Physician practice losses: A tale of two owners

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 be ignored, especially as the market moves toward 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 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 holdover concept from the old healthcare economy based on provider volume in contrast to the future based on value.

In short, there are myriad 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. 

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
• 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

 
In reviewing this figure, 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 lose the least. 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 practice respondents to the 2018 MGMA DataDive 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” isn’t supported by MGMA’s data. Some hospital/IDS-owned practices break even and/or make a small amount of profit.

The general trend of losing money for hospital/IDS-owned practices can also be seen in prior reports. There are exceptions, however. As shown in Chart 2, the 2016 MGMA DataDive 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

 
Physician-owned practices by contrast, generally break even or make profits, as shown in Chart 3 from the 2018 MGMA DataDive Cost and Revenue report based on 2017 data:

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

The median for physician-owned practices indicates they essentially break even, while the top 10% of practices showed substantial profits, ranging from about $121,000 to nearly $300,000. Again, this same pattern has been observed in prior years: Physician-owned practices usually break even 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. On the other hand, physician-owned practices usually break even or make money. Second, not all hospital/IDS-owned practices lose money; a small percentage will break even 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 break even or make a profit?