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    Timothy Smith, CPA, ABV
    Series: Examining Losses in Health System Physician Practices

    This installment of the article series should set off alarm bells for health systems that lose money on their physician practices. A look back at government enforcement actions over the past decade shows practice losses are frequently used to allege payment for referrals by hospitals to physicians. Whether you agree with this idea or not, the fact remains that historically, practice losses have been cited as evidence of overpayment of physicians. Every health system should be prepared to explain and defend its losses as part of its enterprise risk management for regulatory compliance.

    For starters, the industry needs to acknowledge that overpayment of physicians is yet another potential cause or contributor to practice losses. If you pay physicians more than the economics of their practices warrant in order to induce referrals, you’ll lose money. That’s a simple mathematical fact.
    Of course, acknowledging this fact doesn’t mean that you believe all losses stem from nefarious kickback schemes. The past several articles in this series have shown that there are multiple reasons why health systems can lose money on their physician practices.

    Contrary to what you may have heard, the government also doesn’t think that practice losses are always an indicator of kickbacks. Rather, losses present potential red flags for further investigation. According to the government, losses may be justifiable under certain circumstances.

    When we say government, we should sort out which departments or agencies are players in the issue of practice losses. Regulatory guidance on the meaning and application of the Stark law and federal anti-kickback statute (AKS) come from the Department of Health and Human Services (HHS), including the Centers for Medicare and Medicaid Services (CMS) and the Office of Inspector General (OIG) for HHS. Investigating and enforcing both laws, however, fall to the Department of Justice (DOJ).

    To date, CMS and OIG have not issued specific guidance on practice losses. Some healthcare lawyers will point out this fact when discussing the regulatory issues associated with practice losses. Others go further to suggest that CMS regulators downplay the issue of practice losses when it comes to Stark compliance.

    DOJ, on the other hand, has a history of using practice losses as part of its analysis of the commercial reasonableness of hospital-physician compensation arrangements. In the now-famous Tuomey case, the DOJ explicitly argued that practice losses were an indication the physician compensation was excessive. DOJ’s valuation expert, however, made it clear that simply incurring losses is not singularly determinative of the issue. Rather, a health system can lose money in some cases, but it needs a good business reason to do so. And, that reason should be based on community need, not growing hospital referrals. This same valuation expert also used this framework for assessing the practice losses in the Halifax case.

    What about the fact that most health systems lose money on their doctors? In the second Tuomey trial, the lawyers for Tuomey Health System made the “everyone loses money on their physicians” argument, including expert testimony about industry losses on health system practices. That argument failed to persuade a jury that Tuomey’s losses were therefore acceptable, given the other facts and issues in the case.

    There’s another set of industry players that also factor into the enforcement risk equation when it comes to practice losses—whistleblowers and their lawyers. All the cases mentioned started as whistleblower cases under the False Claims Act that allows private individuals to bring suit on behalf of the United States for violation of certain federal statutes. The track record of complaints filed by whistleblowers shows practice losses are frequently used as a key economic indicator of overpaying physicians.

    Practice losses were used as central economic arguments in three separate 2015 cases in which health systems settled with DOJ for large settlements in the tens of millions. Practice losses were alleged in the whistleblower complaints filed in the North Broward and Adventists cases to be indicators of over payment of physicians. The complaints also alleged the health systems would offset the profits on referrals from the practice losses in their overall financial analysis.

    In the Citizens Medical Center case, a judge ruled against a motion to dismiss the case citing practice losses as part of the reason to allow the case to go to trial. The hospital argued that since the physicians were paid at about MGMA median, the compensation was fair market value. The judge rejected this argument, citing practice losses and pay increases for the physicians upon employment. He raised the question of why a health system would incur such losses, regardless of the compensation benchmarking.

    The use of practice losses by whistleblowers has continued. In the latest large-settlement whistleblower case involving Kalispell Regional Healthcare ($24 million), practice losses were once again used as part of allegations of overpayment.

    Certainly, other factors are alleged in all these cases to develop a larger picture of purported wrongdoing relative to Stark and AKS. Practice losses are not solely used to make a case for violations. Yet, if the health system’s practices lose money, it’s highly likely that this fact will be cited as part of the allegations in the case.

    The bottom line is that practice losses create significant enforcement risk for regulatory compliance, should a whistleblower case emerge. If you’re losing money on your physicians, this fact may be used against you as part of a whistleblower case. As a result, health systems need to be prepared for a compliance emergency by evaluating the causes for their practice losses.

    In our next installment, we’ll discuss a growing trend of health systems assessing the ongoing financial risk of practice losses. How much red ink can health systems sustain in a marketplace with shrinking reimbursement? Can the health system afford to underwrite the physician enterprise year after year at current levels?

    Click the following to read previous articles in the series:

    Physician practice losses: A tale of two owners

    Physician practice losses: Why physician-owned practices break even or make a profit

    Physician practice losses: Why losses are typical in health system practices

    Physician practice losses: Losses from revenue issues in health system practices
    Physician practice losses: The impact of converting practice ancillaries to hospital outpatient depa


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