Leveraging Physician Compensation for Alignment and Profit Growth

Hospitals across the country are facing increasing labor costs, with physician compensation being a major contributor to the upward trend. According to the KaufmanHall Physician Flash Report, labor expense continued to outpace the increase in revenue for services provided in 2023. Historically the financial loss on physician employment has often been subsidized and justified by other business factors such as the need for coverage to maintain hospital certifications or the vital support of profitable service lines, among other considerations. While reimbursement factors also have a large impact on the subsidy issues hospitals are facing and, in many cases are outside of a hospital’s control, hospital decision makers can and should evaluate the variables they do have control over in an effort to mitigate further subsidy increases.

Hospitals should start by evaluating individual service line profitability and pay particular attention to those that are less profitable and those that may have room for improvement as it relates to how physician services are linked to overall hospital strategy. For example, this could include examining a service line and identifying the need for a subspecialty service or inject new leadership that could expand the services or better oversee the services a hospital is able to provide for a more integrated care delivery and patient management strategy.

As labor costs relate to physician employment models, we have seen hospitals making changes which could potentially positively impact bottom line profitability.  One change we have seen is hospitals incorporating performance or quality-based pay into physician employment agreements. While overall proposed compensation may not change, there is some money put at risk which would require the physician to reach certain quality metrics. Further, we have seen these metrics broken into tiers. Often quality metrics result in better care, more efficiency, and the potential to capture more revenue and/or reduce clinical waste or inefficiency. Incorporating sound and meaningful metrics and putting some of the physician compensation at-risk can encourage better physician alignment with overall hospital goals. The key is putting well designed and meaningful metrics into play that impact the desired outcomes in a significant way and reevaluating and revisiting those metrics regularly to ensure continued effectiveness.

The recent “Is the Physician Employment Model Broken?” article from Becker Physician Leadership examines the idea of leveraging advance practice providers (“APPs”) and adopting pay models that reward physicians for using those providers. To expand on that idea, hospitals should evaluate the use of APPs and even consider if there could be more training done to allow APPs to practice at their highest and best use. For example, hospitals can consider reviewing the services the APPs are capable of performing, outside of evaluation and management services, such as minor procedures, which would allow physicians to focus more time on higher acuity work. Identifying training opportunities for APPs and evaluating physician leverage of those providers may help increase potential revenue. Evaluating hospital-based specialty coverage models could also help lead to decreased costs. For example, utilizing APPs to cover in-house night shifts and moving the physician providers to on-call services during those hours may represent a better, more cost-effective coverage solution.

To summarize, hospitals should take the opportunity to re-evaluate their current physician compensation models, and where necessary, find ways to incentive physicians to better align with hospital organizational goals to potentially increase reimbursement, minimize losses, and maximize clinical efficiency and outcomes . The first step hospitals can take is making sure they have defined how physician employment and physician activity is linking to overall strategy and focus on service lines that have the biggest impact on organization strategy and profitability.



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