Issue Brief

Findings from HSC NO. 136 • AUGUST 2011

Providing Insights that Contribute to Better Health Policy

While not new, the pace of hospital employment of physicians has quickened in many communities, driven largely 

by hospitals’ quest to increase market share 

and revenue, according to findings from 

HSC’s 2010 site visits to 12 nationally representative metropolitan communities (see 

Data Source). 

Across most of the 12 communities, 

hospital employment of physicians is growing rapidly. Exceptions are Orange County, 

where California law bars hospitals from 

directly employing physicians, but physicians tend to be tied closely to hospitals 

through other means; Boston, where physician organizations keep non-employed physicians tightly aligned with the dominant 

hospital system; and northern New Jersey.

Most physicians practice solo or in private, community-based groups, with more 

than half having an ownership interest in 

their practice in 2008.1 In return for admitting privileges, independent physicians 

historically served on the voluntary medical staff of one or more hospitals and performed such duties as on-call coverage and 

serving on hospital committees. 

But in recent years, several factors have 

weakened community-based physicians’ 

ties to hospitals. Technological advances 

allowed more care to be performed in 

freestanding outpatient settings, leaving 

physicians less reliant on hospitals and less 

willing to take emergency call and sometimes directly competing with hospitals 

for lucrative specialty services. Hospitals 

started to employ specialists to cover oncall duties and increase market share for 

lucrative service lines, such as cardiac and 

orthopedic care, that they were in danger 

of losing to competing physicians. At the 

same time, the increase in hospitalists who 

specialize in caring for inpatients likely also 

has contributed to more hospital-employed 

physicians.

The recent spate of physician employment is not hospitals’ first foray into the 

practice. In the 1990s, the move toward 

managed care and health maintenance 

organizations sparked a wave of hospital 

purchases of primary care practices to 

secure referral bases. Hospitals typically 

lost money when employed physicians’ 

productivity dropped, and many hospitals 

subsequently divested the acquired practices. Unlike in the 1990s, hospitals now 

typically use productivity-based compensation instead of salaried arrangements (see 

box on page 2 for more about hospital 

approaches to employing physicians). 

While the potential of hospitalemployed physicians to improve quality 

and efficiency through better clinical integration across care settings has received 

much attention, from the hospital perspective, physician employment typically is one 

of many strategies to gain market share by 

increasing admissions, diagnostic testing 

and outpatient services.3 Also, hospitals 

usually negotiate health plan contracts on 

behalf of employed physicians, gaining 

higher rates to offer more attractive comIn a quest to gain market share, hospital employment of physicians has accelerated in 

recent years to shore up referral bases and capture admissions, according to the Center for 

Studying Health System Change’s (HSC) 2010 site visits to 12 nationally representative 

metropolitan communities. Stagnant reimbursement rates, coupled with the rising costs 

of private practice, and a desire for a better work-life balance have contributed to physician interest in hospital employment. While greater physician alignment with hospitals 

may improve quality through better clinical integration and care coordination, hospital 

employment of physicians does not guarantee clinical integration. The trend of hospitalemployed physicians also may increase costs through higher hospital and physician commercial insurance payment rates and hospital pressure on employed physicians to order 

more expensive care. To date, hospitals’ primary motivation for employing physicians has 

been to gain market share, typically through lucrative service-line strategies encouraged by 

a fee-for-service payment system that rewards volume. More recently, hospitals view physician employment as a way to prepare for payment reforms that shift from fee for service to 

methods that make providers more accountable for the cost and quality of patient care.

RISING HOSPITAL 

EMPLOYMENT 

OF PHYSICIANS: 

BETTER QUALITY, 

HIGHER COSTS? 

By Ann S. O'Malley, Amelia M. Bond 

and Robert A. Berenson

Hospitals Seek Patients and Leverage
pensation than independent physicians 

could negotiate on their own. Physician 

employment is not the only strategy hospitals use to align more tightly with physicians—in markets where some physicians 

are less inclined toward employment, 

hospitals also are developing contractual 

arrangements short of employment, such 

as physician hospital organizations, to 

strengthen relations. 

While initial hospital moves to employ 

physicians generally focused on hiring specialists to build targeted service lines, such 

as cardiac or cancer care, hospitals increasingly are hiring primary care physicians to 

capture referrals for their employed specialists. “There is a mad grab to hire primary 

care physicians,” according to a Greenville 

market observer, capturing the sentiment of 

many respondents across the markets.

Following enactment of national health 

reform in March 2010, hospital executives 

also increasingly cited physician-hospital 

integration through physician employment 

as key to preparing for expected Medicare 

payment reforms, including bundled payments, accountable care organizations 

(ACOs) and penalties for preventable hospital readmissions.

Physicians Seek Security

Physicians’ reasons for seeking employment, not just by hospitals but also by other 

organizations, include stagnant reimbursement rates in the face of rising costs of 

private practice and a desire for a better 

work-life balance. Hospitals are hiring 

both primary care and specialist physicians. Primary care physicians (PCPs) in 

Center for Studying Health System Change Issue Brief No. 136 • August 2011

2

Learning from Experience

Unlike the last wave of physician employment in the 1990s when salaried arrangements 

were common, hospitals today are using productivity-based compensation and limiting 

purchases of practices’ capital assets. During the 1990s, hospitals often guaranteed physicians nearly 100 percent of their previous year’s earnings during their transition to hospital 

employment.2

Now, while hospitals employ the physician and staff, many do not purchase the practice 

assets and often they lease rather than purchase a practice’s office space or equipment. 

Hospital respondents also noted they are more selective about whom they employ, emphasizing that they don’t buy practices “for the sake of buying,” as they acknowledged doing in 

the 1990s, but rather buy based on “a stricter assessment of quality and service.” Likewise, 

hospitals are maintaining control of ancillary services performed by employed physicians. 

A Syracuse hospital executive said, “Last time, we found out the [hospital-employed] doctors were doing ancillary services at their own offices. So we won’t be letting them do that 

this time around. We’ve learned a lot from that experience.”

Even though newly employed physicians in many markets retain their own offices and 

do not practice on the hospital campus, hospitals are increasing their contractual and 

administrative management and consolidation of practices to negotiate with insurers and 

monitor productivity and quality. Hospitals also are giving physicians a greater role in 

governance and management. Hospital executives believe giving physicians a larger leadership role makes employment more palatable to physicians, enhances physician loyalty and 

helps improve the clinical effectiveness of care. As one Indianapolis hospital chief executive officer (CEO) said, “I think the whole thing is about seeing physicians more as partners, rather than employees. If we [hospital administration] treat them as employees, they 

will act that way. And, in my estimation, you don’t want employees taking care of patients. 

You want to be physician led and governed.” 

 In some hospital systems, employed physicians’ compensation also rewards efficiency, 

providing them with incentives to avoid wasting supplies and agree on standard medical 

devices. One large hospital system chief medical officer (CMO) described how orthopedic 

surgeons’ performance on quality and cost measures is tracked and reported back to them, 

allowing the system “to standardize [surgical device purchases] to one vendor and to [get 

the surgical team to] stop opening every piece of packaged surgical equipment on the table 

that might be needed.” Surgeons have not resisted these efforts to decrease waste because 

part of their compensation is tied to efficiency measures.

particular face challenges in remaining in 

independent practice because flat reimbursement rates and growing overhead costs are 

more of a challenge for their practices, which 

typically cannot generate significant revenue 

through procedures and ancillary services. 

And, even among some specialists, there is 

a notable change in attitude toward employment because of reimbursement issues. As an 

Indianapolis hospital CEO said, “Specialists 

make a lot more money than PCPs, so for 

them to get cold feet about their independence in the future is monumental.” 

Additional motivations for physicians 

include the need to navigate complex changes 

in insurance and delivery systems under 

health care reform, implementation of costly 

but increasingly necessary health information 

technology, and avoidance of high malpractice 

insurance premiums, which hospitals cover 

for employed physicians. 

For physicians just beginning practice, 

hospital employment also is attractive 

because of the perceived financial security 

and work-life balance. Data on medical residents’ first choice for employment support 

this—in 2003, 4 percent said they would be 

“most open” to hospital employment, but by 

2008, the proportion had jumped to about 

22 percent.4 For example, attracting younger 

physicians to Syracuse is difficult without an 

employment offer given their high medical 

school debt. “They see the writing on the 

wall, where they can’t buy into a practice, 

and joining a practice might not help with 

their loan forgiveness. Therefore, they’re 

going to the highest bidder,” a Syracuse hospital chief financial officer said.

Hospital Consolidation 

Spurs Employment

Hospital consolidation continues to be an 

important factor in physician employment 

by hospitals. In markets with high hospital 

concentration, physicians face pressure to 

align closely with one hospital system or 

another.5 And, while hospital employment of 

physicians is more pronounced in areas with 

higher levels of hospital consolidation—for 

example, Cleveland, Greenville, Indianapolis 

and Lansing—it is also taking place in lessconsolidated hospital markets, such as Seattle, 

Little Rock, Phoenix, Syracuse and Miami. 

In some markets, such as northern New 

Jersey and Miami, the local culture of physi-
Issue Brief No. 136 • August 2011 Center for Studying Health System Change

3

cian independence influences physicians’ 

willingness to become employed by hospitals. And, if they are large enough, some 

single-specialty and multispecialty groups 

can remain independent, because they have 

sufficient leverage with payers.

Coordinated, Higher-Quality Care?

Hospital employment of physicians theoretically can improve quality by encouraging 

better integration of care and communication among clinicians, but respondents 

indicated that clinical integration does not 

occur automatically once physicians become 

employees. Echoing the views of many hospital CMOs across the 12 markets, a Lansing 

respondent said, “Being able to bring all 

physicians together with a unified focus on 

quality, service and access is a challenge.” 

At this point, most clinical-process integration appears focused on single diagnoses or 

conditions rather than integration across all 

of a patient’s medical needs. For example, 

according to many hospital CMOs, hospitals 

are focusing on the “low-hanging fruit,” such 

as reducing preventable readmissions among 

patients hospitalized for congestive heart 

failure. 

Communication between inpatient and 

outpatient providers, even between those 

employed by the same hospital system, 

continues to be a problem. As a Lansing 

hospital respondent said, “Coordination of 

care, pre- and post-hospital, needs to be better...care processes and pathways need to 

be integrated.” The potential for true clinical integration, including improved communication, is challenging in the current 

fee-for-service environment, according to 

respondents across the 12 markets studied. 

Hospital systems and clinicians vary widely 

in their development of integrated care processes and implementation of interoperable 

electronic health records (EHRs). 

For example, Cleveland Clinic, with a 

large proportion of employed physicians 

using the same EHR, is further along the 

spectrum of information exchange for care 

integration than many other systems. Other 

markets are at an earlier stage. As a Phoenix 

hospital CMO said, “The lack of communication between outpatient and inpatient 

physicians is problematic...we know we 

need to start addressing it.”

Potential for Higher Costs 

While hospital-employed physicians may 

spur clinical integration that will ultimately 

improve efficiency and help control costs, 

they are more likely to increase costs in 

the short run.6 First, hospitals and their 

employed physicians continue to practice in 

a predominantly fee-for-service environment 

that has incentives to increase the volume of 

services delivered. And, productivity-based 

compensation used by many hospitals for 

employed physicians reinforces these incentives. Numerous physician respondents noted 

that employed physicians face pressure from 

hospitals to order more expensive testing 

alternatives. In one market, at least two cardiologists declined hospital employment offers 

because they perceived the pressures to drive 

up volume were stronger than those in their 

mid-sized, independent cardiology group. 

 In addition, hospitals routinely charge 

facility fees for office visits and procedures 

performed in formerly independent physicians’ offices, where the physicians have converted to hospital employment. The terms 

“hospital-based facility” or “provider-based 

facility” refer to a facility or office that is 

part of a hospital but may not be located on 

the hospital campus. The provider-based status produces substantially higher Medicare 

payments than when physicians remain in 

independent practice, because there are now 

separate payments for professional services 

and for hospital outpatient facility fees. In 

short, it is possible for a physician practice 

to be acquired by a hospital, not change 

locations or even practice operations, yet the 

hospital now receives significantly higher 

Medicare payments if it meets the criteria 

for achieving provider-based status. Most 

commercial insurers follow the Medicare 

fee schedule with some modifications, so 

this practice can affect not only Medicare 

patients but privately insured patients.

Hospitals charging facility fees for physician visits not only results in higher costs 

for payers, but also for patients because 

facility fees are subject to deductibles and 

coinsurance. In isolated cases, litigation has 

resulted, and institutions have reimbursed 

insurers and patients for facility fees under 

consumer protection laws, and the hospitals 

now post their pricing practices.7

Furthermore, increasingly aligned hospitals and physicians are gaining leverage 

with health plans over payment rates. In 

Hospital employment of 

physicians theoretically 

can improve quality 

by encouraging better 

integration of care and 

communication among 

clinicians, but respondents indicated that 

clinical integration does 

not occur automatically 

once physicians become 

employees.
markets with particularly high levels of physician employment, such as Greenville and 

Indianapolis, insurers reported growing difficulty containing both hospital and physician 

payment rate increases. 

Finally, respondents in a few markets 

expressed concern that employment of some 

specialists, particularly those in geographic 

areas served by multiple hospital systems, 

contributes to higher costs because of artificially high compensation generated by bidding wars. An Indianapolis physician said, 

“Hospitals are paying cardiologists over $1 

million a year... hospital costs are going up 

dramatically in our market.... You are seeing a number of compensation offers that 

are multiples of what physicians had made 

historically.” 

Mixed Effects on Access to Care 

Increased hospital employment of physicians 

appears to affect patients’ access to care in a 

variety of ways. From the patient perspective, 

physician employment by a hospital may be 

invisible as many employed physicians continue to work in the same offices they occupied when independent. 

A potential benefit of physician-hospital 

alignment may include better access to 

employed specialists for low-income patients, 

especially those with Medicaid coverage, who 

historically have had poor access to independent specialists. At the same time, with 

increased hospital employment of physicians, 

access to care can shift markedly for patients 

when a major hospital system drops out of a 

health plan network.8

Policy Implications

While the potential of hospital-employed 

physicians to improve quality and efficiency 

has received attention, the potential for higher 

costs has received less attention. The existing 

fee-for-service payment system that encourages hospital strategies to use employed physicians to increase referrals and admissions, 

coupled with the market power of hospitals to 

gain higher payment rates, risks overshadowing potential quality gains.

 In essence, physician employment is 

attractive to both hospitals and physicians 

under volume-driven fee for service, and the 

growing employment trend does not guarantee improved clinical integration will occur. 

The recent acceleration in hospital employment of physicians runs the risk of raising 

costs and not improving quality of care unless 

broader payment reform reduces incentives 

to increase volume and creates incentives for 

providers to change care delivery to achieve 

real efficiencies and higher quality. 

Notes

1. Boukus, Ellyn R., Alwyn Cassil and Ann 

S. O’Malley, A Snapshot of U.S. Physicians: 

Key Findings from the 2008 Health Tracking 

Physician Survey, Data Bulletin No. 35, 

Center for Studying Health System Change, 

Washington, D.C. (September 2009).

2. Kocher, Robert, and Nikhil R. Sahni, 

“Hospitals’ Race to Employ Physicians—

The Logic Behind a Money-Losing 

Proposition,” New England Journal of 

Medicine, Vol. 364, No. 19 (May 12, 2011).

3. Felland, Laurie E., Joy M. Grossman and 

Ha T. Tu, Key Findings from HSC’s 2010 

Site Visits: Health Care Markets Weather 

Economic Downturn, Brace for Health 

Reform, Issue Brief No. 135, Center 

for Studying Health System Change, 

Washington, D.C. (May 2011).

4. Merritt Hawkins and Associates, 2008 

Survey of Final Year Medical Residents, 

Irving, Texas (2008).

5. Casalino, Lawrence P., et al., “HospitalPhysician Relations: Two Tracks and the 

Decline of the Voluntary Medical Staff 

Model,” Health Affairs, Vol. 27, No. 5 

(September-October 2008).

6. Berenson, Robert A., Paul B. Ginsburg 

and Nicole Kemper, “Unchecked 

Provider Clout in California Foreshadows 

Challenges to Health Reform,” Health 

Affairs, Vol. 29, No. 4 (April 2010).

7. Boodman, Sandra G., “That’ll Be $418 

for Use of the Examining Room,” The

Washington Post (Oct. 6, 2009); and 

Suchetka, Diane, “Patients Fume over 

Cleveland Clinic Fee; Hospital Not Alone 

in Levying Facility Charge,” The Plain 

Dealer (June 16, 2009).

8. O’Malley, Ann S., et al., Greenville & 

Spartanburg: Surging Hospital Employment 

of Physicians Poses Opportunities and 

Challenges, Community Report No. 6, 

Center for Studying Health System Change, 

Washington, D.C. (February 2011).

Center for Studying Health System Change Issue Brief No. 136 • August 2011

ISSUE BRIEFS are published by the 

Center for Studying Health System Change.

600 Maryland Avenue, SW, Suite 550 

Washington, DC 20024-2512

Tel: (202) 484-5261

Fax: (202) 484-9258

www.hschange.org

President: Paul B. Ginsburg

The Center for Studying Health System Change (HSC) is affiliated with Mathematica Policy Research

Data Source

HSC periodically conducts site visits to 12 nationally representative 

metropolitan communities as part of 

the Community Tracking Study to 

interview health care leaders about 

the local health care market and how 

it has changed. The communities are 

Boston; Cleveland; Greenville, S.C.; 

Indianapolis; Lansing, Mich.; Little 

Rock, Ark.; Miami; northern New 

Jersey; Orange County, Calif.; Phoenix; 

Seattle; and Syracuse, N.Y. During 

the seventh round of site visits, almost 

550 interviews were conducted in the 

12 communities between March and 

October 2010. This Issue Brief is based 

on responses primarily from representatives of hospitals—chief executive officers, chief financial officers and chief 

medical officers—physician organizations, health plans and other knowledgeable market observers.

Funding Acknowledgement: The 

2010 Community Tracking Study 

site visits and resulting research and 

publications were funded jointly by 

the Robert Wood Johnson Foundation 

and the National Institute for Health 

Care Reform.