As hospital ranks swell, salary pressure could, too

January 25, 2013

Hospitals are buying up practices at a rapid rate. See how this trend could negatively affect salary.

Hospitals around the country have been buying up independent medical practices at a dizzying rate. Because this acquisition trend directly affects your financial well-being, it’s crucial to understand the forces driving it.  

In the past, hospitals acquired physician practices largely as a way of capturing referrals. The hospitals also could benefit from the use of the acquired practices’ operating rooms, diagnostic equipment, and ambulatory surgery centers, often at higher rates of reimbursement than independent physicians could command.

Following enactment of the Affordable Care Act (ACA) in 2010, however, a new reason for hospitals to acquire practices arose: the appearance of the accountable care organization (ACO). The ACA legislation contains incentives for both private and government third-party payers to contract with large ACOs that would provide healthcare for a per-patient, per-month charge. Under this arrangement, the government can transfer financial risk to the ACOs.

As a result, hospitals have rushed to build large inpatient and outpatient medical groups, so as to be able to offer ACO contracts. You may recall that somewhat similar efforts to build an integrated healthcare delivery system through the use of health maintenance organizations (HMOs) in the 1990s mostly failed because hospitals were unable to control physician behavior and sought to maintain “referral friendly” relationships with unaffiliated doctors. In addition, HMOs encountered significant resistance from physicians and patients who did not like the idea of HMOs dictating care decisions.

Much has changed in the past 2 decades. If you own an independent practice now, you have much more incentive to seek employment with a hospital, thanks in part to the quantity of paperwork and regulations required for running a small practice. Think about how few, if any, doctors have set up independent practices in your community in the past few years.

The result is that more and more primary care physicians (PCPs) are coming to accept the idea of hospital employment. As the percentage of employed PCPs in a community or region reaches a certain threshold, competition disappears. Hospitals are able to control their referrals both inward and outward, as well as the parameters of the care they offer. Doctors who don’t want to go along with the system easily can be replaced, as if they were a commodity product.

It is no longer so important for hospitals or health systems to cultivate relationships with the remaining independent physicians because the hospital system now provides most of their referrals, both inpatient and outpatient. Independent specialists either join the ranks of employed doctors or lose patients. Existing referral relationships with emergency-department physicians, hospitalists, and PCPs all can be shifted with persuasion.

Many concerns exist with being employed by a hospital or health system, including the possibility of downward salary pressures in the future. But employment also has advantages, such as no longer having to deal with as much paperwork. And although many physicians continue to value their independence, remaining independent may be difficult as reimbursements continue to shrink and the government looks for ways to rein in healthcare spending.

Neither path guarantees happiness. Your best course is to stay abreast of the rapidly changing environment and choose the path that you believe not only best ensures your financial security but also makes the most sense for yourself, your family, and your patients.  

The author is principal Wealth Management LLC in Merritt Island, Florida. Do you have a subject related to professional finances you would like to have our experts address in this column? Send it to medec@advanstar.com. Also engage at www.twitter.com/MedEconomics and www.facebook.com/MedicalEconomics.