Five years ago, Lourdes Medical Center in Pasco, Wash., began aggressively recruiting physicians. The underserved area needed specialists, so the hospital decided to do something it had never done before: offer full-time employment to physicians willing to make the move.
Managed care swept into the area, so the medical center continued to purchase practices, eventually adding more than 20 doctors to its payroll. Previously, physicians were independent members of the medical staff.
While Lourdes is still hiring physicians -- expecting to raise the number of employed doctors to 30 this year -- it is losing money on the endeavor, says Rene Toledo, executive director of physician services and managed care.
The hospital isn't alone. According to the Medical Group Management Association, hospitals and health systems lose an average of almost $54,000 a year per salaried physician.
As a result, hospitals nationwide are struggling to rethink and redefine their ties to physicians, says Richard Tompkins, M.D., chief executive officer of the Tompkins Group, a healthcare consulting firm based in Baltimore.
Rushing to build integrated delivery networks in response to managed care, hospitals in the early 1990s hastily affiliated with and bought practices, often paying too much and not thinking through how they were going to manage them, he says. After years of losing money, some hospitals have begun to divest practices by dissolving hospital-based medical groups or selling back the practices to physicians.
More often, however, hospitals are working to save and strengthen the relationships by creating new physician management structures, incentive-based compensation plans and business models that better meet physician needs and give doctors a stake in the financial success of their practices.
Hospital executives would prefer not to lose so much money on physician practices, Tompkins says, but they recognize that practices contribute to the overall market presence of the larger organization and help bring in patients.
"All of the hospitals that own practices are in the same boat," Toledo says. "Now that we've gotten into this, we have to figure out how to make it work."
For example, Lourdes is considering setting up a management services organization to streamline the services it offers physicians. And it may combine some physician offices to save money on space and staff.
"We're at a critical transition point," Toledo says. "We realize that we have to separate doctors out into their own entity."
Tompkins says hospitals scrambling to build integrated delivery systems often got caught up in the competitive aspects of buying practices. Executives believed that if another hospital bought the practices first, that hospital would control referrals.
Hospitals that moved too quickly realize they made a number of mistakes when they bought and organized physician practices, Tompkins says. And while it is difficult -- and expensive -- to commit to restructuring such recently formed deals, hospitals have to move forward, he says.
"Only two or three years ago, hospitals considered buying physician practices a slam-dunk," Tompkins says. "So there is a lot of denial going on and a lot of attempts to cover the problems up. That's a major barrier to fixing them. But the longer hospitals delay fixing the problems, the bigger the losses will be."
Employing physicians is a relatively new concept, and hospital leaders have to let it evolve, says Martin Gutkin, chief financial officer at Hays (Kan.) Medical Center, a 165-bed regional referral center that employs 24 primary-care and specialty physicians. The hospital, which serves more than 20 rural counties, is losing money on its practices, though Gutkin says the losses are below the national average.
Hays employed its first physician in 1994, when it set up a practice management group as a department of the hospital. Physicians are working with a consultant, however, to form a more independent multispecialty group practice, Gutkin says. That move is more of a cultural shift than an operational one, he explains. "Physicians want the collegiality that seems to go with a multispecialty group," he says.
The hospital also is trying to standardize physician contracts. Such pacts have always had incentive plans, but they differ for each doctor.
"Every hospital that has employed physicians has struggled, and we are no exception," he says. "We are always looking at ways to improve the profitability of the practices. But profitability is in the eye of the beholder.
"It's like some hospitals that own helicopters. They lose money on the helicopter operation, but they feel like it is important because it brings patients into their institution."
Once hospitals decide to make changes in physician-hospital arrangements, they must address several key issues, consultants say. These include:
"Hospitals that are getting better at the employment model are doing so because they have created very solid compensation plans," Reiboldt says. Successful compensation plans should have good base pay, strong benefits packages, and a well-designed incentive plan that looks at productivity as well as subjective measures such as patient satisfaction and administrative adherence, he adds. A minimum of 25% of a physician's target salary should be put at risk for meeting goals, Reiboldt says.
At Lourdes, physician office staff members are employees of the hospital. Therefore, they receive higher salaries and richer benefit packages than physician offices normally could afford, Toledo says.
If physicians were managed by a separate entity, such as an MSO, they could pay employees on their own, instead of based on hospital wage scales. That would help doctors support their own operations through the revenues they generate, he adds.
He recommends that his clients create full equity partnerships between the physicians and the hospital, with both sides having an ownership stake and a share of the risk. "That way, incentives are much better aligned," he says.
If that's not possible, hospitals and physicians can create the feeling of a partnership through a compensation system or even a management system that gives physicians a voice in governance, he says. Hospitals can ask physicians to help create the incentive-based pay systems, for example.
In Middletown, Conn., community physicians and executives at Middlesex Health System have built a new type of affiliation model to deal with the issue that led hospitals to buy physician practices in the first place -- managed care. Middlesex includes a hospital, outpatient services, home care, an assisted-living community and several owned primary-care practices.
Several years ago, physician leaders and health system executives held a series of think-tank-type sessions and talked about how managed care would unfold over the next five years, says Middlesex President Robert Kiely.
To address the changes, they created an organization called Integrated Resources for the Middlesex Area. A unique physician-led limited liability company, IRMA handles managed-care contracting and contract management for the community's physicians and the health system and builds disease pathways for physicians.
The company also has implemented information systems in physician offices -- an investment that costs about $300,000 annually for three years. The hospital and the physician offices share the cost, with the hospital paying the majority upfront and the physicians gradually increasing their contributions.
"The whole idea behind IRMA was to link the providers to get the best managed-care contracts we could -- to get as much of the healthcare dollar as we could to benefit the patients and the providers in this community," says Susan Menichetti, IRMA's CEO.
Initially funded by loans from the health system, IRMA eventually will support itself through fees from the contracts it negotiates and manages, Kiely says.
The organization is run by a board comprising eight physicians, two health system executives and Menichetti.
"The first thing we did was place a computer in each physician's office, through which physicians can obtain all of the laboratory results, pathology reports and more on every patient that comes to our health system," says Joseph Bardenheier, M.D., chairman of the board of IRMA and a general surgeon at Middlesex Hospital.
"That went a long way to give physicians a feeling that an organization such as this could really offer concrete benefits. This information system is used every day in every physician's office."
IRMA also has set up a medical management program that is developing cost-effective pathways to follow for certain diseases and has negotiated two major managed-care contracts covering more than 15,000 people in the past 18 months. Physicians participate in all IRMA's committees and are compensated for their time.
Bardenheier says: "Our goal was to form a local union between physicians and other providers, such as the hospital, home care, etc., that would allow us to practice efficiently and maintain a high quality of care."
MargaretAnn Cross is an Allentown, Pa.-based freelance writer who frequently contributes to Modern Physician.