Healthcare

Government and commercial insurers are transforming payment models from fee-for-service (FFS) to arrangements that include incentives for quality, outcomes, improved patient satisfaction, and reduced cost. In the FFS environment, hospitals, physicians, and other providers have been subjected to insignificant financial risk relative to the risk borne by payers; however, with time, transformed payment arrangements have encouraged, if not required, more providers to assume downside risk. Why? One reason is to hold providers accountable for the cost and quality of care. The table below by The Commonwealth Fund summarizes this need by showing where the United States ranks relative to other industrialized nations in health outcomes and risk factors:

Currently, one of the more perplexing issues around fair market value physician compensation relates to designing comp models that effectively reward physicians for quality and cost savings in a market that is still driven by fee for service (FFS) reimbursement. Compliance-minded hospitals are understandably concerned about adopting (seemingly aggressive) models that stack quality payments on top of existing FFS models, particularly if total compensation exceeds what is commonly considered outside the upper range of FMV. Unfortunately, what those models should look like, especially what resulting (compliant) physician compensation should come from those models, represents somewhat unchartered waters.

Today, WRVUs are one of the most prevalent measures by which employers determine physician compensation.  WRVUs have the benefit of rewarding physicians for personally performed services based on relative values utilized by CMS without penalizing the physician for charity care provided on behalf of the hospital or for revenue cycle issues outside of the physician’s control. However, misconceptions still exist surrounding the selection of appropriate conversion rates for physician arrangements. Here are three common pitfalls to avoid when establishing a compensation-per-WRVU contract.

Although physicians around the country cheered the permanent repeal of the sustainable growth rate (SGR), the resulting reimbursement and payment model changes could significantly impact the fair market value of physician practices. The passage of the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) changed the valuation environment significantly. The HORNE Healthcare team has been researching the changes, and here is what you need to know:

With the passage of MACRA in April 2015 we began to get some real clarity regarding Medicare’s plans for moving physician reimbursement from volume-based to value-based. With MACRA set to be implemented over the next few years, now is the time to begin addressing how changing reimbursement will impact physician compensation models. Because future reimbursement will be greatly impacted by physicians’ ability to deliver value and quality, hospitals will need to design compensation models that reward and encourage physician behaviors that support these goals.

After our second day at the AHLA Physicians and Hospitals Law Institute, some clear themes are beginning to come into focus around the volume-to-value transformation in physician compensation. Quality-based compensation is fraught with challenges—quantifying value as compared to physician productivity is foreign to many. Also, missteps in the implementation can wreck the entire process.

While the market gradually moves toward value-based reimbursement, hospital payments to physicians have also been in transition from purely productivity-based pay to incentives based in part on quality, patient experience, and efficiency of care. This shift has taken place in employment, professional service agreements, alternate delivery models, and clinical co-management arrangements, among others. Also included in this list are administrative service positions, such as medical directorships.

Stipends (or subsidy payments) are an area we are seeing a lot of activity in lately. It is not uncommon in the market for hospitals to subsidize physician groups in order to ensure physician compensation at market levels, particularly in markets that are heavily impacted by low reimbursement rates. From a compliance standpoint, one of the biggest issues is whether or not the subsidy payment represents fair market value (FMV). While it may seem straightforward, taking a physician group’s historical income statement (or in cases of a start-up venture a financial statement projection) at face value for paying a stipend is a bad idea. Why? Because without dissecting the various components you don’t really know what drives that number. You don’t know if market factors contribute to the loss, if the practice’s loss is due to internal operating characteristics or, as in many cases, a combination of both. So what do you look for? Below are three critical areas of any group’s income statement that should be examined, and if necessary adjusted, to determine true market driven subsidy needs.

“I only want you to tell me what the doctor’s practice is worth. I will worry about her salary. Why do you care about compensation anyway?”

This is a common response from clients when we ask for post-acquisition physician compensation as an input to determine fair market value of the physician’s practice in a potential acquisition. Hospitals sometimes try to compartmentalize physician practices by looking at the value of the business apart from the value of the physician’s services. Because medicine is a service-based industry, however, value is largely dependent on income from physician services, and physicians expect compensation for such services. Therefore, you cannot consider the value of a physician practice without considering the value, or cost, of its primary income generator, the physician.

Given the regulatory risks associated with failure to pay fair market value (FMV) in certain physician compensation arrangements, parties contracting with physicians for services are rightly concerned about FMV and are justified in their efforts to find effective means by which FMV can be determined and documented.

One such means for the assessment of FMV is the use of widely available published survey reports on physician productivity and compensation. Several sources exist for this information, and there is a broad acceptance of published surveys in the industry as indicative of compensation for physicians in many specialties. Let’s look at what the government—specifically CMS—says about the use of surveys.

The recent Citizens Medical Center settlement brings to resolution yet another qui tam action which, among other facts, underscores the compliance risks of hospital compensation arrangements with physicians in excess of fair market value. The USDOJ announced last month that Citizens Medical Center will pay $21,750,000 to settle the False Claims Act allegations involving over two dozen individual physicians of at least six different specialties and practice groups. The opinion of U.S. District Court Judge Gregg Costa of the Southern District of Texas in ruling on the Defendant’s motion to dismiss the plaintiff’s FCA allegations is instructive particularly with regard to the compensation by the hospital of its employed cardiologists.

Today’s sessions at AHLA’s Transactions Program made me reflect on the fact that time has taught us valuable lessons about what not to do in the future. An initial wave of hospital affiliations and acquisitions has occurred with mixed success.

Three recognizable trends were dicussed today that are reshaping healthcare transactions:

With most hospitals paying for emergency department on-call coverage, it is important to understand the factors that influence the value of these arrangements. Following these simple ABCs make understanding and documenting fair market value a lot less complicated.