The potential problem there lies in your partners. Generally speaking, if you are on salary you're not likely to work as hard. I'm not saying this is universally true, but its common enough to be a problem lots of places.
My wife's last hospitalist job was salaried. Some of her partners would fight admissions from the ED, refuse admission in the last 90 minutes of their shifts (they split up admitting between the day people - the total shift was 6-6 so one person would admit 6-10, another 10-2, the last 2-6), refuse consults if the patient census wasn't exactly evenly distributed. Stuff like that. You can also look at threads in the EM forum where the EPs that work in hospitals that pay their hospitalists on production don't have nearly the push-back when it comes to admissions.
Now you do make a good point about some places going a bit too far for production. There's a hospital nearby where the average census per hospitalist is 30 patients and those guys make bank. But I've seen their discharge summaries, they're not doing good work which isn't surprising.
I think an ideal would be either salaried with a bonus based on production to a defined maximum, or production but have enough hospitalists so that you won't end up with an insane number of patients.