A "Next Generation" Model for Physician Employment

Employment models that mirror the structure of successful physician groups allow hospitals and physicians to find valuable common ground and share in revenue streams while avoiding the mistakes of the past.

As the Baby Boomers begin to retire, the next generation of physicians is stepping up to the plate. These new doctors bring a lot to the table — a focus on patient safety, an interest in system improvement, and an emphasis on cooperative care. They also bring a new perspective on the sacrifices and rewards of medical practice: A growing emphasis on lifestyle (along with increasing financial pressure) is driving physicians out of private practice and into large medical groups.

Understandably, many hospital executives see this as a threat. Large physician groups have the resources and motivation to compete energetically with hospitals for a share of their traditional revenue streams. How can hospitals survive in this environment? One strategy is to harness the same forces that are driving the growth of large physician groups. The key is the "Next Generation Model" of physician employment.

Copy the Formula

Under the old physician employment model, doctors typically received a guaranteed salary and in return gave up much of their autonomy. The exchange did not work for either party. Physicians came to resent being treated like employees. Hospitals stood by in shock as previously viable practices began to pile up huge losses.

How does the Next Generation Model solve these problems? By mirroring the structure of better performing multispecialty groups. Here are the five key characteristics:

Strong physician leadership.

In better performing practices, physicians are strongly committed to the success of the group as a whole. The key is robust physician leadership at every level. For hospitals that want to succeed with physician employment, the lesson is to put MDs in the driver's seat. This means creating a physician-dominated board and providing doctors with a variety of leadership opportunities.

Financially driven compensation.

Guaranteed salaries lead to lower productivity and uncontrolled expenses. Large groups manage these risks by making individual physicians accountable for the bottom line. When creating an employed physician organization, link pay to individual profit and loss. This approach can give an employed group the energy of an independent enterprise.

Strong practice management.

Better performing groups provide very effective practice management, simplifying practice for physicians while maximizing revenue. When developing an employed group, commit the resources needed to create a truly well-managed organization. Areas of focus should include effective billing and collections, strong contract management, and a robust electronic medical record. Resist the urge to put a successful hospital executive in charge. What's needed is an experienced group practice administrator.

Focus on patient outcomes.

In leading physician groups, quality care is the key to high performance both financially and organizationally. Focusing on patient outcomes is a powerful way to engage physicians in the organization, build an unbeatable reputation in the community, and stake out a strong position in payer negotiations. Hospitals should empower employed physicians to lead on quality improvement initiatives. Also, consider integrating quality bench marks into pay.

Full vertical integration.

The most successful physician groups have transformed themselves into vertically integrated healthcare organizations that provide a full range of medical diagnostic and treatment services. This level of integration creates powerful internal synergies and produces the revenue to support high performance. To succeed with physician employment, hospitals need to do the same. A viable employed group will include a well-balanced mix of primary care physicians, specialists, and hospital-based providers, plus a strong complement of imaging, laboratory, and surgical services.

These five characteristics enable large medical groups to solve the financial, professional, and lifestyle problems that trouble private physicians. These traits also provide the blueprint for a Next Generation Model employed group. Using this blueprint, hospitals can turn potential adversaries into powerful team members and create a financially self-sustaining organization that ensures strong market presence.

Two Objections, Three Answers

An objection often raised regarding vertically integrated physician organizations is: Will they cannibalize hospital revenue? There are two responses to this question:

• First, the trend toward larger, more strategically aggressive medical groups is nowhere near its limit. Starting soon, your choices will be sharing the pie with physicians or getting none at all.

• Second, the issue of "cannibalization" is really a non-problem. As a hospital CEO in the South said recently, "It doesn't matter to me whose pocket the money goes into. If it goes to employed physicians and that is driving my business, what do I care?”

Another frequently asked question is: Why bother employing physicians at all? Why not forge a joint venture with physicians and let that relationship drive admissions?

The answer: The government will soon make that very difficult. Regulations proposed by the Centers for Medicare and Medicaid Services in July would significantly restrict "per click" payments, services "under arrangements," and other business structures that form the basis for many hospital-physician joint ventures. Final rules are not expected until late 2007, but a future of much narrower Stark interpretation seems inevitable. These changes are effectively closing off the joint venture option for most hospitals. The bottom line is that the alternatives are coming down to either competing with physicians or bringing physicians into your camp by creating a dynamic employed organization that solves their problems. The power of the Next Generation Model is that it gives hospitals and the new generation of physicians an effective framework for finding valuable common ground.

@This article originally appeared in Healthcare Strategy Alert!, Issue 4, 2007, published by the Forum for the Healthcare Strategists. All rights reserved.