The hospital/physician divide: understanding the drivers of their relationships

Physician Executive, May-June, 2004 by Rick E. Weymier

However, over the past several years, there appears to be an accelerating trend toward hospitals and physicians competing for the same patient base through new or separate business models.

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This shift from collaboration to competition is having a significant impact on both physicians and hospitals in terms of financial performance, service capacity and operational effectiveness.

It is critical for both hospitals and physicians to understand each other's business model, strategic direction and motivation for pursuing structural and operational changes within their respective organizations.

In the short run, some of these strategies may result in improved financial performance and alternative access points for health care from the physician's perspective.

From the hospital's perspective, they see some of their most profitable lines of business moving away, creating a less financially favorable patient mix.

In the long run, both hospitals and physician practices run the risk of excessive duplication of services and select groups of patients losing affordable access to certain health care services.

The physician perspective

Why is there a shift away from the traditional hospital/physician model to one where each party is aggressively pursuing the same book of business through the offering of services in a variety of settings?

The simple answer is threefold: financial pressures, desire for greater control and because they can. Key physician drivers include:

* Increased costs: Expenses within a physician practice are accelerating faster than the physician's ability to generate additional revenues under the traditional model. In areas of malpractice insurance, staff salaries, technology requirements and internal benefit costs, double-digit percentage expense increases are not uncommon, whereas revenues remain flat.

* Physician time commitment: There is a limit to the number of hours that a physician is willing and able to devote to patient care. When it appears as if each additional patient seen provides diminishing financial returns and greater loss of personal time, physicians will seek to improve efficiencies in their practices or alternative revenue sources that do not increase what as already perceived as a burdensome workload. Alternate delivery models, due to the specialization and efficiency of service delivery, offer favorable financial returns for minimal--and sometimes less--time commitments.

* Reimbursement: For physicians, the ability to secure increased reimbursement rates from the major insurance carriers has been marginal at best. Likewise, due to the increasing percentage of aging and uninsured patients, Medicare, Medicaid and other government programs are becoming a larger part of each practice's patient base. These entities have the ability to mandate reimbursement levels. Although there have been some recent reimbursement increases from Medicare, long-term projections are not favorable.

* Availability of capital: There continues to be a large number of companies and investors that have the funds and the business model to assist physicians in creating stand-alone operations in areas such as ambulatory surgery centers, diagnostic imaging centers, specialty care hospitals and purchasing advanced technological equipment. Access to capital, management expertise and proven results are attractive to physicians. There are documented success stories that specifically identify each physician's expected investment in time and capital, ability to capture significant market share and the financial return on their investment.

* Technology: Advances in technology resulted in allowing a large number of procedures to be done in an outpatient setting. The specialties of orthopedics, neurosurgery, general surgery, gynecology and cardiology continue to see a larger number of procedures migrate to the outpatient setting. These specialties usually represent the most profitable areas for hospitals. Additionally, the regulatory environment makes it easier for physicians to create entities to provide these services outside the hospital.

In VHA's 2003 research series, The Doctor is Out: Physician Competitors in the Marketplace, the message comes out loud and clear that physicians feel that hospitals truly do not understand the business needs of the physician practice.

"Physicians, especially specialists, do not believe that hospitals perform well in some key business areas such as working to align hospital processes with physician business needs or providing opportunities for joint ventures. By not performing well in these areas, hospitals help to create the context for physicians to either build their own facility or seek other partners who can meet their needs." (1)

VHA surveyed primary care physicians, specialists and hospital-based physicians for this research publication in an effort to solicit their feedback on how well the hospital performs in certain areas. The only area in which the physician responses exceed 50 percent favorable was in encouraging physician involvement in committee work and medical staff organization activities. (1)