We’re Believing our Own Lies About Hospital Finances and Employed Physicians

There’s a very scary trend emerging in health systems across the country. To be fair, I picked ONE scary trend that’s happening in health systems – there are certainly others. We’re starting to believe our own lie that “hospitals lose money on employed physicians” and taking actions as if that statement is true. Since my whole world is cardiovascular, I’m going to focus on that service line in health systems but would guess the same is applicable to other specialties as well.

This whole phenomenon is eerily reminiscent of the Great Recession back in 2008 that was also driven by smart people believing their own lies. That lie was perpetrated by banks and lenders that would package up subprime mortgages – credit that never should have been extended – and rank them in terms of riskiness. Remember, these loans were largely uncollectable, but even bad loans can be ranked from best to worst. Once cataloged, the best of the worst were falsely (knowingly) sold off as grade A investments. When they collapsed (as predicted by actuarial calculations), many financial institutions and the U.S. economy collapsed as well. I’m oversimplifying here, but it’s pretty darn close to what happened.

The lie in health systems is one of accounting. When a hospital employs a cardiologist, that physician is typically legally tied to a physician enterprise corporation. This company likely employs different types of physicians, not just cardiologists. Hospital services, such as inpatient stays, surgeries and imaging, are then housed within a hospital corporation. This separation is done for myriad reasons but chiefly for legal and regulatory protections, such as Stark and anti-kickback, and corporate practice of medicine (CPOM) laws that bar clinical influence by the employer. Each of these entities maintains its own set of financial books and usually has separate leadership and administrations (artificially created redundancy).

Here's the rub: the majority of cardiologist-generated revenue is credited to the hospital entity. A cardiologist sees a new patient in the office and orders an echocardiography. The physician enterprise will receive payment of somewhere between $150 - $300 for that new patient consult (Medicare payment is around $168), then another $68 - $200 for the echo. These are considered “professional services.” The hospital company where the echo will be performed will receive anywhere from $500 - $3,000, depending on insurance. These are “technical services” that produce most of the revenue.

Another example, an interventional cardiologist performs a cardiac cath with percutaneous coronary intervention (PCI) at the hospital, the hospital will bill perhaps $30,000 or more for the procedure; Medicare pays anywhere from $10,000 to $18,000, depending on the complexity. Commercial insurance may pay two to three times that amount. By contrast for that same PCI, the physician enterprise will bill maybe $1,000 to $3,000; Medicare only pays $580. This is for the “professional” component of that intervention.

In both examples, the practice entity carries the entire cost for the cardiologist. Salary, incentives and fringe benefits will be expenses of the physician enterprise. Based on MedAxiom’s most recent survey data, a full-time cardiologist earned about $650,000 in 2024 (Figure 1). So when fully loaded, you’re looking at a total cost of between $780,000 and $850,000.

Figure 1: 2023 Median Compensation per FT Integrated Cardiologist

Keep in mind that more lucrative hospital services could be provided in the physician organization. However, they get moved because reimbursement is higher in the hospital. The value of a cardiologist (think cost for a physician entity) is partly based on this overall financial performance, but the physician enterprise bears the expenses. The not-at-all-surprising results: the physician company operates at a net loss.

Many hospital systems employ hundreds of physicians so even a modest loss per doctor can add significant amounts when multiplied by 1,000. This becomes a tempting prospect for executives who see an opportunity to improve their bottom line. The fastest way to reduce losses in a physician enterprise is to get rid of the physicians. I’m predicting that many of my gentle readers are saying to themselves, “Come on, no one is really disconnecting these dots, right?”

Wrong. We are seeing health systems freeze physician hiring and even letting go of currently employed doctors. This is often done against the backdrop of long procedure wait times and an inability to see new patients in a timely manner. In the extreme, a health system may cancel or choose not to renew contracts. Physicians can also leave on their own terms. Still far from a trend, we are seeing groups of cardiologists leave hospital employment to form private practices often expressing dissatisfaction with the constant characterization as “loss leaders” and pressure on practice budgets and support.

While these physician reductions will temporarily improve the bottom line for a health system physician company, the gain will be short-lived. A newly minted private cardiology group will certainly add back imaging services, redirecting thousands of studies from the hospital to its own facilities. According to 2024 MedAxiom data, the median cardiologist will perform about 650 outpatient echoes per year. A group of 15 physicians could draw up to 10,000 tests from the hospital. And that’s just echoes – there’s also nuclear SPECT, computed tomography angiography, cardiac magnetic resonance imaging and more.

In addition, invasive procedures can now be performed in an ever-growing population of cardiac ambulatory surgery centers (ASCs). The net margin for these procedures is often higher than the margin for imaging, although the annual volumes are smaller. A shift in these surgeries to a private ASC will result in a multi-million dollar impact on hospitals’ bottom lines, raising the question – is the tradeoff worth it?

Despite the headlines, the professional component of healthcare (physicians and the infrastructures around them) has remained relatively flat when measured by its percentage of total healthcare expenditures, oscillating between 20 to 25%. In contrast, administrative costs have skyrocketed. The graphic below shows the growth in healthcare administrators over a 40+ year period as compared to growth in the number of doctors. Administrative costs account for anywhere between 15 to 30% of total healthcare expenditures – diverting those resources from patient care.

Figure 2: Growth in Physicians and Administrators in the U.S. Healthcare System, 1970 - 2017

Reproduced from the Bureau of Labor Statistics.

This brings us to patient care considerations. Physicians are a big part of the product in healthcare. They see patients, perform procedures, interpret imaging studies, and oversee the other clinical services. Much of what is necessary for great cardiovascular care can only be done by cardiologists who have extensive academic and clinical training! Yes, they’re expensive, but is this the right place for cuts?

Then there’s value-based reimbursement, which has been slow to expand but is inching inexorably forward. One of the big promises of integration – the acquisition of cardiology practices into hospitals and health systems – was the ability to better coordinate care, removing misaligned economics and competitive silos. While this has come to fruition in a few systems, it is unfortunately the exception, not the rule.

When hospital systems take actions based on the lie, bad things can happen. They will cut support staff in the practice that make sure schedules are full and efficient. They will cut medical assistants who manage patient flow, support physicians in the office, and perform other daily tasks that often go unnoticed. They will cut nurses who perform invaluable triage functions, communicate with patients, and manage complex clinic operations. They may even cut physicians.

About 15 years ago, I was the CEO of a health system physician enterprise, which was part of a larger national company. A financial executive who toured our operations told me pointedly, “We lose money on everything you do here, so you need to cut expenses.” Without missing a beat, he continued, “You need to figure out how to increase volumes.”

He believed the lie while acknowledging its fallacy. For my fellow Seinfeld fans, the conflicted character George Castanza – who was always trying to be anyone but himself – once famously said, “It’s not a lie if you believe it.”

Please, let’s not fall for our own ruse. The consequences are dire.