The Economic Toll of a Misaligned Physician Base

We are sometimes asked why a hospital or health system should go through the effort of completing a Provider Development Plan. Beyond advocating that having a strategy is smarter than not, there are five real fiscal factors to consider:

1. Not enough primary care physicians

2. Obvious Holes in Your Specialty Base

3. Excess Capacity Within Your Employed Base

4. Recruiting the Wrong Physician

5. The Surprise Retirement

As a hospital or health system, there are at least three costs and business risks associated with not having enough primary care physicians. On average, each primary care physician (Family Medicine & Internal Medicine) manages 1,460 patients, accounts for 136 inpatient discharges per year and 1,065 hospital outpatient encounters. Based on a Merritt Hawkins survey from 2019, each primary care physician generates $2.39 million in inpatient and outpatient net revenue within the hospital.

A lack of primary care physicians is also an opportunity cost from a market share perspective. Missing a single primary care physician represents a reduction of 1,460 patients from the hospital or health system. A simple test that we often complete with our partners is to compare hospital inpatient market share to primary care market share. If the hospital inpatient market share is higher, the lower primary care market share is a real business risk. We often ask “do you believe that some day your hospital market share will be a direct reflection of your primary care market share?” If so, investing in primary care is a necessary cost of doing business.

Finally, living in a partially fee-for-service world, having enough primary care physicians to support existing specialists remains a concern and potential risk. We have found that a large percentage of specialists still rely heavily on referrals from non-captive (outside the family) primary care physicians. As competitors tighten their referral networks, specialists are exposed to the potential of not having enough patients.

Investing heavily in primary care requires also monitoring your specialty base for any obvious holes. One missing specialist within a key service line can dramatically lower both inpatient and outpatient activity within the line:

Without filling the gaps in specialty care, the full investment in primary care is not realized. According to Jackson Physician Search research, 40% of physician vacancies remain unfilled, leaving gaps in many hard-to-fill subspecialties.

Since the early 1990s, hospitals and health systems have tried to increase employed physician productivity and reduce excess capacity, with varying luck. As a practical matter, physician productivity can have a large impact on the number of patients a primary care physician can manage.

Primary care physicians practicing at the 75th percentile manage 27% more patients than someone practicing at median, and 65% more than those practicing at the 25th percentile. On average, a physician practicing at the 75th percentile can manage 2,000 patients, compared to 1,022 at the 25th percentile.

Recruiting any physician tends to be an expensive undertaking, recruiting the wrong physician takes both an economic and reputational toll. According to Merritt Hawkins, between the physician salary, benefits, candidate sourcing, recruitment costs, spouse interview, relocation and start-up marketing, recruiting a single Family Medicine physician costs around $342,000.00.

In addition, the quarterly Physician Flash Report by Kaufman Hall showed that the median subsidy, or loss, per employed physician increased by 14.1 percent from January to August of 2020 compared with the same period the previous year. Overall, the median loss was $227,000 per physician across all specialties. This investment is required on an ongoing basis. Given the above, a physician leaving after a two-year contract would cost a hospital or health system $796,000.00.

In addition, physicians leaving after a short period of time results in both operational and messaging chaos – What do we do with the physician’s patients? Staff? How do we tell them their physician is leaving? Have we done this to the patient before? What is the best way to minimize the damage?

Unplanned physician retirement, particularly in key service lines, can decimate a hospital or health system budget. According to Merritt Hawkins, a General Surgeon retiring can cost 2.707 million in lost revenue, 3.286 million for an Orthopedic Surgeon, 3.437 million for a Neurosurgeon and $3.484 million for an Invasive Cardiologist.

When analyzing the potential for retirement across a physician base, it is best to look at both a three-year and ten-year window and combine it with local knowledge. People in general, and physicians in particular, do not typically enjoy engaging in conversation about planned retirement age. The key is to not shy away from the conversations and engage physicians in helping find the next generation.

Investing in and maintaining a physician base is one of the most capital-intense activities for a hospital or health system. Not having enough, or the wrong type of physician, can cost a hospital or health system thousands of patients, tens of millions in lost revenue and millions in real costs, which is one of the reasons that 3Dhealth exists!

For more information, please contact Shane Foreman at [email protected] or Ron Flower at [email protected]