By Arthur Gale, MD

[Editor’s note: The following article was published in Missouri Medicine, January/February 2013 issue, page 21.]

imageDoctors are becoming hospital employees. Private practice, which has been the dominant way physicians have practiced since the country was founded, may be a thing of the past. Doctors are closing their offices for the simple reason that hospitals give them a hefty signing bonus for the first year or two, and the government and insurance companies reimburse them at higher levels as hospital employees than they can obtain in private practice. Hospitals buy doctors’ practices in order to lock in referral sources for inpatient and outpatient services. How long can this costly state of affairs last?

The government is under tremendous pressure to reduce Medicare costs. Over the past 30 years, health care expenditures have increased from 7% to 16% of the gross national product (GNP). The number of uninsured people has increased from 30 to 50 million (Wikipedia, Health Care in the United States). For a family of four, the cost of health care has increased to $20,000 annually according to a recent report from the Milliman Medical Index (Am Med News, June 4, 2012). And the public is asking if all these expenditures are worthwhile. The health of the U.S. population is no better than the health of citizens of many countries that spend far less on health care than the United States.

Hospitals comprise the nation’s largest single health care expenditure at about 30% of the total. Both the government and employers are finding it increasingly difficult to pay for skyrocketing health care costs. And they are finally beginning to scrutinize hospital costs (see “Bitter Pill Should Be a Wake-up Call for Surgeons,” page 34).

An article last year in the St. Louis Post-Dispatch (June 14, 2012) listed the costs of magnetic resonance imaging (MRI) at various hospitals and outpatient imaging centers. There was at least a threefold difference in pricing. A private for-profit hospital was the least expensive. The largest hospital system in the area refused to reveal its prices for MRIs. Competition is supposed to be the hallmark of managed care, under which our current health system operates and which was supposed to reduce health care costs. How can there be competition when there is no price transparency? Why does this marked disparity in hospital pricing exist?

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MRIs aren’t the only overpriced hospital service. Hospitals strongly urge their employed physicians to refer their patients to hospital imaging centers for other types of x-rays and to high-priced, hospital-owned clinical laboratories and outpatient surgical centers.

Reimbursements Vary

The influential governmental nonpartisan Medicare Payment Advisory Commission (MedPAC) has recommended cuts in hospital reimbursement. One major cut would be in primary care services. Currently a mid-level office visit for a hospital-owned doctor is $124.40. The same visit in a private physician’s office is $69.97 or 44.6% less. MedPAC has recommended the elimination of this disparity (Am Med News, March 26, 2012). MedPAC has recommended uniform pricing for identical treatments, regardless of whether they are administered by doctors who own their own practices or doctors who work for hospital-based clinics. It is estimated that this change alone would save Medicare about $1 billion per year. If implemented, it would also severely hamper hospitals’ ability to attract physician employees.

How did it come about that the government and insurance companies pay doctors in private practice so little but pay hospital-based doctors so generously? Both the Federal Trade Commission and corporate managed care organizations have encouraged hospitals and health plans to employ physicians. Policymakers hold as an article of faith that conflicts of interest inherent in fee-for-service private practice are the root cause of high health care costs.

The “experts” contend that cost savings can be realized when physicians practice as employees in vertically integrated systems like Mayo Clinic, the Cleveland Clinic, Kaiser Permanente and other hospital systems. There are no studies to support this assumption. In fact the data, some of which is cited above, support the opposite conclusion.

What percent of the GNP does health care have to consume before policymakers start making changes in hospital reimbursement? When will hospitals be held accountable for their lavish spending on massive unnecessary building programs, huge administrative salaries, advertising, and yes, even subsidies to physicians? And when will the so-called experts in health care admit that multihospital mergers and the ownership of physician practices function as monopolies that raise, not lower, costs?

The average physician rushing to sell his or her practice to a hospital doesn’t have time to think about these questions. There are bills to pay, children to send to college, mortgage payments to meet and savings to put away for retirement.

Possibilities for Change

But sooner or later, the good times for hospitals will have to end. The hospitals will of course vigorously oppose any changes in the current system. Congress is not bound to accept the recommendations of MedPAC. Hospitals constitute a very powerful lobby and will use all of their vast resources to maintain the status quo. Economic reality may nevertheless force them to cut back on nonessential expenses.

If third-party payers and the government decide to pay physicians owned by hospitals at the same rate that they pay physicians in private practice (as MedPAC recommends), physicians may find becoming a hospital employee less attractive. And hospitals might be forced to lay off many of their employed physicians. If such a scenario plays out, private practice could make a comeback.


Dr. Gale practices internal medicine in St. Louis and is a contributing editor for Missouri Medicine.