Will Hospital Employment Mean a Drop in Referrals for Physicians?

A prior article discussed how hospital employment might adversely affect a physician’s future patient volume from three distinct causes:

• The hospital might bill the physician’s patients a clinic/facility fee related to office visits;
• The hospital might bill current in-office ancillary services as hospital-based services; and
• A specialist might lose referrals that used to come from physicians affiliated with a competing hospital

This article discusses the third potential cause - and how to handle it.

If there are at least two quality hospitals in a community, then it is common for a specialist in private practice to “split” time/referrals between those hospitals. Unless those hospitals employ a sufficient number of physicians of the particular specialty, the “independent” specialist will likely receive referrals from physicians associated with both hospitals.

If the specialist becomes a hospital or hospital group practice employee, then two factors might cause a decrease in referrals to the specialist.

First, physicians who are employed by the “competing” hospital(s) might cease or reduce referring to the specialist. This might be caused by (legal) contractual referral restrictions in the referring physician’s employment agreement. It might also be caused by the employed physician’s loyalty to their hospital and a desire not to advance the cause of a competitor.

Second, community physicians might cease or reduce referrals to the now-employed specialist because the specialist is now likely obligated to perform all procedures for/at the employing hospital. A community physician might have an affinity for a hospital at which the specialist formerly performed procedures - maybe for reasons of quality, proximity, or both. Some independent physicians might direct their referrals to other physicians of the specialty who remain independent. Therefore, a specialist’s employment might cause some referrals to be impractical or just plain undesirable.

A specialist who is considering employment should carefully consider whether he might be subject to reduced referrals for any of the reasons above - and how/whether the lost referrals can be replaced. The first order of business is to project future workload and compensation accurately. This is especially true if the specialist is paid in some degree based on personal productivity. Will past productivity predict future productivity? If a specialist is part of a multi-specialty group that might become employed and pool/share compensation, then these questions should be considered for all types of specialists in the group.

A physician should analyze current referral patterns and referring physician affiliations/dispositions. If a significant portion of current referrals are from physicians affiliated with a hospital that competes with the specialist’s potential employer, then - absent unusual circumstances - the specialist should assume that her productivity will decrease significantly. Many factors will affect the rate at which the specialist might expect to replace that lost productivity. Mitigating factors are whether the employing hospital has excess work and/or a “captive” group of potential referring physicians. Even if they project a near-term referral-related decline in productivity, many physicians project they will rebuild their referral network within three years or so.

A physician who predicts employment/transition-related referral “attrition” should seek contractual protection. A compensation guarantee - a fixed minimum compensation regardless of productivity - is typically not the answer. “Guarantees” (correctly) conjure bad memories for hospital executives who lived through the 1990’s wave of integration and breakups.

Many hospitals are, however, receptive to including terms to identify and compensate for specific transition-related productivity “attrition.” The logic is that the physician should not be penalized for this type of reduction in productivity that is beyond his control.

The methods to deal with transition-related attrition vary. One reasonable method is to identify physicians who have ceased or significantly reduced referrals. Lost productivity (usually measured in wRVUs) can usually be estimated by identifying the typical number of patients each former referred used to refer annually, the procedures performed for the typical referred patient, and the wRVUs associated with those procedures. A small, impartial committee can be used for these assessments. The hospital then credits the physician for the compensation that would have been earned for those “lost” wRVUs.

As always, it is important to look at potential employment from all angles to avoid undesirable surprises.

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