No hospital CEO ever met a doctor he didn’t want. That may be an exaggeration, but we see many hospitals focused on growing their networks with little regard for the network size and specialty mix that will best support their hospital’s core services or meet their communities’ healthcare needs. While a “growth for growth’s sake” strategy is understandable in today’s environment, it will eventually result in massive losses for the employed physician network, particularly for high-priced specialty physicians.

Many healthcare executives have reached that realization. Increasingly, clients are asking us to help them define what the optimal number and specialties of physicians for their employed groups should be. How do we help them get there? We use the rational process outlined below.

Determine Who is Really Needed
Three categories of physicians belong in your employed group:

  • Strategically important physicians who deliver the core services prioritized in your planning process
  • Physicians crucial to delivering clinical care, such as hospitalists and those required to minimize transfers out or cover ED call
  • Physicians in profitable services

With this in mind, place physician specialties into four broad categories:

  • Crucial
  • Important
  • Moderately Important
  • Not Crucial

Next, analyze the performance of the physicians you already employ. We recommend comparing productivity vs. compensation, using MGMA benchmarks. By graphing the findings, you’ll quickly identify which physicians are overpaid. There may be a rational reason for overpayment (e.g., a new practice); however, you’ll also identify the dead wood — physicians you’d be better off without./p>

Align Compensation & Culture
Now is the time to align your physician compensation system with your strategy using these three principles:

Principle 1: It’s more important to subsidize Crucial physicians than those in other categories. If your ability to subsidize is limited, invest your dollars where they’ll do the most good. Graph the subsidy vs. your four categories to see how you’re doing.

Principle 2: The compensation system should drive every physician toward profitability. Use incentives to decrease subsidies and reduce variation and cost on the hospital side. The more you employ this tactic, the easier it becomes to create a common vision and culture for your network. Ultimately, this will result in lower operating losses and subsidies while building physician and support staff expertise in managing to profitability.

Principle 3: The network’s physician leaders must understand the profitability and subsidy challenge. Familiarize physician leaders with the inverse relationship between the subsidy per doctor and the depth of the network. They must understand that higher subsidies limit your ability to build and enhance the network.

Principle 4: Develop employed network leadership that will help keep referrals in the system by building a group culture supporting that behavior. Increased volume helps with profitability and minimizes subsidies.

Improve Your Operations
Check out “Physician Network Performance Improvement” to learn the eight key areas that will have the greatest impact on your network’s long-term financial sustainability.

Make the Tough Decisions
Ultimately, you must decide how much you are willing to lose. You may have to divest doctors that are Not Crucial or poor performers, fundamentally change your compensation system and add “pay for performance” incentives and/or reduce your overhead expenses or shorten your revenue cycle. And you will have to develop a partnership with the physicians, so they can help with these tough, but inevitable decisions.


David W. Miller

Founder and Chairman