Hospitals paying big to snag surgeons

The scramble by hospitals to employ physicians has worked out pretty well for some of the region’s surgeons.

Across the four largest hospital systems in central Indiana, six physicians received more than $1 million in compensation in 2011 while two others received more than $900,000 and nine others received $700,000 or more, according to the hospitals’ most recent reports to the IRS.

Those compensation figures include salaries, bonuses, fringe benefits and contributions to retirement plans for doctors whose primary responsibility is caring for patients.

At Community Health Network, neurosurgeon John Cummings received total compensation of nearly $1.8 million in 2011—about half a million dollars more than the hospital system spent on its CEO, Bryan Mills, that year.

At Indiana University Health, however, CEO Dan Evans’ compensation of $2.3 million was nearly triple that of the hospital system’s highest-paid Indianapolis-area physicians, a group of heart surgeons called Heart Partners of Indiana.

In 2008, when Heart Partners had competing offers of employment from both Community and IU Health, the group ended up striking a deal with IU Health that paid at least four of them more than $900,000 a year in salary, bonuses and benefits.

Two years later, a group of six orthopedic surgeons called Joint Replacement Surgeons—whose doctors had leadership roles at both Franciscan St. Francis Health and at St. Vincent Health—sold their practice to Franciscan. In exchange, Franciscan has been paying one of the doctors more than $1 million a year and paying two others about $900,000 apiece.

When Community Health hired neurosurgeon David C. Hall away from the physician practice Goodman Campbell Brain and Spine, he didn’t come cheaply. Community paid Hall more than $1.2 million in salary, bonus and benefits.

Those pay packages are at the high end of the range of compensation paid to similar surgeons across the country, according to data from Merritt Hawkins, a Texas-based physician recruitment firm.

They point up the recent fear of local hospitals that if they didn’t “lock ’em up”—as one local hospital executive put it—they might see their most valuable physicians scooped up by competing hospitals, taking their lucrative stream of referrals with them.

In addition, hospitals wanted to employ more physicians—and more physicians wanted to be employed—as the best way to navigate the changes coming from President Obama’s health reform law.

“It’s been the land of acquisitions and mergers the last few years. Is that having an impact on compensation? Yes. Not only structure but also total value,” said Travis Singleton, senior vice president at Merritt Hawkins.

But a key question is whether the four local hospital systems will be able to maintain the same high levels of compensation once the health care system shifts from its traditional practices of paying for high volumes of procedures to paying for keeping patients healthy and out of the hospital.

That shift is happening as the 2010 Patient Protection & Affordable Care Act takes full effect in 2014. In addition, the budget battles in Congress already have started reducing the payments hospitals receive from the federal Medicare program. Hospital analysts expect more Medicare cuts to come—and to see them mimicked by private health insurers.

“The greatest challenge facing the not-for-profit hospital industry is the reduction in reimbursement from all major payors, both governmental and private, as the health care industry remains under pressure from policymakers, industry and the general public to reduce costs,” wrote Daniel Steingart and Lisa Goldstein, analysts at Moody’s Investors Service, in a Jan. 22 report.

Dr. Tim Story, an internist in Carmel, doesn’t think the high compensation packages paid by Indianapolis-area hospitals will survive the full onset of health care reform.

“I find those salaries in general quite surprising in light of the remarkable changes that are coming in 2014,” said Story, who is a physician in The Care Group, a large practice acquired by St. Vincent Health in 2010. He added, “My suspicion is, there’s going to be a lot of retrenchment.”

Revenue generators

Surgeons are especially valuable because they help hospitals turn their enormous fixed costs—patients beds, operating rooms, nursing staffs—into profitable revenue.

Each neurosurgeon generates an average of $2.8 million for his or her hospital each year, according to a 2010 Merritt Hawkins survey. Revenue generation averages $2.2 million for a heart surgeon and $2.1 million for an orthopedic surgeon, the survey found.

Some hospital executives think high physician pay will be sustainable longer term. Others acknowledge they don’t know.

“It’s too hard to predict that future,” said Tony Javorka, chief operating officer at Community Physician Network, the physician arm of the Community Health Network hospital system. He added, “When it comes to physician compensation, it has to be tied back to fair market value, and that fair market value is going to go up and down.”

Javorka added Community’s motivation in hiring physicians—even at the highest salaries—was not to fill its operating rooms, but to make it easier to transition to the new payment models coming under health care reform.

Hospitals can run afoul of federal laws and regulations if they directly pay physicians for referrals or pay them outlandish salaries in order to recruit them. Hospitals hire consultants and accountants to conduct fair-market-value studies to justify what they pay physicians.

But fair market value for physicians is hardly a precise figure, or an entirely stable one. For example, the average salary for a heart surgeon last year was $512,000, according to data compiled by Merritt Hawkins. But salaries ranged from $400,000 to as high as $650,000.

Those numbers have come down from 2008—the year Heart Partners of Indiana sold a controlling stake of their practice to IU Health—when cardiologists commanded salaries as high as $1 million.

Since that deal, IU Health has gradually reduced its overall pay to the Heart Partners surgeons. All of them made less than $800,000 in 2011—about 15 percent less than they did in 2009.

Work habits changing

Hospitals base their fair market value analyses not just on what other physicians in the same specialty make, but also on how much reimbursement a physician’s work is generating under a system used by the federal Medicare program called relative value units, or RVUs.

Ed Abel, a hospital accountant at Indianapolis-based Blue & Co., said orthopedic surgeons who spend most of their time in the operating room, and let other doctors handle office visits with patients, easily generate enough RVUs to be paid more than $1 million.

Two of the orthopedic surgeons employed by Franciscan—Dr. Louis Metzman in Crawfordsville and Dr. Jeffrey Pierson in Mooresville—were paid $1.2 million and $1.4 million, respectively, in 2011.

Calls made to both physicians were not returned. Franciscan did not make an executive available to comment for this story.

Abel thinks physicians’ compensation might go down in the future, but not because of health care reform. Instead, he thinks employed physicians will produce fewer RVUs than they did when they owned their own practices—a reflection of the fact that employed physicians have been shown to be 17 percent less productive than physician practice owners.

In addition, today’s physicians are less eager to work the 60- to 70-hour weeks that baby boomer doctors commonly did.

“Lifestyle is driving this profession to work a little bit less than what they used to,” Abel said. “Our society today, they just value their personal and private time, more than a generation or two generations did before.”

John Stewart, president of the St. Vincent Medical Group, which employs 756 doctors, said changes in reimbursement will pressure everyone in health care.

“The expense in health care is no longer sustainable,” he said. “And reality is, everybody will feel some pain.”•