who are most concerned about quality outcomes.
  • Operations. The smoothness and convenience of operations can also align hospitals and physicians. This is the measure that we assign to describe the efforts of hospitals to be efficient workshops.

Engagement alignment factors include:

  • Vision and mission. The goals for changing the market, religious affiliation, etc. all fold into this metric, as does the desire for most people to be a part of a winning team.

Economic alignment factors include:

  • Indirect economics. These include short-term contracts or other transactional financial relationships, such as on-call pay, most medical directorships, business services, etc.
  • Direct economics. These include employment and other relationships where the hospital is directly paying the physicians for long-term services.

In organizations where there is little alignment and the integration gap is large, typically physicians are aligned on only the economic factors. As organizations become more adept at bringing alignment along more ongoing and continuous factors, the integration gap can be narrowed dramatically. It is this development of alignment along all sides — clinical activity factors, engagement factors and economic factors — which is required to create the possibility for integration to be developed.

Spectrum of Alignment Tools
Understanding the challenges to alignment by physician type allows the right alignment tools to be put into practice. These alignment tools fall into four categories.

Category 1: Business Services. The business services category includes services that physicians could purchase. Business services tools are typically implemented in arm’s-length relationships. However, if executed correctly, this vehicle creates great “stickiness” and is hard for competitors to replicate.

Business services include:
  • Practice support services to optimize efficiency of billing, back-office and contracting functions.
  • Lease or contract arrangements regarding real estate.
  • Infrastructure services to promote increased communication among physicians and the hospital (e.g., common electronic health record).
  • Payor contracting vehicles (e.g., IPA).
  • Clinically integrated physician networks or similar structures that, through common information exchange and quality standards, allow better collaboration for patient management and may result in improved payor contracts.

Category 2: Contracts. Contracts generally include anything that is a payment for physician services. Similar to business services, contracts are typically implemented in arm’s-length relationships. However, in the highest-leverage cases, the tools in the contracts category approximate employment tools and can be more durable.

Contract tools include:
  • On-call arrangements to ensure adequate physician coverage for emergency departments and inpatient departments. This includes both per diem on-call pay (stipends per day) and activation payments (payments made only upon an actual call event requiring a physician’s presence in the ED).
  • Physician recruiting to support the ramp-up of physicians new to the market, where there is a designated need.
  • Medical directorships and stipends (payments per hour) to oversee specific programs, services and departments.
  • Clinical co-management to enable hospitals and physicians to jointly manage and improve entire hospital service lines. These agreements tend to stress operational and quality performance metrics and include a base fee (fixed payment per month) and an incentive fee (variable based on achievement of outcomes).
  • Professional services arrangements, which amount to an outsourcing of a function (clinical or managerial) through comprehensive contracts for a broader range of services rendered, which include but are not limited to those defined above.

These agreements are generally less intrusive than other economic-type alignment tools, allowing organizations to make changes more easily. Moreover, the tools typically do not require an entirely new structure to manage. As such, it is these tools that are the most prevalent in hospitals today. However, they are also typically easy for competitors to emulate.

Category 3: Structured Communications. This includes all types of one-on-one and group interactions initiated by the hospital leadership with the physicians beyond ad-hoc hallway conversations. Because the tools in this category require direct interaction between individuals, there is often a very high “stickiness” factor that can result in very strong alignment of the current and future intent.

Structured communications tools include:
  • One-way communications that are typically digital and group focused. These include blogs, newsletters, announcements, etc.
  • Two-way digital communications that are typically focused around emails to individuals; however, this tool also more recently includes social media efforts (YouTube, Facebook, Twitter, etc.), which organizations have begun to use with patients and which can also be used with physicians.
  • Retreats, town hall meetings and other large-group discussion settings.
  • Advisory committees, planning teams and leadership councils. These are typically used to advise on specific topics (service line, subset of physicians, market area), and promote focused interaction on critical issues that need to be solved. A key value of strategic planning is the opportunity to bring groups of physicians into a discussion with hospital leadership around a specific topic, such as the future direction.
  • Direct physician leadership, beginning with a chief medical officer and extending through physician CEO, resulting in the direct participation of physicians in the leadership of the organization.

There are a virtually endless number of permutations of tools in this category. It is this category of tools, we believe, that has declined the most in the last couple of decades and warrants close consideration by virtually every organization. Moreover, these tools, unlike all of the other tools, do not require financial outlays or risk, but require an often more scarce resource: time.

Category 4: Employment. Employment includes all types of relationships covered by the legal definition of employment. Three factors are currently driving this category of tools to the forefront of hospitals’ alignment focus: the recent elimination of many of the previously permitted economic alignment tools; a desire by physicians to alleviate the administrative burdens and ongoing capital investment associated with running a professional practice; and ongoing reimbursement pressure, especially on selected physician specialties (cardiology, neurology and primary care).

Employment tools include:
  • Individual contracts with the individual or with groups of physicians. These employment contracts are typically heavily focused on productivity with some upfront income guarantee per work RVU.
  • Standard employment contracts generally containing incentives that vary depending on the desires and vision of the hospital. These incentives can include payments for quality outcomes, serving selected markets, providing management services, etc.\
  • Single-specialty group employment, which typically is a step in the process as groups of physicians are brought under an employment agreement. The goal is to either capture volumes or realign the group’s direction, both of which often show up in the incentives.
  • Multispecialty group formation, which is the next evolution in creating the communication and cultural infrastructure that encourages multidisciplinary interaction between the various employed specialties.
  • Integration. This differs from alignment in that integration is the formation of a single team. No longer just individual hospitals and physicians, the integrated group is one that has a single culture, outlook and direction. Integration seems to emerge only after the long history of working together creates the relationship and trust needed to form a permanent team.

While employment has received significant attention from both hospitals and physicians, the different rationales for entering employment relationships from both sides give rise to the opportunity for win-win situations, as well as large disconnects on achieving the end goal. As such, each employment situation is different and cannot be treated simply as a single solution. Furthermore, employment does not substitute for the other three categories of tools. The employment tools require careful consideration before deploying.

Pluralistic Medical Staff Model

We propose that for most organizations, multiple vehicles will be needed to increase the alignment of different segments of physicians, whether contracts to increase alignment for physicians desiring more clinical activity alignment, structured communications to increase alignment around engagement or business services, contracts and/or employment for economic alignment.

Given the use of multiple models, a key success factor for the future is the ability to manage a pluralistic medical staff model. To that end, both the principles of the physician relationship and the governance and structure become important.

Direct, honest communication is one of the hallmarks of a good partnership. To that end, the hospital must be clear about its physician-alignment principles.

For instance, in a pluralistic model, will the hospital use its market position to advantage the employed physicians over the private practice physicians? Moreover, will the hospital have the employed physicians lead the protocol development to the exclusion of aligned private practices?

These are tricky questions that merit thorough dialogue. In most markets, the medical staff will be a mix of employed and private practice physicians. Moreover, many private practice physicians are often highly aligned. Setting up a structure that advances employed physicians over aligned private practice physicians can bring about dramatic losses of volumes.

Flexible Platforms

Finally, successfully navigating the current instability of hospital and specialty-physician relationships will require hospitals to develop flexible physician-hospital platforms. Few hospitals will have the luxury of successfully deploying only one or two alignment tools or structures to partner with all key specialty physicians. Fortunately, hospitals can deploy myriad tools, outside of employment, to improve communication and relationships with physicians, including business services, contracts and structured communications.

Many hospitals will find that some key physicians are ready to fully align their practices with the hospital through an employment relationship, while other key physicians wish to remain more organizationally independent. Successful hospitals will become very adept at managing the natural tension of multiple physician models.

Physician-Relationship Models
Fundamentally, hospitals and physicians can choose to align using three relationship models.

  • Private Practice: Economic continuation of the traditional cottage industry (independent contractor) medical staff model, yielding unique hospital relationships with many disparate physician groups
  • Consolidated Groups: A reduction in the number of hospital and private practice physician relationships facilitating an increased scale of independent-physician groups in the market
    • Can be physician led, hospital led or jointly led
    • Can be achieved by combinations, growth of existing groups or building of new groups
  • Employment: Constitutes the substitution of the hospital and private practice physician relationship through enterprise ownership of physician practices

Hospitals and physicians can achieve closer relationships using any model, and, as mentioned, in coming years most hospitals will use two or all three of these models within the same medical staff. Each model offers a unique set of potential risks and benefits to hospitals.

Determinants of Success
Within any given model, hospitals’ abilities to advance relationships with physicians will depend not only on the chosen model, but also on:

  • Hospitals’ abilities to execute strategy within chosen models. This is determined by the extent to which hospitals effectively deploy alignment tools (business services, contracts, structured communications) within chosen physician-relationship models to generate support for and action toward a shared vision.
  • Alignment of relationship models and market dynamics. This is the extent to which market dynamics accommodate or detract from hospitals’ chosen physician-relationship models.
  • Hospitals’ abilities to execute. Abilities to execute are driven by internal factors, specific to individual hospitals and sometimes varying across hospitals’ physician relationships. As with any strategy, managerial acumen will prove critical to success. Those hospitals that have developed relevant managerial abilities in support of their physician efforts will outperform their peers. Examples of abilities include:
    • Managing physician practices (if employing).
    • Considering market dynamics from a physician perspective.
    • Approaching the market for the benefit of the clinical enterprise (hospitals and physicians), not just that of hospitals.
    • Structuring and managing financial alignment tools—CCMAs, JVs, etc. (if not employing).
    • Engaging physicians in meaningful dialogue to guide the clinical enterprise.

Managerial acumen aside, successful physician-hospital partnerships require that deployed alignment tools fit within broader physician and organizational strategic frameworks. To date, many hospitals have used opportunistic, reactive physician strategies. Employed-physician groups are often those that approached the hospital requesting employment or were put into play by competition, not necessarily those groups that are most strategically important. Deployed alignment tools (e.g., CCMAs, JVs, physician leadership councils, etc.) are often “me-too strategies,” in response to competitors’ actions, not deliberately constructed as components of broader hospital strategies. Additionally, many hospitals have focused efforts on financial-alignment strategies, ignoring less transactional aspects of building physician relationships. Going forward, hospitals that craft physician strategies in support of overall hospital strategy and deploy tools to meet underlying strategic aims will outperform their competitors.

Lastly, hospitals’ abilities to succeed in these endeavors will depend, at least partially, on selecting appropriate physician partners. Generally, hospitals that choose to partner with physicians who deliver high-quality care can consider market dynamics from a hospital perspective, can approach the market for the benefit of the clinical enterprise and can effectively solicit support of fellow physicians for the organizations’ visions, and they will enjoy an advantage versus the competition..

Cultural Barriers

Finally, many hospitals that achieve competencies necessary to develop large, multispecialty practices will still fail to successfully merge with physician practices on their medical staffs. The cultural differences between physician practices and hospital organizations are significant. Numerous academic and informal studies of merger efficacy have cited cultural factors as key determinants of successful combinations.

Hospitals that fail to address key cultural differences inherent in the two business models (hospitals and physician practices) will ultimately see their physician-alignment efforts crumble.

Luke Peterson, Kate Lovrien and Thomas Dixon work in the health care practice at Kurt Salmon Associates, a healthccare consulting firm. Learn more about Kurt Salmon Associates.



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