Does Physician Employment Lead to Higher Costs of Care?

Physician employment by health systems has been on the rise over the last five years. First it was primary care providers — who form the foundation of a system and its market share — then cardiologists, who flocked to hospitals as shelter from stiff reimbursement cuts. Others specialists, both medical and surgical, followed.

Somewhere between a quarter and a third of physicians are currently employed by hospitals, according to various studies on the subject.

Hospitals employ them — and take on responsibility on their hefty salaries — because employment provides a variety of benefits: higher market share, alignment, better care coordination and physician involvement in developing (and adhering to) care pathways — the latter of which should lead to better quality and lower costs.

Yet, a new study in this month's Health Affairs suggests the oppose: Physician employment leads to higher costs.

How is this the case?

In theory, stronger alignment between physicians and hospitals, along with better information for decision making, should reduce duplicative and unnecessary care and improve adherence to evidence-based medicine and care pathways, which often promote the use of generic drugs and less expensive testing.

How can employment increase costs?

The answer is simple: hospital payment vs. outpatient rate differences.

I've experienced this situation first hand. A few years back, before I worked in healthcare media, I'd been seeing a gastroenterologist who was on the medical staff at Northwestern Memorial but practiced independently. Each visit cost me a $40 co-pay, and I'd occasionally need outpatient labs, which were performed onsite. That bill was never anything noteworthy — $20 to $40, maybe $50 on the high end.

Then, he retired. I sought out a new specialist and found one at another academic medical center here in Chicago. When I was billed for the visit, I had a small charge on top of the $40 co-pay. It was around $8, and I wasn't sure what it was for. Turns out, it was my share (after insurance) of the hospital's facility fee for running the practice. It wasn't clear to me why the hospital got this and my other doctor didn't, but the bill was small, so I paid it. The trouble came when I got the lab bill. The physician had sent me to the hospital's lab for my regular blood tests. It seemed no different than when I'd had them drawn at my old doctor.

That is, until about a month later when I got the bill. The labs cost me $800! Because I hadn't received any treatment at the hospital for the year, I owed all of it — my deductible was $1,000. And because I was a lowly recent graduate, I didn't have $800. I called the financial office and they put me on a payment plan; I paid off the bill in 24 installments.

This is why employed physicians are more expensive.

But it isn't hospitals' fault. Reimbursement methodology encourages is. Payers have implicitly agreed, through their contracting (or rulemaking, in the case of Medicare and Medicaid), that hospitals should get more for providing services. It would be financially irresponsible of the hospital to leave that additional money on the table.

I don't want to suggest payers want or like this. But, long-standing payment systems are slow to change, and thus, we're left with different payment structures for different sites of care. When different sites performed vastly different levels of services, this made sense. Whether or not it still does today is questionable.

The result, at least for now, is unhappy patients who don't understand why their bills are more.

The good news is this is probably a short-term problem, part of the inevitable growing pains that result when an industry goes through transformational change.

In fact, I'd argue we shouldn't worry all that much about what the Health Affairs study found. Why?

Because everything I just discussed takes place in a fee-for-service environment.

And guess what? Those days are numbered.  

Physician employment includes significant carrying costs, so no system should jump into it without careful analysis of its strategy and needs.

But, in a world of capitated payment where the winners are those with coordinated care, there seems no better model, at least to me, than employment.

Contracts with incentives for desired outcomes, adherence to pathways, etc., are powerful. But are they as powerful as employment? That's a question every hospital executive today should be asking themselves, and considering closely.



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