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Issue #12-2 | May 16, 2013

Overly lucrative physician pay spells financial disaster

Hospitals cannot pay physicians more than fair market value compensation. A unique case—unique because it went to trial—illustrates the importance that obtaining a thorough valuation of a physician compensation arrangement is imperative to be on safe ground. The penalties are huge—as one hospital recently found out.

New decision: A federal jury has found a hospital guilty under the Stark Law of providing illegal kickbacks to a group of local doctors under part-time employment contracts that the government said paid well above fair market value. Although the deals made no mention of referral fees, the government argued that the excess amount was paid to ensure that they would continue to get those fees for the clinical procedures. The hospital argued that it had both legal and fair market value opinions that backed up the appropriateness of the employment agreements. The jury disagreed and assessed the hospital $39 million in damages.

Also, the jury found the hospital guilty under the False Claims Act (FCA), so additional monetary penalties will apply and will be determined later. Under the FCA, the federal government can recover from $5,500 up to $11,000 per false claim and up to three times the monetary value of those claims.

The case is U.S. ex rel. Drakeford v. Tuomey Healthcare Systems, Inc., C/A No. 3:05-2858-MBS (D. S.C.). Tuomey is a nonprofit, single hospital system based in South Carolina.

According to a local report, a “visceral silence” fell over the courtroom when the verdict was read and the hospital’s CEO appeared “physically shaken.” In his closing argument, the defense lawyer said a verdict against the hospital would "annihilate" the organization. According to reports, total potential penalties could exceed $350 million. The hospital’s Form 990 for 2011 showed net assets of $124 million.

What to do: The case underscores the point that any opinion on the valuation of a physician compensation arrangement cannot—in any shape or form—be based on any consideration of anticipated referrals. Paying physicians for loyalty is prohibited. Before any arrangement is put into place, the fair market value and commercial reasonableness should be established. Benefits provided under these arrangements should be consistent with those provided to other hospital employees. If part of the compensation is for administrative duties, the arrangement should clearly describe those duties. Also, if arrangements are long term, they should be reviewed periodically for compliance.

Regulatory matters, including the Stark Law, and how they impact compensation in healthcare are fully examined in the BVR/AHLA Guide to Healthcare Industry Compensation and Valuation.

Groundbreaking data reveal wild variations in hospital billing

The debate over medical costs will grow louder with the release of data by the government showing that hospitals charge wildly differing amounts for common inpatient services to Medicare patients. This will add fuel to the fire over questions of how hospitals determine prices and why there is so much disparity in charges for the same procedure.

The data for 3,300 hospitals, released in a report by the Centers for Medicare & Medicaid Services, cover bills submitted from virtually every hospital in the country in 2011 for the 100 most common treatments and procedures. The data—released to the public for the first time—show wide variations not only regionally, but also among hospitals in the same area or city.

Big swings: A hospital in Livingston, N.J., charged $70,712 on average to implant a pacemaker, while a hospital in nearby Rahway, N.J., charged $101,945. In one Dallas hospital, the average bill for treating simple pneumonia was $14,610, while another there charged over $38,000. In Saint Augustine, Fla., one hospital typically billed nearly $40,000 to remove a gallbladder using minimally invasive surgery, while one in Orange Park, Fla., charged $91,000.

Of course, some of this variation can be attributed to the fact that some patients were sicker, older, or required longer hospitalization. Also, different hospitals have different cost structures. For instance, teaching hospitals have a much higher cost structure than others. Also, many hospitals write off the difference between how much they charge patients and how much they get reimbursed from Medicare.

A cat-and-mouse game could also be going on between providers and insurers. As insurers cut reimbursements or demand discounts, hospitals could raise prices to preserve their bottom lines.

Whatever the reason, the data add new transparency to what hospitals are charging, so they will likely intensify the long debate over the methods that hospitals use to determine their prices.

New revenue-per-physician metrics

A full-time physician brings in, on average, $1.45 million in annual revenue to his or her affiliated hospital, reveals a new report from Merritt Hawkins, a recruiting firm.

Looking at 18 different physician specialties, the report shows orthopedic surgeons make the most revenue for their affiliated hospitals, at $2.68 million, followed by invasive cardiologists, at $2.17 million, and family practice physicians, at $2.07 million.

Key trend: Hospital revenue generated by primary care physicians jumped 23%, while revenue generated by specialists declined 10% over the past decade. This trend is expected to continue with the emergence of accountable care organizations and the shift toward more primary care. Primary care physicians generate $1.57 million in annual revenue for their hospitals versus the $1.42 million that specialists generate.

Net annual inpatient and outpatient revenue is generated through patient admissions, procedures performed at the hospital, as well as tests and treatments ordered, according to a Merritt Hawkins announcement.

M&A megadeals in healthcare on hiatus

Large merger and acquisition deals in the healthcare sector gave way to smaller deals during the first quarter of 2013, but the megadeals may return soon, according to the Health Care M&A Report from Irving Levin Associates.

“Overall, the health care merger and acquisition market is doing smaller, more strategic deals while it waits for the economy to improve and the results of the sequester to settle in,” said Lisa E. Phillips, editor of the Health Care M&A Report. “Deal-making activity seemed to be picking up towards the end of the quarter, so we expect more positive results in the second quarter.”

Deal volume was down 33% during the first quarter of 2013 versus the previous quarter.

Deal value dropped as well—to $14.6 billion in the first quarter, which was down 39% compared with the fourth quarter of 2012.

Behavioral healthcare is the only sector that posted a gain against the previous quarter, with deal volume up by 133%.

Proposals to strengthen ACO model

Recently released health reform reports take the concept of the accountable care organization (ACO) and develop it further. This type of setup is designed to lower the cost and improve the quality of healthcare. Medicare is testing the ACO model under the Patient Protection and Affordable Care Act.

New setup: The latest example is the Medicare comprehensive care (MCC) system in which teams of providers would deliver coordinated care and receive one payment for the entire scope of patient services. A new report from the Brookings Institution calls for the creation of the MCC system, which includes collaborations of providers that would receive a globally capitated, comprehensive payment for treating beneficiaries. Providers would have to meet a set of care quality and outcome performance measures to receive full payment. There would be no rigid structural requirements for these organizations, which could include integrated systems or networks of providers working together, the report said.

The Bipartisan Policy Center has also issued a report that recommends the creation of a stronger version of ACOs it calls “Medicare networks.” These groups of providers working together would contract with Medicare and have a unique spending target. Providers would be paid through a mix of a fixed per-beneficiary payment and a fee schedule and would share in savings from improved efficiency.

Whether accountable care and bundled payments will do what they are designed to do is yet to be seen. The first results from ACOs being tested will be available this summer.



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