Expense increases offset physician practice productivity and revenue gains

Rising expenses and continued high physician investments are clouding prospects for the road to recovery from COVID-19.

Physician groups across the country saw productivity and revenue improvements in the second quarter of 2021 compared with both the same period in 2020 and pre-pandemic levels seen in Q4 2019, according to Kaufman Hall’s latest Physician Flash Report. However, significant increases in expenses and continued high levels of physician investment compared with the pre-pandemic period remain areas of concern.

The changes are among multiple dramatic swings experienced across key physician performance metrics for the quarter, especially compared with Q2 2020, when nationwide shutdowns and widespread concerns over potential exposure to the virus caused patient visits to plummet at the start of the COVID-19 pandemic.

Physician investments remain high, but productivity increases

The median Investment/Subsidy per Physician FTE improved to $232,583 for the quarter, down 20.9% from $294,073 in Q2 2020. Compared with the year’s first quarter, Q2 of 2021 saw a 6.0% decline in this metric, driven by an increase in physician productivity and subsequent rise in revenue. Physician subsidies remain high compared with pre-COVID levels, with Investment/Subsidy per Physician FTE up 16.5% from Q4 2019.

Among specialty cohorts, improvements were particularly pronounced in procedural specialties, including those involving surgical and medical procedures, as more patients sought care that was deferred during the height of the pandemic. Investment/Subsidy per Physician FTE fell significantly compared with Q2 2020 for primary care, obstetrics and gynecology (OB/GYN) and surgical and medical specialties. It increased slightly for hospital-based specialties but rose significantly for psychiatry — jumping 48% from $270,468 in Q2 2020 to $401,059 in Q2 2021.

The median actual paid Physician Compensation per FTE was $312,799 in Q2 2021, up 5.0% from the same period in 2020. Compared with a high of $327,871 in the first quarter of this year, however, the metric was down 4.6%, as it dropped back to levels seen in Q3 and Q4 of 2020. Compared with pre-pandemic levels in Q4 2019, Physician Compensation per FTE was up slightly at 1.0%.

Physician Compensation per wRVU fell significantly, down 24.0% from $70.88 in Q2 2020 to $53.90 in Q2 2021. The metric was down 11.8% from the first quarter of this year, with declines occurring across most specialty cohorts. Physician Compensation per wRVU also decreased compared with pre-pandemic levels, down 7.5% from Q4 2019. Q2 increases in productivity, however, likely will lead to increases for this metric in Q3.

Physician productivity — measured as Physician wRVUs per FTE — continued to increase in this year’s second quarter, jumping 44.7% from Q2 2020, 10.6% from Q1 2021, and 11.4% from Q4 2019. Productivity rose across most specialty cohorts, with surgical specialties seeing the biggest increase at 12.3% from Q1 to Q2 2021.

Revenues are up; allocated system cost increases may be driving rise in overall expense

Not surprisingly, Net Revenue per Physician FTE, including advanced practice providers (APPs), also increased in Q2 2021, with higher patient volumes and physician productivity. The metric rose to $631,488, up 56.2% from Q2 2020, 9.3% from Q1 2021 and 11.6% from Q4 2019.

At the same time, Net Revenue per Physician wRVU (including APPs) was relatively flat, increasing 1.4% from Q2 2020 and 1.1% from Q1 2021. Physician productivity likely will continue to be the primary driver of changes for this metric throughout 2021, as recent changes in payments and fee schedules continue to show minimal effects on it.

Total Direct Expense per Physician FTE (including APPs) continued to climb, reaching $875,878 in the second quarter. That amount represents increases of 21.3% from Q2 2020, 3.9% from Q1 2021 and 11.7% from Q4 2019. Expenses increased across most specialty cohorts from Q1 to Q2 2021. Hospital-based specialties were the exception, dropping 3.5% quarter-to-quarter.

Deeper analysis suggests an increase in allocated system costs is driving overall expense increases, due to higher revenue cycle costs as physician productivity rises. Health system leaders should take a hard look at their allocated costs and look for ways to bend this cost curve moving forward.

Practices continued to improve operational efficiencies as physician productivity increased. Support Staff FTEs per 10,000 wRVUs dropped 15.3% from highs seen at the start of the pandemic in Q2 2020, and down 4.2% from Q1 2021. Compared with Q4 2019, Support Staff FTEs per 10,000 wRVUs were down 6.1%

Rapid spread of the Delta variant adds to future challenges

The large fluctuations in Q2 2021 compared with Q2 2020 demonstrate how far physician practices have come since the devastating losses seen early in the pandemic. Rising expenses and continued high physician investments, however, suggest that the road to recovery remains uncertain. While patient volumes are returning, so are challenges related to patient access and support staff retention/hiring.

Consumer expectations also have increased since the pandemic began as many patients have discovered alternative “front doors” to care, including digital, retail and urgent care. Health systems that effectively serve and capture consumer loyalty from these returning patients have the opportunity to improve market share. We anticipate year-end 2021 results to show material market share changes versus 2019 in several major U.S. markets.

Looking ahead, physician practices are expected to see further volatility as COVID-19 cases rise with rapid spread of the Delta variant. COVID-19 has permanently changed how physicians and the hospitals and health systems that employ them view compensation, practice work and staffing. Healthcare leaders should expect to see the following developments in the coming year:

• Physicians are likely to demand that their contracts be restructured in anticipation of future public health emergencies. Efforts to increase quality incentives likely will be offset by physician interest in stabilizing base compensation.
• Lack of a unified national telemedicine approach will continue to be problematic in terms of understanding payments and defining best practices relative to virtual care.
• Organizations will continue to face intense competition for the best physician practice personnel. The success of recruitment and retention efforts going forward will depend on how well healthcare leaders understand their organizations’ practice staffing models and how they will leverage existing staff (e.g., centralized services, co-location of multiple practices, etc.).