By: Craig Fowler, Pinnacle Health Group
It is rare that a physician will move to a community and set up his or her own practice. Usually, it falls upon the local hospital to attract physicians to the community. Why? Larger local health care organizations generally have the deepest pockets and can afford the initial cash outlay required to bring in a physician.
Traditionally speaking, health care organizations such as hospitals have preferred attracting doctors to their community through income guarantees. This method is used because the long-term cost of assisting a physician in setting up an independent practice through a guarantee is less than the cost of employing and maintaining a physician’s salary, benefits, and malpractice insurance. Recently, however, many hospitals have been offering physician candidates a choice of either an income guarantee or employment.
Why is physician employment becoming a more popular option for physicians? In one word—Risk. Physicians are leery of the dangers involved in starting their own practice in a new community. Even when a hospital offers an income guarantee, there is a certain amount of risk in that the money “loaned” to the physician will eventually have to be paid back. This puts pressure on them to earn a certain predetermined income from their practice.
When a physician is brought in under an employment contract, his or her risk is significantly reduced. Oftentimes, a physician will first come on as an employee and then transition into an independent practice after becoming familiar with the community and its practice potential through firsthand experience. Of course, hospitals usually encourage this acclimation toward independence.
However, there are circumstances in which hospitals may favor employment, especially when they find themselves in a competitive situation where surgery centers, urgent care clinics, and entrepreneurial physicians are directly competing with them in providing services that are traditionally performed by hospitals. To combat this, hospitals may work aggressively to establish joint ventures and employ physicians in these particular service areas. By employing physicians, they can lock in referrals and productivity, and potentially increase market share. This technique is particularly attractive in expanding a hospital’s services in a secondary market.
To illustrate the increased use of the employment option, we have included a real life case study of a community in the northern United States. This case study shows how income guarantees are now more frequently being offered along side employment contracts.
Case Study
This northern community has historically offered incoming physicians an income guarantee arrangement, however; in this case, the hospital administration has decided to offer an incoming candidate the option of employment through the hospital.
Their reason for offering this option is that administration feels the perceived security associated with employment will attract some candidates who are fearful of the perceived risks associated with accepting an income guarantee/loan arrangement.
Income Guarantee Risks
Some of the perceived “risks” associated with the income guarantee are absorbed by the hospital in the employed setting. Possible risks can include:
- miscalculation of demand for services in the area,
- overhead expenses, and
- hiring and firing responsibilities.
Additionally, in an income guarantee setting, the physician is essentially a small business owner, so s/he has all of the risks, potential pitfalls, etc. of operating a private practice.
Benefits of Employment
Some of the perceived “benefits” of employment are:
- a secure paycheck,
- a benefits package including health, life, malpractice insurance etc.,
- better quality of life, and
- none of the hassles associated with owning your own business.
In the example above, the hospital will offer the orthopedic surgeon a $450,000 salary as an employee or $800,000 in the form of a gross collections guarantee.
A physician has many issues to consider when starting a practice including licensing regulations, insurance requirements, personnel, contracting, and taxes. However, with income guarantees, there are no restrictive covenants as there are with employment contracts. Physicians must weigh the risk against the benefits of starting a practice on an income guarantee or opting for the relative safety of employment.