Every so often, an article emerges that so perfectly aligns with a company’s strategy to address a problem, and discovering it feels like striking gold. Kaufman Hall’s recent piece, “Hospitals keep losing money on physicians. Is there another way?” is one of those articles.
The fundamental question raised in the article—to employ or not to employ physicians—isn’t a new one. Still, Kaufman Hall’s explanations for why hospital systems are losing money on employed physicians and the proposed alternatives demand closer scrutiny, especially in a quickly changing healthcare landscape. Hospital losses are up 5% from last year’s numbers, an alarming increase that reveals the current strain on health systems. How can hospitals continue to enhance care coordination and avoid significant financial losses?
The Challenges of the Current Model
The Kaufman Hall article outlines three main threats to the sustainability of current health systems:
1. Reimbursement Rates Compared to ASCs
Kaufman Hall points out that hospitals often have higher reimbursement rates than ambulatory surgery centers (ASCs) and other independent sites. While this is true, it overlooks the reality that ASCs typically focus on a narrow range of high-volume, high-margin procedures. In contrast, hospital-employed physicians are often required to provide a broader range of services, including unprofitable but necessary community care. Comparing these models without accounting for the full spectrum of services provided is misleading.
2. Overutilization of Low-Margin Services
The article criticizes hospitals for prioritizing volume over profitability, leading to financial strain. However, the issue isn’t solely about volume. The real problem lies in the misalignment between service utilization and reimbursement structures. Instead of just increasing volume, health systems need to develop care models that drive profitability through strategic service line management and better alignment of reimbursement incentives.
3. Administrative Burden
Kaufman Hall mentions the costs associated with electronic health record (EHR) integration and compliance programs. However, they fail to address the complex nature of reimbursement itself. Billing and coding complexities, varying payer rules, and inconsistent fee schedules contribute significantly to administrative overhead. Without addressing these root causes, the proposed solutions fall short.
Proposed Alternatives and Their Pitfalls
1. Joint Ventures with ASCs
Suggesting that health systems partner with ASCs essentially concedes that, despite a hospital system’s intellectual capital and resources, partnering with entities that capture high-margin procedures is the best strategy. This approach ignores the value of leveraging existing resources to optimize care delivery within the hospital’s own framework, potentially leading to lost revenue from outpatient migration.
2. Converting Clinics to FQHC Look-Alikes
The article suggests rebranding primary care clinics as federally qualified health center (FQHC) look-alikes to enhance reimbursement, as “FQHC look-alikes receive enhanced Medicaid and Medicare reimbursement, as well as federal grants, reducing the need for direct subsidies from the hospital.” However, this is not a sustainable strategy. Rather than reshuffling designations to “game the system,” hospitals should develop robust primary care strategies focusing on preventative care, patient engagement, and reducing chronic disease burdens. Changing the branding without addressing the underlying care model is only a superficial fix.
3. Value-Based Care (VBC) Arrangements
Kaufman Hall argues that “value-based care” (VBC) models benefit both hospitals and physicians by providing “cost-effective, high-quality care without requiring employment.” However, in reality, VBC models often fail to deliver real value when reimbursement is not tightly coupled with patient outcomes. Health systems must advocate for bundled payments where cost predictability and outcome alignment are paramount. The reluctance to embrace these models reflects a deeper issue: health systems do not fully understand their unit cost of delivering an episode of care.
The Real Bottom Line: What Needs to Change
1. Understanding Unit Costs
The fundamental problem is that health systems lack insight into the actual cost of delivering care. If they truly understood the unit cost, bundled payment models would dominate the landscape. Despite over a decade since the passage of the Affordable Care Act, commercial bundled payments remain rare because most systems have not developed the financial literacy to implement them successfully.
2. Focusing on Health, Not Sick Care
Health systems continue to prioritize reactive care over proactive health management. As a result, they lose market share to providers who emphasize wellness and preventative strategies. Legislative moves like transparency rules and the Consolidated Appropriations Act are shedding light on inefficiencies in the current payment structure, forcing health systems to reassess their priorities.
3. Embracing Disruptive Partnerships
Instead of defaulting to traditional partnerships with BUCA (Blue Cross, United, Cigna, Aetna) insurers, health systems should seek out innovative, disruptive partners who understand direct-to-employer contracting. Hospitals can mitigate financial risk and enhance long-term sustainability by diversifying partnerships and incorporating models that directly link outcomes with payments.
Final Thoughts
The healthcare landscape is rapidly evolving, driven by regulatory pressures and the rising demand for cost-effective care. While Kaufman Hall’s article correctly identifies the financial challenges of employing physicians, its proposed solutions fail to address the complexities of the root causes. Health systems must move beyond superficial fixes and embrace strategic, data-driven approaches that align care delivery with financial viability.
Until hospitals fully understand their cost structures, shift from sick care to proactive health management, and seek out disruptive partners who can challenge conventional models, they will continue to face financial instability. Instead of conceding to ASCs or rebranding primary care, the focus should be leveraging existing resources to create financially sustainable, patient-centered care models.
