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Understanding Physician Practice LossesFebruary 6, 2019

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Presented By

Randy Biernat, CPA, ABV®

Partnerrbiernat@bkd.com

Scott Bezjak, CPA, CGMAPartnersbezjak@bkd.com

Which HFMA Chapter are you a member of?

1. Western PA

2. Central PA

3. Northeast PA

4. Metro Philadelphia

5. Other

Getting to Know You

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Today’s Topics

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Losses Are Not the Fault of Physicians—Historic Overview of Physician Employment Drivers

Employed Losses Are Often Overstated—Purchased Services Analysis

2

3

4 Four Buckets Framework for Evaluating Physician Spend (Including Losses)

Board Expectations for Employed Physicians

Physician Portfolio Strategy5

Overview of Reasonable Board Expectations

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Hospital systems are integrating physicians into

hospital management

Hospital systems are integrating physicians into

hospital management

Hospital systems are integrating physicians into

hospital management

The physician workforce, whether employed or not, is

every hospital’s greatest asset

The physician workforce, whether employed or not, is

every hospital’s greatest asset

The physician workforce, whether employed or not, is

every hospital’s greatest asset

Systems are losing money on

physician employment (average of $176K per physician)

Systems are losing money on

physician employment (average of $176K per physician)

Systems are losing money on

physician employment (average of $176K per physician)

Physician Losses

The Main Topics &Focus of

Governance

Board Expectations: Physician Employment

Strategic relative to service plan

Appropriate to community needs

Compensation is commensurate with work effort

Appropriate at health system service line level

Budgeted, managed & accountable

Market-based cost levels, including physician pay

Financially sustainable

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Level of Responsibility Expectations Re: Physician Employment

Board Strategic, Sustainable, Supportable

Senior System Management Sound Business Case, Meets Current & Future Community Needs

Compliance Function Fair Market Value, Accuracy in Work Effort

Medical Group Management Performance Is Budgeted, Approved, Monitored & Managed to Reasonable Market Standards

Physicians Fair Pay for Work Performed, Clinical Autonomy, Access to Appropriate Staff, Equipment, Space

Patients Access to Care, Quality Care, Affordable

Outside Stakeholders Done If Necessary, “Equitable,” Compliant

Stakeholder Views

“Thi

s an

d”

Physician Losses Are Not the Fault

of PhysiciansHistoric Overview of Physician

Employment Trends

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Physicians Don’t Want Employment

Control over practice operations

Pride of ownership

Efficiency in operations/less training

Tax benefits

Flat Reimbursement for 20 Years

$36.69 $35.99

3.52%

$1000.00 $1,930.60

MPFS Conversion

Factor in 1999

MPFS Conversation Factor in 2018

Market basket of medical

care in 1999

Equivalent market basket

in 2018 –93% increase!

Medical inflation growth in same period (general

inflation at 2.17%)

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How Practices Have Coped

Seeking Compensation

for Nonclinical

Work

Seeking Compensation

for Nonclinical

Work

Expanding Ancillary Services (Where

Permitted)

Expanding Ancillary Services (Where

Permitted)

Scaling Up

Joint Ventures

Joint Ventures

Selling Out!

Compensation for Nonclinical Work

Clinical Productivity – Traditional

Nontraditional• E.R. Call Pay

• Medical Direction Services

• Profit on Mid-Level Providers/ Supervision

• Teaching/Research

• Co-Management Services

• ACO/Bundled Payments

Seeking Compensation for Nonclinical

Work

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Compensation for Nonclinical WorkIndependent Groups• Revenue - Expense = Compensation• Hospitals: How big of check can we get

them to writeReimbursement• Medicare Physician Fee Schedule

(MPFS)-drivenMedicare Road Map • For “sustainable” expense levels

across functional areas, including labor-all CPT-based

Medicare Cost Profile • Can be extended to an actual payor

mix providing indication on what is “affordable”

Scaling Up

Compensation for Nonclinical WorkSignificant Incentives for Health System Physician Acquisition• On-call coverage• Outreach/collaboration with smaller

health systems• Control over referral network/patient

spendEmployment Compensation Levels• Take into account all expected work

effortPrivate Equity Groups/Other Groups• Aggressively pursuing roll up strategies

as well

Selling Out!

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Employed Losses Are Often

OverstatedPurchased Services Analysis

Health systems often fail to account for physician services provided to the hospital corporation

• Physician call or coverage

• Subsidies (payor mix or low volumes)

• Management services/administrative services

Most systems are not utilizing transfer pricing to assign physician cost proportionally to services provided

Financial Reporting Practices

Presented as a separate physician

corporation in a consolidated

entity

Key Impacts

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Employed physicians are routinely asked to contribute via

• Clinical productivity (assign cost to clinic)

• Call compensation (assign cost to hospital)

• APP supervision (assign cost to clinic)

• Medical direction (assign cost to hospital)

• Clinical quality efforts (assign to ACO/CIN)

• Other time-based services, such as teaching, research, administrative tasks, etc. (assign to “consumer” of time)

Cost Allocations of Physician Work Internal

Pricing ModelRegardless of what the contract calls for in terms of payment mechanisms, an internal pricing model can be used to assign a physician’s cost into appropriate buckets

Accomplish by establishing &

adopting a standard pricing model

RealValue Pricing Model – Inputs

Demographics

Employer Name Health System

Compensation Paid $342,000 ESTIMATED INDIVIDUAL LOSS = $159,500

Specialty Area Gastroenterology

Clinical Inputs Nonclinical Work Effort

WRVUs 5,850 MLP Supervision Hours per Year 100

Clinic Days per Week 3 Administrative Time 100

Weeks Worked per Year 46 Paid Time Off 208

Annual Clinic Days 184 Annual Nonclinical Work Effort Hours 408

Clinic Hours per Day 9

Annual Clinic Hours 1,656

Total Active Work Effort Hours

Call Coverage Inputs Clinical 1,656

Primary call rotation (# of docs) 3 Nonclinical 408

Total On-Call Hours (Primary) 2,920 Active Hours Total 2,064

Activations per Year 100

Clinical Time Once Called In (Hrs) 75 Effective Hourly Rate (without benefits) ~ $170

Example of Physician Services “Pricing” Model

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Paid Compensation & Benefits 392,000$ $342K Comp, $50K Benefits

RealValue Pricing Analysis Notes:Clinical Services 273,839$ 5,850 WRVUs at 130% of MedicareOn-Call Coverage Services 71,635 1,713 discrete hours at $24.80MLP Supervision Services 23,808 192 hours at $124Other Time-Based Services 29,680 424 hours of PTO at $70

Indicated Value of Services 398,962$ 86,635

Variance 2% 21.7%Compliance Risk Scoring Conclusion AcceptableCompensation per WRVU (all in) 58.46$ ~45th P of traditional surveys

Purchased Services/RealValue Pricing Model Conclusion

Purchased Services/RealValue Pricing Model Conclusion

Call coverage has value of 19.4% of the indicated value of services

This equates to $76,207 of cost that is a hospital “use” of physician group resources. There is no reimbursement associated with this cost (per model)

This charge-back would could change the “loss” profile significantly (allocated loss was $159,500)

If the service was acquired from an independent group, it would not be “costed” back to the physician group

Takeaways

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Understanding Practice Losses –

Four Buckets Framework

Or They Can Be Analyzed & Reconciled Financially

Common Ways to View Losses

Cost of doing business

Cheaper than locum tenens

Defensive strategy

Support of community needs

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BKD Four Buckets Framework

PHYSICIAN COMP

Market costs

Per unit costs

Marginal analysis

Contract structure

Attribution

Compliance

PRACTICE EXPENSEDirect expense

Indirect expense

Operating leverage

Market costs

Reimbursed costs

VOLUMEStart-up

Rural

Programmatic

Coverage

Work effort

REIMBURSEMENTPayor mix

Revenue cycle

Charge capture

Chargemaster

Billing & coding

Collections

Denial mgmt.

Key Concept: Insufficient volume will drive practice losses

• Start-up/transitional volume

• Commitment to rural health care

• Programmatic commitment

• Call coverage

• Lack of work effort

Bucket 1 – Volume

= acceptable | = problematic

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Key Concept: Physician clinical services are “cost-reimbursed”…

• Medicare classifications: Direct expense & indirect expense

• Structural market v. reimbursement profile

• Operating leverage – fixed v. variable cost mix

Bucket 2 – Practice Expense

= acceptable | = problematic

Medical Assistant• Actual cost: $15/hr + 35% benefits = $20.25

• Medicare reimbursed cost: 27¢/min or $16.20

• Utilization – 90% (36 hrs clinical, 4 hrs other)

• Hourly gap = $4.05, annual gap $11,800

• Loss attribution

› $4,200 – Unreimbursed time (nonclinical)

› $7,600 – Structural reimbursement gap ($4.05 x 1,872)

Bucket 2 – Illustrative Expense Gap

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• Specialty physician practice expense reconciliation –positive!

• Medicare practice expense level – $324,300

• Actual reimbursed – $317,800 (98% of MC)

• Practice expense per financials – $219,100

• Difference – $98,700 (reimbursement > cost)

• Physician loss reconciliation – $22,200

Bucket 2 – Example Calculation

Key Concept: Inadequate reimbursement for services drives losses

• Payor mix

• Revenue cycle › Appropriate charge capture

› Chargemaster: completeness & accuracy of services & related price setting

› Billing & coding: appropriate billing for work performed

› Collections: point of service efficiency

› Denial management: pre-certifications, approvals, secondary insurance, timely follow up, etc.

Bucket 3 – Reimbursement

= acceptable | = problematic

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• Actual collections as a % of Medicare – 97.7%

• Typical percentage – 111.5%

• Impact to specialist physician practice

› Actual collection – $849,510 (or $35.17/TRVU)

› Collections at 25th P MGMA – 969,694 (or $40.14/TRVU)

› Dollar difference for clinic – $120,000

› Physician loss reconciliation value – $27,200

Bucket 3 – Example Calculation

Key Concept: Physician employment cost has exceeded related reimbursement levels

› Non-Part B services are unreimbursed by insurers at the medical group level

› Contract structure is “marginally” important

› Payment structures should match work effort & cost allocations should follow

Bucket 4 – Physician Compensation

= acceptable | = problematic

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• Provider expense – $1,058,200

• Medicare reimbursement – $513,400

• Actual reimbursement – $531,700

• Actual expense $555,100 or 210% greater

• Physician loss reconciliation – $236,800

Bucket 4 – Example Calculation

Category Amount Notes

Purchased Services ($76,200) Decrease Loss

Bucket 1 – Volume No Impact No Impact

Bucket 2 – Practice Expense ($22,200) Decrease Loss

Bucket 3 – Reimbursement $27,200 Increase Loss

Bucket 4 – Physician Expense $236,800 Increase Loss

Assigned Loss Subtotal $165,600

Summary Loss Reconciliation

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Financial decision-making answer

• Is the arrangement likely to be accretive to the system on a risk-adjusted, net basis?

• That is, is the sustainable clinic-level loss outweighed by the facility-level referral relationship, after risk is considered?

Strategic decision-making answer

• Is the net system level loss on a risk adjusted basis critical to the success of the organization’s mission or key business initiatives?

• If so, how should the loss be accounted for?

› How are we calculating & attributing the loss?

› How are we monitoring & managing?

Conclusion: Employed Physician Losses

How much should we be “losing” on employed physicians?

Strategic Losses: Risks & Physician Portfolio Analysis

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Practical Explanation of Physician Losses ($10 Million)

Strategic Losses: Physician Portfolio Analysis & Risk

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› Increased Insurance Coverage

• Medicaid Expansion & Employer-Based or ACA

› Aging of Physicians

› Community Demographics (Baby Boomers)

› Lifestyle Preferences

› Health Insurance Plan Changes

Environmental Items That Affect Physician Need & Access

› Retirement doctors that support large volumes at the hospital corporation

› Retirement doctors that fill a physician need that aligns with mission

› Scarcity of population health specialties• Psychiatry, OB/GYN, Cardiology, Pulmonology, Gastroenterology, Hospitalists,

Neurology

› Geography concentrations for certain specialties

› Primary care physicians that refer to system specialty physicians

Risks in Your Physician Portfolio

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› FTE vs. headcount› Medicare/Medicaid acceptance rate› Age of physician & estimated retirement age› HCC score & MIPS score› Volumes (practice/hospital/referrals)› Research or teaching physician› Compensation & incentives› Call coverage requirements› Management or administrative duties› Diversity

Better Inventory of Your Employed Physicians Requires More Information

› FTE

› Volumes (practice/hospital/referrals)

› Compensation & Incentives

› Call coverage requirements

Physician Portfolio Scorecard AnalysisA Combination of Profitability & Quality Factors

Profitability Factors Quality Factors› Medicare/Medicaid acceptance rate

› Age of physician & estimated retirement age

› HCC score & MIPS score

› Research or teaching physician

› Management or administrative duties

› Diversity

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Physician Portfolio Scorecard Matrix High Quality

High Profitability

Low Quality

Low Profitability

“Training Doc”High Quality Low Profitability

“Superstar Doc”High Quality High Profitability

“Killer Doc”Low Quality Low Profitability

“Cash Cow Doc”Low Quality High Profitability

Physician Portfolio Scorecard Matrix High Quality

High Profitability

Low Quality

Low Profitability

“Training Doc”• Potential for Superstar status• Quality component increases

future value• Easier to change profitability

than quality

“Superstar Doc”• The “Best” docs• Other hospitals want them• High compensation demands• Maintain “Superstar” status

“Killer Doc”• The worst of all worlds• Physicians need to move

quickly to improve status• Drastic reductions in

compensation or unemployment

“Cash Cow Doc”• Historically valuable to system • Potential retirements• Possible decrease in

compensation• Opportunity to understand quality

measurements & improve status

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Physician Portfolio Scorecard Matrix High Quality

High Profitability

Low Quality

Low Profitability

“Training Doc”High Quality Low Profitability

“Superstar Doc”High Quality High Profitability

“Killer Doc”Low Quality Low Profitability

“Cash Cow Doc”Low Quality High Profitability

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The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.

› CPE credit may be awarded upon verification of participant attendance

› For questions, concerns or comments regarding CPE credit, please email the BKD Learning & Development Department at training@bkd.com

CPE Credit

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rbiernat@bkd.com | sbezjak@bkd.com

bkd.com/hc

The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.