Hospitals hang on to money-losing medical practices

Medical practices owned by hospitals or integrated delivery systems reported a median net loss of more than $82,000 per full-time physician in 2002, according to a survey published by the Medical Group Management Assn.

The report says the loss was 9.5% more than in 2001, when groups posted a median loss of just more than $75,000 per physician. The report highlights a trend that has been apparent to health systems for several years. Hospitals were selling practices back to physicians or anyone else that would take them more than four years ago because they already had been deemed a drain on finances.

Still, some hospitals have managed to mold thriving medical practices, while others have decided the losses are worth it to have a physician network.

"The philosophy is, 'We will make money off their referrals, even if we don't make money off their practice,' " said Janet Houser, PhD, associate professor of health services administration at Regis University in Denver.

Hospitals started buying practices as a competitive response to the growth of physician practice management companies in the early 1990s.

The hospitals that have not cut bait and sold their practices probably have recognized a benefit of some sort from their investment, said Daryl Johnson, co-founder and principal of HealthCare Appraisers Inc., a valuation consulting firm based in Delray Beach, Fla., that specializes in physician compensation agreements with hospitals.

"The competition hospitals faced a number of years ago is no longer present," he said.

Meanwhile, the ownership situations at hospitals may not be as dire as they may appear by the figures in the MGMA study. Bookkeeping for a hospital-owned facility may differ from that for a private practice, and ancillary revenue that independent physicians may count could end up falling under a different category on a hospital's income statement.

Costs apparently are allocated differently, too. The MGMA study reported total median operating costs per full-time physician at hospital- and system-owned practices were just more than $295,000 in 2002, compared with revenue of almost $435,000. Physician-owned practices, meanwhile, reported per-physician costs of nearly $370,000 and revenue of more than $631,000. Those numbers do not include salaries of medical staff, including physicians.

One of the reasons why it's difficult to measure hospital-owned and integrated network practices is because there aren't as many common factors between the groups, said Raymond Kuntz, administrative director of clinic operations for Altru Health Systems, an integrated network of about 200 physicians and one hospital in Grand Forks, N.D. The cost and revenue variables can differ widely between systems, he said.

Altru, for example, estimates its mean loss per physician is a fraction of the reported MGMA average, which can be attributable to both its operational efficiency and its cost reports, which only reflect physician professional services, he said.

"If you have 200 physicians like we do, and you're losing $82,000 per physician, that would be about $16.5 million," Kuntz said. "Our system could not survive with that kind of loss."

On the other hand, costs for hospital-owned practices rose 8.4% from 2001, while revenues only increased 4.5%, according to the study.

Compared to the alternatives, however, some hospitals are willing to absorb the cost, including salaries for the physicians and support staff, rather than trying to entice a new physician every few years with an income guarantee and nurture the new practice, said Jayne Oliva, a principal with The Croes-Oliva Group, a practice management consulting firm based in Burlington, Mass.

Oliva described one hospital that would land a new physician with an income guarantee, only to see that doctor receive a better offer and leave once the guarantee expired.

"The salary guarantee helps them recruit, but they're finding they can't retain," she said. "They feel compelled to guarantee a salary forever, if you will."

There are other practical reasons for employing physicians as well, consultants said. A medical center would have an easier time making sure on-call schedules are filled if they have employed physicians at their disposal, and salaried physicians may be more likely to participate in long-range planning and strategy discussions if they don't have to fret about empty exam rooms, they said.

Health centers also simply may want physicians to fulfill their mission, or they may realize they would incur a loss somewhere else anyway if they didn't hire doctors.

"If you're philosophically committed to an integrated delivery network, it's a piece you perhaps lose money on, but it's a mission-driven investment," Dr. Houser said.