Employed Physicians Add Revenue, Trim Profits

Although hospitals with employed physicians gain revenue, expenses rise simultaneously. Hiring doctors is "a strategic move by hospitals for a variety of reasons, but it does come with a financial penalty," says one analyst.

Hospitals with very high physician employment generate stronger revenue growth but are less profitable than peer institutions with fewer employed physicians, Moody's Investors Service says.

"It's pretty simple. Physicians are very expensive to employ," says Daniel Steingart, vice president and senior analyst at the rating agency.

"Typically when doctors come from being in private practice or a small group practice and they come under the hospital's employ it's not even just a straight transfer of their revenues and expenses. Oftentimes the expense base actually grows. Hospitals typically have a more generous benefits package and there is additional overhead associated, oftentimes with new IT systems, etc."

"So, although the hospital gains the revenues that the practice had been generating, the expenses of the hospital go up, and physicians earn quite a bit of money," Steingart says. "It's a strategic move by the hospitals for a variety of reasons, but it does come with a financial penalty."

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For the study, Moody's divided hospitals into four categories based on employed physicians as a percentage of total medical staff. Low physician employment was defined as 1% to 15% of total medical staff and high physician employment was defined as 65% to 100% of total medical staff. The physician employment medians data was taken from 226 rated hospitals in Moody's portfolio from 2012 to 2014 and compared with the rating agency's not-for-profit and public healthcare medians data for fiscal 2014.

Moody's found that the median operating cash flow margin is 10.7% for hospitals with low physician employment, compared to 8.5% for hospitals with very high physician employment.

However, hospitals with very high physician employment saw a 6.8% three-year revenue compound annual growth rate, compared to 4.9% for hospitals with low physician employment.

Hospitals with very high physician employment have a median operating revenue of $950 million, compared with $431 million for hospitals with low employment, and $673 million as the national medial.

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Hospitals with very high physician employment also report that outpatient revenues (54%) exceed inpatient revenues (46%), Moody's says.

Steingart says there are some indications that expenses related to physician employment level off in time, or at least don't grow as quickly, as hospitals find more efficient ways to operate practices.

No Goldilocks Formula
"It's an iterative process. It takes a little bit before it levels out," he says. "We have some systems that began employing docs in the mid-1990s and never stopped and have very mature practices. So for them, you don't see it in the financials anymore, but you still have plenty of others still in the growth phase."

There also appears to be no institutionalized Goldilocks formula for the perfect percentage of employed physicians.

"It's case-by-case and what makes sense for your market and your strategy," Steingart says. "We aren't in the business of giving advice. That being said, if your primary competitors are going all out and employing every last doc they can, you're forced to either adopt an aggressive employment strategy yourself or you're positioning yourself in the market as somebody that is open to any sort of arrangement. The point being that you would have to react to what your competitors are doing. Every market is different."

Steingart says this trend is expected to continue because hospitals are employing greater numbers of physicians to gain market share and the transition to risk-based contracts, and because younger physicians generally prefer to be employed.

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"There is a large generational divide in how doctors want to practice," he says. "Physicians 40 and under generally are more interested in work/life balance and not running a practice and not dealing with the business aspect. There is both a demand from the hospitals for this, but there is also a very willing supply from physicians."  

Steingart says anyone paying attention to this issue wouldn't be surprised by the study's findings.

"If you're following the industry everybody pretty knows this already, but it's one thing to 'know something' and another to show it with the data," he says. "We've been collecting the data for several years and, sure enough, it tracked out the way we expected it to. We thought that was worth commenting on."