Doctors Inc.

Doctors Inc.: Medicine goes corporate as more physicians join hospital payrolls

Updated: 2014-01-17T17:35:23Z


The Kansas City Star

In unprecedented numbers, America’s doctors — those most entrepreneurial and fiercely independent of professionals — are trading in their autonomy for regular work hours and a hospital paycheck.

Quickly and quietly, hospitals across the country have been buying up hundreds of doctors’ medical practices and hiring thousands of formerly independent physicians.

Since 2000, the number of doctors on hospital payrolls nationwide has risen by one-third, according to the American Hospital Association.

In the Kansas City area, fully 55 percent of physicians are now employed by hospitals, Blue Cross and Blue Shield of Kansas City estimates. That includes virtually all cardiologists and most cancer specialists.

The future solvency of the nation’s health care system may rest on how doctors adapt to a corporate style of medicine and on whether hospitals put the doctors to work improving patient care or fattening the hospitals’ bottom lines.

The hope of the Obama administration, as well as many independent health care experts, is that hospital systems will use their new employee-doctors both to keep people healthier and save money by preventing unnecessary trips to emergency rooms.

It’s far from clear whether those goals will be realized.

What is certain:

• Hired doctors already are bringing hospitals billions of dollars in revenue by funneling patients to their services. There’s enough money at stake, and a great enough concern about monopoly power over health care markets, to draw the attention of federal government watchdogs.

• As they buy out independent doctors and acquire their clinics, many hospitals are tacking “facility fees” onto those employee-physicians’ bills. For Medicare patients, these fees can bump up costs by 70 percent compared to the bills for basic office visits to independent doctors.

• Young physicians are embracing hospital employment for a variety of personal and financial reasons, while older doctors are selling their practices out of frustration over declining payments for their services. Some observers say we’re seeing the death of independent medical practices.

The trend is playing out across the country, particularly in growing suburbs with well-insured residents like Overland Park, Spartanburg, S.C., and Phoenix, where hospitals have been buying up large independent practices.

Other hospitals, like the Cleveland Clinic and Heartland Regional Medical Center in St. Joseph, have been hiring physicians to staff new outpatient facilities in direct competition with independent doctors.

“No one wants to be left out,” said Joy Grossman, a senior health researcher with the Center for Studying Health System Change, a Washington think tank. “It becomes a war between hospitals to acquire practices.”

Fueled by referrals

For hospitals, the spoils of that war begin with referrals.

It’s a business model adopted by hospitals across the country: Hospital-employed primary care doctors refer patients to the hospital’s employed specialists, who admit the patients to the hospitals that employ them.

As those patients make their way through, the employed doctors order their tests, lab work, MRIs, surgeries and other lucrative services through their hospital system. By one estimate, these revenues average $1.5 million a year per physician.

Data analyzed by The Star for the Kansas City area suggest that while independent physicians spread their referrals among many hospitals and physicians, employed doctors overwhelmingly favor the hospitals that pay their salaries.

“The walls are going up around the hospitals,” said Aaron Seacat, marketing director for an independent neurology practice that has seen referrals dry up as hospitals hire other doctors.

“One of those doctors sells out to a hospital, and suddenly the person who has been sending us two or three patients a week is sending us zero. We go from being their best friend to ‘we can’t help you.’ 

The Kansas City area’s largest hospital groups, HCA Midwest and St. Luke’s Health System, said they don’t require their employed doctors to refer patients to the specialists or hospitals within their organizations.

“Our physicians make decisions about where to send patients based on the quality … basically what’s best for the patients,” said Corrine Everson of HCA Midwest. “And patients don’t just do what their doctors tell them. They can select for themselves.”

Tests and other services that employee-physicians funnel into a hospital system often come at premium prices.

Hospitals with strong exclusive networks of doctors have far greater leverage than independent doctors to negotiate higher payments from insurance companies. Costs can soar where hospitals command large shares of the market.

“We see it every day in hospitals across the country. They use their clout to increase prices for physicians,” said Robert Zirkelbach, vice president of America’s Health Insurance Plans, the industry’s trade association.

“When a hospital buys a practice, its rates will increase in the following year’s contract. Increases of 20, 30 or 40 percent are not uncommon. It’s not 3 or 4 percent, that is for sure.”

While there may be some “anecdotal” cases, there’s no comprehensive evidence so far that opportunities for higher payments are encouraging hospitals to hire more doctors, said Herb Kuhn, president of the Missouri Hospital Association.

“We just don’t know yet,” he said.

One patient’s story

Jill Stower of Overland Park encountered the new breed of employee-physicians after she developed a stubborn cough.

Her first stop in January was her primary care doctor, an employee of the St. Luke’s system.

That doctor sent Stower to a lung specialist on St. Luke’s staff, who referred her to a cancer specialist employed by St. Luke’s. The cancer specialist wanted Stower in St. Luke’s immediately to start treatment for lung cancer.

Stower, 61 and a nonsmoker, was stunned. She told the doctor she wanted a second opinion, perhaps at the University of Kansas Cancer Center.

She didn’t have time for KU, the doctor insisted. Besides, at KU she would see young doctors still in training.

“ ‘Don’t go to KU. You won’t like it there,’ ” Stower said the doctor told her. “We felt we were trapped.”

“We felt like a bag of money, not people,” said her husband, John Stower. “ ‘Don’t let that bag of money out the door.’ 

Stower didn’t follow the urging of her St. Luke’s doctor. Instead, she traveled to the Mayo Clinic in Minnesota and is now under treatment at KU.

St. Luke’s declined to comment on Stower’s case, citing patient confidentiality laws.

But St. Luke’s Hospital CEO Julie Quirin said there is “no mandate or policy” for employed physicians to refer within the St. Luke’s system.

However, she added: “Our doctors believe many times their colleagues are the best choice and can coordinate care better.”

Integrated care

Improving patient care, which could help lower costs, stands high among the potential benefits when hospitals hire physicians.

Hospitals say it’s easier to make sure the best medical practices are used uniformly when doctors are employees. That keeps patients healthier and needing less medical care. The equipment, supplies and drugs can be standardized, which improves efficiency.

And integrating health professionals into teams to care for patients — something that’s being encouraged by both the Affordable Care Act and commercial insurance plans — is easier when doctors are employed.

“Employing physicians allows more integration and more communication of the team taking care, especially of a complicated patient,” said Mark Laney, CEO of Heartland Regional Medical Center, which has about 176 physicians on its payroll.

“We are continuously working on how to treat cases. We’ve reduced variability among doctors’ treatments, in devices such as heart valves, knee joints. You can still vary from the plan, but you have to have a good reason.”

But so far, there’s not enough evidence to say this is really the motivation of most hospitals for hiring physicians, or if the approaches taken by organizations such as the Mayo Clinic, where teams of employed physicians confer on patients, can be easily applied elsewhere.

Some health policy experts such as Robert Berenson of the Urban Institute are skeptical that these newly integrated systems will lower patients’ costs.

Integrated care is a great idea, Berenson said, but “it could backfire if we don’t have the ability to address the issue of pricing.”

Independent doctors say they are freer than employed doctors to act in their patients’ interests.

“We can refer to any specialist or hospital we think is best for our patients,” said Nathan Granger of the Clay Platte Family Medicine Clinic, a nine-physician independent practice in Kansas City, North.

“We have the ability to look at the cost and quality data and look at what’s best,” Granger said. “We have that ability, whereas if you’re employed, there’s definite incentives not to.”

The growing potential for conflicts between the interests of patients and employers was enough of a concern to the American Medical Association that it issued guidelines last year for maintaining the professional autonomy of employed physicians.

“The physicians have got to be able to keep the patient in the center of this; the patient comes first,” AMA president Ardis Dee Hoven told The Star.

“If it’s in the patient’s best interest, physicians should be able to refer outside (a hospital system) without penalty.”

Fighting ‘leakage’

Hospital administrators talk about referrals that slip outside their system as “leakage.” Some use their electronic records to identify doctors who make these outside referrals.

Some hospitals also write requirements into their employment contracts that doctors routinely refer within the system except in cases where patients say they want to go somewhere else or the doctor thinks there’s a medical need for an outside referral.

Other hospitals allegedly have given what amount to kickbacks to their employed doctors.

Halifax Health Medical Center in Daytona Beach, Fla., faces a civil trial in federal court on accusations that it gave six oncologists and three neurologists prohibited bonuses that grew with the number of patients they referred for treatments.

Hospitals also use more subtle tactics, such as throwing up administrative hurdles to outside referrals. A hospital’s computer system may make “default” referrals to its own facilities and employed physicians.

The physician referral line of at least one Kansas City area hospital was preferentially giving out the names of its employed physicians, as one independent practice discovered when it tracked down the reason it was getting fewer patients.

Referring within a hospital system may be more convenient to both physicians and their patients when the needed specialists and testing facilities are nearby, said Grossman of the Center for Studying Health System Change.

And it may be socially awkward for physicians to refer outside rather than to the physicians they see every day in their clinic, she said.

At the Rowe Neurology Institute in Lenexa, senior administrator John Hunter ran through a list of formerly independent practices in Johnson County that had drastically reduced referrals in the past few years as they’ve been bought up by hospitals.

“We saw a pretty dramatic shift,” Hunter said.

Some practices now send Rowe only the most extreme cases.

“It’s more common we get the train wrecks,” Hunter said.

Ed Moore is CEO of Diagnostic Imaging Centers, an independent radiology practice with 16 physicians and six clinics around the metro area. He also has seen the numbers of patients referred to his clinics decrease after a hospital buyout.

“We have heard from physician practices that they feel pressure to refer within the system. We’ve heard it in Olathe, in Overland Park, in the Northland,” Moore said.

Both Moore and Hunter have been trying to circumvent the traditional referral route through physicians by seeking out potential patients directly. They have expanded their marketing and built up their online presence.

Other practices have decided to join hospitals rather than fight for referrals.

Mark Myron was the president of the Kansas City Cancer Center, until recently one of the region’s largest independent cancer practices. Its network of clinics and nearly three dozen oncologists dwarfed the cancer programs of local hospital systems.

Even so, remaining independent wasn’t an option.

“In our particular situation, we saw we weren’t going to maintain our practice as before if we didn’t become part of a hospital,” Myron said. “We were competing with hospital-employed oncologists who were getting referrals from hospital-employed primary care doctors.”

Myron’s group merged with the University of Kansas Cancer Center in 2011, creating one of the largest groups of cancer treatment specialists in the nation. The merger also gave KU the boost it needed to become a National Cancer Institute designated cancer center.

“I was counting on that,” the brand names of KU and the National Cancer Institute, to regain market share, Myron said.

Lure of hospitals

This isn’t the first time hospitals have bought up physician practices.

They tried it in the 1990s when managed-care health insurance plans with tightly controlled referral networks were all the rage and hospitals wanted to make sure they kept their share of the business.

But the public revolted against the harsh limits of managed care, and insurance plans dropped their restrictions.

Meanwhile, hospitals discovered that doctors on a straight salary weren’t as motivated as they had been in private practices, where they were paid by the number of patients they saw. Many hospitals sold off money-losing practices.

This time could be different, experts say.

Hospitals have learned to base at least part of their doctors’ pay on productivity. Advances in computerization make it easier to track their performance.

“Hospitals really wield the power now,” said Kurt Mosley, vice president of strategic alliances for Merritt Hawkins, a national physician recruitment firm. “The doctors really need the hospitals. I just don’t see that trend reversing.”

Many independent physicians are feeling the strain of increasingly stingy insurance payments. Over the past decade, Medicare rates for doctors increased 9 percent, while the cost of running a practice rose 27 percent.

Physicians also must foot the bill for converting their practices to computerized medical records.

And the Affordable Care Act is encouraging new ways to pay doctors based more on how successfully they keep patients healthy and less on how many patients they see or how many procedures they do. That has many doctors worried about their future earning power.

“Older doctors are saying, ‘I can’t make it anymore.’ Hospitals are accommodating them,” Mosley said.

More than 12 percent of doctors surveyed nationally in April and May said they left a private practice for a hospital or other employment in 2012. A similar number said they would be doing so this year.

James Day jumped last year from an independent family medicine practice to become an employee at a Northland outpatient clinic run by Heartland Regional Medical Center.

“I feel like I’m in the right place for where medical care is going in this country, and my patients are comfortable with it, so I’m comfortable with it.”

Day said that as an employee, he is paid for the quality of the time he spends with his patients, not for “how many people can you push through in a day.”

Independent primary care doctors have become “dinosaurs,” Day said.

“It’s pretty hard for (them) to make it. They live off fee for service. I saw this was not going to be a long-term, viable situation. Medical economics are changing.”

Hospitals may lose as much as $250,000 a year on newly employed physicians during their first three years as they build their practices and adjust to their new work environment.

But even though some practices may never be really profitable, hospitals still expect to make money from them.

Although Day said he never feels pressure from Heartland, he is well aware of how his hospital pays for him and the other primary care doctors they employ: “They make that up in referrals to the system.”

On regulators’ radar

The Kansas City area still has a diverse health care market with large hospital groups like HCA Midwest and the St. Luke’s Health System, academic centers like the University of Kansas Hospital and community hospitals like Shawnee Mission Medical Center all vying for patients.

But in other parts of the country, hospitals have been acquiring so many physician practices that they have caught the attention of the Federal Trade Commission, the agency charged with promoting market competition.

“They’re on our radar more because we’re seeing it to a greater extent,” said Jeff Perry, who is in charge of the FTC division dealing with hospital mergers and acquisitions.

“If you employ a larger and larger number of physicians, your leverage (with insurance plans) increases and you can raise prices.”

Last year, the FTC filed a complaint against the Renown Health hospital system after it bought the two largest cardiology practices in Reno, Nev., giving it 88 percent of the area’s heart specialists.

Renown quickly settled by agreeing to let about a third of the cardiologists out of their contracts.

A major court case is playing out in Idaho, where the FTC says the state’s largest hospital system has been buying up medical practices to improve its bargaining power with insurance companies and funnel lucrative patients to its facilities.

In March, the FTC, along with the Idaho attorney general, sued to force the sprawling St. Luke’s Health System (no relation to St. Luke’s in Kansas City) to relinquish control of a large independent practice it had acquired.

With its 44 physicians, the Saltzer Medical Group had about 39 percent of the market for adult primary care services in Nampa, a fast-growing city west of Boise in the Treasure Valley.

When St. Luke’s acquired Saltzer, St. Luke’s market share became a commanding 57 percent, according to the FTC.

“As a result, St. Luke’s will have even greater bargaining leverage with health plans, leverage it has shown that it is willing to exploit,” the FTC alleged in its suit.

The evidence: In an area of southern Idaho called Magic Valley, St. Luke’s started buying up hospitals and physician practices in 2004 and turned its facilities there into some of the most expensive in the state, according to the Federal Trade Commission.

St. Luke’s documents uncovered by the FTC describe the health system’s “success” in Magic Valley as a “precursor to what we may be able to achieve across the region if we can attain the critical mass of physicians committed to partnering in the St. Luke’s Health System.”

St. Luke’s considered the Saltzer physicians such a lucrative acquisition, it agreed to pay raises for the practice’s adult primary care physicians that were almost double what hospitals typically offer when they acquire a physician group, the FTC said.

According to a St. Luke’s document, those raises would be recouped.

“Funding for compensation increase(s) is provided through higher hospital based reimbursement … and other downstream revenue sources,” such as surgeries and ancillary services.

St. Luke’s has argued that it has been buying physician practices as part of its plan to transform itself into a fully integrated health care system.

But as one St. Luke’s board member said in an email to St. Luke’s chief financial officer: “Let’s be realistic. Employing physicians is not achieving better cost, it’s achieving better profit.”

To reach Alan Bavley, call 816-234-4858 or send email to

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