Hospitals as Source of Physician Capital: Opportunities and Dangers

Judy Brown, the editor of the Journal of the Association of Staff Physician Recruiters, located in St. Paul, Minnesota, called the other day. She said the association had tripled in size in the last couple of years, and she was looking for material for her journal. Would I consider writing for them?

I said I would. I have a soft spot for Minnesota, where I spent 25 years, 15 years as the editor of Minnesota Medicine. She said Minnesota, typically a state with a sufficient supply of primary care physicians, was having a hard time recruiting generalist physicians. And she added multispecialty clinics, the dominant mode of delivering care in Minnesota, were having an especially hard time. Finally, she noted large hospital systems were buying out major multispecialty groups who needed hospital capital to survive and too, among other things, recruit new physicians.

None of this surprises me.

• Everybody, in Minnesota and elsewhere, is having a tough time recruiting primary care doctors. There are simply not enough of them out there to recruit, and the supply is drying up.

• Physician groups simply do not have sufficient capital to recruit new primary care doctors, or specialists for that matter, retain existing doctors, upgrade facilities, invest in information technologies without entering into partnerships or ownership arrangements with hospitals. It’s a variation of Sutton’s Law. Willie Sutton, the bank robber, who, when asked why he robbed banks, and responded. “Because that’s where the money is.”

Here, in an article in the Group Practice Journal in early 2007, is what Daniel Zismer, PhD, and Peter Person, MD, of Essentia Health System, anchored in the St. Mary’s Hospital System in Duluth, say drives physician sell-outs, or more politely “acquisitions” by hospital systems.

Said simply, the fully integrated model has greater economic leverage. It aggregates more of the total health-care dollar within a unified business model. The model has superior capital re-generation potential, and debt markets see the model as being more credit worthy over time.

Put even more simply, hospitals have the capital, and doctors do not. “Integrated models, “ i.e. hospitals with medical staffs in too, simply have the organizational structure and the scale to invest in information, diagnostic, technology, and data to be economically robust and to offer one-stop shopping and diversified products to consumers. An exception to this are some high tech specialists – orthopedists, cardiovascular specialists, and other proceduralists – who have profit margins and economic cushions to resist hospital adsorption.

Is this a good thing? I have mixed feelings.

• On the positive side, integrated models, backed by hospital capital, helps physicians survive and recruit and compete. And these models facilitate the bundling of care for a given hospitalization to be paid to a single provider entity composed of a hospital and its affiliated medical staff.

• On the negative side , these integrated entities may be just another nail in the coffin of physician autonomy. And these integrated systems may drive health inflation over the roof. Owned physicians will be obligated to refer all high-ticket referrals for diagnostic and surgery procedures to the hospital, which may cost 2 to 3 times more than what one could obtain on the outside. It’s the nature of the hospital beast, with its embedded facilities fees, which often exceed the cost of the procedure, and the overhead associated with offering diversified services to a mixed population needing services, some of which must be provided at a loss.

Oh, well, in modern health care, money isn't everything, physician independence is two percent.