How financial incentives are reshaping the face of medical institutions

TriHealth, St. Elizabeth, Christ Hospital, Cincinnati Children’s, Mercy Health, UC Medical Center. If you’re getting medical treatment locally, you probably recognize these names as among the big power players in care in Northern Kentucky and Greater Cincinnati. And, In some cases, they keep getting bigger: TriHealth, for instance, shelled out $6 million last year to acquire Clinton Memorial Hospital in Wilmington, Ohio, to incorporate it into the TriHealth network. 

But why? Whatever happened to the old, independently owned and operated private medical practice, run by doctors themselves, instead of huge institutions? Although it turns out private practices, (i.e. ones run by doctors actually providing services there), aren’t going extinct just yet, they may be headed that way. 

Every two years, the American Medical Association conducts its “Physician Practice Benchmark Survey,” which tracks trends in medical practices throughout the country. The 2024 survey, published last year, found 42% physicians worked in a private practice. While this is still the largest group, it has been declining for years. That percentage fell 18 points from 2012, meaning that there are about 80,000 fewer physicians in private practice in 2024 than there were in 2012, according to the American Medical Association.

Conversely, the number of physicians practicing out of a hospital system increased from 23.4% in 2012 to 34.5% in 2024. Increases were also observed in the number of practices owned by private equity and the number of practitioners engaged in contract work, although to a lesser degree than those absorbed by hospital systems.

Other studies have corroborated this trend, even if the exact figures differ, reflecting changes in financial incentive structures and broader economic pressures in the healthcare sector. If these trends continue, the way both patients and practitioners interact with the broader sector could be forever changed. 

Money and medicine

“There are very few freestanding groups of primary care docs,” said Joseph Bateman, a physician, UC faculty member and executive director of the primary care network at Christ Hospital, which includes about 115 doctors in various locations in Cincinnati and NKY.

Bateman has never worked in an independent practice, having spent much of his long career either as an academic or at a hospital system (or both). Yet, Bateman described a phenomenon that independent practitioners also attested to: the smaller operators’ loss of negotiating power with insurance companies. This was especially acute among primary care providers, who have had to move away from the old community-storefront business model to make money and survive.

“There are a few that are solo practitioners who can still make it from a financial perspective by offering subscription or concierge-level service, [but] those are very few practitioners,” Bateman said, referring to models of medicine wherein patients pay a monthly retainer or fee to have direct access to a doctor. 

In fact, all of the doctors LINK nky spoke with, as well as much of the academic literature we consulted, pointed to the ability of larger institutions to garner bigger payouts from insurance companies as the primary driver of consolidation of small practices into hospital systems.

Insurance companies and medical providers routinely negotiate (and renegotiate) reimbursement contracts. Since many patients can’t pay for their medical care out of pocket, doctors and other professionals rely on reimbursements from insurance providers (as well as government programs like Medicare and Medicaid) to cover the cost of care and make a profit. 

The aforementioned American Medical Association benchmark survey found about 71% of independent physicians who had sold their practices after 2014 did so because it would allow them to negotiate better prices from payers. Improving access to costly resources and being able to better manage payers’ regulations and administrative requirements were also top reasons for selling, according to the survey. 

“It’s usually a decision made because of the financial constraints that they’re experiencing, and there’s no other option,” said Michael Anthony, who was the incoming executive director for River Valley Pediatricians, Inc., or RVPI, when LINK nky spoke with him in May.

RVPI serves independent pediatric practices on both sides of the Ohio River. Initially formed as a way to purchase vaccines at discount bulk pricing for independent practices, its role has since expanded to advocating for the interests of independent pediatric practices more broadly. The organization represents 27 independent practices with over 225 individual professionals. 

One of the services it offers is a centralized way for disparate independent practices to come together as a group so they have more leverage at the negotiating table. Yet, even with pooled resources, it’s still difficult to compete. 

“[Payers] don’t keep their reimbursement increases up to independent practices at the level that they do for the larger systems or for organizations that maybe are triple the size of an independent practice’s,” Anthony said. 

“It’s leverage,” said Ed Freeman, who was the acting executive director of RVPI in May. “The larger volume supports being able to negotiate with payers better. Even a small independent organization can’t command that leverage.”

“Even a large group of 10 docs has really no power to negotiate a fair and equitable reimbursement rate,” said Bateman.“I’ve heard from many stories of docs who have joined us where they were near financial ruin when they decided to throw in the towel and join us.”

Besides the financial stresses, the choice for a doctor or other professional to be independent or to be an employee comes down to whether or not they’re willing to both practice medicine and run a business. If you’re running an independent practice, you’re responsible for everything — not only patient care, but also administration, hiring and personnel, managing billing, marketing and legal compliance. 

The flip side is that doctors who would rather not deal with all of that can find a home as a salaried employee and let the hospital’s administrators take care of everything. You also don’t have to worry about succession planning, a common problem among independent practices, Freeman said. 

Administrative burdens have also played a role in the growth of private equity in the healthcare sector. Private equity firms pool private funding into funds that then purchase businesses with the hope of restructuring and expanding them before possibly selling them for a profit. 

Private equity’s activity in the healthcare sector is comparatively recent, but the pressures that would induce an independent practitioner to sell their practice to a private equity firm is based in the same administrative and financial pressures that induce professionals to join hospital systems. 

When a practice offers to sell to private equity, the firm pays the practice a lump sum up front. In exchange, the private equity firm then takes on the responsibilities of running the business. It does this by  spinning off a separate management organization that takes care of administration, sometimes staffed with administrative workers who were already at the practice. 

This new management service organization, or MSO, is what the firm actually owns on paper. Regulations prevent equity firms from owning medical practices outright, but the new MSO essentially runs all of the non-medical aspects of the business, leaving the doctors to focus on medicine exclusively. 

Several big medical providers with locations throughout Kentucky, Ohio and Indiana have MSO deals with private equity firms, including The Urology Group, Cincinnati Eye Associates and Beacon Orthopedics & Sports Medicine. 

So what does the private equity firm get out of this arrangement? They get to charge a fee to the medical practice for providing administrative services.

“We’re buying basically a perpetual contract to provide services, administrative in nature only, to a physician practice,” said Keith Carlson, founder of Roebling Capital Partners, a private equity group out of Cincinnati that has made in-roads in small middle market segments of the healthcare sector. 

“When we go to sell it, we will sell the management service organization, which has those contractual rights with a physician practice,” Carlson said. 

Carlson was aware that private equity had a bad reputation among independent practitioners, a suspicion that was echoed among the independents LINK nky interviewed. This suspicion has even appeared in elite institutions nationally. Dr. Edward P. Hoffer of the Harvard Medical School in an 2023 op-ed for the American Journal of Medicine, described private equity buying up medical practices (or their MSOs, rather) as “a marriage made in hell.”

“I don’t think it’s unfounded,” Carlson said, although he caveated that by saying that “not all private equity firms are created equal” and that a firm that’s done its due diligence and is acting honestly should be able to avoid exploitative relationships with doctors. 

“In private equity, your value proposition to the physicians can never be ‘I’m going to optimize the way that you work so you can do more,’” Carlson said. “It needs to be, ‘how can I get the physician to work smarter, not harder?’ The good groups that get into this realize I’m not going to ask someone to double their output. I’m going to give them the tools and the compensation programs to do whatever they want, but I am going to make them more efficient.”

For doctors who wish to retain their independence, however, the risks of selling to a hospital versus selling to private equity are similar: Can I trust this new employer to help me provide for patients, or am I going to become a cog in a machine? 

“If you’re working for the system (i.e. either one, a hospital or private equity), you’re being told how many patients you need to see per day in order to fulfill their requirements and make them the money they want to make or get the referrals that they need to keep their systems operational,” Anthony said. 

What does this mean for patients?

LINK nky heard inconsistent things about whether or not a provider’s size was an advantage or an obstacle. 

There are several purported benefits to working within a larger system. For one thing, insurance coverage tends to become more predictable. Depending on your policy, if you’re in network with one facility in a system, you’re more likely to be in network at its other facilities. 

Referrals to specialists and lab services, as well as record keeping and billing, also become more straightforward as they’ll be centralized within the same administrative framework.

“What might take a patient weeks to accomplish, I can do in 30 seconds,” said Isaiah Fry, a doctor and assistant vice president for hospital medicine in St. Elizabeth Healthcare. Fry, who manages about 65 physicians at St. Elizabeth, argued centralization made it easier to coordinate care. 

“When you’re in a large healthcare system, like St. Elizabeth, when (patients) saw their primary care, when they saw their cardiologist, when they saw their addiction medicine specialist; everything is all there in one spot, so there is no question,” Fry said. “Everybody’s on the same page at the same time, accessing the same information, which ultimately leads to streamlined care.”

Certain kinds of practices also naturally lend themselves to being part of a hospital. Specialities like anesthesiology and cardiology, not to mention emergency care, will likely find it easier to operate with a hospital system’s resources at its disposal. 

Some independent physicians were skeptical of this argument, however. Charlie Cavallo, an independent NKY pediatrician whose practice is part of RVPI, was especially skeptical of ones that argued that greater centralization made access and navigating the medical landscape easier. 

“The reality is medicine is still very siloed,” Cavallo said, “and each specialty is sort of unto itself. It’s much harder to coordinate across specialties. Everyone thinks it’s easy to pick up a phone or shoot a message or an email or whatever — we’re on the same system; we can see what’s going on — it’s not always that simple.”

Additionally, there is some evidence to suggest that increased vertical integration of small practices into larger systems could increase out-of-pocket costs for patients. 

A joint 2024 study between researchers at Brown University and the RAND Corporation examined cost increases using Medicare data collected from arthroscopies and colonoscopies, two common Medicare-paid procedures for which data was readily available. Unlike private insurance companies, providers can’t negotiate Medicare prices. Instead, prices are based on federal fee schedules, which vary depending on the size of the provider. Medicare tends to pay hospital outpatient facilities at a higher rate than ambulatory surgery centers, which can be run either independently or separately from a hospital system’s main facilities. Both facility types provide arthroscopies and colonoscopies, so this allowed the researchers to compare pay outs between while controlling for other variables. 

The study found that “for just these two services,” fully integrating all physicians into a hospital system “will lead to a $315.4 million increase in Medicare spending and a $63.1 million increase in patients’ out-of-pocket payment costs.”

In other words, the more services become housed in hospital systems, the study argues, the more expensive they become for patients. The same study found integration had no effect, positive or negative, on clinical quality measures. 

For physicians at the end of the day, the primary question (besides the financial pressures) is if they want to remain independent. 

“Doctors are independent creatures that like to have a say in things,” said Cavallo. “One thing about private practice that I really enjoy is learning about management, employment issues, the business side of it, versus letting somebody else dictate everything.”