2 Thoughts on Hospital/Physician Deals from AHLA’s Annual Meeting

Two days into the 2015 Annual Meeting, two important fair market value (FMV) and commercial reasonableness (CR) issues stand out as worthy of emphasis, as they resonate in almost every discussion on hospital/physician deal compliance.

Paying FMV for Value

With the focus on quality incentive compensation, the FMV of value-based compensation is taking center stage, while payment reforms gain momentum. However, value-based incentive compensation models aren’t necessarily keeping pace with payment reforms. There are some important reasons for this slow change, and some facts are worthy of consideration as they relate to the transition from volume to value.

Many employers and physicians are still concerned about first-to-move risk. Because most payers are still largely in the fee-for-service world, transitioning to value-based pay can have negative implications. For starters, high productivity doesn’t necessarily mean high quality, so former winners may be the new losers. Moreover, the volume-to-value conversation may impact productivity, contributing further to the impact on those who previously succeeded in the volume-based world.

Several questions remain unanswered in the challenge of measuring and valuing quality. For example, which metrics are most effective? What can be done about the fact that market data lags behind, coupled with the fact that payers are less than likely to share payment models? How much compensation should be guaranteed and how much should be at risk? What is an equitable means for rewarding quality and cost savings, and how much incentive is enough to drive behavior? When factoring in volume-based compensation, value-based incentives, and other compensation in the aggregate, how does one ensure that stacked pay still represents FMV?

CR and FMV are Different, but CR is Becoming More Prevalent in Qui Tam Actions

As most know, it is very difficult for a hospital-owned practice to do anything better than breakeven; operating losses on physician practices are the norm, rather than the exception. However, plaintiffs and regulators are fixated on year-over-year practice losses. Protecting legitimate arrangements requires diligence in understanding why hospitals lose money on physician practices and a proactive, defensive strategy.

Contemporaneous documentation of CR in practice acquisition and employment is one of the important means for proactively defending legitimate arrangements. Additionally, documenting the system’s mission, vision, and values for physician practice operation; community need and hospital staffing requirements; and strategy and expected ROI on physician practice investment are all essential to show the rationale for the investment in physician practices.

Other steps that show effective due diligence in practice acquisition and physician employment include setting physician compensation policies and a strategic plan that conform to organizational goals and objectives; employing competent leadership responsible for oversight of physician practices; and undertaking regularly the benchmarking and management of physician practice operations against market and best practices and implementing corrective action as necessary.

When physician practice losses are inevitable, identify the causes for losses and ensure that management decisions are made regarding hospital profitability focus, cost structure and cost allocation models. Exploration should be made into whether the losses are a result of physician network management; a poorly designed physician compensation structure or overcompensation of physicians; cost accounting policies; or revenue cycle issues.

It seems in a sense an oxymoron that public policy has driven the market toward hospital consolidation physician practices and employment of physicians alongside a notable increase in enforcement activity surrounding physician acquisition and employment. Notwithstanding, the risk of draconian penalties makes compliance a critical concern, with the best defensive strategy centered on a solid offense.

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