The hundreds of thousands of doctors that hospitals hired over the last decade or so aren't quite as good of a deal anymore, hospital allies say, and policymakers' responses to that consolidation could make the arrangement straight-up unsustainable.

Why it matters: There are plenty of economists who shed no tears at the idea of hospitals making less money, especially at taxpayers' and patients' benefit. But if a substantial number of hospital CEOs decide it doesn't make sense anymore to employ so many doctors, it could really shake up the health care landscape.

• Research has shown that health care costs go up when hospitals acquire physicians, which translates to higher hospital revenues, which is part of why they're attractive to health systems in the first place.
• So while clamping down on costly billing practices — which policymakers are looking to do — would save the government and patients money, there would be a potentially huge downside to hospitals.
• And that downside could present health systems with a big problem: What do they do with all the additional doctors they've hired if they become a financial drag?

State of play: More than half of doctors are employed by hospitals or health systems, at least according to one study, a drastic increase from when hospitals only employed a quarter of doctors in 2012.

• Another 22.5% of doctors are employed by insurers, private equity or other "corporate entities," as the Physicians Advocacy Institute-Avalere study puts it. Altogether, nearly 80% of America's physicians are employed by someone else.
• But hospitals and their allies have been warning that the cost of employing physicians is much higher than the direct revenue they bring to the hospital — to the tune of a nearly $300,000 annual deficit per physician, according to Kaufman Hall, a hospital-friendly consulting firm. That deficit was only $177,000 in 2018, according to the firm.
• That number generally excludes what I'll refer to as indirect revenue brought in by hospital-employed doctors, such as facility fees that hospitals charge in addition to the doctors' fees or revenue brought in from referrals for other services.

In other words, at least according to hospitals, insurance reimbursements for the services directly provided by physicians have fallen even further behind the salaries hospitals must pay them and other employment-related expenses.

• "We never made money off employing the doctor through the doctor's employment. We made money on the things surrounding the doctor — the downstream revenue," said Kaufman Hall's Matthew Bates. "Over the last couple years, hospitals have been struggling financially, their margins are smaller, so their ability to subsidize the doc is much less."
• "These aren't dumb decisions. It's not like half the docs in America ended up employed by hospitals by mistake … but the economics have changed," he added. "The labor costs have gone up, the reimbursement is flat to down … and the downstream you were using to subsidize is under pressure."

Reality check: That downstream revenue still almost certainly offsets what hospitals "lose" on employing physicians, economists say — or else they wouldn't continue to do it.

• "Actions speak louder than words. ... Hospitals and health systems are still buying up physician practices," said Christopher Whaley, an associate professor at Brown University.
• "I would guess it's just as — if not more — attractive relative to when the spree started roughly 10 years ago," he added.
• And while national hospital groups are sounding the alarm about hospital finances, the reality is there's wide variation in how hospitals are performing — with plenty of them doing just fine.

Here's how this relates to one of today's biggest health policy debates ...

The indirect revenue that acquired physicians bring to health systems — especially facility fees — is part of what policymakers are targeting, both on the Hill and in state legislatures.

• Here's the latest on the "site neutral" push from my Pro Policy colleagues, which they've been on top of for the last year-plus.

Why it matters: If these initiatives are successful, particularly on the more ambitious side of the spectrum, hospitals could end up left with what they say are deficits from employing doctors without some of the biggest offsetting sources of revenue.

• And that's why they're lobbying so hard against the policy changes.
• "This is why the glib discussions about hospital facility fees that some policymakers have undertaken is so disappointing, because they're ignoring the total context of what's happening in the provision of care in communities across the country," said Chip Kahn, CEO of the Federation of American Hospitals.
• "The fact that the facility fees by Medicare have been historically where they were set helps make the system we're talking about go round."

Between the lines: Whether or not you're sympathetic to hospitals — or doctors, for that matter — everyone has a stake in both reducing what the U.S. spends on health care while maintaining access to care for patients, two goals that can sometimes be at odds with one another.

• That's partially why policymakers are reluctant to hack at hospital spending, despite the fact that it's the largest component of overall health spending.
• It's not unreasonable to predict that Congress could find a way for everyone to have their cake and eat it too, such as by increasing what Medicare pays providers while cracking down on hospital billing practices.

Yes, but: Chaos is also a possible outcome, especially if policymakers truly want to reduce health costs.

• Half of America's doctors could suddenly find that their employment has become a bad business deal for their employer.
• "If there's no facility fee, the margin is gone, and then some hospitals might find nothing to offset the loss," said Ge Bai, a professor at Johns Hopkins University. "I don't think government will do that. The political environment does not allow [it]."
• Compounding the chaos possibility is the fact that doctors sold their practices for a reason.
• "We talk a lot about how we want to have independent physician practices, but physicians are voting with their feet; they either want to work with a hospital system or, increasingly, a private equity firm," Brown's Whaley said.

The bottom line: If the policy landscape did significantly change, hospitals may not only lose their incentive to buy up doctor's practices; they could also stop having much incentive to employ the ones they already own.

• And in that case, I hear Optum is in the market for physicians!

Jumping to a different but related topic, there's a pair of studies out this week on private equity-acquired hospitals, the first of which examines the state of their finances before the acquisition.

• TL;DR: Private equity-acquired hospitals had, on average, similar earnings and operating margins as their non-PE-acquired counterparts, but carried a lot less debt and owned more of their assets, according to the study published in JAMA Internal Medicine.

Why it matters: The study blows a pretty big hole in the argument that private equity buys up struggling hospitals and tries to save them, so if they end up failing anyways, it's not the PE firm's fault.

• "These findings do not support the notion that PE investments generally target struggling hospitals and instead support broader evidence that PE firms target successful entities for acquisition," the authors conclude.
• "Prior evidence linking PE hospital acquisitions to staffing reductions and worsened patient outcomes, and future research in this domain, should take this finding into account."
• If you need a refresher on why any of this matters, here's the newsletter I wrote on private equity and hospitals.

The second study, published in JAMA, looks at acquired hospitals' assets before and after they were bought by PE.

• During the first two years, acquired hospitals' assets dropped by 24% compared with hospitals that weren't acquired.
• "Private equity acquisitions appear to have depleted, rather than augmented, hospital assets," the authors conclude.
• If you didn't click on the newsletter link above and you are confused about why hospital assets are part of this conversation ... go click it! There's a big debate about private equity firms' strategy of using sale-leasebacks to generate cash after they buy hospitals, and we do not have room to rehash it all in this newsletter.

The other side: "The reality is that private equity plays a limited role in the health care sector. When it is used, private capital helps drive medical innovation, increase access to care, and improve local communities," an American Investment Council spokesperson said in a statement, pointing to this PitchBook study.