Published March 2, 2011

Health System-Owned Practice Losses Reach Dramatic Levels: Alarming Trend or Misunderstood Performance Metric?

As we observe Valentine’s Day today, red is a color we celebrate.  However, red is a color which sparks a much different emotion when seen as the “bottom line” of a financial statement.   And, unfortunately, it appears far too often as the dominant color associated with hospital-employed, or Integrated Delivery System (IDS)-owned, physician practices.

While this is not a new finding, the five-year trend of reported losses per physician (for IDS-owned physician practices) has reached a nearly unthinkable number (on average) of approximately $200,000 per physician (see trend line below).  This number has more than doubled during this five-year reporting period (i.e. 2005 to 2009) as hospital-employment of physicians has skyrocketed and shows no signs of slowing down.

Should we be alarmed or is this an over-reaction to a misunderstood metric?  Most hospital executives are bewildered by such losses but remain committed to the strategic vision of a more integrated health system with physician alignment (i.e. physician employment) being the focus of much of this activity.  Such losses certainly are not sustainable so how hospitals evaluate these losses (or “investments”) is critical.

Here are a few questions to carefully consider as you evaluate this reported trend and your own organization’s position relative to financial performance of IDS-owned physician practices:

  • Do we have an absolute understanding of the revenue, expense and physician compensation environment (both pre- and post-employment) of our physician practices?
  • How do we explain financial performance variances in the physician practice specific to revenue, expenses and physician compensation pre-employment versus post-employment?
  • If certain services are now provided at a hospital location and no longer at the practice, can this be quantified?
  • What impact, if any, does the post-employment performance have on fair market value compensation which was likely established in a pre-employment context?
  • Do the financial losses have an impact on bond covenants or any other unintended health system impact?
  • How are we thinking strategically about the ROI and true value of IDS-owned practices longer term?

The answers to these questions are very important.  They represent only the “tip of the iceberg” but will begin a necessary analysis that will impact how one thinks, manages and leads integrated delivery systems in this new era of hospital-physician integration.   Without answers to these questions, (at a minimum) one risks creating an unhealthy organizational culture and limiting meaningful integration and alignment discussions with employed physicians.  At its worst, a lack of answers can set an organization on a much more destructive path of unsustainable financial performance.

Bottom line, it is a very dangerous place for an organization to be if “losses per physician” associated with IDS-owned practices becomes an accepted cost of doing business.   Some financial losses are likely a reality in many IDS-owned practices given how they integrate in a hospital organizational environment.  However, it is imperative to understand “why” such losses exist, mitigate long-term risks of unsustainable losses and trust such answers (to the questions posed above) will create a more healthy and well-prepared organization to “maximize the value” of a more integrated environment between hospitals and physicians.

If you would like additional information on IDS-owned physician practice performance, please contact the experts listed below at (800) 270-9629.

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