Between 2012 and 2024, the percentage of physicians in private practice declined significantly, from 60% to 42%. At the same time, the share of physicians working in hospital-owned practices rose from 23% to 35%, with the remainder employed directly by hospitals, private equity-owned groups, or other organizational structures. This shift was largely driven by challenges such as inadequate reimbursement, limited access to necessary resources, and increasing administrative and payer-related burdens.[1] While hospitals are hiring at a faster rate than independent practices, employing physician practice owners introduces complex considerations around fair market value (FMV) and commercial reasonableness (CR).
What are the FMV and CR challenges when employing physician practice owners?
Due to the growing national shortage of physicians, hospitals often purchase physician practices and employ the physicians to preserve patient access to a specialty in the market. From a CR perspective, the hospital should not offer compensation significantly higher than what the physician was earning in private practice; however, determining a physician owner’s total historical compensation can be challenging. While some owners take a salary during the year that shows up on their IRS Form W2, additional income derived from the practice profits is often less transparent.
Practices that offer ancillary services, such as diagnostic imaging or laboratory testing, generate revenue and incur expenses that may not be a part of a hospital employment model, which focuses on the physician’s personally performed professional services (further, the physician gets compensated for these ancillary services through the sale of the practice). Moreover, certain business expenses may distort the true profitability of the practice. For instance, a physician who owns their office space might pay above market rent, effectively compensating themselves through the practice in a manner that is disguised as rent expense on the practice’s historical financial statements. Similarly, employing family members as practice staff with high salaries can skew expenses. Discretionary costs (e.g., auto expenses) or one-time charges (e.g., a legal settlement) should also be adjusted when evaluating historical earnings. While understanding these individual expense items is helpful, reviewing general and administrative expenses and total operating expenses can also provide insight into a practice’s financial performance.
Normalizing the income statement with these adjustments helps clarify what the physician owner truly earned. This process allows for a more accurate comparison between past compensation and proposed employment compensation. This comparison is essential for understanding the value of the physician’s professional services in the market.
How can employment challenges be addressed?
Hospitals can offer physicians a variety of supplemental compensation options, such as signing bonuses, payment for didactic teaching, quality and engagement incentives, call coverage, and medical directorship. Providing compensation for these additional services can mitigate variances from historical compensation and make employment more appealing to private physicians.
Compensation structures may also be designed to ramp up or ramp down depending on the specific situation. For example, if a physician is projected to earn significantly more under the hospital’s standard employment model, the hospital may phase in the increase gradually, starting at a lower rate and increasing compensation over several years to smooth out the transition and allow time to verify physician operational and service aspects, which may be integral to the compensation formula. Conversely, physicians nearing retirement may be offered higher compensation initially that declines over time, incentivizing them to remain in the market while the hospital hires replacements.
To ensure compensation aligns with FMV, hospitals must conduct thorough due diligence to understand the personally performed productivity of the physician. Many hospital-employed physicians are compensated on a personally performed work relative value unit (wRVU) basis, whereas private practice physicians typically do not compensate using this metric. Hospitals, therefore, must understand the physician’s personally performed services, excluding any ancillary services or use of advanced practice providers, to accurately budget for compensation expenses and maintain compensation at levels consistent with FMV.
Beyond the employment agreement, hospitals must consider additional valuation implications if they are purchasing the practice. The value of the business is influenced by FMV compensation, and the selected employment model can affect the payment the physician receives for the sale of the practice. In addition, private physicians may hold ownership interests in other entities, such as ambulatory surgery centers, management companies, or corporations that lease space, equipment, or staff. Hospitals should consult legal counsel to evaluate compliance risks and regulatory implications of these interests once the physician becomes an employee.
Final Thoughts
The ongoing shift from private practice to hospital employment reflects changes driven by financial pressures, administrative complexities, and a growing physician shortage. While hospital employment offers stability and access to resources, it also presents the challenge of transitioning physician practice owners into employed roles. Accurately assessing historical compensation is key to ensuring fair market value and commercial reasonableness of the terms of the employment agreement. As hospitals continue to acquire practices and integrate physicians into their systems, careful planning, due diligence, and legal oversight will be critical to achieving sustainable, compliant, and mutually beneficial employment arrangements.
This PYA thought leadership was originally published by the American Association of Provider Compensation Professionals.
PYA has more than 40 years of experience advising physician practices and healthcare systems on fair market value compensation and commercial reasonableness; physician compensation design, development, and strategy; physician/hospital economic alignment models; and value-based compensation.
[1] “The physician ownership shift: 10 new stats on the move to employment,” <https://www.beckersphysicianleadership.com/independent-practice/the-physician-ownership-shift-10-new-stats-on-the-move-to-employment/>, accessed November 8, 2025.
