California’s Ban on Physician
Employment by Hospitals
BERKELEY RESEARCH GROUP
MARCH 16, 2022
1
TABLE OF CONTENTS
Executive Summary .................................................................................................................................... 2
Key Findings and Conclusions ................................................................................................................... 3
Overview of CPOM Ban in CA .................................................................................................................. 6
Physician Employment in Other states ..................................................................................................... 6
National Trends in Physician Employment ............................................................................................... 9
Physician Shortages and Maldistribution in California ......................................................................... 12
Health Inequities ....................................................................................................................................... 15
Physicians Why Do They Want to be Employed? ............................................................................... 17
Hospitals Why are they Employing Physicians? .................................................................................. 20
Potential Benefits of Physician Employment .......................................................................................... 21
CPOM Exclusions in CA ............................................................................................................................ 24
Non-Employment Models for Achieving Hospital-Physician Alignment in California ....................... 27
Conclusion ................................................................................................................................................. 29
Appendix ................................................................................................................................................... 30
2
EXECUTIVE SUMMARY
California’s Corporate Practice of Medicine (CPOM) Ban, which effectively prevents
corporations and other artificial entities from practicing medicine, has been in place for
over a century. Although it has wider applications, the CPOM Ban now most commonly
refers to a ban on the employment of physicians by hospitals to provide professional
services, so references to the CPOM Ban will be used in this paper to refer only to the
employment of physicians by hospitals.
As applied in California, the CPOM Ban prevents most hospitals and health systems in
the state from employing physicians to care for patients.
According to a 2007 report from the California Research Bureau, "The policy rational for
the CPM Doctrine can be summarized as follows:
A profit motive will lead to commercial exploitation of physicians and lower
professional standards.
An employed physician’s loyalty will be divided between his/her patient and
employer.
Lay persons should not have control over professionals."
1
Since the CPOM Ban was created, the practice of medicine has changed dramatically
both nationally and in California, calling into question the continuing need for the Ban
on physician employment by hospitals and raising questions regarding its possible
negative impact on patients’ access to care and the quality of that care.
Outside of California, there has been a growing trend toward physician employment by
hospitals, driven by the move toward integrated care and physicians’ increasing
preference for employment in the face of increased administrative overhead,
regulatory burdens, and financial pressures that buffet their bottom lines. While
California nonetheless continues its broad Ban on physician employment, it has been
forced to create numerous exceptions to the Ban to address changes in the health
care landscape and the needs of the state’s population raising further questions
about the current value and practicality of the Ban in today’s healthcare landscape.
The impact of the CPOM Ban in California cannot be viewed in isolation.
There is a shortage of physicians in the state, both primary care and specialty
providers, that is expected to increase over time, given the aging of the state’s
physician population and other factors.
These shortages are exacerbated by the current maldistribution of physicians
within the state: 20 percent of California’s population lives in an area that
presently suffers from a serious shortage of primary care providers. This
maldistribution is likely to get worse, as young physicians are disinclined to
3
practice in many of the geographic areas suffering from the greatest physician
shortage.
The number of physicians who wish to be employed, rather than practice
independently, is increasing, prompted by the administrative costs of
maintaining a private practice, the burdens of regulatory compliance and
insurance billing, the difficulty of negotiating complex value-based contracts
with health plans, and the challenges of obtaining access to necessary capital,
as well as lifestyle preferences.
Nationally there is an increased trend towards physician employment, driven by
the move to integrated care, physicians’ desire to be employed, and the fact
that other states do not restrict it as California does.
As these larger trends towards physician employment continue, California’s CPOM Ban
will place the state’s hospitals at a competitive disadvantage in recruiting and retaining
an adequate physician workforce. These challenges may become particularly stark in
underserved areas that already have difficulty recruiting physicians to meet patient
needs.
Although it has been claimed that physician employment by hospitals will lead to lower
quality of care, this conclusion is not supported by the research to date. National
quality data and research examining the impact of employment on quality metrics like
mortality has found no substantial differences in quality outcomes when physicians are
employed by hospitals. In addition, the increase in physician employment by hospitals
may lead to greater clinical integration and access to care for patients a premise that
warrants additional study.
The CPOM Ban does not serve the goals it was originally created to achieve. There are
other means of assuring that physicians professional judgment remains independent,
that have, in fact, been expressly incorporated into many of California’s existing
exceptions to the Ban. Other states have successfully moved away from the Ban. Even
the American Medical Association (AMA) does not endorse it: it is the policy of the
AMA that physicians be free to enter into mutually satisfactory contractual
arrangements, including employment with hospitals.
2
Continuing the CPOM Ban in
California will only place California’s hospitals, and by extension its citizens, at a
competitive disadvantage as they seek to maintain a world class health care system in
the future and ensure that all Californians have access to it.
KEY FINDINGS AND CONCLUSIONS
Physician Shortages in California
Many of California’s residents reside in Health Professional Shortage Areas (HPSA). By
2030, California is projected to have a shortage of 32,669 physicians.
3
This trend is
4
influenced by demand factors such as a growing elderly and overall state
population (148 percent and 112 percent growth, respectively).
There continues to be disparate primary care access by region in California, with
some areas of the state having significantly fewer primary care providers than
recommended based on population.
Trends in Physician Employment
Increased administrative costs among other factors drive the trend for physicians
to choose employment by hospitals and others over private practice.
Many physicians are consolidating their practices to stay financially afloat, to meet
regulatory requirements, to negotiate complex value-based contracts with health
plans, and to access capital for expensive health information technology (HIT).
Fewer physicians wholly own their practice. In 2020, around 49 percent of doctors
worked in a private practice, which marks a 5 percentage-point drop from 2018,
according to AMA data.
COVID-19 has accelerated existing physician employment trends. Many
independent physicians said that due to COVID-19, they were considering
partnering with a larger entity, selling their practice, or becoming employed.
45 percent of medical residents surveyed prefer hospital employment as their first
practice setting rather than any other type of setting.
These trends may lead to a greater recruiting advantage for those states that allow
hospital employment.
CPOM in California
While the CPOM Ban in California has changed over the years, with exclusions being
granted to certain types of organizations, it remains the most restrictive ban in the
nation.
The exclusions that have developed over time create a disparate ability for
organizations to recruit and retain physicians, putting those organizations still subject
to the Ban which includes most hospitals and health systems at a competitive
disadvantage.
As trends toward physician employment continue, this competitive disadvantage
will continue to harm these hospitals and limit their ability to meet their mission.
CPOM in Other States
Some states have never had a CPOM Ban in place.
In those states that have had some form of the ban, it generally has either not been
rigorously enforced or has been modified over time to no longer apply to hospital
5
employment of physicians through a mixture of legislation, case law, Attorneys
General opinions, or medical board licensure decisions.
Even among the handful of states that substantially limit hospitals’ ability to employ
physicians, California’s CPOM Ban is recognized as being the most restrictive.
To address concerns that hospitals and other corporate entities may try to
inappropriately interfere with physicians’ clinical decision-making, many states that
allow hospitals to employ physicians specify that the employer may not interfere
with the independent medical judgment of the physician. A prohibition is
incorporated into virtually all of California’s exclusions from the CPOM Ban.
Significantly, BRG has not found evidence of higher quality outcomes in states with
CPOM Bans versus those that do not have them.
Review of Medicare Quality Data
Based on a review of Medicare Shared Savings Program (MSSP) and Merit-based
Incentive Payment System (MIPS) data, BRG concluded the following:
Nationally, hospital-owned MSSP Accountable Care Organizations (ACO) have
similar (if not slightly higher) MIPS scores than non-hospital owned ACOs.
University of California hospitals, with large employed (faculty) practices, outperform
the overall national average and non-hospital owned national average MIPS’
scores for MSSP ACOs.
Impact of Physician Employment on Quality
Combining physician practices with hospitals has not had a negative impact on the
quality of care at hospitals
o One study assessed the performance of 4,438 hospitals on 29 quality
measures reported on Hospital Compare from 2008 to 2015. The authors
found hospitals with employed physicians performed similarly as hospitals that
did not employ physicians on all quality measures and performed better on
two of them.
4
o This study found no association between conversion to an employment
model and subsequent changes in composite mortality, readmissions, length
of stay, or patient satisfaction.
Physician employment can provide better access to care
o It provides access to employed specialists for low-income patients, especially
those with Medicaid coverage, who historically have had poor access to
independent specialists.
6
OVERVIEW OF CPOM BAN IN CA
The CPOM Ban has historically prevented lay (unlicensed) individuals, organizations,
and corporations from practicing medicine. This includes employing physicians to
provide medical services. The original purpose of the CPOM Ban was to prevent the
“conflict between the professional standards and obligations” of medical professionals
“and the profit motive of the corporate employer.”
5
Over the years, California has created by statute or recognized (through judicial
decisions or opinions of the California Attorney General) several exceptions to the
CPOM Ban that apply in limited circumstances. These exceptions are summarized at
pages 24 to 26 below. But notwithstanding these exceptions, most California hospitals
remain unable to employ physicians. As a result, some physicians and hospitals have
been forced to create “work arounds” to allow them to achieve some of the benefits
of an employment relationship without actual employment. Some of these work
arounds are discussed at pages 27 to 28 below.
PHYSICIAN EMPLOYMENT IN OTHER STATES
California’s expansive application of its CPOM Ban to prevent the vast majority of the
state’s hospitals from employing physicians makes it an outlier among the other 49
states and the District of Columbia. Almost all of these other 50 jurisdictions permit at
least most, and many permit all, hospitals to employ physicians.
How these other 50 jurisdictions arrive at this result varies widely. Some do not now and
never have recognized a ban on the corporate practice of medicine. Most, however,
do recognize some form of prohibition on the corporate practice of medicine as a
result of state statutes or regulations, judicial rulings, opinions of the state’s Attorney
General, position statements and/or disciplinary actions of state licensing boards, or
some combination of these. But even those that have such a ban on the books vary
widely in applying it: some simply do not enforce it at all; some interpret it in such a
way as not to apply to hospitals and/or other licensed health care entities; and others
have created explicit exceptions allowing hospitals (and other entities) to employ
physicians, often subject to express requirements that the employer not exercise control
over an employed physicians independent professional judgment concerning the
practice of medicine.
6
In 1991, the federal Department of Health and Human Services (DHHS) Office of the
Inspector General reported, based on a survey of hospital emergency room
administrators, that only 5 states prohibited hospitals from employing physicians:
California, Colorado, Iowa, Ohio, and Texas.
7
The report acknowledged that even in
those five states, the prohibition did not apply in all situations. Thirty years later, three of
7
those five states Colorado, Ohio, and Texas have all made substantial changes that
serve to relax their CPOM Ban by, among other things, permitting all or many more
hospitals to employ physicians.
Colorado
In 2016, Colorado enacted Colorado Revised Statutes 25-3-103.7 allowing a wide range
of health care business entities to employ physicians subject to certain specified
limitations. Specifically, this statute allows a “health care facility” as defined to employ
physicians subject to specified limitations, with health care facility” defined to mean a
hospital, hospice, community mental health center, federally qualified health center,
school-based health center, rural health clinic, Program for All-inclusive Care for the
Elderly (PACE) organization, or a long-term care facility.
8
The statutory limitations on
such employment are:
The health care facility cannot exercise control over the physician's
independent professional judgment concerning the practice of medicine,
diagnosis, treatment or require physicians to refer exclusively to the health care
facility or to the health care facility's employed physicians.
The health care facility may not offer physicians any percentage of fees
charged to patients by the health care facility or other financial incentive to
artificially increase services provided to patients.
The medical staff bylaws or policies or the policies of the health care facility
cannot discriminate against credentials or staff privileges based on whether a
physician is an employee, a physician with staff privileges, or a contracting
physician with the health care facility.
Ohio
Prior to 1994, Ohio recognized and enforced a CPOM Ban. But beginning in 1994,
statutory changes were enacted that changed this historical prohibition, permitting
corporations to provide professional services.
9
Ohio’s CPOM Ban now “appears to be
all but extinct.”
10
Indeed, in 2012, the State Medical Board of Ohio issued a public
statement on the corporate practice of medicine with the announced purpose of
“clarify[ing] that Ohio law does not prohibit an Ohio licensed physician from rendering
medical services as an employee of a corporation or any other form of business entity,
while noting that no matter the business entity, a physician must exercise professional
judgment to render medical services based on the best interest of the patient and
within the minimal standards of care of similar practitioners under the same or similar
circumstance.
11
Texas
8
Texas has had a strong history of outlawing the corporate practice of medicine. But
beginning in 2011, it enacted statutory exceptions to its CPOM Ban that allow a variety
of hospitals, among others, to employ physicians subject to certain requirements. The
entities thereby allowed to employ physicians include:
a hospital meeting certain requirements that primarily provides medical care to
children younger than 18 years of age;
critical access hospitals;
sole community hospitals as defined or that are located in a county with a
population of 50,000 or less; and
19 specified hospital districts.
The requirements these hospitals must comply with include:
enforc[ing] policies to ensure that a physician . . . exercises the physician’s
independent medical judgment” and establishing a process for complaints
regarding interference with that judgment.
12
“giv[ing] equal consideration regarding the issuance of medical staff
membership and privileges” to physicians employed by the hospital and those
who are not.
The purpose of modifying the Ban was to attract more physicians to rural areas. It also
suggests that state legislators may eventually lift the Ban on the corporate practice of
medicine altogether in Texas. Many believe the Ban impedes clinical integration that is
integral to federal healthcare reform and ignores the evolution of medical practice
away from solo practitioners.
13
Many states do not have a CPOM Ban at all or, like Ohio, have almost entirely removed
it. States that do not have a CPOM Ban include Alabama, Alaska, the District of
Columbia, Florida, Hawaii, Idaho, Indiana, Mississippi, Missouri, Montana, Nebraska, New
Mexico, Utah, Vermont, Virginia, and Wyoming.
Idaho is an example of a state that previously adhered to the CPOM doctrine.
However, in 2016, the Idaho Board of Medicine affirmatively rejected the doctrine and
stated that it would no longer discipline their licensees for practicing in a corporate
structure.
14
In formally abandoning the corporate practice of medicine doctrine, the
Board declared:
In the past, occasionally the Idaho State Board of Medicine has
disciplined physicians for aiding and abetting the unlicensed practice of
medicine by working for unlicensed entities or persons, sometimes known
as the corporate practice of medicine doctrine. The Idaho State Board
9
of Medicine hereby formally disavows and rejects the corporate practice
of medicine doctrine. The Idaho State Board of Medicine will not
discipline physicians or physician assistants solely because they practice
medicine in association with or for unlicensed entities or persons.
15
Given the variations across states, the change in CPOM Bans over time, the exceptions
granted to the Bans both in California and nationally, it is clear that the prohibition on
employment of physicians by hospitals is outdated. Maintaining such a Ban has the
potential to place hospitals in those states that maintain it at a significant disadvantage
when it comes to recruitment and retention of physicians.
NATIONAL TRENDS IN PHYSICIAN EMPLOYMENT
Within the past decade, an important shift has occurred in the relationship between
U.S. hospitals and physicians. For the first time in recent history, hospitals in the United
States as a whole are more likely to employ physicians than to enter any other kind of
affiliation or relationship with them.
16
A study by the Annals of Internal Medicine examined changes in U.S. hospitalreported
affiliations with physicians. The study examined 803 so-calledswitching hospitals (that
is, those that switched to an employment-type arrangement) compared with 2,085
non-switching control hospitals between 2003 and 2012. The study found that not only
has the proportion of hospitals employing physicians increased, but this model now is
the most dominant arrangement that hospitals form with physicians. The study noted
that large nonprofit teaching hospitals were more likely to have embraced this tightly
integrated relationship.
In 2003, approximately 29% of hospitals employed members of their physician
workforce, a number that rose to 42% by 2012.
10
Figure 1: Physician-hospital affiliation trends, 2003 -2012
Source: Scott, K., Orav, J., Cutler, D., & Jha, A. (2017). Changes in HospitalPhysician Affiliations in U.S. Hospitals and Their
Effect on Quality of Care. Annals of Internal Medicine. http://annals.org/pdfaccess.ashx?url=/data/journals/aim/935961/
by Kevin Rosteing on 01/13/2017.
Fewer physicians wholly own their practice. Around 49 percent of doctors worked in a
private practice in 2020, which marks a 5 percentage-point drop from 2018, according
to American Medical Association data.
17
The COVID-19 pandemic has also led many providers and physicians to consider how
to maintain clinical quality standards and financial stability. McKinsey launched a
national survey of general and specialty physicians in 2019, which it repeated six weeks
into the pandemic. During the first wave of COVID-19, more than half of respondent
physicians reported that they were worried about their practices closing.
18
While
autonomy has remained a priority for physicians, respondents indicated that they will
consider partnerships or joining a health system because of financial uncertainty
resulting from the COVID-19 pandemic. In McKinsey’s 2019 survey, around 40 percent of
employed physicians cited both personal and practice finances as influencers in their
decision to become employed.
New financial pressures resulting from the COVID-19 pandemic may also increase
physician interest in being acquired or employed. Six weeks into COVID-19, 53 percent
of all independent physicians reported that they were worried about their practices
surviving the COVID-19 challenge. Almost half of all independent physician practices
said they had less than four weeks of cash on hand, and 68 percent of those
respondents looking for partners ranked financial support as their number-one reason
for doing so. A third of small independent physician practices reported that they
11
believe working for a larger practice may provide greater benefits. Of the physicians
surveyed, 40 percent of them indicated that they were much more likely or somewhat
more likely to pursue employment due to COVID-19.
Figure 2
Source: McKinsey COVID-19 Physician Survey, May 2020
Avalere Health researchers studied the two-year period between January 1, 2019, and
January 1, 2021(which encompasses the first nine months of the COVID-19 pandemic),
to examine whether physician practice acquisition continued during this timeframe.
19
Avalere looked at two key related integration trends:
Acquisitions of physician practices by hospitals/health systems and “other”
corporate entities such as insurers and private equity firms
Physicians leaving independent medical practices for employment with
hospitals/health systems and corporate entities
Avalere’s findings include:
49 percent of physicians were hospital-employed by January 2021
Over the two-year study period, the percentage of employed physicians grew
by 5 percent
12
Figure 3
Source: Revised-6-8-21_PAI-Physician-Employment-Study-2021-FINAL.pdf (physiciansadvocacyinstitute.org)
PHYSICIAN SHORTAGES AND MALDISTRIBUTION IN CALIFORNIA
California currently has serious challenges meeting the physician needs of its
population, particularly in primary care. This challenge is even more pronounced in
certain areas of the state, with 28% percent of California’s population living in a HPSA,
defined by the United States DHHS as a “geographic area, population, or facility with a
shortage of primary care, dental, or mental health providers and services.”
HPSAs can be defined due to a shortage of providers for an entire group of people
within a defined geographic area (geographic) or a shortage of providers for a specific
group of people within a defined geographic area (population). Each designation
denotes a deficit of critically needed providers to care for the community.
13
There are three categories of population-based
HPSA designation, based on the health
discipline that is experiencing a shortage: (1)
primary medical, (2) dental, and (3) mental
health. The primary factor used to determine a
HPSA designation is the number of health
professionals relative to the population with
consideration of high need. Federal regulations
stipulate that, to be considered as having a
shortage of providers, an area must have a
population-to-provider ratio above a certain
threshold. For primary medical care, the
population-to-provider ratio must be at least
3,500 to 1 (3,000 to 1 if there are unusually high
needs in the community) to be considered a
HPSA.
20
California HPSAs
Although California meets the minimum
threshold for primary care providers statewide,
substantial disparities exist across counties and
regions of the state, with some areas below the recommended threshold.
For primary care, California has a total of 643 HPSAs across 115 geographic
areas, 96 population groups, and 432 facilities.
21
The designated HPSAs have a
total population of 7,800,038.
To remove all primary care HPSA designations by eliminating these primary care
provider shortages, California currently needs another 1,402 such providers in
HPSAs alone.
22
California currently has only ~46 percent of the primary care providers needed
for its population.
23
Having a sufficient number of primary care providers is critical to support the health of
the population. Primary care providers (including physicians, nurse practitioners,
physician assistants, and certified nurse midwives) can develop sustained relationships
with patients and practice in the context of family and community. Having a
designated primary care provider is associated with a higher likelihood of receiving
appropriate care and lower mortality. Having greater access to primary care providers
can provide better health outcomes and save lives.
24
Source: Bureau of Health Workforce, HRSA
Figure 4
14
The California Health Care Foundation has also looked at physician shortages, both for
primary care and for specialists in California.
Primary Care:
The Federal government
recommends an average of 60-80
primary care doctors per 100,000
people. As of 2020, California had 60
per 100,000, but only due to a
saturation of such physicians in the
Greater Bay Area.
25
Although meeting the minimum
recommended threshold statewide,
large geographic areas within the
state are well below the
recommended number.
A UC San Francisco study projects
California will need 4,700 additional
primary care providers in 2025 to
accommodate demand for
services.
26
Specialty Care:
The Federal government
recommends an average of 85-105
specialty providers per 100,000
people.
Two regions, San Joaquin Valley
and Inland Empire, have fewer than
the recommended base of
specialty physicians for the
population with others only slightly
over the recommended minimum
number.
27
Figure 5
Figure 6
15
Although statewide California meets the minimum recommended thresholds for
providers, this masks the underlying inequities across the state. While the Greater Bay
Area, for example, has an adequate number of primary care providers, other parts of
the state such as Northern and Sierra and Inland Empire are substantially below the
recommended number.
Over 33 percent of all active physicians in California are over 60 years old and within 5
years of retirement higher than the nation-wide figures (the national level is ~30
percent). Similar trends in shortages exist for advanced practice providers such as
physician’s assistants and nurse practitioners. The anticipated shortage is also
influenced by demand factors such as a growing elderly and overall state population
(148 percent and 112 percent growth, respectively). Concerted efforts are needed to
address these shortages to adequately meet the needs of California’s population as a
whole.
HEALTH INEQUITIES
County
Total
Population
Alpine County
1,155
Calaveras County
45,585
Colusa County
21,477
Del Norte County
27,948
Glenn County
27,914
Humboldt County
136,373
Lake County
64,382
M ariposa County
17,676
M odoc County
9,109
Nevada County
99,696
Tehama County
63,411
Trinity County
12,870
Tuolumne County
54,349
Imperial County
181,827
Kings County
151,366
M adera County
157,672
M erced County
274,765
Tulare County
465,861
Counties with 100% of their
population in an HPSA
Figure 8: Counties with 100% of
the Population in a HPSA
Source:
https://www.chcf.org/publication/shortch
anged-health-workforce-gaps-
california/#related-links-and-downloads
Figure 7: Percentage of adults reporting fair or poor
health (age-adjusted) in California by County.
Source:
https://www.countyhealthrankings.org/app/california/2021/meas
ure/outcomes/2/map
Note: The 2021 County Health Rankings used data from 2018 for
this measure
Kern
16
The maps (Figures 7 and 9) show the
health outcomes of the population by
county as well as the adults
experiencing fair to poor health in
each county. For example, Kern
County located in the San Joaquin
Valley has an average of only 47
primary care providers for 100,000
people, compared to the federally
recommended average of 60-80
primary care providers; Kern County
also has the worst ranking for poor
health and overall health outcomes in
the state.
While 20 percent of the U.S.
population lives in a rural area, only 9
percent of the nation’s physicians
serve that population.
This problem, impacting both rural
and urban underserved areas, can be
attributed to multiple factors including
inadequate reimbursement rates for
primary care services, medical school
debt load, geographic isolation, lifestyle preferences, and lower rates of health
insurance coverage in rural and inner-city areas.
28
There is significant evidence that optimal health care outcomes and optimal health
system efficiency are demonstrated when at least 40-50 percent of the physician
workforce is composed of primary care physicians.
29
For example, a recent
Government Accountability Office report concluded that over-reliance on specialty
services results in a less efficient health care system.
30
For each incremental primary
care physician, there are 1.44 fewer deaths per 10,000 persons. Patients with a regular
primary care physician have lower overall health care costs than those without one.
31
The report also concluded that preventive care, care coordination for the chronically ill,
and continuity of care can achieve cost savings and improve health outcomes. A
Health Affairs report found that established surrogate markers for health care outcomes
in the U.S. are improved at considerably lower expense in states that have a high supply
of primary care physicians.
32
In addition, socioeconomic and racial disparities in health
Figure 9: Overall Health Outcomes in California
by County
Source:
https://www.countyhealthrankings.org/app/califo
rnia/2021/rankings/outcomes/overall
Kern
17
care outcomes are dramatically reduced when there is an appropriately sized primary
care workforce.
PHYSICIANS WHY DO THEY WANT TO BE EMPLOYED?
For decades, physicians have been burdened with increases in the cost of attending
medical school, duration of training, cost of licensure/maintenance of board
certification, and the cost of malpractice insurance. Additionally, increased
administrative costs of operating a private medical practice among other factors
has driven a trend for physicians to move from private practice to employed positions.
33
Physicians are increasingly choosing employment over private practice because it
allows them to focus on patient care, rather than the administrative challenges and
economic uncertainties of running a business. Specific concerns drive this desire by
private-practice physicians to be employed.
Market Forces
o Private-practice physicians are held captive to government regulations
dictating fixed payment structures, and they have little power to negotiate
favorable pay rates from private insurers.
o On the other hand, because hospitals and hospital systems recognize the
critical role physicians serve in providing patient care and the increasing
physician workforce shortage, they have incentives to employ physicians to
ensure access to care is not jeopardized. Consequently, physicians who seek
hospital employment can capitalize on these market forces to negotiate
favorable compensation terms.
Inflationary Pressures
In the last 20 years, administrative, personnel and supplies costs in the health care
sector have all risen significantly beyond the general inflation rate. Over the same
time, however, Medicare reimbursement rates have declined dramatically when
adjusted for inflation.
o For example, Medicare physician reimbursement for orthopedic surgery
procedures fell an average of 28 percent between 1992 and 2007, when
adjusted for inflation. And while private-payer data are not as readily
available, general correlations in reimbursement exist so one can assume a
similar pattern across the spectrum of payer sources.
34
18
Figure 10
Source: https://www.healthaffairs.org/do/10.1377/hblog20170127.058490/full/
Geographic Considerations and Practice Setting
A Merritt Hawkins’ 2021 Survey of Final-Year Medical Residents found that:
Geographic location was the most important factor residents consider when
examining a job opportunity, followed by adequate personal time and lifestyle
considerations.
Figure 11 shows that in 2021, none of the medical residents surveyed would prefer to
live in a community of 10,000 people or less, and only 3 percent would prefer to live
in a community of 25,000 people or fewer, a worrisome sign for rural communities in
need of physicians.
19
Figure 11: Practice Location Preference Based on Population
Source: merritt-hawkins-2021-resident-survey.pdf (merritthawkins.com)
Figure 12 shows what practice setting survey respondents preferred, with 45 percent of
medical residents preferring hospital employment as their first-choice practice setting
over any other type of setting. Notably, only 1 percent of medical residents would
prefer a solo setting in their first practice, signaling the further decline of traditional
private practice.
Figure 12: Physician Employment Preferences from 2021 Survey of Final-Year Medical Residents
Source: merritt-hawkins-2021-resident-survey.pdf (merritthawkins.com)
20
HOSPITALS WHY ARE THEY EMPLOYING PHYSICIANS?
Nationally, hospitals and multi-hospital systems are acquiring medical groups and
physician practices as part of a strategy to build integrated delivery systems capable of
providing the full range of professional, facility, laboratory, and pharmaceutical services
to patients. There is potential in this type of clinical integration to lead to greater
coordination of care, less duplication of tests and treatments, a substitution of low-cost
for high-cost settings where appropriate, and as a result, lower total expenditures for
care.
Additional reasons hospitals choose to hire physicians include:
Many hospitals in rural areas have no choice but to employ physicians. Retiring
independent physicians are leaving large gaps in care in their economically
challenged communities. Consequently, hospitals that do not step in to fill the gaps
are in danger of losing physicians, being unable to provide needed care, and
closing.
35
Inner cities also have a difficult time attracting physicians, compelling the hospitals to
employ them (when state law permits) to meet the needs of the communities. For
example, placing primary care physicians in urban areas is especially challenging.
Demand is extremely high, but the reimbursement can be less than the suburbs and
even lower in the inner city where there is a higher proportion of patients with public
insurance like Medicaid.
Employing physicians better positions the organization for capitated, or value-based
payment, in which purchasers of health care (such as the government and
employers) and payers (public and private) hold the health care delivery system at
large (hospitals, physicians and other providers) accountable for both quality and
cost of care. This is different than the traditional reimbursement system that has
historically been utilized whereby providers are paid for each service they provide.
These value-based payment models are typically more complex and involve
financial risk for participating providers. Better clinical integration and care
coordination can increase the probability of success under these models.
Building an in-house staff of physicians has streamlined coverage for 24/7 hospital
services such as the emergency department, the intensive care unit, and diagnostic
services like radiology and pathology.
36
As hospitals employ larger numbers of physicians, many are also giving physicians a
greater role in governance and management. Hospital executives believe giving
physicians a larger leadership role helps improve the clinical effectiveness of care and
enhances physician loyalty.”
37
21
POTENTIAL BENEFITS OF PHYSICIAN EMPLOYMENT
Improved Quality of Care Through Increased Clinical Integration
Hospital-physician alignment is a key strategy to create clinical integration across the
care continuum, thereby improving the quality of care for patients while also controlling
healthcare costs. The need for hospital-physician alignment was accelerated by the
Affordable Care Act (ACA), which creates value-based payment models that require
greater provider accountability for cost and quality outcomes.
Many U.S. policymakers believe that increased integration between hospitals and
physicians may foster better care and potentially decrease health care spending. The
logic is that when physicians are employed, they can focus on patient care rather than
the need to generate revenue and manage the myriad operational details of running
a practice. Furthermore, as hospitals increase their efforts to improve the quality of
patient care, the presence of a physician workforce that is tightly integrated with the
hospital will make it easier to incentivize these clinicians to focus on quality metrics,
share common information systems (which is critical to efficient care coordination), and
comply with clinical guidelines that are designed to provide improved patient care.
38
Support among policy makers to move toward greater integration between hospitals
and physicians has had the effect of encouraging hospitals to employ physicians the
tightest form of “vertical integration” and acquire medical practices.
An employeremployee relationship between hospitals and physicians can improve
outcomes by:
bolstering coordination efforts by operating under a single electronic health
record, supporting a more complete view of the patient’s care;
increasing continuity of services by providing for the full continuum of services
between primary, specialty, and acute care;
improving access to capital to support necessary clinical investments such as
electronic health records;
boosting physician satisfaction; and
augmenting accountability for clinical performance (such as through bonuses
and withhold pools).
39
One of the more prominent ways to promote integrated care delivery is through the
creation of accountable care organizations (ACOs), under which some component of
provider fees is under financial risk if patient care costs exceed the expenditure target.
40
Medicare ACOs were created due to the passage of the ACA and the launch of the
Medicare Shared Savings Program (MSSP). These innovative models seek to reward
providers if they can reduce the cost of care year over year while also improving the
22
quality of care being provided. These models have evolved over time to include
greater amounts of financial risk for providers. There has been a similar expansion of
these types of models being utilized by commercial and Medicaid insurers nationally.
Providers are also measured as part of the Merit-based Incentive Payment System
(MIPS) on a range of measures including cost and quality.
Figure 13
Figure 13 shows a condensed view of scores solely by ownership type (hospital-owned
or non hospital-owned). Collectively, hospital-owned ACOs exceed the national ACO
average score across Quality, Promoting Interoperability, and Final Score domains. Non
hospital-owned ACOs report slightly lower scores (0.5 points lower in Quality, 1.5 points
lower in Promoting Interoperability, and 0.4 points lower in Final Score).
Nationally, hospital-owned MSSP ACOs have similar (if not slightly higher) MIPS scores
than non hospital-owned ACOs. BRG also specifically looked at the performance of the
University of California hospitals, with large employed (faculty) practices, and found
that they outperformed the overall national average and non-hospital owned national
average MIPS scores for MSSP ACOs.
In addition to the above analysis, BRG reviewed existing literature to determine if studies
had examined the correlation between physician employment and associated quality
outcomes. In a study published in the Annals of Internal Medicine, the authors
compared those physicians that had switched from an independent model to an
employment model (switchers) and those that had remained independent. In
comparing switching with non-switching hospitals in the same region, they found no
association between conversion to an employment model and subsequent changes in
23
composite mortality, readmissions, length of stay, or patient satisfaction
41
in other
words, common measures of quality of care remained consistent after physicians
became employed.
Access to Care
Physician employment also has the benefit of ensuring access to needed services for
the communities the hospital serves. The problem of ensuring that patients have access
to needed care is particularly acute in rural or other areas that have difficulty attracting
a sufficient physician workforce. In the absence of physician employment, hospitals are
compelled to turn to contracting for on-call coverage (which raises the overall cost of
health care) and providing additional subsidies to physician groups for providing
services in underserved areas that can’t otherwise sustain needed services.
Subsidy arrangements with physicians are essential for hospitals to ensure they have
adequate coverage for service lines with relatively low volumes that are insufficient to
support a physician’s practice or to address the needs of a payor mix that includes
greater numbers of Medicaid patients (for whom physicians receive relatively low
compensation) and uninsured patients.
Hospitals face serious practical and economic challenges in getting sufficient call
coverage to meet patient needs, sometimes forcing them to reduce services. Being
able to hire physicians to provide call coverage helps to solve these problems, insuring
patients’ access to necessary services. On-call coverage arrangements with physicians
are essential in managing any emergency department or acute care hospital service
line. Given the uninsured population in the United States and the burden and expense
of ensuring adequate access, the shortages in the physician supply have created
significant challenges for hospitals trying to secure physician coverage.
A study conducted by Sullivan, Cotter and Associates surveyed 142 hospitals and other
organizations across the country to determine trends in physician on-call pay rates and
practices. Their key findings include:
42
Hospitals are more likely to have to pay independent physicians for call
coverage than pay employed physicians. According to the survey, 82 percent
of hospitals pay some independent physicians to provide call coverage.
Additionally, hospitals are more likely to have to compensate independent
physicians for being called in than employed physicians.
On-call pay is expected to grow. One-fifth of survey participants indicated they
plan to start paying more physicians for on-call services within the next six
months. The reasons cited were:
o Shortages of physicians willing to provide on-call coverage in certain
specialty areas, primarily surgical specialties and intensivists.
24
o Desire to increase the amount of coverage provided in certain specialty
areas.
o Demands from medical staff.
o Physician expectations have increased as more specialties receive on-call
pay.
Physician employment is a strategy to alleviate the need for expensive call coverage
and to ensure access to needed services.
CPOM EXCLUSIONS IN CA
Beginning in 1968, California began creating limited exceptions to the CPOM Ban in
response to specific policy needs, court decisions or federal requirements.
Examples of specific exclusions from the CPOM Ban:
Business and Professions Code Section 2401 creates the following five exceptions to the
Ban on physician employment.
Clinics Operated for the Purpose of Medical Education by Certain Medical
Schools (Business & Professions Code Section 2401(a)
43
o Medical schools are not subject to the Ban. Today, thousands of
physicians are employed through academic appointments across the
California’s public and private medical schools. Further, Business and
Professions Code Section 2401(a) permits “a clinic operated primarily for
the purpose of medical education by a public or private nonprofit
university medical school, which is approved by the board or the
Osteopathic Medical Board of California, [to] charge for professional
services rendered to teaching patients by licensees who hold academic
appointments on the faculty of the university, if the charges are approved
by the physician and surgeon in whose name the charges are made.
Nonprofit Research Clinics (Business & Professions Code, Section 2401(b); Health
& Safety Code, Section 1206(p))
o These clinics, which conduct research in such areas as prostate cancer
and cardiovascular disease, also provide healthcare services to patients
in conjunction with the research being conducted. These clinics may
employ physicians and charge for their professional services. Addressing
the lay control and other concerns underlying the CPOM Ban, this
exception expressly requires that “the clinic shall not interfere with, control,
or otherwise direct the professional judgment of a physician and surgeon
in a manner prohibited by Section 2400 or any other provision.”
25
Narcotic Treatment Programs (Business & Professions Code, Section 2401(c);
Health & Safety Code, Section 11839, et seq.)
o Narcotic treatment programs, which are operated under Section 11876 of
the Health & Safety Code, may employ physicians and charge for
professional services rendered. Narcotic treatment programs currently
employ 108 physicians throughout the state. Addressing the lay control
and other concerns underlying the CPOM Ban, this exception expressly
requires that “the narcotic treatment program shall not interfere with,
control, or otherwise direct the professional judgment of a physician and
surgeon in a manner prohibited by Section 2400 or any other provision.”
Specialty Pediatric Hospital (Business & Professions Code, Section 2401(d))
o A hospital owned and operated by a licensed charitable organization,
that offers only pediatric subspecialty care, and that meets requirements
including the following, may employ physicians and charge for their
services: (1) prior to January 1, 2013, it employed physicians on a salary
basis; and (2) it had not, as of that date, charged for professional services
rendered to patients. (These requirements are such that it applies only to
Shriners Children’s hospitals.) Addressing the lay control and other
concerns underlying the CPOM Ban, this exception expressly requires that
“The hospital does not interfere with, control, or otherwise direct a
physician and surgeon’s professional judgment in a manner prohibited by
Section 2400 or any other provision.”
Critical Access Hospitals (Business & Professions Code section 2401(e), added by
AB 2024 (Wood, 2016)
o This seven-year exception to the CPOM permits federally certified critical
access hospitals to employ physicians and charge for the professional
services rendered to patients, provided that, among other things, the
medical staff concurs by an affirmative vote that the licensee’s
employment is in the best interest of the communities served by the
hospital. Addressing the lay control and other concerns underlying the
CPOM Ban, this exception expressly requires that “The hospital does not
interfere with, control, or otherwise direct a physician and surgeon’s
professional judgment in a manner prohibited by Section 2400 or any
other provision.”
In addition to these, there are the following exclusions or exceptions to the CPOM Ban.
County Hospitals
Though not delineated in statute, California courts have long recognized that
the CPOM Ban does not apply to counties, and thus county hospitals may
26
employ physicians to provide medical services to patients.
44
There are 12
county-owned hospital systems in California that operate a total of 21 hospitals.
State Agencies (Government Code, Section 18500)
The State of California has the authority to create a state civil service, including
healthcare professionals. For example, the California Department of Corrections
and Rehabilitation employs physicians, surgeons, psychiatrists, and dentists,
among other types of medical professionals. As of December 2015, there were
534 physicians and surgeons, 631 psychiatrists and 284 dentists employed by the
state.
University of California Hospitals
By virtue of its constitutional creation as a unit of government (see Cal. Const,
Art. IX, §9), the University of California is not subject to the CPOM Ban. This has
been acknowledged by what is now the Medical Board of California, the
agency charged with enforcing the CPOM Ban. Judicial decisions also
acknowledge this status. See, e.g. California Medical Association v. Regents of
the University of California (2000) 79 Cal. App. 4
th
542, 548-550, and fn. 11.
Health Maintenance Organizations (HMOs) (42 U.S.C., Section 300e; Health & Safety
Code, Section 1340, et seq.)
HMOs have effectively been exempted from California’s Ban on physician
employment since Congress, as part of the HMO Act of 1973, preempted state
laws that could inhibit HMOs, including the prohibition on employing physicians.
But while employment relationships between physicians and HMOs are allowed,
the only HMO model that directly employs physicians is the staff model, and
there are few, if any, HMOs of this type today in California.
Certain Charitable Institutions, Foundations, or Clinics (Business & Professions Code,
section 2400, California Code of Regulation, Title 16, Section 1340)
The Medical Board of California may authorize the employment of physicians on
a salary basis by licensed charitable institutions, foundations, or clinics if no
charge for professional services rendered patients is made by that entity.
Post-Graduate Training Programs (Business & Professions Code section 2403)
Physicians and surgeons or doctors of podiatric medicine enrolled in approved
residency postgraduate training programs or fellowship programs may be
employed.
27
NON-EMPLOYMENT MODELS FOR ACHIEVING HOSPITAL-PHYSICIAN
ALIGNMENT IN CALIFORNIA
As noted above, hospital-physician alignment is critical to creating clinical integration
across the care continuum, thereby improving the quality of care for patients while also
controlling healthcare costs.
Hospital employment of physicians is a direct way to achieve such alignment, as
salaries and bonuses can be used to incentivize physicians to achieve these quality and
cost outcomes. But in California, where only a fraction of the state’s hospitals can
employ physicians because of the CPOM Ban, hospitals have had to develop other
ways to align with physicians. Below are three examples that do not violate the
employment Ban but do create a relationship between a physician and a hospital that
can facilitate the goals of alignment: improved patient care at a reduced cost. Each
of these examples, however, are workarounds that can be achieved only with
additional administrative burdens and cost.
Medical Foundations
Health & Safety Code, Section 1206(l)
One way for hospitals to align with a group of physicians is to have a clinic operated by
a non-profit medical foundation that can contract directly with physicians.
The following requirements must be met for a 1206(l) medical foundation:
a clinic operated by a nonprofit corporation exempt from federal income
taxation under paragraph (3) of subsection (c) of Section 501 of the Internal
Revenue Code of 1954, as amended, or a statutory successor thereof;
the clinic must conduct medical research and health education and provide
health care to its patients;
it must have a group of 40 or more physicians and surgeons, who are
independent contractors representing not less than 10 board-certified
specialties; and
at least two-thirds of those physicians and surgeons must practice on a full-time
basis at the clinic.
The medical foundation arranges for physician services through a professional services
agreement with one or more medical groups or with individual doctors. The Palo Alto
Medical Foundation, Dignity Health, and First Choice Physician Partners (created by
Tenet Healthcare) are examples of medical foundations.
28
These strict requirements for medical foundations can prevent smaller hospitals from
creating them. The California Health Care Foundation notes, for example, that “the
complexity and costs of [establishing medical foundations] may preclude smaller,
financially weaker, and rural hospitals from pursuing them, thus widening gaps between
them and stronger, competing hospitals.”
45
In light of some of the challenges of using this medical foundation model, given its
requirements, in 2019, California enacted AB 1037 (Gipson, 2019) which, among other
things, allowed the Martin Luther King Jr. Community Hospital to create a medical
foundation comprised of only 26 physicians practicing on a full-time basis at its clinic,
rather than the 40 physicians required by Health & Safety Code §1206(l).
Hospital Outpatient Departments
Health & Safety Code, Section 1206(d)
Another strategy for physician alignment is to form hospital-based outpatient clinics
which provide care outside of the four walls of the hospital, often treating patients with
chronic or complex conditions. See Health & Safety Code, Section 1206(d) Because
such clinics are owned by the hospital, they are not exempt from the CPOM Ban. But,
under a professional services agreement between them, physicians agree to provide
medical services (for which they generally bill third-party payers), while the hospital
agrees to provide infrastructure, administrative assistance, and support services
Hospitals Purchasing Medical Practices
Though they may not employ physicians, California hospitals and health systems may
purchase the physical assets (building, equipment, etc.) of physician practices and
contract to manage the administrative and operational side of the practice while the
physicians continue to be responsible for medical care, clinical decisions, and direct
billing of insurers.
Although hospital-physician alignment models do exist outside of hospital employment,
they are often expensive, administratively burdensome, and unresponsive to physician
choices regarding employment.
29
CONCLUSION
California’s ban on hospitals employing physicians is outmoded, well behind the laws
and policies of virtually all other states. More importantly, it disregards the desires of
physicians, the needs of hospitals, and the needs of California residents by creating
unnecessary barriers to the state’s ability to attract a sufficient number of physicians to
provide adequate access to, and address inequities in, healthcare. It also is a major
barrier to clinical integration, the goal of which is to facilitate improvements in the
quality of care patients receive. While there are “work arounds” to attempt to achieve
these goals, they are of limited application as well as burdensome and expensive to
utilize.
30
APPENDIX
Methodology to analyze provider-level data for ACOs
To determine whether hospital-owned ACOs performed at a similar overall level as
non-hospital-owned ACOs, BRG used MSSP data from 2019 to create a list of ACOs
to evaluate. ACOs were then categorized into “hospital-owned” or “non-hospital-
owned” based on ownership status and exclusive participation with a hospital or
health system. Only organizations that participated in the MSSP in 2019 were
included in the review.
BRG also coded whether ACOs were primarily based in California based on the
ACO’s self-reported states of operation. If California was the first state listed in the
states of operation field, that ACO was coded as operating primarily in California. If
California was listed in any other position or not at all, that ACO was determined to
be operating in “any other” state.
BRG then matched the identification number from MSSP data to the Merit-based
Incentive Payment System (MIPS) data set and limited the scores to alternative
payment models for quality outcome data. MIPS was created under the Medicare
Access and CHIP Reauthorization Act (MACRA) of 2015 to measure the quality of
care being provided based on specific domains quality, promoting
interoperability, improvement activities, and cost. Eligible providers are required to
report to the federal government on these measures on an annual basis.
31
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