Health System Practice Investment: What’s the Cost?

Health systems generally incur some level of investment in their employed physician network due to numerous operational and accounting-related variables. A question that health system executives often ask is “What is the appropriate level of investment per employed physician?” This concern is valid and calls for caution and guidance to determine an accurate answer.

When searching for information from the marketplace to address the potential investment question, some survey sources are available to provide reliable material. As an example, according to the Medical Group Management Association (MGMA) Cost and Revenue Survey, in 2016, hospitals’ multi-specialty physician groups invested almost $196,000 per employed physician.[i]

One of the more helpful resources in the marketplace for comparative investment-per-physician benchmark information is MGMA’s Cost and Revenue survey. Though various industry sources, such as the American Medical Group Association (AMGA) or the National Society of Certified Healthcare Business Consultants (NSCHBC), strive to publish similar comparative practice financial performance data, these sources are somewhat limited both in respondents and the level of detail reported; thus, they are less useful as a comparison source.

We also caution against using any investment-per-physician data as a means of gauging the performance of a physician or practice for the following reasons:

1. Cost Allocations: Survey respondents (i.e., organizations) do not treat their physician practices consistently from a cost allocation methodology. Some organizations will “fully load” costs, while others do not. Some organizations allocate health system-physician group corporate support overhead cost down, such as human resources, legal, accounting, payroll, information technology, etc., while others are better at accounting at the practice level, but then do not allocate related corporate overhead costs. As a result, cost allocations vary widely between organizations.

2. Treatment of Ancillaries: Due to hospital-based reimbursement considerations, many health systems choose to remove ancillary services from the employed physician network, while others do not. Clearly, the treatment of ancillary revenue has a direct impact on reported measurements of profitability.

3. Treatment of Hospital Subsidized Services: Some organizations have a formal professional services agreement in place between the hospital and employed physician group. Here, the employed physician group receives payment for hospital-based services they provide, such as emergency department call, medical director services, and other administrative arrangements. However, this arrangement tends to be the exception rather than the rule, with many hospitals paying the employed physician directly for these services, similar to their approach with independent community physicians. In our opinion, if these services are provided on behalf of the hospital, the hospital should pay the employed physician group for rendered services, which should be reflected in the physician group’s revenues.

4. Type of Entity Structure: Some health systems choose to structure their employed physician group as a department(s) of the hospital, while others are structured as standalone group practices. Thus, the type of entity structure also has a direct effect on the treatment of revenue and costs.

The above four points represent just a few areas that can skew investment benchmarks in physician practices. Though many health system leaders want to know the “magic” number of what their investment should be, we caution using available benchmark data as that gold standard. Without consistency concerning the points above, among others, it is difficult to compare the investment-per-physician to national survey data and across entities and derive a sound basis for meaningful conclusions.

As opposed to relying solely on national benchmark data, we advocate that health system leaders also evaluate their employed physicians on an overall financial return basis by considering the hospital’s contribution margin generated by patients of the employed physicians, similar to the evaluation and financial rigor used for other investments made by the hospital. As with any exercise that connects medical group data with hospital facility data, per compliance-related considerations, we recommend always excluding such analyses from physician compensation discussions and decisions.

The benefit of using contribution margin to evaluate overall physician financial performance is that an internal relative standard of performance can be derived between physicians and specialties. Health system leadership can then focus on underperforming practices with actionable strategies. Common reasons for lackluster performance can include a high self-pay and/or Medicaid payer mix (justified by the health system’s charitable mission), leakage in patient referrals, barriers to patient access, lack of patient satisfaction with a physician or quality-related concerns, to name a few. Thus, we believe contribution margin per employed physician can translate into an objective measure with which to evaluate the reasonableness of the investment-per-physician, in addition to available sources of national benchmark data.

As the healthcare environment continues to experience significant shifts in care delivery and reimbursement, health system leadership increasingly look to their employed physician group as a means of achieving strategic advantage in delivering highly integrated care in a cost-effective manner. However, for many organizations, the realities of compensation practices coupled with practice operations, expenses and related overhead frequently exceed physician collections, which has caused investment-per-physician to reach unsustainable levels. A key function of Coker’s consulting services is to work with our clients’ employed physician networks to help provide a positive return on the health system’s investment, thereby ensuring financial health over the long term.

[i] Beth J. Sanborn, Healthcare Finance, Hospitals are losing money on employed physicians:

Here's how to save the bottom line and your staff, May 31, 2018. Available at https://www.healthcarefinancenews.com/news/hospitals-are-losing-money-employed-physicians-heres-how-save-bottom-line-and-your-staff. Accessed August 6, 2018.