Hospital Finances

How Should Hospitals Subsidize Physicians?

Hospitals and the physicians that practice in them have a conflicted relationship. They are mutually interdependent but often are often adversaries when it comes to finances. Across the country, this is the time of year that academic medical centers are preparing budgets for the next year. Most academic hospitals are on a July-June fiscal year to coincide with the June graduation of medical schools and the July start of new residents in the hospital. So, February and March is the prime season for physician practices to submit budget request for subsidies for the upcoming fiscal year. And every year, at every hospital in the country, more resources are requested than the hospitals have to give.

2019 was a turning point, when for the first time, more physicians were employed by hospitals than were self-employed. In academic medicine, the percentage of hospital-employed physicians is even higher. As with most things in life, the primary driver of this employment model is economics. By joining physicians and hospitals together, lower malpractice premiums can be negotiated and higher rates from commercial health insurance companies can be negotiated. The hospitals and doctors can better align their services and administrative efficiencies of larger size can often be realized. The hospital can be assured of referrals from hospital-employed physicians and the physicians can have a greater say in the services that the hospital provides.

But it is becoming increasingly difficult for physicians to earn enough to cover their entire salary + benefits. This is particularly true for specialties such as hospital medicine and palliative medicine where the time required to provide optimal care exceeds the professional fee reimbursement. But hospital-employed physicians generally do not use revenue from professional services as the medium of exchange; instead, it is the RVU that is used as the measure of physician productivity.  And when physicians do not meet RVU targets, they look for other ways to maintain their salaries. Here are some of the ways that hospital-employed physicians can be subsidized.

Everyone wants a nurse practitioner, physician assistant, or social worker

One of the easiest ways physicians can increase their RVU numbers is by having someone else generate them. A nurse practitioner or physician assistant is ideal because both NPs and PAs can write orders and can bill for services. If the hospital hires an NP or PA to assist a physician, that NP or PA can do all of the “scut” activities that would otherwise occupy the physician’s time without generating many RVUs. This could include doing phone calls, writing prescriptions, entering progress notes and orders into the electronic medical record, and filling out forms.

Surgeons can particularly benefit by this type of arrangement because the surgeon will be paid a set amount for doing a surgery and that amount is supposed to include post-operative follow up care. If the surgeon has a PA or NP doing the post-operative visits, either in the hospital or in the office, then that frees up the surgeon to be able to do more surgeries. Additionally, if that surgeon has an experienced PA assisting in the operating room, the surgeon will be more efficient and can do more surgeries per day. So, frequently, having the hospital pay for an NP or PA can be a win-win: the surgeon can do more surgeries leading to more RVUs for the surgeon and more procedural revenue for the hospital.

Because NPs and PAs cost considerably less than a physician, they can also be used to reduce costs in certain areas within the hospital. For example, if an emergency department is too busy for a single physician but not busy enough to justify 2 physicians, then a physician plus a nurse practitioner may make sense. Similarly, if an ICU is too busy for a single physician but not busy enough to justify 2 physicians, then a physician plus a physician assistant may be more cost-effective.

However, there are 2 situations when this type of subsidy can go wrong. First, if the NP or PA is used to subsidize an otherwise underperforming physician then the hospital is paying to support an inefficient physician (or one that just does not want to work very hard). Second, if the physician demands their own full-time PA or NP but the workload only justifies a partial FTE, then there is money wasted on the NP or PA who is not busy enough to justify their cost. The solution to the first situation is to be sure that the surgeon’s productivity is being benchmarked to others in that specialty. The solution to the second situation is to have an NP or PA who is shared by multiple surgeons.

Another common request by physicians is a social worker who works only for that physician to help with patient counseling and care coordination. Some physicians will ask for a scribe (particularly those who grew up before the era of the computer keyboard and can’t type). Other physicians will request a nurse to take care of phone calls and scheduling. In some situations, each of these requests may be valid and valuable. But each of these requests must have a careful cost:benefit analysis.

Call pay

You can’t cover the cost of a physician being on call with professional fee revenue. The hospitalist covering the inpatient service at night will generate a small number of RVUs from nighttime admissions but does not generate any RVUs from the calls from the floor nurses. The pediatrician taking home call at night can bill only a tiny number of RVUs for every phone call from an anxious parent of a child with a fever at 2 o’clock in the morning. The surgeon on trauma call who has to be within 20 minutes of the hospital at all times may not generate any RVUs if there are no motor vehicle accidents or gunshot victims that night.

In the past, for self-employed physicians, taking call was just part of the job. But increasingly, hospital-employed physicians are expecting addition pay to be on call. Similarly, physicians are often requiring a supplement for working on holidays.

Call pay is a necessity in many situations. Your hospital cannot manage myocardial infarctions, be a designated stroke center, or be a trauma center without an interventional cardiologist, stroke neurologist, or trauma surgeon available 24-hours a day. But what about specialists for less time-sensitive diseases or for conditions that less frequently result in calls to the hospital at night? Should the hospital provide call pay to the otolaryngologist, the endocrinologist, the psychiatrist? Which specialties warrant call pay will vary from hospital to hospital depending on the size of the hospital and the scope of emergency services provided.

Direct subsidies

These are often listed as “physician support” or “hospital investment” and are funds transferred from the hospital directly to the physicians to subsidize their income. Frequently, these are justifiable means to ensure availability of physician services. For example, hospitalists almost never bill enough to cover their salaries. Hospitals with a high percentage of uninsured patients or patients with Medicaid will have a difficult time attracting specialists who will be paid nothing or next to nothing in profession fees. In these situations, subsidies are necessary for the physicians to make a competitive take-home income.

But sometimes these direct subsidies are used as ransom by physicians when the hospital has no alternatives to provide that particular service or procedure. If all three of your hospital’s gastroenterologists demand an extra $50,000 per year or they are going to leave to go work at a hospital across town, you may have no option but to pay them. Ransom subsidies can be be as maliciously infectious as the plague… as soon as other physicians find out that the hospital is paying one group of physicians just to keep them, then every group of physicians will have their hand out.

Direct subsidies are particularly common in academic medical centers. These medical centers must produce research and education but the amount of money that physicians get paid directly from research grants or teaching appointments is so much less than they get paid for clinical activities, that in order to keep those physician researchers and educators, the hospital has to support their salaries. Furthermore, the success of a department chair or division director is measured by that department’s or division’s research and educational output and so that chair or director is incentivized to bring on as many researchers and educators as possible, requiring the additional costs of those researchers and educators to be passed on to the hospital. Although some subsidy is necessary, there is a limit to the number of researchers that the hospital can support, particularly if those researchers do not have grant funding. The hospital must have a regular accounting of the value that every subsidized researcher and educator brings.

It can be challenging when the clinical volume of the hospital is insufficient to justify a 100% FTE physician. For example, if the inpatient cardiology consult census only averages 5 patients per day, then that only equates to 2-3 hours of inpatient work per day. If the cardiology group wants to put one physician in the hospital all day for consult coverage, then they are going to require an enormous subsidy. It may require some negotiation with the cardiology group in that situation to have that consult cardiologist also assigned to interpret EKGs, read outpatient cardiac echos, or do outpatient telemedicine visits when the consult service is slow. Usually creative thinking and flexibility can solve the dilemma.

Medical directorships

In the past, this was a common way of disguising subsidies to physicians, with medical directorships paying a lot more than the actual physician time required to perform a given administrative role. However, more recently, CMS is requiring that fair market value be paid for medical directorships and this generally means ensuring that medical directors keep time logs and ensuring that medical director compensation be in line with national averages.

However, this is an important way for the hospital to get the administrative and quality oversight that it needs so that the operating room runs efficiently, the emergency department is meeting regulatory standards, and the intensive care unit has protocols in place. If the uncompensated administrative time required for a service provided in the hospital is 2-3 hours per week, then a 5% FTE directorship is appropriate. For administrative jobs that require only a few hours per year, sometimes an unpaid medical directorship that comes with a title (but no money) is sufficient for many physicians.

Think beyond this month’s financial statement

Every year, I get requests for more nurse practitioners & physician assistants than the hospital can afford and each year, I get a requests for enough direct subsidies to put the hospital in deficit. Deciding who and how to subsidize requires careful analysis of upfront costs and benefits as well as downstream costs and benefits. Sometimes the requests that seem most outlandishly over-expensive on the surface can either dramatically increase revenue or decrease expenses in the long-term. But sometimes, the requests that are most outlandishly over-expensive on the surface are really just outlandishly over-expensive.

March 14, 2021

By James Allen, MD

I am a Professor Emeritus of Internal Medicine at the Ohio State University and former Medical Director of Ohio State University East Hospital