August 21, 2018

Health System-Owned Physician Practices Operating at a Loss

by Continuum Health

Some recent U.S. Department of Justice (DOJ) enforcement cases and settlements suggest that owning physician practices that are losing money may be a significant regulatory concern. The DOJ has suggested in the last few years that practice losses may be an indicator that physician compensation is not at fair market value (FMV) or commercially reasonable.

Many practices owned by health systems are losing money[1]. However, physician -owned practices have a better financial record. The explanation appears to be that physician-owned organizations are compensated based on the actual performance of their practice. Hospital-owned practices compensate their physicians based on various compensation surveys available to the industry without consideration of any other economic factors.

The DOJ has taken the position that losses in practices owned by health systems are a potential indicator of payment for referrals. This position was made clear in a whistleblower case, United States ex rel. Michael K. Drakeford, MD v. Tuomey Healthcare System, Inc. (DOJ Resolves a $237 Million False Claims Act Judgement that made Illegal Payments to Referring Physicians). Losses by themselves do not determine whether a practice’s compensation is commercially reasonable. There are other factors that must be considered, such as community need, and each practice must be individually reviewed.

Health systems need to determine the source(s) of their practice losses and implement improvement opportunities. These sources could be one or more of the following: (1) revenue and expenses for the practice; (2) system-level decisions that affect revenue or expenses; (3) intercompany transaction payments or allocations; and (4) the level of compensation and benefits paid to physicians.

In summary, physician practice losses are a regulatory and financial risk to hospitals. Loss analysis that includes implementation of financial improvement and an explanation of defensible losses will assist the health system in any review by the DOJ.

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