Mitigating Compliance Risks Posed By Physician Practice Losses

June 9, 2015

Physician practices owned and operated by health systems frequently report net losses, and those losses can be substantial in some situations. The table below provides profit and loss data for selected types of physician practices from the 2014 MGMA Cost Survey.

The data from prior years of this survey show similar results. Why would a health system operate its physician practices in the red year after year? Do these repeated losses call into question whether the compensation paid to practice physicians is consistent with fair market value (“FMV”)?

Over the years, industry participants have debated whether regulatory compliance risks were associated with such losses. The consensus answer has usually been that such losses are not determinative of FMV in and of themselves. Thus, many in the healthcare industry have been unconcerned with whether physician practice losses are a red flag for FMV or commercial reasonableness (“CR”) compliance tests under the Stark law and federal anti-kickback statute.

The potential compliance risk due to such losses doesn’t appear to be high on the radar screen for much of the industry. Yet, warning signs have been recently accumulating. While the Tuomey case has been widely reviewed in the compliance literature, one area that is often short-changed is the scrutiny given to the losses incurred on Tuomey’s part-time employment arrangements. A significant portion of the testimony by the government’s valuation expert focused on whether it was commercially reasonable for Tuomey to lose money on these arrangements. The government’s expert repeated this analysis when scrutinizing the compensation of the neurosurgeons in the Halifax case.

An attentive reading of the expert’s valuation reports and trial testimony shows that losses on physician arrangements are an initial indicator for CR problems, regardless of FMV concerns. CR and FMV are different analyses with separate criteria, according to the government’s expert. A health system needs to demonstrate strong business reasons for incurring practice losses in order to avert the arrangement being found as commercially unreasonable.

Another warning sign stems from a ruling in the Citizens’ case, in which the judge was unpersuaded that median compensation from a national survey could be used to excuse large practices losses. Many in the industry have believed paying median compensation was a low-risk exercise. In the current environment, a health system shouldn’t expect the median pay defense to work as a trump card against FMV and CR scrutiny.

Finally, in a recent article published in Health Business Daily (March 25, 2015), Robert Trusiak, former head of the affirmative civil enforcement unit in the U.S. Attorney’s Office for the Western District of New York, gave an insider’s view of how federal regulators view the issue of practice losses. “In the government’s eyes, profit is required for commercial reasonableness,” Trusiak stated. In Tuomey, Trusiak observed the government’s position was essentially “if it’s not profitable, the hospital is paying for referrals.” The article presents Trusiak’s own critique of the government’s position, but a key takeaway is that losses on health system physician practices are an area of heightened scrutiny by regulators. The industry should take notice.

What should health systems do if they operate physician practices in the red? The first step is to identify what factors are causing the losses. Is it a poor payer mix due to charitable mission, operational inefficiencies, conversion of practice ancillaries to provider-based billing, or some other factor? Was survey data used for physician compensation without a broader economic analysis?

In some cases, a combination of factors may create the loss. A second step is to quantify the loss resulting from each factor. This step is important in evaluating regulatory risk. Many times market participants talk about losses in the abstract without the real data to support their analysis. Assuming what the numbers are is ill-advised.

Finally, evaluate compliance concerns based on the source of the loss. Some sources may not be fatal from a regulatory compliance perspective, while others may raise significant risk. (For more discussion about the causes of losses and their compliance implications, see “The Fair Market Value Implications of Health Systems Losing Money on Their Employed Physicians,” by Timothy Smith, The Health Lawyer, Vol. 26, No. 1, October 2013, American Bar Association – Health Law Section.)

At Ankura Consulting Group, we can help hospitals and health systems understand and mitigate risk by analyzing prospective and existing physician arrangements for both FMV and CR issues. Our approach is robust and comprehensive, going beyond mere use of survey data to a more in-depth economic analysis. Simply using surveys may not be enough to address how regulators view practice losses for commercial reasonableness. We believe rigorous analytics are what help our healthcare clients develop stronger proactive compliance programs and mitigate the risk of an unsuccessful outcome in a regulatory review.