For many physicians in private practice, their days of flying solo may be numbered.

Faced with declining reimbursements, closed-off revenue streams, capital investment pressures and the changes of health care reform, many doctors are turning to hospital and health system employment to safeguard their financial and lifestyle stability.

Between 1994 and 2008, the percentage of hospitals employing physicians more than doubled to about 32 percent, according to PricewaterhouseCoopers’ analysis of American Hospital Association data. Last month, the global accounting and consulting firm said physician groups joining health systems will be one of health care’s top 10 trends for 2010.

“Doctors are saying, ‘Gee, it’s time to consider coming in from private or solo practice,” said David Chin, leader of PwC’s health industry research group.

Wallets getting lighter

Multiple factors are driving physicians into the arms of hospitals. Perhaps foremost are the declining reimbursements by governmental and commercial payers. Each year, Medicare payments to physicians increase about one to two percent, a rise not substantial enough to cover inflation or the three- to five-percent annual increase in operating costs at most practices, said John Deane, CEO of Nashville-based physician practice management firm Southwind Health Partners.

In fact, those slight increases are the result of annual Congressional action to defer the sharp reimbursement cuts called for under the “sustainable growth rate,” the Medicare payment formula implemented in the ’90s to help control the growth of the government program. Without last-minute Congressional action, physicians would have faced a 21-percent pay cut on Jan 1.

“So what they’ve done is basically had a one- or two-year reprieve in the cuts in physician reimbursement,” Chin said. “But the expectation is that they will come back.”

On top of that, payers have been reducing reimbursement for ancillary services like diagnostic imaging and ambulatory surgery — businesses doctors once pursued to supplement their income.

Charlie Powell, CEO of Saint Thomas Physician Services, said Medicare changes are “upsetting the physician community tremendously,” driving some doctors to reach out for a partner. At Saint Thomas Health Services, the number of employed physicians, including hospitalists and those involved in professional services agreements, totals about 180, up from just 40 about three and a half years ago.

For systems like Saint Thomas, owning doctor practices is attractive primarily because having a stable medical staff helps in the recruiting both of other doctors and the patients they bring with them. A prime example of that is the recently finalized acquisition by Community Health Systems of a large physician group in the Spokane, Wash., market. The deal will align more than 200 doctors with two hospitals CHS acquired a year ago.

Carrots, sticks and easy living

But declining physician incomes aren’t the only problem. Like so many entrepreneurs, doctors face pressure to spend on new equipment and technology. In particular, physicians are mulling the American Recovery and Reinvestment Act’s provision to reimburse doctors and hospitals for part of the cost of implementing electronic health records — if they show they’re meeting certain usage benchmarks and thus help lower administrative costs.

Physicians know they need to buy these systems, whose up-front cost can be steep — tens of thousands of dollars even for a small practice. The special reimbursement payments will help cover that bill. However, over the coming years, that cash pool will start to shrink before the Centers for Medicare and Medicaid Services will instead begin to penalize providers who aren’t using EHRs.

“They’re sort of caught between the pressures of declining reimbursements with increased pressure to make capital investments in their practice,” said Scott Noonan, a health care attorney at Nashville law firm Bass Berry & Sims.

Enter health systems with the necessary cash. Often, doctors moving under the umbrella of a hospital system will be provided with an EHR system to integrate their practices with the hospital’s records.

Then there’s the issue of health care reform. Among the changes it could bring to the health care system is a major shift in the way hospitals and physicians are reimbursed for the care they provide. Instead of the current fee-for-service model — where providers are paid based for each thing they do for a patient, each procedure or service — the government is exploring a move to global payments that would provide one flat payment for each case. That money would be divvied up among the hospital, physician and any other associated care providers.

The idea, which would be first tested in pilot programs, is to incentivize providers to give quality care more efficiently instead of focusing on performing a high volume of services to maximize their revenue.

“It will change the dynamic so that (physicians) don’t get paid for doing more, (they) get paid for outcomes,” Chin explains.

Powell says it sounds a lot like “the days of HMOs” but with a focus on quality indicators, not just cost reduction.

“This may go a lot more toward quality indicators, where Medicare is moving toward penalties if providers don’t meet certain quality indicators,” he said. “And (to do) that, in a hospital, you have to engage physicians, who end up driving a lot of health care in the hospital setting.”

Finally, it seems young physicians coming out of medical school today — perhaps aware of the financial and lifestyle benefits hospital-based employment can provide — are more interested in that model than their predecessors were.

“A new generation of physicians have emerged that are more wired to be employees and are more seeking out scenarios where they’re employed by hospital systems,” said Bass Berry’s Noonan.

In a 2008 survey of final-year medical residents by Merritt Hawkins & Associates, 22 percent chose hospital employment as the practice setting they’d be most open to — up from just 4 percent in 2003.

“Physicians coming out of training are looking for more of a work/life balance,” said Dr. Jordan Asher, physician network executive for Saint Thomas.

He said he’s noticed a general shift in the “needs and wants” of physicians today compared to 10 or 15 years ago. Given the regulatory and paperwork loads doctors have to carry, the very business of being in private practice has become too onerous for some who want to get back to focusing on the medicine, he said. Employment helps them do that.

Not the first go-around

The health care industry has experienced this trend before.

But because of the way the deals were structured — with health systems paying large up-front fees for physician practices and guaranteed salaries for doctors — the physician-buying tear of the late ’80s and early ’90s largely resulted in disaster. Multiple challenges, including administrative difficulties and physician productivity issues, led to many buyers losing significant amounts of money.

“Those agreements failed miserably,” Deane said. “Health systems had operating losses in excess of $100,000 per physician per year, with some losing as much as $300,000 to $400,000 per physician per year.”

Most hospitals, realizing the mistake, promptly got out of the business of owning doctors.

Today, with lessons learned and the pressure on all providers rising, physician practice ownership has clearly re-emerged — albeit in a different form.

“(Hospitals) are not so much buying (doctors) like they used to,” said Mike McClintock, president of physician practice management company PivotHealth. “They learned it didn’t do them any good, it was driving up the costs and putting a lot of money into doctors’ pockets without doing the hospital any good.”

Deane explained one way some of today’s deals are being structured: Health systems provide some practice management support and connect the doctors to the hospitals’ electronic records. The doctor then earns his traditional revenue minus expenses plus some additional annual investment from the hospital.

That way, physicians still have the incentive to be productive and efficient, but they have an extra revenue cushion. And the hospitals have a built-in referral network with which they can provide coordinated care with measurable data.

Stay tuned for more of these and other employment arrangements in 2010, experts say. According to Noonan, “There will continue to be a steady stream of physicians selling their practices to hospitals.”