Hospitals are increasingly confronted by the challenge of employing physicians. To meet this challenge, hospitals bring a high motivation for success but very little practical experience.

In this article, we’ll address three areas to augment your knowledge and help ensure the success of your employment strategy:

  1. Why employment is growing.
  2. When should a hospital consider a major commitment to physician employment?
  3. How to maximize the chances for success.

Why Employment?

A number of factors are driving hospitals to employ physicians. One core reason is the economic challenges faced by private practice, as costs are growing faster than reimbursement.

On the cost side, staffing costs are growing at 4-5% annually while reimbursement growth is limited. Other costs, such as malpractice and information technology expenses, are increasing rapidly as well.

On the reimbursement side of the equation, Medicare increases are minimal at best and potentially negative. Private insurers are also increasingly aggressive, and physicians in small practice have no leverage. The result is that physician income is under significant pressure, and many feel powerlessness to reverse the trend. This is often driving physicians into the arms of hospitals.

A second factor is the shortage of physicians. There is increasing demand due to population growth, economic expansion, an aging population, and the effectiveness of treatments that has lead to improved survival rates and, therefore, a greater prevalence of illness.

The supply side also creates challenges. There have been many questionable assumptions over the years about the number of physicians required to provide care. This has resulted in limited growth in medical schools and cutbacks in residency programs. The net result of which has been a shortage of physicians.

There are also specialty specific shortages. Some areas of the country are experiencing a significant shortage of internists, as physicians can drastically increase their income by pursuing a specialty. The same is true for general surgery, and general surgery also suffers from lifestyle challenges and the fact that it is not as attractive a specialty to the growing number of female medical school graduates.

The desire for a nice lifestyle is a challenge across the board, as the number of hours worked by individual physicians has declined over the years. It is not uncommon for a busy primary care practice to require two younger physicians to take the place of one older doctor, given this difference in work ethic.

All of these challenges mean that hospitals have to become more aggressive to recruit the physicians needed by their community. In a tight physician supply market, hospitals are better able to attract new talent if they can guarantee the physician that he or she can focus on medical practice and a guaranteed level of earnings that will reduce the physician’s anxiety over income.

When to Consider Employment?

There are a number of reasons hospitals enter into employment relationships. One of the first, and most important, is their commitment to patient access and quality. In our practice, we see hospitals pursuing employment to ensure call availability, to provide physicians to less attractive subsets of the community where the payer mix may not be great, or simply to attract needed specialties to address community health issues.

Another common motivation is seeking strategic advantage. We have seen hospitals achieve strategic advantage with large groups of primary care physicians giving them greater leverage on the payer’s and protecting their referral base. Such a strategy also decreases the dependence on private practice, a valuable result for many hospitals.

Hospitals can also use employment to their strategic advantage in specialty and subspecialty care. Again, employment can help them “”lock in”” strategically important physicians, reduce the likelihood that competitors might steal physicians, and also limit the ability of those physicians to compete with hospital. Frequently, these efforts are focused on subspecialties that are profitable.

Hospitals also use employment as a defensive mechanism. This is particularly true when a key physician group is disintegrating. The hospital can take this group (or some subset) under its wing, and avoid losing that physician to a competitor or another community. Increasingly, one other factor is driving employment: The pool of potential recruits demand it. Younger physicians, many of whom have substantial debt, do not want to take the risk of a private practice. The lesson in many communities has been that employment must be an option if you expect to compete for new recruits.

How to Maximize Success?

Many mistakes have been made as hospitals have pursued physician employment. Addressing the following key leverage points will help to ensure success:

Structuring the Deal. The relationship must be driven by appropriate incentives. These incentives must focus the physician on seeing appropriate numbers of patients and must allow compensation reduction if incentive targets are not met. Our experience is that the most effective models mirror the private practice approach to productivity and compensation. However, RVU systems, which shift the collection risk to the hospital, are also useful in many circumstances.

Management Capabilities/Infrastructure. Hospitals must recruit leaders who understand practices and have expertise concerning the infrastructure needed to manage practices. This includes knowledge of claims processing and follow-up (which is different than hospital billing) as well as knowledge of practice management information systems.

Business Planning. Each practice requires a business plan, with an operating proforma projecting expected results. This document is critical in helping physicians understand the economics of the practice, as well as establishing expectations for all the constituencies, including your board.

Economies of Scale. It’s hard to have efficient practices with one or two physicians in each location. Our experience is that aggregations of six to eight are ideal, as it allows the practice to have ancillaries and creates flexibilities that will help to make them profitable.

Market Power. As you develop your employment strategy, a key element to consider is the development of market power. Market power will improve your managed care rates by improving your leverage with the insurers. For primary care groups, our experience is that a 35% market share will make you largely indispensable to insurers, thus guaranteeing better rates.

Information Technology. Long-term, all employed practices will need an electronic medical record. It is essential to pay-for-performance systems and allows better management of care processes. However, it may well create costs to which the physicians will not commit if they are freestanding, contributing to practice losses.

Group Culture. To get the maximum value of an employed group, it is critical that an effective group culture be developed. This can only be achieved with effective physician leadership, and through engagement of that leadership with hospital executives. It is crucial that new physician leaders be mentored, be involved in the planning process, and that expectations about culture be developed over time.

An important element of this culture is physician involvement. It is crucial that physicians do not abdicate their important role within the practice. They must remain psychologically invested in the practice operations and its results.

Retain Referrals. Retaining referrals to hospital loyal specialists is essential. A monitoring system, through the office staff, will help you to understand where referrals are going. And it will be important to work with leaders of the group to minimize any outflow. While referrals to specialists loyal to the hospital can be mandated, in many situations the issue must be finessed. Working through physician leaders and creating a shared vision with the group will help you achieve that result.

Financial Planning. Board and management need to understand the financial impact of these practices. It is essential to develop pro forma projections, including the incremental hospital revenue (including increased referrals or higher managed care rates), costs of providing that incremental care, recruitment costs, and practice subsidies. Understanding the investment in infrastructure and IT is crucial, as well.

Performance Standards. Performance standards must be clear and mutually understood. Standards should address productivity, access, quality, and physician support of the group culture. It is crucial that the standards be applied, and that you be willing to cut your losses and not renew the contracts of physicians who are not performing as expected.


Building an effective strategy for physician employment really has two core elements. First, how does it fit with the strategic plan of the organization, addressed above under Why Employment? It is recognized that political realities may intervene, but the focus of an employment effort (given the likely losses) should be for a strategically important purpose.

If you are comfortable with the strategic purposes for employment, then maximizing success becomes crucial. Maximizing your chances for success, as outlined in the 10 points above, will help ensure that losses are minimized and corporate support can be sustained.


David W. Miller

Founder and Chairman