No hangover: Doc buying binge rolls on as systems learn from past deals

Hospitals continue to add physicians at a brisk pace, defying predictions that the practice acquisition binge would end in a fiscal fiasco.

Unlike the 1990s, when system purchases of physician practices led to losses and an unwinding of many deals, hospital systems this time around appear to have found a way to absorb the costs associated with employing physicians, which usually include a steep overhead tab and the higher salaries and benefits paid for office-based specialties. Experts point to the welcome influx of paying patients from healthcare reform, efficiencies associated with hospital consolidation and the continued improvement in the overall economy as factors offsetting those higher costs and cushioning hospitals' bottom lines, at least for the moment.

But just as significantly, hospitals have taken a number of steps to hold down costs related to their physician-practice acquisitions. They include leveraging their heavy investment in health information technology, focusing their acquisition strategy on primary-care practices and moving quickly to standardize physician activities at the newly acquired practices.

“Obviously, there's an investment to be made in bringing them on,” said Paul Marmora, executive director of the medical group at Atlantic Health System in Morristown, N.J., which grew to 383 employed physicians in 2014, up from 316 the previous year. But “the costs will come down as we share some of the best practices,” he said.

Health systems across the country are continuing to expand the number of physicians they employ despite the increased costs that come with having physicians on staff. Physician employment increased 3.8% between 2013 and 2014, according to Modern Healthcare's annual Systems Survey, which this year included responses from about 80 health systems across the country.

But few are writing big checks simply to inflate their totals. System officials say they are becoming more selective about which specialists they hire. They are also looking more closely at compensation models and how they integrate the new physicians once they are on board.

Spectrum Health in Grand Rapids, Mich., had a 40-member primary-care group just six years ago. Now the number of employed physicians has swelled to 668, including a 10% bump since 2013.

Much of the growth has come as the system has expanded farther into western Michigan through the acquisition of several rural hospitals. But it is also part of its strategy to expand service lines and build up its tertiary and quaternary care offerings.

“We don't see this slowing down,” said Dr. David Ottenbaker, associate chief medical officer at Spectrum Health Medical Group. The number of employed clinicians could conceivably reach 1,500 by 2020, he added. “We call it growing with purpose. We want to grow where it makes sense.”

Demand is particularly high for primary-care physicians, the backbone of both referral networks as well as value-based care models that emphasize keeping people healthy. “The supply and demand equation for them has turned upside down,” said Bob Collins, managing partner at The Medicus Firm, a physician recruitment agency. “There's an arms race for primary-care providers. By far, that's where there's the greatest angst and need.”

Spectrum and its insurance arm, Priority Health, are not participating in accountable care organizations. But physician employment will allow them to consider adding risk-based contracts, where they will be paid based in part on outcomes, Ottenbaker said.

“At the end of the day, we're committed to driving down costs,” he said. “Our goal is always to get into the bottom quartile for cost and the top quartile for quality.”

Adding high-cost specialists is a tougher lift, but is still being avidly pursued by some. The fields in demand include cardiology, obstetrics and certain surgical subspecialties such as cardiothoracic and neurosurgery. “It's all about fulfilling a broader service line in the community,” said Mark Folk, a healthcare attorney at Waller Lansden Dortch & Davis.

Investment in physician employment continues despite predictions it would slow because of the strain on hospital balance sheets. But the improving economy and the reduced uninsured population has enabled systems to offset those higher costs with higher revenue, at least for now.

The average revenue increase reported in the survey was 10.2%. The average operating margin in 2014 rose to 3.3% among systems in Modern Healthcare's financial database, an increase from 2.5% the previous year.

As systems get larger, they're better able to spread their fixed costs, such as health information technology. The systems in Modern Healthcare's survey had an average of 21 hospitals in 2014, up from 19 in 2013.

Having its physicians on a single electronic health-record system has been beneficial, said Marmora of the Atlantic Health. Like other systems, it initially focused on expanding its employment of primary-care physicians and cardiologists. It has since expanded to other specialties, preferring to bring on large doctors' groups rather than two-physician practices. “Now we're working and practicing as one aligned group,” he said.

In Columbus, Ohio, 12-hospital OhioHealth also has focused on better collaboration with its physicians as a way to improve clinical outcomes and ultimately reduce costs. Dr. Gary Ansel, an interventional cardiologist, spent 17 years in private practice at MidOhio Cardiology and Vascular Consultants before the group became part of OhioHealth in 2009.

At first, the cardiology practice tried to operate almost as an independent franchise of OhioHealth, Ansell recalled. “You really didn't notice much change in the practice at first,” he said. But over the past couple of years, OhioHealth has focused on standardizing practices across the system.

Physicians now serve in leadership roles and have regular meetings with their colleagues. “We created a vascular institute without walls,” Ansel said. “We are driven to come up with common treatment protocols for the entire system; we are a resource for the entire system.”

The goal is to allow patients to receive care close to home but still get the same outcomes as if they were treated at an OhioHealth tertiary-care hospital. The changes have reduced the system's complication rate for vascular procedures to 0.3%, well below the typical 1% to 3%.

Yet while many systems tout the benefits of having more physicians, they're also looking for ways to make the costs more manageable. “What you're seeing here is probably a more disciplined approach,” said Paul Generale, who oversees the physician group at 25-hospital Christus Health. The Irving, Texas-based system operates with a slim operating margin below 2%, and Generale acknowledged that its physician-employment strategy has contributed to the strain.

The number of employed physicians at Christus actually declined slightly in 2014 to 265 from the previous year's 273. But the system reports that in 2015, that number has jumped to 303.

What's changing, however, is the mix of physicians, Generale said. Specialists once accounted for 57% of its employed physicians. Now that number has flipped, with 60% of its employed physicians practicing primary care.

The system can employ primary-care providers more economically than higher-paid specialists. Moreover, Christus is moving away from office-based services by embracing urgent and walk-in care in retail locations. Primary care is central to that shift, Generale said.

But expanding physician employment isn't for everyone. SCL Health in Denver is shrinking its paid physician workforce by taking a hard look at which specialties would be better to have in-house and which should remain community-based, making its decision on a market-by-market basis.

The three-state system employed 293 physicians in 2014, down from 368 the previous year, after shedding two Kansas City hospitals.

But SCL isn't adding physicians at its existing hospitals either, at least not across the board.

Competition in metro Denver, for instance, has forced its hand toward an employment model, particularly in specialties such as primary care and cardiology. But in Montana, SCL prefers to contract with cardiologists under a professional services agreement.

“Over the past 24 months, we have been much more purposeful about the specialty mix that we're bringing into our medical group,” said Dr. Richard Lopes, chief population health officer at SCL. “Our specialty recruitment has been very selective.”

With labor costs accounting for more than half of revenue, compensation is another avenue where systems are attempting to manage expenses. Compensation still largely follows productivity-based formulas, despite moves toward value-based care delivery models, said Travis Singleton, senior vice president at Merritt Hawkins.

The physician recruitment firm actually has seen a move away from value-based payment incentives. Only 24% of its assignments feature bonuses linked to quality or value metrics, down from 39% the previous year. “As much as we want to believe our system is moving to outcomes, by and large, our system is based on volume,” Singleton said.

Still, OhioHealth is one provider rethinking the productivity-based compensation formula. “In certain areas, we've actually moved away from production,” said Hugh Thornhill, president of the OhioHealth Physician Group. About 20% of OhioHealth's physicians are now on a salary-plus model, where they get incentives for meeting certain targets. “Productivity was actually a barrier for us,” he said.

OhioHealth is among the systems that has been expanding its medical group, both through affiliations with new hospitals, as well as through a focused strategy to develop key specialties. It has increased physician employment at a rate of 20% each year, and is concentrating in particular on services such as cardiology, vascular medicine and neurology—the latter as it prepares to open a $300 million neuroscience center at Riverside Methodist Hospital in Columbus.

The number of doctors on staff in 2014 numbered 722, up from 588 the previous year. “We've gone from an administrative to a physician-led organization,” Thornhill said.

The system sees no reason to change course. It expects to keep growing at the same rapid rate in primary care, and will add specialists only slightly more slowly at a 12% to 15% per year clip. “If we build a good enough business,” said intervention cardiologist Ansel, “we're going to drive patients to OhioHealth.”