The required initial investment ranges from a low of $15.8 million to serve 100,000 patients to a high of $159.3 million to serve 1M patients.

The Cost of Succession Planning & Attrition

Across the U.S., 10% of all physicians are 65 and over and likely need to be included as a succession planning need.  In addition to considering the impact of an aging physician base on your health system, 6% to 7% of all physicians leave a health system in a given year – i.e., attrition.

The resulting investment requirement equates to 17% of the initial investment – from a low of $2.7M per year serving 100,000 patients to a high of $27M serving 1,000,000 patients.

The Cost of Employment

In addition to the threshold investment and succession planning/attrition needs, 74% of the physicians across the U.S. are employed, which brings ongoing subsidies.  The median employment subsidy is $218k per year for primary care, $419k for medical specialties and $422k for surgical specialties.  The resulting ongoing investment becomes sobering:

While our industry is understandably focused on mergers and acquisitions, skyrocketing workforce and contract labor expenses, drug prices, medical supply and PPE costs and economy-wide inflation, this level of physician investment requires ongoing professional management.

The Portfolio Approach

From our perspective, hospitals and health systems should be managing their physician portfolio with five key opportunities in mind:

1. Grow & Differentiate Your Primary Care Patient Base
2. Fill Obvious Holes in Your Specialty Base
3. Eliminate Excess Capacity Within Your Employed Base
4. Avoid Recruiting the Wrong Physician
5. Prevent the Surprise Retirement

Grow & Differentiate Your Primary Care Patient Base

As a hospital or health system, there are at least three costs and business risks associated with not having enough primary care physicians.  On average, each primary care physician (Family Medicine & Internal Medicine) manages around 1,460 patients, accounts for 136 inpatient discharges per year and 1,065 Hospital outpatient encounters. Based on a Merritt Hawkins survey from 2019, each primary care physician generates $2.4 million in inpatient and outpatient net revenue within the hospital.

A lack of primary care physicians is also an opportunity cost from a market share perspective.  Missing a single primary care physician represents a reduction of 1,460 patients from the health system.  A simple test that we often complete with our partners is to compare hospital inpatient market share to primary care market share. If the hospital inpatient market share is higher, the lower primary care market share is a real business risk.  We often ask, “do you believe that at some point your hospital market share will be a direct reflection of your primary care market share?”  If so, investing in primary care is a necessary cost of doing business.

Finally, living in a partially fee-for-service world, having enough primary care physicians to support existing specialists remains a concern and potential risk.  We have found that a large percentage of specialists still rely heavily on referrals from non-captive (outside the family) primary care physicians.  As competitors tighten their referral networks, specialists are exposed to the potential of not having enough patients.

Fill Obvious Holes in Your Specialty Base

Investing heavily in primary care requires also monitoring your specialty base for any obvious holes.  One missing specialist within a key service line can dramatically lower both inpatient and outpatient activity within the line:

Without filling the gaps in specialty care, the full investment in primary care is not realized.  According to Jackson Physician Search research, 40% of physician vacancies remain unfilled, leaving gaps in many hard-to-fill subspecialties.

Eliminate Excess Capacity Within Your Employed Base

Since the early 1990s, hospitals and health systems have tried to increase employed physician productivity and reduce excess capacity, with varying luck.  As a practical matter, physician productivity can have a large impact on the number of patients a primary care physician can manage.

Primary care physicians practicing at the 75th percentile manage 27% more patients than someone practicing at median, and 65% more than those practicing at the 25th percentile.  On average, a physician practicing at the 75th percentile can manage 2,000 patients, compared to 1,022 at the 25th percentile.

Avoid Recruiting the Wrong Physician

Recruiting any physician tends to be an expensive undertaking, recruiting the wrong physician takes both an economic and reputational toll.  Between candidate sourcing, interviews, recruitment fees, relocation allowances and sign-on bonuses, the average cost to recruit a single physician is $82,718.

The quarterly Physician Flash Report by Kaufman Hall showed that the median subsidy, or loss, per employed physician increased by 14.% from the first quarter of 2022 to the first quarter of 2023.  Overall, the median loss was $306,362 per physician across all specialties.  This investment is required on an ongoing basis.  Given the above, a physician leaving after a two-year contract would cost a health system $695,442.

Additionally, physicians leaving after a short period of time results in both operational and messaging chaos – What do we do with the physician’s patients?  Staff?  How do we tell them their physician is leaving?  Have we done this to the patient before?  What is the best way to minimize the damage?

Prevent the Surprise Retirement

Unplanned physician retirements, particularly in key service lines, can decimate a health system budget.  According to Merritt Hawkins, a General Surgeon retiring can cost $2.7 million in lost revenue, $3.3 million for an Orthopedic Surgeon, $3.4 million for a Neurosurgeon and $3.5 million for an Invasive Cardiologist.

When analyzing the potential for retirement across a physician base, it is best to look at both a three-year and ten-year window and combine it with local knowledge.  People in general, and physicians in particular, do not typically enjoy engaging in conversation about planned retirement age.  The key is to not shy away from conversations and engage physicians in helping find the next generation.

Conclusion

Investing in, maintaining and growing a physician portfolio is one of the most capital-intense activities for a hospital or health system.  A health system serving 100,000 patients has spent around $15.8M to simply get their physicians to town, $2.8M annually to replace aging and departing physicians, and up to $43.9M per year in medical group investments.  Not having enough, or the wrong type of physician, can cost a hospital or health system thousands of patients, tens of millions in lost revenue and hundreds of millions in real costs.  Protecting your investment is one of the reasons that 3Dhealth exists!

For questions or more information, please contact Ron Flower at RFlower@3Dhealthinc.com or Shane Foreman at SForeman@3Dhealthinc.com .