Finding it increasingly difficult to remain profitable in private practice, many physicians are turning to hospital employment to avoid the economic realities of running a small business. However, as a recent article in the New York Times illustrates (see "A Hospital War Reflects a Bind for Doctors"), physicians should bear in mind that even under hospital employment, economic pressures — though perhaps different from those in private practice — will continue to exist.

Few hospital-owned physician practices are actually profitable after payment of practice overhead and physician compensation. Although hospitals typically receive economic benefit from ongoing physician referrals for hospital services, under federal law, hospitals are not supposed to take these dollars into consideration when establishing physician compensation.  Moreover, Hospital employers may lose sight of the intangible contributions of employed physicians when they are compelled to provide a regular financial subsidy to their captive physician practices.  It is critical, therefore when establishing physician employment arrangements with hospitals to reach clarity on the economic expectations on both sides of the transaction and build adequate protections for both parties into the employment agreement. Key elements of such an understanding will include productivity expectations, budgeting and staffing considerations and appropriate incentives for continuing or improved performance.