Employing more physicians stabilizes hospital finances

Increasing direct employment of physicians may be starting to pay off for nonprofit hospitals.

Previous reports from credit agencies stated that growing physician employment was straining finances at the hospitals. But after several rocky years, their balance sheets are showing steadiness because of this trend, according to reports from Fitch Ratings and Moody’s Investors Service. In particular, they said, the revenue the physicians bring in from outpatient care is overcoming long-term trends in flat inpatient revenue.

“The hospitals that are in the best financial position are aligned more with physicians,” said Emily Wong, senior director at Fitch Ratings. “This is definitely a key to hospital financial performance and credit-worthiness.”

The Fitch paper, issued Aug. 16, and another document published Aug. 23 by Moody’s found that the operating margins of nonprofit hospitals had stabilized. The overall median operating margin of nonprofit hospitals included in the Fitch report grew slightly from 2.6% in 2010 to 2.7% in 2011. The operating margins of hospitals included in the Moody’s report held at 2.5%.

Analysts said employing physicians is a way for outpatient services to compensate for inpatient revenues, which have been flat or declining for several years. The Moody’s document found that median inpatient admissions grew only 0.1% in 2011 after a decline of 0.4% in 2010 and no growth in 2009. The volume of visits to physician offices increased 4.8% in the second quarter of 2012, according to a June 23 research note by Credit Suisse investment analyst Charles Boorady. Visits declined 8.9% in the second quarter of 2011.

“We expect the shift from inpatient to outpatient to continue, because health reform is moving care to a lower-cost setting,” said Sarah Vennekotter, assistant vice president at Moody’s. “There will be more observation stays and outpatient visits going forward.”

Bringing physicians on board, however, remains a stressor. This strategy can help hospital finances, but it can cost a lot.

“Employing physicians helps with market share,” Vennekotter said. “It can help with creating a firmer referral base, but the related expenses can be quite high. It’s expensive to employ a physician, and there are other continuing pressures on revenue.”

Community hospitals employed 62,152 full-time physicians and dentists in 1998 and 91,282 in 2010, according to the American Hospital Assn. The number of physicians and dentists employed part time grew from 15,837 in 1998 to 24,139 in 2010.