Knowledge Expansion

Physician practice losses: A tale of two owners

Insight Article

RVUs

Data Analytics & Reporting

Timothy Smith CPA, ABV
Part 1 of the Series: Examining Losses in Health System Physician Practices


In recent years, the issue of health systems losing money on their physician practices has steadily gained visibility within the industry. Regulatory as well as financial concerns are driving the growing recognition that practice losses should not simply be ignored, especially as the market moves towards increasing levels of hospital ownership of physician practices.

Enforcement cases over the past few years have pointed to practice losses as a regulatory concern. At the same time, reimbursement pressures are reducing financial resources for underwriting practice losses. The pursuit of the Triple Aim (improving quality and population health at a lower cost) also provides reasons for addressing practice losses.

Despite these market pressures, one often observes a general resignation that practice losses are simply a cost of doing business for health systems. “Everybody loses money on their physicians,” is a common refrain one hears in the marketplace. Indeed, some health systems will cite their practice losses as a core metric of their value contribution for meeting community need.

Other market participants dismiss the issue of practice losses by pointing to the move from volume to value and growing hospital-physician integration. Physician practices are no longer a separate business enterprise or service line in the larger continuum of care that health systems offer to patients. The income/loss metric for a practice is merely a leftover concept from the old healthcare economy based on provider volume in contrast to the future based on value.

In short, there are a myriad of market trends and varying opinions that affect the question of practice losses. Sorting out these issues and separating fact from fiction are important first steps, however, in thinking about practice losses. This article series will attempt to do just that--identify the key issues involved in analyzing practice losses. The series will examine why practice losses occur and what are the financial, operational, strategic and regulatory risks that result from them. It will also evaluate how these risks can be evaluated and addressed. The goal of this series is to provide health systems—and all owners of physician practices—with a framework for evaluating practice losses as part of their management toolkit.

MGMA’s DataDive Cost and Revenue provides a great source of information about practice losses. This dataset reports data on practice income or loss using various common-sizing metrics, such as per FTE physician or wRVU. One of the filtering options in MGMA DataDive is practice ownership, allowing users to select data based on the type of owner of the practice. The vast majority of practices and physicians, however, break down into two camps: hospital/IDS-owned practices and physician-owned practices.  The MGMA DataDive Cost and Revenue reports practice income/loss by type of practice or by specialty-type. To get a sense of the big picture when it comes to practices losses, looking at income/loss by specialty type can be highly informative. The specialty types include:
  • Single-specialty practices in the primary care specialties;
  • Single-specialty practices in the nonsurgical specialties (medicine and hospital-based specialties);
  • Single-specialty practices in the surgical specialties; and
  • Multispecialty practices.
 
Chart 1 below presents the net income/loss per FTE physician for hospital/IDS-owned practices from the 2018 MGMA DataDive Cost and Revenue report based on 2017 data:
 
Chart 1: Hospital/IDS-owned Practices Income/Loss per FTE Physician based on 2017 Data

Hospital-2017-data.png
 
In reviewing this chart, certain observations are apparent. Most hospital/IDS-owned practices lose money, and some of these losses are substantial! Surgical practices lose the most, while primary care practices show the least amount of red ink. The mean and median losses per FTE physician range from about $150,000 to $400,000 in the 2018 report (2017 data). This data confirms a general trend of losses for hospital/IDS-owned practices respondents to the MGMA Cost and Revenue Survey. The top 10% of primary care, multispecialty, and nonsurgical practices, however, make money. So, the idea that “everybody loses money on their doctors” doesn’t fully square with MGMA’s data. Some hospital/IDS-owned practices breakeven and/or make a small amount of profit.

The general trend of losing money for hospital/IDS-owned practices is also found in prior years. There can be exceptions, however. As shown in Chart 2, the 2016 Cost and Revenue report based on 2015 data shows the top 25% of primary care and multispecialty practices (75th percentile and above) making profits, and all practice types showing income per FTE physician, ranging from about $25,000 to $200,00. Nonetheless, most hospital/IDS-owned practices lost significant amounts.
 
Chart 2: hospital/IDS-owned practices​ Loss per FTE Physician based on 2015 Data

hopital-owned-practice.png
 
Physician-owned practices by contrast, generally breakeven or make profits, as shown in Chart 3 from the 2018 Cost and Revenue report based on 2017 data:

Chart 3: Physician-owned practices Income/Loss per FTE Physician based on 2017 Data

Physician-owned-practice-net-income-loss.png

The median for physician-owned practices indicates essentially breakeven, while the top 10% of practices showed substantial profits, ranging from about $121,000 to nearly $300,000. Again, this same overall pattern is observed in prior years of the data: physician-owned practices usually breakeven or make a profit.

Two key takeaways emerge from reviewing MGMA’s data. First, hospital/IDS-owned practices generally lose money, with some of these losses being substantial.Physician-owned practices, on the other hand, usually breakeven or make money. Second, not all hospital/IDS-owned practices lose money; a small percentage will breakeven or make a profit.

This stark contrast between the two owners—health systems and physicians—raises a critical question: Why do most hospital/IDS-owned practices lose money, while most physician-owned practices breakeven or make a profit?

That question will be addressed in the next installment of this article series when we compare and contrast the core economics of physician-owned practices and hospital/IDS-owned practices, especially when it comes to physician compensation. Stay tuned! There’s more to come…
 

About the Author

Timothy Smith CPA, ABV
Principal TS Healthcare Consulting, LLC
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