Wipfli CPAs and Consultants | tax, auditing, accounting, IT & HR for businesses & individuals.

Why do physician practices, once they become hospital-owned, lose thousands of dollars per physician, yet were profitable practices when they were independent? Will the hospital-owned practices ever be as profitable as independent medical practices?

When comparing data provided by multispecialty groups, hospital-owned practices lose on average $30,011 a year per full-time equivalent (FTE) physician according to data generated from Medical Group Management Association’s (MGMA) Cost Survey: 1998 Report Based on 1997 Data.

In comparison, groups not owned by hospitals virtually end the year at a zero bottom line, as normally all profits of the group are paid to the physicians as compensation. In general, because the majority of the independent groups are cash basis, losses are not generated. Physicians’ compensation is limited to the amount of cash available for distribution.

Other interesting factors are as follows:

The table above indicates some interesting differences between hospital-owned and non-hospital-owned groups. Hospital-owned groups generate $236,000 less in gross charges, $165,000 less in net medical revenue, and $47,000 less in total operating costs, yet physicians working at hospital-owned groups earn only $16,000 less that the non-owned group. Explanations surrounding this disparity include:

Guaranteeing doctors attractive compensation packages in order to entice, without tying to future production levels
Ongoing physician compensation not incentive based
Treating physician practices as just another cost center of the hospital
Monitoring of hospital-owned physician groups is inadequate
Managing the hospital-owned physician with hospital personnel
Differing overhead structures for a hospital-owned practice versus an independent practice
Contracting jointly for the hospital and hospital-owned medical practices by hospital employees without the best interest of the medical practice in mind
Maintaining ancillary services by the hospital, which reduces the total charges generated by the hospital-owned medical practice
Purchasing a medical practice for strategic reasons with full realization that it will lose money

Many experts argue that hospital-owned physician practices, in general, need to be operated just like any other independent group practice--physician compensation should be tied to production in some manner, and clinic operations should be managed with appropriate budget and benchmarking tools.

Although the disparities noted above are certainly caused by many factors, the majority feel it’s caused by lack of incentive for the physician to produce once he/she becomes a hospital employee. A guaranteed salary with no production levels attached does not provide the physician incentive to produce more income. The thought may be, “Why should I work harder when it’s the hospital benefiting, not myself?” Physicians entering into guaranteed contracts often find themselves with guarantees that their income won’t drop regardless of productivity levels. Surveys indicate that production levels often do drop once physician practices are purchased by hospitals. Coming from private practice, physicians understand the direct correlation between increased charges resulting in increased compensation (at least within a noncapitated environment).

The recommendation of any compensation arrangement is certainly outside the scope of this article. In addition, every practice is different and would need to take into account the market and internal environment of the individual practice.

To assist in monitoring medical practices, management should consider establishing monthly operating indicators with goals established by medical practice. A partial list of benchmarking operating indicators is as follows:

Production per day
Production by provider
Production per encounter
Collection percentage
Accounts receivable aging
Overhead percentage
Salaries as a percent of receipts or production
Payer percentages
Contractual adjustments percent by payer

The good news is there’s still hope for the hospital-owned medical practices. The 1997 MGMA survey reported the loss of hospital-owned practices at $53,917, compared to the 1998 survey results of $30,011--a 44 percent improvement. Hospitals have been and will continue to make progress in this area.