The choice of employment arrangement in the market for hospitalist services.

• Author: David, Guy
• Position: Report

1. Introduction

   Hospitalists specialize in the management of patients who are hospitalized and provide continuity of hospital care from admission to discharge. Clinical studies show that hospitalists reduce average length of stay and contain cost without compromising quality of care (Meltzer et al. 2002). By closely monitoring patients and coordinating the flow of information, they limit the number of unnecessary tests and procedures, help reduce medical errors, and help in the formulation of practice guidelines (Meltzer 2001a; Wachter and Goldman 2002). Since hospitalists were first introduced as a "new breed of physicians" in 1996, the number of physicians specializing in hospital medicine in the United States has grown beyond 11,000 (Kralovec et al. 2006), with future projected growth to 20,000, about the number of cardiologists in the United States (Wachter 2004b).

   For physician groups, hospitalists are attractive in that they enable the referring physicians to delegate the hospital-based component of their patients' medical care. In turn, for hospitals, the ability to manage utilization and thereby contain cost without compromising the quality of care makes hospitalists an attractive proposition. In response to these diverse incentives, a variety of employment arrangements for hospitalists has emerged. These include hospitalist-only groups, the integration of hospitalists into multispecialty groups, and the development of hospital-based hospitalist programs in both teaching and nonteaching facilities.

   While the growing number of hospitalists is beyond dispute, to date no study has examined the underlying economic forces responsible for the diversity in employment arrangements. This is especially important because the prevailing employment model in a given market may affect the optimality of reimbursement rates set by a regulator or payer organization. To the extent that rate-setting agencies ignore the endogeneity of employment arrangements, under current legal statutes reimbursement levels may fail to achieve their intended allocation goals.

   In this paper, we provide the first systematic analysis of how the differing motives of primary care groups and hospitals for the adoption of hospitalists are reconciled, how the strategic interaction between these two players may give rise to multiple equilibria, and how trends in hospitalization rates and fixed setup costs may explain gradual shifts in the predominant employment arrangements.

2. The Incentives to Employ Hospitalists Directly

   Hospitalists, regardless of who employs them, are the liaison between primary care physicians and hospitals and confer benefits to both parties. Yet hospitals and primary care physicians weigh differently the various dimensions of a hospitalist's performance. While primary care physicians want hospitalists to focus solely on ensuring high quality of inpatient care, even if it raises the cost of treatment (which is borne by the hospital), hospitals want hospitalists to strike a balance between the cost of treatment and its quality. Thus, either party can capture important additional benefits if it employs the hospitalists that it uses itself rather than contracting with hospitalists employed by another party. By employing them directly, the hiring party can overcome constraints on fee splitting, enabling it to share with its hospitalists the cost savings they generate for the employer and, thus, achieve greater cost reductions than if it bought services from outside hospitalists.

   As long as the costs of setting up its own hospitalist program are not too high, each party will prefer to employ and use its own hospitalists. While hospitals can refuse to allow hospitalists who they do not employ themselves, primary care physicians can refuse to send their patients to a hospital that refuses to admit their hospitalists. As will be shown in the model here, this conflict implies that the relative bargaining power of each party plays a key role in determining which employment arrangement prevails in a given market. It also implies that the prevailing employment arrangement may be inefficient if kickbacks are ruled out.

   Figure 1 sketches the three most salient employment arrangements for hospitalists: employed by hospitals (forward integration), employed by physician groups (backward integration), and self-employed through hospitalist-only groups ("freestanding"/no integration).

   [FIGURE 1 OMITTED]

   Table 1 shows the distribution of hospitalist employment arrangements in hospitals in 2003 and 2004. The figures are based on the American Hospital Association's (AHA's) annual surveys of hospitals in 2003 and 2004, the first two years for which information about hospitalist use and employment arrangement is publicly available.

   Hospitals using hospitalists employed by a hospital or university comprised the largest group in both years, followed by hospitals whose hospitalists were employed by a hospitalist-only group and those whose hospitalists were employed by a physician group. Overall, in both survey years, over 90% of hospitals in which hospitalists provided care used one of these three employment arrangements.

   Growth was not uniform across employment arrangements. The number of hospitals that employed hospitalists themselves grew by 13%, the number of hospitals using hospitalists employed by physician groups grew by 34%, and the number of hospitals using self-employed hospitalists grew by 24%.

   Table 2 shows results from the 2003 Productivity and Compensation Survey of hospitalist groups conducted by the Society of Hospital Medicine (SHM), the largest professional association of hospitalists in the United States.

   Differences in survey format of each group may explain the proportional discrepancy between the AHA data and the SHM data. The AHA survey asked U.S. hospitals whether they used and employed hospitalists, while the SHM surveyed hospitalist groups directly. As many hospitalist-only groups serve multiple hospitals, they will appear multiple times in the AHA survey yet only once in the SHM survey. As such, the AHA data probably overestimate the share of this group relative to the SHM. On the other hand, programs run by hospitals should align one to one from AHA to SHM. A second difference is that the AHA survey includes the bulk of U.S. hospitals, while the SHM survey had an approximate 30% response rate and, as such, is likely to overstate the share of well-established hospital-based hospitalist programs relative to freestanding hospitalists groups.

   Economic theory predicts that if hospitalists are uniformly engaged in a specific set of tasks, the health care system will converge to a single, cost-minimizing employment arrangement. In this light, the diversity of employment arrangements is puzzling. Despite the importance of the choice of employment arrangement for realizing the efficiency gains promised by the hospitalist movement, this question has received scant attention in the literature.

   Apart from teaching duties for hospitalists who are employed by academic health centers, hospitalists are engaged in similar tasks across all employment arrangements. We conjecture that differences in transaction costs, perhaps reflected in the legal status of advantageous financial and contractual arrangements, account for the emergence of various employment models. These transaction costs hinder the parties involved in the continuum of care from sharing the efficiency gains. As a result, we would expect the direct employment by the hospital or physician groups to prevail over independent employment whenever the efficiency gains of the former exceed those of the latter.

   Primary care physicians must make two types of decisions. The first decision is whether to delegate inpatient care to hospitalists, balancing gains from specializing in office-based patient care against the potential discontinuity of care that the introduction of hospitalists creates. This handoff, at the point of the patient's transfer from the referring physician's office to the hospital, can lead to a loss of patient-specific information that might be relevant for optimizing the person's medical care in the hospital (Sox 2001). If they decide to use hospitalists, the second decision that primary care physicians must make is whether to employ them directly, balancing the fixed setup cost of employing hospitalists against the savings due to smoother continuity of care. Hospitalists that are directly employed by primary care groups will maintain close contact with the patient's primary care physicians, who convey to the hospitalist their knowledge of the patient's medical history and treatment preferences. Hospitalists employed directly by primary care physicians are more likely to use the hospital's resources in accordance with their employer's objectives.

   The growing infrequency and the higher severity of the typical hospitalization have made hospital work less attractive for office-based clinicians (Meltzer 2001b). A decline in time spent in the hospital by primary care physicians lowers their return to investing in skills necessary for inpatient care. When hospital-based care becomes an "economically inefficient use of their own time" (Wachter 2004a), perhaps because of long travel times to the hospital yet similar reimbursement rates for office and hospital care, primary care physicians have an incentive to delegate this component of the patient's medical care to hospitalists. Moreover, primary care physician groups may prefer to employ or contract directly with hospitalists because it may give them better control over the hospitalist's priorities in treating the referring group members' hospitalized patients. Compared to direct employment by the hospital, this arrangement may mitigate the possible loss of knowledge about the patient's medical history and treatment preferences, which might be particularly acute for older patients.

   When primary care physicians...