Investors Shocked by Hospital-based Physician Losses After No Surprises Act

Also: EM residency applications up, TMB on CPOM, HCA gutting hearts & souls, Abridge abridges documentation time, & pharmacists' wildcat strikes.

Top of the Week

After years of reading articles about acute care physician companies’ “exorbitant” revenues (see KFF Bill of the Month archives), many investors have been shocked by publicly traded hospital companies’ announcements that in-housed physician practices lost massive amounts of money in Q3 2023.

While Envision declared bankruptcy this year, Envision practices at HCA facilities were internalized by the health system. That ownership change made Envision’s former practices’ financial performance visible to the public.

On its Q3 earnings call, HCA revealed that the former HCA-Envision joint venture, now named Valesco, lost $100 million in the quarter (26.3%). Bill Rutherford, HCA’s Chief Financial Officer, explained: “There's no doubt the issue for us in the quarter was the Valesco operations. We’re not clearing as much revenue as we anticipated.”

In the earnings call Q&A, Justin Lake, a healthcare analyst with Wolfe Research, was so bewildered at the degree of HCA’s physician practice losses that he had difficulty formulating his question. He asked, “I'm going to pile on with this physician stuff. So just, I've never seen a business kind of be off this far from, like, you guys are obviously very, very good at what you do. I know this is a new business, but to be $50 million of revenue on a $250 million baseline, 20%. So I just the like, can you triple click on that for me and just say like, what did you think was going on versus what is? And then the, for – when you gave your headwinds, tailwinds for next year, the only headwind you talked about was that payment, which makes sense. But you've given some numbers around the subsidy costs right, the physician costs that run through other operations. And they do seem like they've been a pretty big drag on margins.”

HCA’s answers amounted to revenues being lower than expenses for hospital-based physician services. No new solutions were offered. HCA’s forward guidance estimated continued 25% Valesco operating losses.

For HCA, these losses are just a cost of doing business. Overall, Q3 was a strong quarter for the nation’s largest hospital company. Per Fierce Healthcare, HCA reported total revenues of $16.21 billion and expenses of $14.58 billion for the quarter, representing year-over-year increases of 8.3% and 9.9%. Net income attributable to the company landed at $1.08 billion. As Sam Hazen, HCA’s CEO, summarized, “We believe the decision to consolidate Valesco was strategically imperative in maintaining the overall competitive positioning and capacity offerings of the company.”

Community Health Systems, the second-largest publicly listed hospital chain, also reported significant losses on the physician practices they took over from American Physician Partners (APP). However, CHS had been paying such large subsidies to APP that a 25% operating loss seemed like a relative win. From CHS’ Q3 earnings call: “When factoring in the net revenue associated with in-sourcing those physicians, we estimate we benefited by approximately $4 million sequentially compared to the subsidy payments previously paid to APP.”

In their earnings call, a third public health system, Universal Health Services, showed why outsourcing physician practices does not solve hospitals’ financial problems. UHS’ outsourced physician staffing companies have required subsidy increases of 35-40% to survive.

In response to an investor question about physician subsidies, UHS’ Chief Financial Officer replied, “As it turned out, I think this has been a bigger issue than we anticipated, and I think virtually all of our peers anticipated around the country… I think what really drove this sort of immediate pressure and position expense and the timing of it was the passage of the No Surprise Billing Act. And what I think we all collectively learned was that these physician coverage businesses had relied on their profitability in large part for their billings to out-of-network patients.”

Before the No Surprises Act, out-of-network billing by outsourced physician practices had allowed hospitals to staff their physician services with lower (or no) subsidies. When those practices returned to collections at in-network levels, the hospital subsidies returned, too. 

Kenneth Kaufman, managing director of Kaufman Hall, explained: “America’s hospitals have a $104 billion problem. That’s the amount you arrive at if you multiply the number of physicians employed by hospitals and health systems (approximately 341,200 as of January 2022, according to data from the Physicians Advocacy Institute and Avalere) by the median $306,362 subsidy—or loss—reported in our Q1 2023 Physician Flash Report. Subsidizing physician employment has been around for a long time, and such subsidies were historically justified as a loss leader for improved clinical services, the potential for increased market share, and the strengthening of traditionally profitable services. But I am pretty sure the industry did not have $104 billion in losses in mind when the physician employment model first became a key strategic element in the hospital operating model.”

Data from Kaufman Hall’s October 2023 Physician Flash Report, a survey of 200,000 employed physicians, PAs, and nurse practitioners:

EM Practice

Dr. Brian Carmody, an expert on all things Residency Match, announced strong emergency medicine applicant numbers on Twitter. “WINNER: Emergency Medicine. The big story of Match Week 2023 was the 500+ EM positions available in the SOAP, caused by a rapid drop in EM applicants. But this year, EM applicants are up 33% (driven mainly by increases in DO and IMG applicants).”

From Dr. Rob Orman: “Why performance metrics frustrate and how to make one that doesn’t.”

In the Guardian, “Here’s what happens when a for-profit company takes over your local ER.”

Envision’s deadline to emerge from Chapter 11 bankruptcy restructuring is November 13, 2023.

House of Medicine

Physician-led AI company Abridge raised a $30 million round to scale its ambient patient care documentation software.

Take Medicine Back released a new report: “The Corporate Practice of Medicine - Taking the Profession Back From Corporate Interests.” Dr. Vicki Norton also introduced a resolution, “Corporate Practice of Medicine Prohibition,” to the AMA House of Delegates.

Stanford Law Review: Private Equity and the Corporatization of Health Care. “The drive for quick revenue generation threatens to increase costs, lower health care quality, and contribute to physician burnout and moral distress. These harms stem from market consolidation, overutilization, and up-coding, constraints on physicians’ clinical autonomy, and compromises in patient care. Policymakers attempting to counter these threats can barely keep up. Like a cloud of locusts, private equity moves so quickly that by the time lawmakers become aware of the problem and researchers study the effects, private equity has moved on to other investment targets.”

Hospitals & Health Systems

HCA is taking heat from doctors at Mission Health System in Asheville, NC. Per an open letter signed by 45 Mission physicians, “Many of the for-profit-driven changes that HCA has wrought, despite advocacy and protests from multiple sectors, have gutted the heart and soul of our community healthcare system.”

The Atlantic: “What Financial Engineering Does to Hospitals.” From the article: ‘Like so much of America, Riverton has become well acquainted with the business that most epitomizes today’s Wall Street: private equity. In 2018, the local hospital, SageWest, was purchased by Apollo Global Management as part of the giant private-equity firm’s $5.6 billion deal to buy a chain of hospitals called LifePoint Health. Even before Apollo got involved, LifePoint had merged Riverton’s small hospital with the hospital half an hour away in Lander, the county seat. Vivian Watkins, a Riverton resident who once served as Wyoming’s economic-development director, told us that the idea sounded viable—at first. “They told us the new trend in hospitals is ‘centers of excellence,’ so you’ll have maternity care in one place and, say, orthopedics in another,” she said. But in the Apollo era, Watkins and other Riverton residents concluded that, instead of dividing specialties between the two hospitals and beefing up the ones remaining at each location, hospital managers were simply stripping away essential services from their community.’

Henry Ford Health and Ascension Michigan are entering a joint venture.

Nursing & Allied Health

MIT Sloan Management Review released its 2023 Nursing Satisfaction Index, based on a big data analysis of nurse reviews of their hospital employers on Glassdoor from 2020-2023. Themes: a) nurses reviewed for-profit hospitals (HCA Healthcare, Community Health Systems, Tenet Healthcare, Lifepoint Health®, Prime Healthcare, UHS, Steward Health Care) more negatively than their nonprofit health system peers; and, b) health systems with regional near-monopolies (UPMC, Ballad Health) tended to perform poorly.

Pharmacists at CVS and Walgreens are staging wildcat strikes across the country. Per the New York Times: “Some pharmacy workers are calling in sick or walking off the job this week to protest what they call inadequate staffing and increasing work requirements, according to protest organizers, and say it’s harder to do their jobs safely. The protests by nonunion workers, called Pharmageddon on social media, are affecting some CVS and Walgreens locations, according to organizers and workers. They are happening during a period of increasing labor activism by workers in other sectors, including the auto industry and Hollywood.

Bled Tanoe, a pharmacist in Oklahoma City who used to work for Walgreens and now works for a hospital, said she was helping to spread the word about the walkouts because she was concerned that pharmacy chains had been telling workers for years to work faster and work with less help. ‘Pharmacies are not OK,’ Ms. Tanoe said. ‘Your local Walgreens and CVS and Rite Aid are not OK. It’s a soup of danger, with ingredients from companies who have lost the core belief of what we do, which is patient care and patient focus.’”

The Dispo

To quote Dr. Mel Herbert, “Thanks to all the docs, nurses and front line workers across the world...what you do matters more than ever!”

Emergency Medicine Workforce Productions is sponsored by Ivy Clinicians - simplifying the emergency medicine job search through transparency.