Seeking a profitable and steady source of patient referrals, in the early 1990s US hospitals and hospital systems began hungrily acquiring primary-care physician practices (Exhibit 1).¹ By 1998, they owned roughly 10 percent of such practices, yet this strategy has done little, if anything, to increase their supply of patients. Moreover, proprietary primary-care practices have become a drain on their parent hospitals, which in 1998 lost a net average of roughly $80,000 per physician from them.² That adds up to more than $1 billion in losses, roughly 30 percent of the net revenue these doctors generated.

Such deals are not easily undone. But by thoughtfully applying two practical ideas from the world of marketing—segmentation and sound channel management—hospitals can increase the number of patients referred to them and turn this channel into a source of competitive advantage.³

A postmortem

Hospital systems overestimated the ability of affiliated physicians to change their referral patterns

Hospitals failed to improve their economic performance through the ownership of primary-care physician practices for several reasons. In the first place, most of the hospitals overestimated the ability of affiliated physicians to change their referral patterns. In a recent study of a large system-owned...