The State of Medicine on the Provider Side

While it is noble to try to provide insurance to every citizen in our country, we cannot do it on the backs of our providers (physicians, medical students and hospitals).

The control of physician costs (their compensation) must be balanced by fairness and our country’s long-term objective of keeping smart, motivated students going into medicine and keeping our valuable physicians still working and in the belief that medicine is still a good career.

Let’s take a look at pros and cons health care reform offers for doctors, future medical students and hospitals.

Physicians

This is a very challenging time for physicians for many reasons. Reimbursements are declining for physicians and there is uncertainty regarding future reimbursement. Medical practice costs are increasing.

There is more regulation and oversight by insurance companies and Medicare regarding coding and billing. New electronic health record requirements are expensive and time consuming. Physicians and staff must be trained on how to use these new systems. Coding is changing next year from ICD-9 to ICD-10, which will change coding and billing for physicians. This could pose temporary glitches in practices’ cash flow cycle. Physicians must keep up with new regulatory requirements such as HIPAA.

There is uncertainty regarding new accountable care organizations (ACOs) that have been formed and whether there is an actual benefit to ACOs. As of this writing, just a few of these organizations realized reported cost savings. It is questionable if the financial objectives of ACOs will be achieved. There is uncertainty as to whether bundled payments for an episode of care will benefit physicians. Insurance plans are creating their own networks for the exchanges, and deciding which physicians they want to invite to be in their exchange plan. They only want providers who have proven to be low cost. Again, this is out of the providers’ control.

Plus, there is significant acquisition activity. Practice management companies are buying up smaller medical practices (as are hospitals) and physicians are losing autonomy and the ability to control their own destinies. Initially, the compensation offered may be higher than historical, but that may be a short-term benefit.

Health care reform is changing compensation from volume-based, fee-for-service care, to quality-based care and reimbursement. Physicians can see reimbursement rates decline if the insurance company or Medicare decides that quality care was not provided. For hospitals, a new quality measure is the readmission of patients within 30 days. Hospitals’ are getting penalized with reduced payments due to readmissions.

For all of the aforementioned reasons, it is a difficult time for physicians to be in independent practice or practice at all. There is genuine concern regarding reimbursement and how the medical profession is changing. Reviewing compensation for physicians in many specialties, I believe overall compensation is still good relative to other professions. But for how long is the question.

I do believe in economies of scale for physicians and promoting more groups that can enjoy synergies and saved costs. However, I do think that physicians considering employment should give serious thought to what the culture will be going forward, and whether they are prepared to be an employee versus a part of management. In most cases, there is a financial incentive to becoming an employee; however, the jury is still out whether the financial incentive is short- or long-term. In many situations, physician compensation is revisited a few years after the acquisition and compensation could be adjusted downward, perhaps substantially, based on reimbursement rates, productivity change or other factors.

Certainly primary care physicians have suffered from reduced compensation. The investment of money and time in their education and post-graduate training is not yielding the return that it should due to reimbursement reductions to primary care physicians. Health care reform developers recognize this and have tried to implement some changes (loan forgiveness, reimbursement for Medicaid at Medicare levels, etc.).

Future medical students

We are not a socialist society and many still believe that physicians should not be financially capped. And while it hasn’t happened yet, we are moving in that direction.

Physicians should have opportunities, like every other profession, to work hard and be fairly compensated. I believe this is essential in order to keep smart, motivated young people interested in pursuing a medical career. It is imperative to keep compensation fair for physicians due to all the years of education and post-graduate training, the expense of medical school and the opportunity cost of lost earnings during years of post-graduate training.

As a society, is it in our best interest to encourage smart, motivated students to become investment bankers, lawyers or businesspeople instead of physicians because the earning prospects of a physician are low and capped? We should recognize that this is now happening.

Hospitals

Many hospital providers are experiencing reductions or relatively flat reimbursement from Medicare, Medicaid and commercial payers. Additionally, health care reform is insisting on more attention to “quality metrics” that can be used to reduce reimbursement if it is determined that the provider did not meet the quality metric.

Providers are also experiencing increasing costs due to inflation. Hospitals are labor intensive and have high fixed costs. Also, hospitals must utilize the Medicare accepted system of accounting, Step-Down accounting, a system that is challenging for hospital managers to use to make decisions regarding profitability and cost cutting.

With all these factors, it is not surprising that many hospitals struggle to remain financially viable. Some hospitals are successful, which may be due to very skilled management, the population they service, or having certain profitable lines of business that help sustain the hospital. With more bundled payments, additional penalties due to patient readmissions, more highly paid physician employees, and certain subsidies to hospitals being cut, maintaining hospital profitability is extremely challenging.

Many hospitals are trying to grow their integrated networks with physicians and employment agreements usually reflect higher compensations for newly hired physicians as compared to their income in private practice. Higher compensation is the incentive to get the physicians to join. The issue is the hospital’s cost structure is increased. If and when hospitals are forced to lower their employee physicians’ compensation due to changes in reimbursement, there will be an exit of employed physicians.

Uncertainty in health care reform and significant provider risk

Lots of numbers have been published regarding the number of additional uninsured who will join the state health care exchanges. This could provide an upside for physicians, as there will be more insured patients and less self-paying patients, who many times do not pay their bills. However, it is too early in health care reform to know how successful the health care exchanges will be. At this moment, sign-up is still occurring.

Health care reform could be very good for our country in terms of promoting better health and well-being, having more people insured, protecting patients from insurance companies who don’t want to cover pre-existing conditions or older children, etc. Moreover, insurance companies are becoming more accountable for the premiums they charge and their level of profits.

As discussed, greater regulation and audits, insistence on electronic health records, joining accountable care organizations (if a physician can), accepting bundled payments (because they have to), Medicare threatening to reduce reimbursement yearly with the sustainable growth rate, rising costs, the importance of good education (which is expensive), years of training and the opportunity cost of lost time in the work force due to training will discourage the best and brightest from choosing the practice of medicine as a career. If so, the intended benefits of available, quality health care will not be realized.

Monica Kaden is an accredited senior appraiser (ASA) with the American Society of Appraisers. She specializes in valuations of medical practices and groups, typically for matrimonial and shareholder litigation cases, estate and gift tax valuations, selling and buying business interests, and mergers and acquisitions.