https://mailchi.mp/89b749fe24b8/the-weekly-gist-february-17-2023?e=d1e747d2d8

This week, a health system CFO referenced the thoughts we shared last week about many hospitals rethinking physician employment models, and looking to pull back on employing more doctors, given current financial challenges. He said, “We’ve employed more and more doctors in the hope that we’re building a group that will allow us to pivot to total cost management.

But we can’t get risk, so we’ve justified the ‘losses’ on physician practices by thinking we’re making it up with the downstream volume the medical group delivers.

But the reality now is that we’re losing money on most of that downstream business. If we just keep adding doctors that refer us services that don’t make a margin, it’s not helping us.” 

While his comment has myriad implications for the physician organization, it also highlights a broader challenge we’ve heard from many health system executives: a smaller and smaller portion of the business is responsible for the overall system margin.

While the services that comprise the still-profitable book vary by organization (NICU, cardiac procedures, some cancer management, complex orthopedics, and neurosurgery are often noted), executives have been surprised how quickly some highly profitable service lines have shifted. One executive shared, “Orthopedics used to be our most profitable service line. But with rising labor costs and most of the commercial surgeries shifting outpatient, we’re losing money on at least half of it.”

These conversations highlight the flaws in the current cross-subsidy based business model. Rising costs, new competitors, and a challenging contracting environment have accelerated the need to find new and sustainable models to deliver care, plan for growth and footprint—and find a way to get paid that aligns with that future vision.