Following Doctors' Orders

U.S. hospitals are under increasing pressure to retain their best, most highly sought-after physicians. After all, research shows, hospitals are only as competitive as the physicians they retain since patients tend to choose doctors, while hospital choices are often the result of physicians’ affiliations, especially in the case of elective procedures.

Moreover, in the rapidly changing healthcare landscape, numerous regulatory shifts, such as adjustments to the Medicaid reimbursement rate and changes under Obamacare, also are making hospitals less profitable. Meanwhile, doctors are facing increased financial pressures as their salaries shrink and malpractice insurance and operating costs continue to skyrocket.

In response, many hospitals are abandoning their nonprofit model for a new one, a “hybrid.” In a hybrid structure, parts of the hospital remain nonprofit, while other areas are for-profit, such as an orthopedic surgical center or a dermatology specialty group.

These for-profit centers play a dual role for hospitals: They help hospitals retain top physicians attracted by new income opportunities, and they offer new revenue streams. But relying on profit-generating centers, often physician-run, may add to a hospital’s troubles.

A new study, which explores the bargaining power of physicians in a hospital setting as a key driver of organizational change, found that physician-driven changes may be counterproductive to a hospital’s long-term survival.

Following Doctors’ Orders: Organizational Change as a Response to Human Capital Bargaining Power—authored by Michael D. Santoro of Lehigh, Jill A. Brown of Bentley University and Peter T. Gianiodis of Clemson University—appeared in a recent edition of Organization Science.

To get an in-depth understanding of this increasingly common phenomenon, the researchers studied a large hospital, Hospital X, for six years as it underwent a transition from a nonprofit to a hybrid model.

“We found that Hospital X administrators were either somewhat reluctantly OK with these physician-driven changes or simply acquiesced since they had no choice in order to ensure the hospital’s long-term survival,” said Santoro, professor of management in Lehigh’s College of Business and Economics.

According to the study, Hospital X sought to retain physicians by offering them a share of for-profit revenues and allowing them greater autonomy. This, of course, had immediate benefits for the physicians, who gained access to new revenue streams in the face of eroding income. It also allowed Hospital X to retain these physicians and stay competitive in the wake of increasing external pressures.

However, it resulted in an escalation in replacement costs for physicians as they became part-owners of shared facilities. Any competitive marketplace advantage gained by Hospital X from the new organizational structure was undermined by weaker internal bargaining power with its physicians.

“We found that the power physicians hold to drive these changes actually intensifies once the changes have been made,” Santoro said.

The study of Hospital X led the researchers to conclude that human capital bargaining power is a “double-edged sword,” shifting the governance structure to benefit those with power by providing additional income streams, but creating challenges for the ongoing management and retention of such valuable human capital.

The findings have implications beyond hospitals and are relevant to the long-term survival of any talent-intensive organization where human capital power is strong. —Lori Friedman