Connecticut hospitals have been in a rush to add doctors and physician practices to their networks to build up market share and a strong referral base.
But the move isn’t always profitable.
In fact, hospitals adding doctor’s practices or individual physicians can often be a money losing venture, at least in the short term, experts say.
In 2010, Eastern Connecticut Medical Professionals (ECMP), which is the not-for-profit organization that operates physician office practices and a hospitalist program for the Eastern Connecticut Health Network, lost $4.2 million, regulatory filings show.
The 100-doctor practice, whose operating budget has grown from $3 million a decade ago to $28 million today, includes mid-level providers, hospitalists, specialists and primary care doctors who work at or outside Manchester and Rockville hospitals, which are part of the ECHN system.
Kevin Murphy, the treasurer and executive vice president of network and business development at ECHN, said the business of “hiring physicians is not always a winning proposition in the short-term.”
“On a standalone basis, it’s not a feasible enterprise,” Murphy said.
According to the New England Journal of Medicine, hospitals lose an average of $150,000 to $250,000 per year over the first three years of employing a physician. ECHN isn’t losing that much on some of its doctors, Murphy said.
Still, the red ink isn’t stopping Connecticut hospitals from aggressively pursuing physicians.
That’s because the long-term economics often make financial sense. In many cases, hospitals view the short-term loss as an investment. The main attraction is building up local market share and a strong referral base.
Health care reform is also pressuring hospitals to form accountable care organizations and better coordinate care to improve quality outcomes. Building that integrated system includes adding doctors to their ranks.
“Hospitals have to have physicians aligned with them financially and operationally,” said Brett Hickman, a partner in consulting firm PricewaterhouseCoopers’s Health Industries Advisory Practice.
As hospitals employ physicians, those doctors will often refer their patients to other doctors or specialists within the network they work for, generating a steady stream of business for the hospital system.
So, for example, even though Eastern Connecticut Medical Professionals directly lost over $4 million in 2010, the group was responsible for helping generate $62 million, or 26 percent of ECHN’s $250 million in patient service revenue.
“The proposition isn’t to lose money, but keep that medical referral engine running,” Murphy said.
Newly added physicians can become unprofitable ventures for hospitals for a myriad of reasons. New doctors, in particular, often don’t have a strong patient base to bring with them and need time to ramp up their business.
Even newly acquired veteran doctors take time to ramp up in a hospital system because they typically lose up to 30 percent of their patient base in the transition, Hickman said.
For physicians to breakeven, they need to see about 20 to 25 patients a day. That business flow allows hospitals to cover a doctor’s salary and overhead costs, Murphy said. But newly acquired doctors typically don’t reach those levels until their third year of service, meaning the hospital is losing money in the meantime.
Murphy said ECMP typically recruits younger doctors, in part because they are more likely to want to join a larger hospital network. To ease their transition into the system, ECMP’s primary care docs are put into pod systems with a group of three to five other physicians, as well as specialists that rotate from one office to the next.
The pod system also allows doctors to book referral business for specialists. But it still takes time for those newly hired physicians to get adjusted and they typically only start seeing eight to 10 patients in their first year. That ramps up in year two, but they typically don’t hit the breakeven point until the third year, Murphy said.
Another issue for hospitals acquiring doctor practices is productivity. When doctors who have been running their own practice join a larger network, there is a tendency for some of them to slow down or see a smaller patient base, officials said.
Chris Dadlez, the president and CEO of St. Francis Hospital and Medical Center, said that in the 1990s, during another wave of industry consolidation, many hospitals didn’t know how to effectively contract with doctors, leaving out productivity requirements.
“They were guaranteed good salaries, but didn’t have to work as hard,” Dadlez said.
After a while, financial pressures forced hospitals in the ‘90s to divest themselves of those practices.
But contracts are being written differently today. At St. Francis, for example, Dadlez said the hospital is putting incentives in contracts that require certain productivity and quality standards to be meant.
Hickman, of PricewaterhouseCoopers, said historically physicians had 75 to 80 percent of their salaries guaranteed by hospitals. Today, about 50 percent of a doctor’s income is guaranteed, with the other half based on meeting performance and quality standards. “It’s not just about productivity, but also quality management,” Hickman said.
Consolidation in Connecticut’s health care industry has been heating up in recent years; particularly hospital’s buying up physician groups.
One of the most recent high profile deals involved Hartford Hospital purchasing the assets of the Connecticut Surgical Group, a 200-employee practice in Greater Hartford.
Financial pressures related to health care reform and lax reimbursements from government payers, among other issues, are making it harder for doctor’s practices to do business.
Over the next decade, observers say, many independent Connecticut doctors may need to affiliate with — or join — a larger physician group or hospital system to make ends meet.
Murphy, of ECHN, said competition for doctors is intense, especially with the shortage of primary care physicians. However, younger doctors that do go into the industry are more interested in joining a larger network for quality of life reasons.
“They are not interested in working 12 to 14 hours a day, which is more typical in a small practice,” Murphy said.
