Should hospitals subsidize physician salaries?

I have been doing locum tenens work as a hospitalist for nearly two years. One of my reasons for doing this is that the practice of medicine in the US is very interesting, and by working in very different places I get to see how things work and don’t work, and make up cool theories. I have time to read and listen to people and have become curious about several true things which don’t seem to fit together.

  1. Hospitals are paid an absurd amount of money to take care of patients.
  2. Small hospitals can barely survive financially.
  3. Small hospitals, rural ones with 25 beds or fewer (critical access hospitals) are paid more generously by Medicare than large hospitals.
  4. Hospitals that employ physicians subsidize them above the money they bring in as professional fees, to the tune of about $100,000 per year per physician.
  5. Hospitalists and hospitalist programs are expensive, in the range of 1-2 million dollars per year for a 25 bed hospital.
  6. Hospitals are willing, even happy, to start hospitalist programs.
  7. Hospitals have a slim enough margin (net income divided by total revenues) that changes in payment schemes has resulted (in times past) in the financial collapse of many of them, especially those that serve vulnerable populations.


So how can hospitals be so financially tenuous despite the fact that they are the largest cost center of the huge healthcare sector of our economy? Are they just whining?
I have been eager to get my hands on a hospital budget or two to try to piece together how hospitals spend their money, to see if there is some obvious extravagance. I have asked to be allowed to see the budget of the hospital that I know best, and somehow emails were lost or it wasn’t very high on anyone’s to-do list or it was a deep dark secret or something.

Finally I Googled the right collection of words and found a link on the Washington Department of Health website where I could see quite a number of budgets for Washington state hospitals, even ones I knew something about.

I learned various things, which should be taken with grains of salt, because these budgets were not very detailed and may have misrepresented the truth in some important way. Still. It is the best I can do, and is somewhat instructive. I looked at one 300 bed hospital and one 25 bed critical access hospital and this is what I learned.

  1. Hospitals have a profit margin of about 3-4%, which is a fact I have also read elsewhere. This is considered very small, and makes them vulnerable to small changes in payments.
  2. Hospitals bring in about $4000-$5000 per patient per day spent in the hospital. They also make a pretty big portion of their revenues by serving outpatients (doing things like blood tests and imaging and outpatient procedures). Since most hospitals are paid according to diagnosis rather than length of stay, at least for a large proportion of patients, they make more money with less resources if the patients are discharged sooner rather than later. Small hospitals make more per patient per day than large ones.
  3. The majority of a hospital’s expenses are the salaries of the many people who work there, nurses, technicians, administrators, employed physicians, janitors, cooks etc. These costs generally go back into the communities they serve since people usually spend their money for food and rent and stuff they buy.

What I glean from this is that significant cutbacks in hospital expenses will probably involve cutting local jobs. That may not be a bad thing, in the big picture, especially if the workers are perpetuating an inefficient system, but hospitals are often the economic heart of their communities, so cutting jobs is not ideal. There may be some extravagance in some salaries and there may be waste elsewhere, but finding it will probably be laborious.

I also figured out how it might serve a hospital to have an expensive hospitalist program. If a hospital spends a million dollars to have a hospitalist program, with an average length of stay of about 4 days and a daily revenue per patient of about $5000, if a hospitalist program resulted in only 50-60 more patients being admitted to the hospital in a year, the program would pay for itself.

The same goes for other subsidized physicians. If a hospital has to pay each of 3 surgeons an extra $100,000 per year above their actual professional fees to work at that hospital, those surgeons would only have to bring in a total of 20 more patients to pay for their subsidy. Not having a viable surgery department in the hospital, on the other hand, would result in a tremendous loss of patient volume which would be financially devastating.

Because the budget information is so vague, I can’t tell how much of a hospitals’ costs are fixed and how much are based on volume of patients, which could significantly alter my calculations. Still, with very round numbers, it does appear that attracting more patients, especially those whose insurance pays well, would easily make it worthwhile for a hospital to employ physicians in various capacities.

So how does this information fit in with my ongoing thesis that healthcare is too expensive because we do stupid things? Much of the volume of actual work done in a hospital is aimed at servicing the wasteful procedures and tests which we do because that is how we do things. If we truly want to reduce healthcare costs, we need to be thrifty in a way that saves hospitals as much money as is necessary to offset any reduction in payments. This is definitely possible, but we do need to be sensitive to details of cost efficiency and realize that spending less on healthcare, at least at the level of hospital services, will impact the folks who are employed by the hospital and the communities where they live.

Janice Boughton is a physician who blogs at Why is American health care so expensive?


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  • Steven Reznick

    I do not understand how having hospitalists brings in money by admitting 40-50 more patients a month? Either the patients are ill enough to require admission or they are not. If the non salaried private community physicians were bringing in these 40-50 extra patients a month because they required admission wouldnt the hospital be far better off financially without having to pay the hospitalist salaires and benefits?

    • GH

      Because the hospitals are paid for the diagnosis, not the length of stay, the hospitalists help by getting patients out faster then a traditional doctor would be able to. Thus, the hospital makes more money. Not sure if this is true, but it is what I got from the article.

    • heartdoc345

      There’s a limit to the number of beds in the hospital – maybe you don’t get 50 extra patients, per se, but 100 patients over 4-day DRGs vs 50 patients admitted 8 days but only paid for 4 DRGS. Not new patients, but a higher percentage of reimbursement.


    To comment on the question posed by the title. I would say yes, especially for pediatrics. Most peds subspecialists could not survive in an “eat what you kill” environment where you only get what you bill. Since peds subspecialists often end up primarily taking medicaid which pays way less than medicare (that is supposed to change this year supposedly) they need hospital support to make a fair wage.

    For hospitalists in particular from what I’ve read having a hospitalist program is a money saving endeavor. i.e. if you invest a few million in hospitalists but you cut length of stay by a day or two you’ll make your money back. It’s simple arithmetic.

  • Anthony D

    A large percentage of doctors will find that they will be unable to survive financially…so many have huge loans to repay from their time in school, and with the 6-digit cost of malpractice insurance thrown in, they won’t be able to
    pay their bills, let alone make an income…it’s simply an extension of
    what’s going on now with the way medicare/medicaid programs limit what
    they cancharge, making it necessary for them to depend on other
    patients’ ability to pay and the insurance they carry…which in turn
    becomes problematic because ObamaCare or any national healthcare program
    will severely limit those insurance payments, making it then necessary
    to charge even more to the patients who pay on their own…and there
    won’t be many, if any, of those anymore…in short, or severe doctor
    shortage in this country today will become even more of a problem, and a
    lot of the treatment now available simply won’t be available from truly
    qualifiedpersonnel anymore, and thus will become rationed, and of course that
    will make it even more difficult for doctors…Because they’ll be
    stretched so thin…

    In effect, what ObamaCare does is create a situation in which there
    will be many fewer highly qualified physicians and a tremendous amount
    of your medical care will be administered/prescribed by minimally
    trained/educate/experienced people making, for all intents and
    purposes, minimum wage…think of it this way…when you go to have something
    fixed on your car, you want someone working on it who has a bit more
    idea about your car than where to put the gas in.

    • macbook

      When you write “..which in turn becomes problematic because ObamaCare or any national healthcare program will severely limit those insurance payments, making it then necessary to charge even more to the patients who pay on their own” can you explain further?

      Are you saying that obamacare will replace private insurance and once it does that will essentially have a monopoly on patient care, in which they can provide low reimbursements and at that point, doctors would have no choice but to accept it because there would be no alternative?

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