More doctors taking salaries

[GoodmanBrown]

Not FM-exclusive per se, but there was an interesting article in the NY Times talking about a sudden shift toward larger hospital-owned practices by all medical specialties.

Seems like it had been holding relatively steady until about 5-6 years ago when it started to shift quite dramatically. The recession furthered the trend by making a lot of self-pay customers less able to pay. Interesting article at any rate.

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[lowbudget]

Curious why no one's bitten on this topic yet. But I'll take first stab.

These things come in waves. We saw this come around back in the early 90's when the HMO movement picked up and health systems began buying up physician practices in an attempt to integrate. Part of it was to ensure access to patients to their specialists and the other part was hoping that the gatekeeper model would pan out significant cost savings. Everyone was looking to California's Kaiser as the model with closed-panel HMO.

Like anything, once momentum picked up, people have a tendency to over-react. So more and more physicians sold their practices to hospitals and became employees. The problem is that physician practices are very difficult to price & valuations became incredibly inflated, partly because people looked at the downsteam revenue (see the other thread on this topic), but what health systems couldn't really handle how much to pay for "intangibles" (or goodwill).

Many hospital systems overpaid for primary care practices and soon started going bankrupt. The best case being Allegheny out in western Pennsylvania that binged on gobbling up physician practices (and resulted in the buy out of Hahnemann Medical School and hospital and Medical College of Pennsylvania, their merger, and subsequently their fire sale, ultimate collapse, with the hospital sale to Tenet, and the combined medical schools subsumed by Drexel). Feel free to google the history on this case. It's well researched and studied.

Salaried physicians and the wave of physician buyouts are currently just a wave. We've seen it before. It makes more sense for physicians to be salaried during times of uncertainty and volatility because individual practices don't have deep cash reserves to withstand any variations in revenue stream. Hospital systems do. The problem with "big medicine" (as the article puts it) is that medical care becomes incredibly bureaucratic because of cost-savings measure.

The difference between then and now is that in the 90's, hospital systems partnered up with insurance companies against physicians and health policy followed that tone. Now, hospital systems are siding with physicians to bargain against insurance companies, and our current health policy reflect that.

The other difference is that then we did not have 2 technological revolutions that we have now: advances in tele/electronic communications and advances in electronic medical records and decision support. Both of these technologies favor primary care practices (or specialty practices that rely heavily on continuity of care). As the article states, these technologies are currently very expensive, and so it makes sense for new physicians to be salaried until these technologies come down in price so that individual practices aren't locked into large investments in the face of volatile revenue. "Big medicine" and being a salaried physicians has its share of problems. This won't be a one size fits all.

But until future revenue streams become more predictable, political risk minimized, and work-leisure tradeoff (i.e. the "wage" rate) can be pushed outward via technological innovations that improve productivity, you will find more physicians preferring salaried positions over private practice. In the meantime, look for opportunities to exploit and improve current practices... "big medicine" isn't very nimble and are slow to evolve and adapt to changing needs of the people.

 

[JackADeli]

...buying up physician practices in an attempt to integrate...

...physicians sold their practices to hospitals and became employees. The problem is that physician practices are very difficult to price & valuations became incredibly inflated, partly because people looked at the downsteam revenue ...

Many hospital systems overpaid for ...practices...

I just wanted to comment on the point of buying/selling practices. I don't know their names, but certain laws did come into effect. They are "anti-kickback laws". These severely restricted purchasing "practices". To my understanding, hospitals can not buy/pay for anything beyond the tangible. That is, they can buy the equipment at fair market value, they can buy the building/real estate at fair market value. They apparently can NOT buy "the practice" because the physician does not "own" the patients...

Numerous more senior physicians have come to heart break over this issue. There was a sense that one was building a sort of "equity" by reputation and referral base. However, the laws apparently does not allow for this and reality doesn't either.... If DrBigWig sells his "practice" and retires...... the patients are not obligated to continue care under the new junior physician. As such, DrBigWig has sold the junior guy an intangible cloud plume.... So, "buy in" into partnerships have dramatically diminished as has the "purchaseability" of practices.... WS spoke to some of her partnership trials/tribulations in another thread....

Bottom line, you can NOT buy someone's reputation as if it was your own.... The senior guy/gal earned a reputation over years, they can endorse you.... but in the end, you will make/earn/build your own reputation.

JAD

 

[lowbudget]

I just wanted to comment on the point of buying/selling practices. I don't know their names, but certain laws did come into effect. They are "anti-kickback laws". These severely restricted purchasing "practices". To my understanding, hospitals can not buy/pay for anything beyond the tangible. That is, they can buy the equipment at fair market value, they can buy the building/real estate at fair market value. They apparently can NOT buy "the practice" because the physician does not "own" the patients...

Numerous more senior physicians have come to heart break over this issue. There was a sense that one was building a sort of "equity" by reputation and referral base. However, the laws apparently does not allow for this and reality doesn't either.... If DrBigWig sells his "practice" and retires...... the patients are not obligated to continue care under the new junior physician. As such, DrBigWig has sold the junior guy an intangible cloud plume.... So, "buy in" into partnerships have dramatically diminished as has the "purchaseability" of practices.... WS spoke to some of her partnership trials/tribulations in another thread....

Bottom line, you can NOT buy someone's reputation as if it was your own.... The senior guy/gal earned a reputation over years, they can endorse you.... but in the end, you will make/earn/build your own reputation.

JAD

Not a lawyer myself; but you're referring to Stark laws. Hospital systems can most definitely own practices and employ physicians on salaries. It all depends on how it's structured. Because of corporations may not practice medicine (called corporate practice of medicine), hospital systems will set up a physician-owned/partnered corporation and that shell corporation is what technically employs the physician. My understanding of Stark is that the buyout can't be quid pro quo for future referral business. That's illegal.

You're right, hospitals can't buy the patients because no one owns them, but they can own the paper that the charts are printed on, which is considered an asset.

Physician practices follow a service model (like, consultancy, accountancy, or financial services firm) and valuations are based on the practice being a "going concern". Unfortunately, there's no good accurate way of valuing a practice that's not asset-intensive, where cash flows are unpredictable, which is why physician practices are severely undervalued or overvalued when sold. More reason why many physicians find shelter in salaried positions.

 

[JackADeli]

...Stark laws. Hospital systems can most definitely own practices and employ physicians on salaries...

You're right, hospitals can't buy the patients because no one owns them, but they can own the paper that the charts are printed on, which is considered an asset.

...there's no good accurate way of valuing a practice that's not asset-intensive, where cash flows are unpredictable, which is why physician practices are severely undervalued or overvalued when sold. More reason why many physicians find shelter in salaried positions.

I am in no way saying a hospital can not "own" a practice and/or employ physicians. The issue comes to purchasing... because of the laws there has to be more tangible structure and valuation. this results in a clear decline in a physician saying "buy my practice" which in itself does not really have any tangible assets but rather speculative anticipation of future earnings. So, the days of building a practice over twenty years then turning to a hospital and saying buy this cause this practice has historically earned "x" is much changed...

You can be employed. The hospital is a business and thus can have a "service line"/practice. But, to my understanding, there are marked limits. Most of these limits work to the hospitals advantage as they often lean on them to tell you,
"sorry, I know your practice has earned "x", I know you have worked very hard for years, but, under the law that does not mean your practice is "worth" as much as you'd like.... so legally we can not offer you a large pot of gold...."

Again, the "service line"/practice is built upon the providers/physician/s experience and reputation. speculation of future earnings presumes upon the continuation of said experienced and reputable providers..... The hospital buying a practice of a retiring provider is not tangible in that sense. The young fresh grad can not be presumed to maintain the same level of production/performance and/or clientele because they paid the retiing physician.... You can pay the 20yr senior/experienced physician a million dollars.... its does not translate in a transfer of said experience/reputation to the purchaser.

 

[deleted87716]

I am in no way saying a hospital can not "own" a practice and/or employ physicians. The issue comes to purchasing... because of the laws there has to be more tangible structure and valuation. this results in a clear decline in a physician saying "buy my practice" which in itself does not really have any tangible assets but rather speculative anticipation of future earnings.

Nonetheless, doctors who "sell out" to hospital systems are typically paid a tidy sum of money to do so.