Physicians as Hospital Employees

Hospital administrators view things differently. One of the primary reasons any firm in any industry (health care included) brings an individual who provides a service or produces a product in as an employee is to reduce transaction costsFirms exist because transactions that occur within them are more efficient than if those same transactions occur outside of the firm.  Once the marginal cost of a physician’s services consistently exceeds the marginal benefit the physician provides to a hospital it is in the hospital’s best economic interest to employ the physician in order to control the costs or improve the benefit. For example, as physician reimbursements decrease and their costs increase they must seek alternative revenue streams or practice efficiencies in order to maintain the same income. With the paltry 1.1% raise coming from Medicare and the July 07-08 inflation rate at 5.6% it is not difficult to understand why this is happening. As physicians struggle to keep up it seems it is inevitable they will lean on hospitals to either boost revenue (stipend for call, reimbursement for uninsured patient care) or cut costs (EMR support, medical office space). These are transaction costs administrators are willing to support in order to keep the hospital doors open. When it is less costly to employ a physician than pay these costs hospitals must as a practical matter move toward employing physicians. It’s an expensive choice but when the alternative is more costly it becomes the best alternative to a negotiated agreement (BATNA).  In order for physicians to remain independent they must be able to generate revenue and decrease costs in a manner that does not make them dependent on the hospital. I don’t claim to know where this will lead to in the coming years but I think as long as physicians squeeze more of their revenue stream out of the hospitals they will ultimately increase the probability they will become employees of the hospital.

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