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

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.


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)

These items will not endear hospitals to physicians because they take time, often do not have a positive impact on physicians and are uncompensated. In fact, there appears to be an emerging trend among physicians that they will not serve on committees, participate in hospital activities or provide call coverage without some form of compensation.


Examples of concern (less than 50 percent favorable) expressed by physicians include:

* Hospitals do not accept constructive input from physicians, and do not respond promptly and appropriately.

* Hospital physician leaders do not keep physicians informed of issues facing the hospital and do a poor job of bringing hospital administration and physicians together to forge common solutions.

* Hospital administration does not aggressively work to align hospital processes with physician's clinical needs or business needs. (1)

* And least favorable was that the hospital does not offer physicians the opportunity to participate in joint ventures, rating between 14 percent and 21 percent "does well." (1)

Hospital perspective

Early this year, The Advisory Board Company in Washington D.C., published a document titled "Beyond Reactive Growth Creating Profitable Growth Paths for America's Hospitals."

Bradford Koles, a researcher for the company said many hospitals continue to see certain lines of profitable business move to alternative delivery mechanism, often controlled by others. Koles, who recently presented an overview of these findings to the Financial Management Society-Managed Care Assembly Annual Conference, an affiliation of Medical Group Management Association, indicated that hospitals continue to be reactive and most do not have a well-thought-out strategy for addressing this change in market dynamics.

In fact, 75 percent of hospital executives feel that creating increased margins was a major concern, but only 43 percent felt that addressing specialist competition was a critical issue. (2) This creates a significant gap in that the higher-margin businesses tend to be the ones that are controlled by the specialists and are the ones that are moving toward physician-controlled outpatient settings.

Koles stated that hospitals are at some of their highest occupancy levels and the construction of new facilities continues to be high on hospital administration agenda. However, high occupancy does not translate into higher margins, as the patients filling the beds tend to be more medical cases.

This squeezes out capacity for surgical cases and forces them to find alternative outlets for care. Hospitals face the unfavorable prospect of becoming the providers of services for the most costly mix of patients.

In order for hospitals to ensure viability in the future, they need to change their focus on how they address market-driven factors. Hospitals need to move from a reactive posture to one that is more proactive.

From a strategic perspective, hospitals need to stop reacting defensively to the loss of patients and move forward to recognize and capture growth opportunities. Koles stated that hospitals need to get better at identifying which services are more profitable within service lines instead of trying to manage service lines in a bundled manner. And, hospitals need to do all of this in partnership with physicians rather than in competition with physicians.

VHA identified three strategies that hospitals are taking to address the changing dynamics created by the migration of certain services away from the hospital and toward the physician. They are:

* Build barriers: This strategy creates a defined "ours" and "theirs' mentality. Hospitals adopting this strategy attempt to eliminate physicians' ability to create competing entities. Those adopting this strategy must be prepared to aggressively pursue tactics that keep physicians from encroaching on hospital services, and be prepared for the potential negative consequences on hospital/physician relations. (1)

* Cultivate the commons: Under this strategy, hospitals work to make their facilities physician friendly. By increasing operational efficiency, incorporating physician input into decision making and paying physicians for hospital-oriented services, the hospital may make it less attractive for physicians to seek outside partnerships. (1)

* Extending the enterprise: Rather than competing with physicians, the hospital embraces the concept of working with physicians and other parties. This strategy incorporates the skills of each party and provides the forum for joint ventures and new businesses.

Hospitals are no longer in position to dictate market conditions. They are faced with multiple problems of a more unfavorable patient base, large fixed costs, the inability to make immediate and rapid changes to their delivery model amid pressures on reimbursement levels.

Hospitals and physicians are the foundation for providing a continuum of quality health care services to the patients in their communities. No one is disputing the fact that there is a strong desire by each to have the opportunity to succeed. However, in the current environment of increasing expenses and flattening reimbursement levels, there is a strong incentive for each party to do what they feel is best financially for the individual, often at the expense of the other.

It is critical that both hospitals and physicians recognize the long-term consequences of short-term strategies. By increasing awareness of the operational and financial needs of the respective entities, innovative and forward-thinking individuals have the opportunity to create a health care delivery system that will meet the needs of hospitals, physicians and patients.

However, it is unlikely that the current trends of market segmentation and the desire to increase financial performance will lead to a higher level of collaboration in the short term.


1. The Doctor is Out: Physician Competitors in the Marketplace, Irving, TX: UHA, 2003, page 12.

2. "Beyond Reactive Growth Creating Profitable Growth Paths for America's Hospitals" Washington, D.C.: The Advisory Board Company, page 4.

By Rick E. Weymier, MBA, FACMPE

Rick E. Weymier, MBA, FACMPE, is director of clinical consulting and physician services at VHA, Inc., a nationwide network of community-owned health care organizations and physicians. He is based in Irving, Texas and can be reached at 972-830-0298 or at
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Title Annotation:Practice Management
Author:Weymier, Rick E.
Publication:Physician Executive
Date:May 1, 2004
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