Physicians seek employed status to weather payment risks

Dr. Theodore Strange and his 60 physician colleagues at the University Physicians Group in New York City will soon be hospital-employed again.

The practice, launched in 1991 as part of Staten Island University Hospital in New York City, became independent in 2002. But faced with the need to upgrade reporting systems, a shortage of capital and an aging leadership, the group will rejoin the hospital, now a part of Northwell Health (formerly North Shore-Long Island Jewish Health System) on Aug. 1.

“We'll have the financial capital to stay state of the art,” said Strange, 57.

The group that University Physicians is joining, Northwell Health Physician Partners, has more than 2,500 employed physicians and is the seventh-largest physician group practice in the nation. It is a key part of the state's largest healthcare system with 21 hospitals and 450 outpatient practices.

Across the country, physician groups are going through the same deliberate exercises that led Strange and partners to cast their lot with a bigger system.

They're asking themselves: Do we have the money, information technology and access to data to transition from traditional fee-for-service to value-based reimbursement that asks physicians to take financial risks for patient care and puts a premium on quality?

Over the past several years, there's been a steady increase of physicians choosing employment over independence. They're joining either hospital systems or giant physician-staffing companies, such as TeamHealth of Knoxville, Tenn., and AmSurg's Sheridan subsidiary.

According to member surveys by the Medical Group Management Association, the share of physicians who worked directly for a hospital or in practices at least partially owned by a hospital rose from 29% in 2012 to 33% in 2014.

Of 84 respondents this year to Modern Healthcare's hospital systems survey, almost all respondents added employed physicians in 2015 with the total physician employment among respondents showing a 9.8% increase year over year.

Physician practices purchased by third-party staffing companies in the first quarter nearly doubled to 21 groups compared with 13 in the year-ago quarter, said Michael Abrams, managing partner of healthcare management consultancy Numerof & Associates.

The last time the industry saw such active physician consolidation was in the early 1990s, said Alan Badey, managing partner and co-leader of the healthcare practice at Citrin Cooperman.

At that time, hospitals—investor-owned and not-for-profit alike—bought physician practices anticipating a continuation of high reimbursement rates, Badey said. For-profit consolidators, such as Nashville-based PhyCor, gobbled up physician practices at a head-spinning rate.

But a series of changes enacted by Congress—the sustainable growth-rate formula contained in the Balanced Budget Act of 1997; the shift from average wholesale prices to average sales prices plus 6% for in-office administered drugs contained in the Medicare Modernization Act of 2003—began ratcheting down physician reimbursement.

Moreover, hospitals discovered that physicians who they had brought aboard at straight salaries weren't nearly as productive as when they were entrepreneurial professionals, Abrams said. What had once been a lucrative play became a money loser for hospitals and companies such as PhyCor.

The latter ended up in a spectacular descent into bankruptcy in 2002. Hospitals, in turn, returned many of their employed physicians back to private practice often at a loss to the hospitals, Abrams said.

The year 2002 is when Strange's practice was spun out of Staten Island University Hospital.

Badey said this time is different. Hospitals and the third-party physician-staffing companies are rolling up physician practices to deal with structural changes in the industry requiring them to increasingly care for patient populations at capitated rates or by episodes of care rather than fee-for-service.

Having those doctors available in the community as access points for patients is so critical in the new value-based reimbursement paradigm that hospitals are willing to lose money per employed physician—about $190,000 annually on average when salary, bonuses, overhead and insurance expenses are subtracted from the revenue they produce, said Dr. Halee Fischer-Wright, CEO of the MGMA.

In return, the hospitals expect those doctors to be in a position to treat patients in the right cost setting for their acuity and, hopefully, those patients will remain in the system for specialty care and diagnostics that can cover the losses from the physician practice, she said.

Whether the tactic will work remains to be seen. The Stark law forbids hospitals from compelling those physicians to refer within the system, Fischer-Wright said.

Northwell Health has nearly doubled its number of employed physicians since 2010, said Deborah Schiff, senior vice president of strategy and business development. It is 3,000 today vs. 1,600 in 2010. The system prefers to absorb established practices in the community rather than open them because of the trust those physicians have earned with a broad base of patients, Schiff said.

Long Island-based Northwell is seeking to expand into New York City and its suburbs with practice acquisitions that fill in geographic gaps and provide primary-care and specialty coverage to make it convenient for patients to be seen in their own communities, she said.

Northwell isn't stopping with the University Physicians Group. The system also is finalizing the acquisition of Westchester Health Associates, a practice based in Katanoh, N.Y., that will provide additional coverage north of the city and into Connecticut, Schiff said.

University Hospitals Health System in Cleveland has been on a similar campaign. It has added five hospitals to the system in the past 30 months, creating the need for more physicians to close gaps in geographic coverage, said Paul Tait, chief strategic planning officer.

The newly acquired hospitals include University Hospitals Elyria (Ohio) Medical Center and University Hospitals Samaritan Medical Center, Ashland, Ohio.

Tait said University Hospitals added 278 employed physicians in 2015. It ended the year with 1,356 employed physicians, not including residents, according to the system's 2016 Modern Healthcare survey.

Strange said that by staking the long-term future of the University Physicians Group to Northwell Health, the group's physicians can count on having the capital and IT necessary to survive and maybe flourish under new government reimbursement models instituted by the Medicare Access and CHIP Reauthorization Act that rewards doctors for taking care of populations and improving their quality.

He said he expects Northwell will be able to use its size and leverage with private insurers to negotiate rates that will ultimately provide the physicians in the group with higher compensation as employees than they made as partners in the independent group.

His group even negotiated an out clause for physicians to leave the system without penalties if they don't like the new setup as long as they return to private practice and not to a hospital rival, he said.

“At the end of the day, this is a very fair deal for us,” Strange said.