Practice Notes

With $1.4 trillion in federal cuts, medical groups need a new economic playbook

by John Deane, MPA and Adam Bryan, MBA, Advisory Board Consulting

Most of our health system clients are putting less stock in fee-for-service care delivery—whether or not they feel ready to do so. Obama-era reimbursement cuts are still on schedule to reduce payments by $143 billion in 2025 and that's compounded by legislative proposals that would increase cuts to $1.4 trillion. But making a pivot could mean investing tens of millions to build the infrastructure to support value-based care.

On top of an already tight budget, that kind of investment is not something many leaders are running to shell out. But with strategic efforts made in the physician enterprise, health systems can actually free up fee-for-service economics to fund the transition at least in large part.

First, think differently about physician value

Understanding the real value of the employed medical group goes far beyond standalone profit and loss economics. In order to calculate the holistic ROI from employed physicians—including the hospital contribution margin generated by patients of the medical group—our clients use the physician enterprise value or PEV metric to capture facility and medical group value together.

With the ability to calculate PEV, an organization can then drill into opportunities and gaps along the care continuum: Where are patients not able to access care in timely manner? Where are physicians experiencing roadblocks when it comes to patient referrals? Where is the revenue cycle underperforming?

The questions differ for every organization, but the answers and solutions lead to a more efficient, high-performing physician enterprise with increased revenue for the medical group and across the entire health system. 

Using PEV to pursue budget-friendly initiatives

Once a health system understands where it falls on the PEV scale, the next step is moving the needle on the numerator (contribution margin) and denominator (investment).

Traditional efforts to improve expenses and cash collections in the medical group are still essential in the investment category—but the numerator requires an increased need to focus on topline revenue. It's a different-in-kind playbook that economically positions a medical group to be ready to pivot from fee-for-service.

Get the guide to achieving physician enterprise ROI

To bring this to life, we'll share an example of how this can play out.

A 500-physician medical group in the northeast reviews its PEV score to find that practices are inconsistent in how many patients they see per physician and there's generally room to get more patients on the schedule. Based on knowing that the average downstream contribution margin per physician outpatient clinic visit ranges from $350 to $950, and half of the group's physicians see patients daily, they calculate what it would look like if they added one more patient per day: an annual financial improvement of between $20 million and $59 million. The ability to generate that kind of return alone provides for the necessary resources to finance the infrastructure required in a total cost management environment.

With such a significant increase to total system contribution, this medical group will move the organization's PEV score in a big way. And when such initiatives are combined with other similar efforts—such as strategies to improve physician productivity and referral management—the health system yields exponentially greater improvements than if they are addressed alone.

Looking back, building the medical group was mostly about assembling large numbers of acquired practices and newly recruited physicians. Now that we have medical groups at scale, today is about transforming the group to become the primary performance engine of the health system network.

Get our guide to achieving physician enterprise ROI

To go deeper on understanding physician enterprise value, read this additional resource from John and Adam to learn how the PEV formula supports broader medical group and health system alignment strategies.

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John Deane is Chairman of Advisory Board Consulting, where he leads transformational engagements focused on health-system sponsored medical groups. Adam Bryan is Vice President of Advisory Board Consulting and leads Advisory Board's technology and data analytics work in service to the employed physician enterprise.

This article previously appeared in Becker's Hospital Review. It is part of a series about understanding PEV and using the metric to comprehensively impact health system and medical group performance.