The Growing Crisis of Physician Practice Losses

Many hospital-owned or affiliated physician practices operate at a loss. As hospitals have acquired or expanded physician clinics, these losses have increased at a rate that threatens the long-term sustainability of this model.

Hospitals must subsidize these practices to close the gap between revenues and expenses. The required subsidy is impacted by several factors, including:

• High compensation levels driven by market supply and demand for physician services
• Compliance with regulatory staffing requirements, such as trauma level designations that require the availability of certain physician specialties
• The community need for healthcare services and the high cost of physician recruitment and retention

Additionally, physician practices that are part of larger health systems generally do not provide ancillary services (e.g., lab and radiology) that are typical of their independent counterparts, since these services are offered in other hospital departments. The absence of that revenue stream exacerbates the disparity between revenue and expenses when looking at the physician practice segment in isolation.

While the need for subsidies is clear, the amounts are increasingly unsustainable and are threatening the financial stability of healthcare systems. Understanding the forces driving these losses can help healthcare leaders identify where they have influence and where broader policy change may be required.

Rising Subsidy Trends

A report from Kaufman Hall highlighted that the median subsidy per physician full-time equivalent (FTE) reached $315,358 in Q4 of 2025, a 4% increase since 2023. Labor as a percentage of total expenses increased to 84.4%.

This trend of rising subsidies in hospital-owned physician practices reflects a broader issue: rising expenses that outpace revenue increases for physician practices. The investment or subsidy required to support a physician practice generally reflects the gap between total practice expenses and net patient revenue, including fee-for-service, capitation, and quality payments.

Ancillary service revenue is not included in this subsidy calculation, which is a crucial distinction when comparing hospital-owned practices to private practices. While private practices often have access to ancillary services as a part of their revenue stream, these revenues are stripped out of physician practices when they become hospital-owned, as they generally shift to other hospital service lines. While the hospital-owned practices do not incur the expenses associated with providing ancillary services, they still lose the profit margin inherent in such services, which can be significant depending on the specialty and impacts the overall bottom line.

As hospitals continue to operate on tight profit margins, the subsidy model becomes less sustainable – especially as expenses outpace revenue. Physician employment arrangements may still meet fair market value and commercial reasonableness requirements even when a practice operates at a loss. However, substantial or growing deficits can invite additional scrutiny, making appropriate documentation and regular review increasingly important.

Sources of Healthcare Revenue for Physician Practices

The primary sources of net patient revenue for physician services are private insurance, Medicare, and self-pay patients.

In contrast, hospital-owned practices have limited flexibility due to regulatory requirements and their mission to serve broader community needs. Hospital-owned practices often serve a broad patient population as part of the organization’s regulatory obligations and community mission. This can result in a payer mix that includes a greater proportion of Medicaid, self-pay, and uninsured patients, whose reimbursement may not cover the full cost of care.

Medicare reimbursement, once regarded as a break-even proposition, has not kept pace with inflation. Effective January 1, 2026, there was a one-time 2.5% increase as part of the 2026 Medicare Physician Fee Schedule after years of physician pay cuts. However, other changes in the 2026 Medicare Physician Fee Schedule, including an efficiency adjustment and revisions to practice-expense methodology, may offset those increases for certain services, specialties, and sites of care.

Overall, physician payments for services delivered in facility settings will fall 7%. The adjustment may fail to account for physicians’ administrative costs in these settings, put private practices at risk, and reduce competition by encouraging consolidation.

The effects will vary by specialty and site of service, with facility-based physicians and practices that rely heavily on affected services facing greater reimbursement pressure.

Impact of Private Equity on Hospital Bottom Lines

The increased involvement of private equity in healthcare services has reshaped the financial landscape. According to the Lown Institute, private equity buyouts of physician practices increased sixfold from 2012 to 2021. Another report from Georgetown University notes that private equity has given $200 billion to the U.S. healthcare industry over the last decade.

Because private equity investment often concentrates in higher-margin areas such as diagnostics, ambulatory surgery, and certain specialty services, hospitals may face greater pressure to maintain essential services with lower or negative margins, including emergency and intensive care.

As private equity expands into these high-margin areas, hospitals face increasing difficulty subsidizing physician services without the same aggregate revenue levels available historically.

Solutions to Address the Subsidy Crisis

Addressing the growing physician subsidy crisis will not be easy. The problem has been growing for as long as hospitals have been running physician practices. However, there are actions that both the government and specific hospitals can take to reduce the pace of subsidy growth.

Increase MPFS Conversion Factor

Medicare physician reimbursement continues to face long-term structural pressure as payment updates have not consistently kept pace with rising practice costs. For 2026, Congress provided temporary relief through a 2.5% payment increase, while statutory updates provided an additional 0.75% increase for qualifying Advanced Alternative Payment Model participants and 0.25% for other clinicians. As a result, the Centers for Medicare & Medicaid Services finalized 2026 Medicare Physician Fee Schedule conversion factors of $33.57 for qualifying APM participants and $33.40 for other clinicians, increases of 3.77% and 3.26%, respectively, from 2025.

However, the 2.5% congressional increase applies only to 2026, continuing the pattern of temporary payment relief rather than establishing a durable solution. At the same time, changes to relative value units and practice expense methodology can offset increases in conversion factors for individual services and specialties. For example, CMS implemented a 2.5% efficiency adjustment to the work RVUs and corresponding intra-service time for many non-time-based services beginning in 2026.

Increase Residency Slots

Physician compensation represents a significant portion of practice operating expenses, and compensation levels are often driven by demand for physicians that exceeds available supply. These pressures can be particularly acute in rural markets and high-demand specialties.

One way to address this imbalance is to expand the number of residency positions available to train future physicians. While a 2022 provision added 1,000 Medicare-supported residency slots, additional investment will be needed to address projected workforce shortages. The Association of American Medical Colleges projects a physician shortage of up to 86,000 physicians by 2036 and notes that insufficient growth in graduate medical education could further constrain the future physician supply.

Increasing Medicare, Medicaid, and state investment in residency positions could help expand the physician workforce over time and ease some of the labor-cost pressure created by persistent shortages.

Maximize the Use of Advanced Practice Providers (APPs)

Healthcare organizations should evaluate how nurse practitioners, physician assistants, and certified registered nurse anesthetists can be incorporated more strategically into care delivery. When aligned with state scope-of-practice requirements and patient needs, APPs can expand capacity and allow physicians to focus more consistently on services that require their training and expertise.

Participate in Value-Based Care Initiatives

Hospitals should actively engage in value-based care initiatives, such as Accountable Care Organizations (ACOs) or Value-Based Enterprises (VBEs). These collaborations can help reduce costs without sacrificing quality, enabling hospitals to manage financial pressures more effectively. Additionally, effective value-based care programs can lead to enhanced revenue as more payers seek to shift from fee-for-service to value-based payment arrangements.

Regularly Review Payer Contracts

Hospital systems should regularly assess and optimize their payer contracts. With the rise of price transparency, hospitals have greater visibility into reimbursement rates and can negotiate more favorable agreements with insurers, potentially increasing revenue from private insurance.

Next Steps to Prepare for Physician Practice Loss

The growing subsidies required to attract and retain physicians while sustaining physician practices represent an unsustainable trend that will require both federal and organization-specific action.

While short-term measures like increasing the use of APPs, participating in value-based care, and optimizing payer contracts can help alleviate financial pressures, long-term solutions require federal action to increase Medicare reimbursements and expand residency programs. Together, these measures can help hospitals manage physician subsidies while protecting care quality and long-term financial viability.

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