Why Relying on a Physician Income Statement for a Subsidy Payment is Risky Business

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.

1.       Practice Collections

One of the first things that should be evaluated is expected net revenue or collections. Collections are influenced by several factors, including patient volume (or lack thereof), payer mix and collection practices. Patient volume is generally a function of community need or demand, but that may not be the only factor influencing volume. If the group has low volume are there factors within the group’s control that contribute to the low volume that need to be examined? Payer mix is another major factor affecting revenue. If the group’s payer mix is tilted highly towards low or no pay care that may contribute greatly to deficient revenue. How much it influences should be gauged against existing market data for that specialty. What do you know about the practice’s collection habits? Does the practice bill and collect in an efficient manner? Do you know? The practice should be willing to be completely transparent on collections or you should not be willing to pay the subsidy.

2.       Examine Operating Expenses

Overhead is another major factor that influences net income. Assuming that a practice’s overhead “is what it is” could be a major mistake. Why? Not all physician groups operate efficiently. In fact, many times poor earnings are a result of inefficient overhead management or, in some cases, a result of the inclusion of non-operating assets. A stipend predicated on poor practice management or inclusion of non-operating assets will likely fall short of regulatory compliance. If you haven’t examined overhead you shouldn’t be paying the subsidy.

3.       Examine Physician Compensation

Many times physician compensation is the largest expense item of the practice and therefore can have a tremendous impact on the subsidy amount. Like overhead, it should not be assumed that provider compensation found on the practice’s income statement represents a market rate. For example, the practice may be overstaffed relative to the volume or coverage required. For this reason, the number of physician FTEs necessary for the relative volume and or coverage requirement must be examined. If it can be determined that FTEs are overstated for the volume or coverage required, then corresponding compensation may need to be adjusted for a market level of FTEs. Of equal importance is the level of compensation per FTE built into the model. This is especially true of projected financial statements. It is imperative that compensation built into the stipend model reflect FMV for the market and volume of services provided.

Stipends are a very useful tool for hospitals to retain necessary physician services and secure service line management expertise. However they also represent a high risk payment if not based on sound information that reflects actual market influences.

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