Hospital risk-based payments and physician employment: Impact on financial performance

Hospital involvement in risk-based payment and employment of physicians can have a large impact on their profitability. Risk-based reimbursement approaches with third-party payers and provider-sponsored insurance products hold hospital organizations financially accountable for a range of patient services. Direct employment of physicians can add new revenue sources for the hospital but comes at the high cost of physician compensation packages.

Risk bearing and physician employment have multifaceted effects on hospital profitability. The objective of this study is to assess overall financial implications of these arrangements.

Fixed-effects estimation with American Hospital Association, Centers for Medicare & Medicaid Services, and Area Health Resource File data are used for the period 2012-2015. Key measures include indicators of hospital involvement in risk-based payments and the number of employed physicians by specialty. Hospital and market factors that could affect profitability are controlled in the analysis.

Increases in employed hospitalists for hospitals with risk-based payment arrangements had a beneficial effect on their profitability. No significant association existed between profits and increased physician employment for hospitals lacking such payment arrangements and for increased nonhospitalist physician employment in hospitals with these arrangements.

Hospitals that hold some degree of financial responsibility for patient care have learned how to deploy employed hospitalists to their financial advantage. The unique role of hospitalists in expediting and coordinating patient care may yield the cost control that hospitals need to succeed under risk-based payment arrangements.

Hospitals are still on a learning curve in determining how to structure incentives for their nonhospitalist employed physicians. To the extent that employment of these nonhospitalist physicians has not yet had a detrimental effect on hospital profits, a window of opportunity exists for hospitals to develop enhanced approaches to align primary care and specialist physicians to achieve financial aims.