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The number of independent physicians & practices has been in decline, especially the smaller practices. Those that have been able to remain independent have been facing more and more financial pressure from a combination of increased costs and declining reimbursement. (1)
Furthermore, when a physician retires or otherwise departs the practice, it creates a vacuum that is hard to fill. The remaining physicians are then left with a higher allocation of fixed costs unless they can absorb the departing physician's volume and/or recruit a new physician and get them up to speed quickly.
However, the financial realities for most small independent physician practices also make it extremely difficult to provide competitive compensation packages necessary to recruit new physicians. In order to do so, the remaining physicians may have to get a loan, finance it themselves, or in certain cases, enter into an income guarantee agreement with a local hospital. Regardless of which path is taken, the existing physicians frequently take a pay cut, and in some cases, they end up earning less than the physician they have recruited, just to stay independent.
This situation often creates division and animosity among the remaining physicians and can lead to other physicians in the group retiring early or seeking employment on their own, further compounding the problem.
Because of these aforementioned issues, many private practices and physicians who have fought hard to stay independent now see no other choice but to sell their practice, seek employment and/or pursue some sort of alignment with the health systems. However, those who pursue these options often find themselves at a disadvantage when negotiating the sale of their practice and/or future employment agreement.
This is especially true when it comes to negotiating compensation for providers who have been absorbing a higher level of overhead costs and thus earning less compensation historically, all else equal.
Many hospitals are hesitant or unwilling to pay physicians from their local market much, if any, more than they made in private practice based on commentary and guidance from regulators over the years. Many more have become more wary due to recent Stark Law cases, such as the CHN settlement in 2023, which made specific reference to compensation amounts that were “significantly higher – sometimes as much as double – what they were receiving in their own private practice.”(2) However, these same hospitals may not blink an eye if they recruit an out-of-market physician and offer them compensation twice as much as the local physician is earning if compensation survey data supports it.
Ultimately, provider compensation needs to be fair market value (“FMV”), commercially reasonable, and not based on the value or volume of their referrals to the hospital. While compensating physicians more than they were earning in their local private practice may be viewed as more risky, it should not be a non-starter.
If you and/or your practice find yourself at a crossroads, our experts at Root Partners have significant experience in helping physicians successfully navigate compliant business and employment transactions so that their value is fully realized. Please contact Mark Spurlin at mspurlin@rootvaluation.com or book a meeting directly if you would like to discuss your situation and how we may be able to help.
References
1. https://www.ama-assn.org/practice-management/private-practices/private-practice-collapsing-congress-can-help-stem-tide (Accessed 3/11/25)
2. “United States’ Complaint In Intervention” Department of Justice, January 6, 2020, https:// https://www.justice.gov/opa/media/1329616/dl?inline (Accessed 3/11/25)