My Hospital System is Losing Millions on Physician Practices. Is it a Death Sentence?

Recent DOJ settlements provide clear evidence of the position of qui tam relators, prosecutors, and government experts that hospital losses on physician practices are clearly targeted. For example, in U.S. ex rel. Parikh v. Citizens [No. 6:10-cv-00064 (S.D. Tex.)], the court denied the defendant hospital’s motion to dismiss in part because of an inference between the plaintiff’s allegations of practice losses and improper remuneration to induce referrals.

In a second example, the complaint in U.S. ex rel. Reilly v. North Broward Hospital District [No. 10-cv-60590 (S.D. Fl.)] alleges significant losses in several specialties, further alleging that operating losses and over-compensation of physicians would not have been economically feasible if the physicians had not been in a position to illegally refer patients. There are other examples. This short list gives a flavor of the how the qui tam bar and the authorities view this serious issue.

Anecdotal evidence suggests that losses on physician practices are common among many hospitals. This begs important questions that hospital boards and executives, as well as physician-stakeholders, must consider:

  1. Do the health system’s losses put the system and key individuals at risk for a “nuclear” compliance event?
  2. To what degree can existing physician practice losses be justified through contemporaneous, factual documentation?
  3. Does the health system have a functional Fair Market Value (FMV) and Commercial Reasonableness (CR) enterprise risk management process (note the question is not, “Do we have FMVs on all contracts?”)?
  4. Is a plan at the ready to begin mitigating practice losses?

Because items 1 through 3 above are specific to each health system, this article and the piece that follows are written to help you formulate a plan to address item 4 above.

Consider a scenario not unlike the qui tam matters above. With significant practice losses, you wake one day to find your hospital system mounting eight-figure annual practice losses. Management has serious concerns over the losses and asks whether a would-be relator could file a qui tam action. To allay your compliance concerns, you should consider an action plan to immediately address your current and future physician practice losses:

  • Put a written plan in place to reduce or eliminate physician practice losses. Include deadlines and timelines to establish expectations and milestones. Monitor the plan on a regular basis.
  • Use the system’s strengths to negotiate profitable managed care contracts. Some hospital’s we’ve worked with have been primarily interested in negotiating the best hospital reimbursement. Be certain the best possible physician contract rates are likewise negotiated. Consider accepting financial risk as appropriate to maximize reimbursement, and study the implications of MACRA to take advantage of upside reimbursement opportunities and avoid negative payment adjustments.
  • Where ancillaries have been placed in a hospital outpatient department (HOPD), consider the pros and cons of moving ancillaries back into the physician practices. In some cases, reimbursement is no longer as favorable in the HOPD environment, and practices are often operating at losses because of stripped out ancillaries.
  • Ensure the system is putting strong physician practice managers in charge of running physician practices, and seek physician-stakeholder input. We have seen too many examples of hospital administrators ineffectively leading physician practices. Similarly, operate the physician practice revenue cycle function optimally for a physician practice, not a hospital.
  • Structure health system overhead allocations to represent accurate cost accounting associated with the physician practice, not favoring hospital profitability.
  • Make absolutely certain your physician arrangements are FMV, CR, and not otherwise running afoul of Stark and AKS. Don’t simply rely on published survey data—consider the economics of the arrangement without taking into account hospital revenues and other prohibited referrals of Stark Designated Health Services. Obtain an independent appraisal of each questionable compensation arrangement, and reduce physician compensation if the appraisal says it compensation too high.
  • Be sure the file documentation of CR is complete, and get an outside opinion if needed.

While not a complete list of all steps a health system could take, the suggestions above can begin to create a pro-compliance mindset and reverse the trend of practice losses. In the next installment, we will look at a few strategic steps to limit physician losses in the changing reimbursement environment.


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Topics: Physician Compensation

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