Employing Physicians? Organizational Structure is a Multimillion Dollar Decision: A Case for Centralized Management
Written by James Hamilton, FACMPE

When employing physicians, organizational design is critical. The successful premise of structure should be that organizational form should follow the functional needs of managing the employed physician enterprise. One needs to go no further than the private group practice environment to identify successes in organizational design and performance. Attributes of the successful organizational structure for physicians in private group practice are as follows:

• A governing board that provides overall leadership for the group

• Defined means of physicians being placed in a leadership role

• Defined expectations of physicians that have leadership responsibility

• Understood and agreed upon rules of decision-making by physician leadership
  - Building consensus is important

• General ability of the non-leadership physicians to have input into leadership decisions

• Respect for the collegial and professional relationship of being a physician
  - Understood code of conduct

Hospitals and health systems that have been successful in the employment of physicians have recognized and incorporated these principles into their organizations. Best of breed operational elements for governing physician employment in the hospital/health system setting include:

• Senior leadership reporting relationships that actively sponsor and support the employment of physicians

• Formation of a governing board/council with a defined mechanism of physicians being placed in a leadership role

• Understood physician compact
  - Set understanding and expectations of physicians being employed by a hospital or health system

• Authority guidelines of decision-making that cover all critical aspects of the working relationship of employed physicians and hospital board/leadership

• Established code of conduct

Physician Leadership Board/Council
Hospital and health system leadership could work from the principle of unilaterally making decisions that impact the employed physician group. However, this is not a wise position for hospital/health system senior leadership. Therefore, the creation of a physician leadership group is a must have to be successful when employing physicians. The reporting relationship of the executive holding administrative responsibility for the leadership of the medical group should be to hospital/health system leadership that supports the concept of employing physicians. Depending on the organization and its size/structure, successful reporting relationships can be with the CEO, COO, CFO or administrative VP that has responsibility for the medical group. Reporting through a system Chief Medical Officer has been seen. The success, however, in the CMO structure has not been as robust as when reporting to the senior leadership positions.

Physician Governance Issues for Stand-Alone Hospitals Versus Multi-Hospital Systems
The successful organizational fit of the physician leadership board/council will vary if the organization is a stand-alone community hospital or multi-hospital system. The most simplistic design for the stand-alone hospital is to have the physician leadership board/council as well as medical group become a service line/department under the umbrella of the hospital. It is recommended, however, that the employed physician network not be a department of the hospital but rather set aside in a separate entity. For the multi-hospital organization that operates under a health system structure, the medical group as well as physician leadership board/council should reside within the health system structure and not within each hospital. However, local operating councils can be structured at the local hospital level.

The Critical Decision: Centralized or Decentralized Management of the Medical Group
Below physician governance issues, the next most critical issue for a hospital or health system is the functional design of centralized versus decentralized management for the employed physician network. Examples of centralized versus decentralized management of a hospital/health system medical group have been experienced in a number of different organizations as well as geographic markets. The sub-optimized or failed systems have been in decentralized systems. With that said, centralization or decentralization needs to be defined for both the stand-alone hospital as well as the health system with multiple hospitals that employ physicians. This delineation can be defined as follows:

Stand-Alone Hospital
To support a centralized or decentralized structure, the stand-alone hospital needs to provide basic administrative services to support the medical group. These services include revenue cycle management, information technology, financial reporting, coding services/audit, accreditation assistance and physician recruitment.

Additional attributes of centralization for a stand-alone hospital employing physicians are as follows:

• Governing council/board (as defined above)

• Designated administrative leadership that holds responsibility for all aspects of the operations of the medical group
  - Experienced in physician practice management

• Management support staff that reports directly to the designated administrative leader
  - Experienced in physician practice management

Attributes of decentralized management for a stand-alone community hospital can include:

• No governing council/board or governing council/board that plays advisory role with minimal decision making or physician group performance responsibility

• Physicians report to the managers of the hospital service lines
  - Service line manager holds practice performance and decision-making responsibilities

The contraindications of a decentralized organizational structure in a stand-alone hospital include:

• Hospital management that generally has minimal to no experience in managing physicians or their practices

• Decision-making for the physician or their practice will be based on individual service line performance

• Operational and economic imbalances between physicians/staff that work in service lines with varied economic performance

• Physician contracting and economic equity between the employed physicians may vary significantly

• Performance standards for the employed physicians will vary depending on the expectation of the individual service line manager

• Physicians will manipulate leadership based on the management decisions made by other service lines

• Structure will uphold the old physician compact of autonomy, protection and entitlement

• Employed physicians will be unwilling to work with each other for the common good of the hospital. Examples for divergent opinions include:
  - Fee schedule
  - Revenue cycle policies and procedure
  - Managed care contracting
  - Information technology decisions
  - Quality/clinical studies

• Hospital medical staff will feel they have power over the employed physicians

• Reporting practice performance to benchmark performance will be difficult

• Senior management responsibility for service lines and physician management becomes dysfunctional

Multi-Hospital Health System
Attributes of successful centralized management for a multi-hospital health system include:

• Unified governing council/board

• Designated administrative leadership that holds responsibility for all aspects of the operations of the medical group
  - Experienced in physician practice management

• Regional and practice management support staff that reports directly to the designated administrative leader
  - Experienced in physician practice management

• Economic responsibility is centralized with an equitable partitioning of costs to the local hospital market

• Information technology services

• Physician recruitment

• Revenue cycle management

• Purchasing

• Managed care contracting

• Fee schedule management

• Human resource management

• Financial and benchmark reporting

Attributes of decentralized management for a multi-hospital health system:

In a distributed hospital system, certain administrative services may be centralized. Such centralization may include information technology (practice management and electronic medical record), financial reporting and some elements of revenue cycle management. Additional attributes of the decentralized systems include the following:

• Possible oversight by health systems governing council/board
  - Advisory role with minimal decision-making for the physicians employed within the local physician network

• Physicians report to the leadership of the local hospital

• Economic responsibility for the medical group is decentralized
  - Local CEOs claim right to manage the practice since they fall under the hospitals budget

Cost of Doing Business in a Decentralized Environment
Decentralization in multi-hospital systems creates an environment where there can be significant cost duplication with strong sub-optimization or failure in operations. The following represents a description of the cost and sub-optimization issues:

• Duplication of infrastructure costs
  - Each hospital will request or build infrastructure to support local market
      > Physician recruitment
      > Information technology
      > Purchasing
      > Managed care contracting
      > Accreditation
      > Coding/auditing services

• Individual negotiations create significant variation/cost in physician compensation

• Competitive physician recruitment for each local market

• Varying degrees of negative perception of management and overall dissatisfaction in the health system

• Economies of scale is lost in purchasing clinical/office supplies and equipment

• Cost and performance to benchmark will vary significantly

• Performance and quality of practice management staff will vary due to lack of consistent performance standards

Depending on the size of the organization, the additional infrastructure in a decentralized system can cost health systems millions of dollars in duplicate expenses.

Summary
The organizational structure as well as decisions regarding centralized or decentralized leadership and services for the employed physician networks in the stand-alone hospital or multi-hospital health system is a critical decision. In multi-hospital systems, the additional/duplicate cost of decentralized management has been seen to be in the millions of dollars. The reasons for the millions of dollars of additional costs in multi-hospital systems include:

• Local management with lack of practice management experience

• Poor physician recruitment processes and contracting

• Poor physician insurance credentialing

• Poor compensation methodologies

• Employed physicians being managed like the medical staff (i.e., a philosophy of giving the physicians what they want regardless of the cost)

• Poor policies and procedures in physician practice management

• Local variances in managing critical revenue cycle issues

• Variances in information technology and practice management systems

• Managing physician practices based on hospital principles

• Poorly designed quality studies

• Inappropriate management of physicians with high risk issues

These issues have been experienced in varying hospitals and health systems. As a result of these observations it would be advised that centralization should occur where possible in both stand-alone or multi-hospital systems.

The Somerset Health Care Team of hospital and health systems consultants have 20+ years of direct operational experience. On a first-hand basis, our consultants have experienced the complex issues encountered in most medical markets. We stand ready to work with you in a flexible and collaborative manner and provide you with unique tools and approaches that will be key to your organization’s success. Please contact us.

Health Care Commentaries is provided by Somerset’s Health Care Team for our clients and other interested persons upon request. Since technical information is presented in generalized fashion, no final conclusion on these topics should be made without further review. For additional information on the issues discussed, please contact a member of our Health Care Team. This document is not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer.

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