Don’t Miss the Value of Hospital-Based Physicians

In earlier days of hospital-based physician coverage, specialties were mostly limited to radiology, pathology, anesthesiology, and emergency medicine. As the hospitalist specialty developed, more hospitals began contracting for inpatient coverage to provide a broader continuum of care. Later, additional specialties, including pediatric hospitalists, intensivists, nocturnists, laborists, surgicalists, and neonatologists, grew in popularity.

Coverage by hospital-based physicians can be based on shifts or hourly or daily coverage, and can extend to multiple facilities and hospital departments. Coverage can include restricted and unrestricted on-call coverage as part of the arrangement. In addition, administrative responsibilities, quality improvement, and program development are often required.

Since the rise of the specialty, it has been difficult, if not impossible, for most hospitalist practices to generate enough revenues through reimbursement to cover overhead and physician compensation and benefits. This delta between reimbursement and the cost of operating the hospital-based practice is most often a result of uncompensated care. This shortfall can be substantial, so much so that the group could not otherwise operate without incurring significant financial losses or paying its physicians far below market.

Short of directly employing the hospital-based physicians, hospitals have developed ways to compensate contracted physicians for meeting their coverage obligations through financially subsidizing the practice. Similar to the approach used by a hospital to guarantee the revenues of a recruited physician, the subsidy arrangement compensates the hospital-based physician group for unreimbursed coverage, uncompensated care, administrative and leadership duties, and, through the use of incentive provisions, meeting quality goals.

As with nearly all financial arrangements between hospitals and physicians that can refer health care services to each other that are payable by federal health care programs, significant federal (and some state) laws place restrictions on the arrangements between the parties. The Stark law and the federal anti-kickback statute are two notable laws that are implicated by most hospital coverage subsidy contracts. While these laws carry the risk of significant exposure if violated, legitimate arrangements are protected by certain Stark exceptions and anti-kickback safe harbors, both of which require that such financial arrangements be commercially reasonable, consistent with fair market value, and not be based on the volume or value of referrals.

Other options in addition to direct hospital employment are available, including professional service arrangements—also called PSAs or synthetic employment—or hospital purchase of the physician group practice. These are also subject to compliance requirements, although the specifics vary depending on the structure of the arrangement.

Adding to the complexity of any financial arrangement between hospitals and physicians, the post-Affordable Care Act period has seen an increase in the use of non-physician providers, including growth of mid-level providers in the hospital-based practice. This leveraged care model has changed reimbursement dynamics in hospital-based practices, and physician responsibilities have grown to include medical direction and supervision of mid-level providers such as nurse anesthetists and nurse practitioners.

Valuation of the subsidy arrangement involves more than simply asking the hospital to make up the shortfall after overhead and doctor compensation and benefits are paid. Because of the substantial compliance risks, it is important to have a defensible analysis of the fair market value of the totality of services furnished by the physician group. A thorough FMV analysis considers benchmarking and review of physician productivity, billing and collection practices, overhead management, staffing levels, compensation and benefit structure, and other financial and operational measures.

Moreover, a strong compliance plan around the monitoring of fair market value compensation, the contracting and approval process, and legal compliance is critical. Because of the nature of some arrangements, hidden risks exist that may not be completely clear. We recommend consultation with experienced health care legal counsel and valuation analysts skilled in the health care industry and in working with these types of arrangements.