Moody's: High rate of physician employment linked to lower profitability

Nonprofit and public hospitals and health systems with very high rates of physician employment showed stronger revenue growth but lower profitability than those with lower employment rates, according to Moody's Investor Service's Physician Employment FY 2014 Medians report.

Moody's predicts this dynamic will persist for several years as hospitals continue employing greater numbers of physicians.

For its analysis, Moody's divided hospitals into four categories based on employed physicians as a percentage of the total medical staff:

  • Low: 1 to 15 percent
  • Mid: >15 to 30 percent
  • High: >30 to 65 percent
  • Very High: >65 to 100 percent

Here are four key findings from Moody's report.

1. Very high levels of physician employment quell margins. The median operating cash flow margin is 10.7 percent for hospitals with low physician employment, compared to 8.5 percent for hospitals with very high physician employment.

2. Physician employment contributes to higher revenue and expense growth. Hospitals with very high rates of physician employment have higher revenue and higher expense growth as they absorb physician salaries and make related IT investments and staffing changes.

This is evidenced by a 6.8 percent three-year revenue compound annual growth rate and 7.5 percent expense CAGR for hospitals with very high employment rates. Hospitals with low physician employment, on the other hand, had a median 4.9 percent and 5 percent, respectively. "While we expect expense growth to slow as hospitals generate efficiencies through better practice management and economies of scale, direct losses on physician practices will remain a challenge," Moody's analysts noted.

3. Operating revenue for hospitals with very high physician employment vastly exceeds the U.S. median total operating revenue. Hospitals with very high physician employment have a median operating revenue of $950 million compared to $431 million for hospitals with low employment and $673 million for the national median.

4. Hospitals with very high physician employment report greater outpatient revenue than inpatient revenue. Hospitals that employ a high volume of physicians report a greater share of outpatient revenue (54 percent) than inpatient revenue (46 percent), nearly the exact inverse for hospitals with low employment rates.

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