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    David N. Gans, MHSA, senior fellow, MGMA, recently spoke with Timothy Smith, CPA, ABV, principal, TS Healthcare Consulting, to dig deeper into key metrics in MGMA DataDive to explore the issue of losses in hospital-owned and physician-owned practices and how to interpret cost and revenue data to determine what’s real and what’s not.

    As Gans notes, hospital-owned practice data looks much different, and the key to understanding the differences is in financial data, which have not changed drastically in the past three years. Looking at total medical revenue per physician in MGMA DataDive Provider Compensation, the total for physician owned-groups – slightly more than $1.2 million – is about double that of hospital-owned groups (about $600,000) for multispecialty groups with primary and specialty care. Similarly, operating costs in physician-owned groups – about $800,000 – are about double those of hospital-owned groups ($400,000). At the end of the day, physician practices break-even, yet hospital practices regularly report a loss.

    I think there can be multiple causes of losses in a hospital-owned physician practice. It's not just a singular phenomenon that causes these losses. … There are physician practices where the ancillaries haven't necessarily been converted out, for example,” Smith said.

    In certain ancillary-dependent specialties such as orthopedic surgery, those services “are often converted from being part of the practice to a hospital outpatient department, because the hospitals can bill at a higher rate for those services,” Smith noted.

    Smith, in working with a variety of healthcare organizations, says he hears numerous anecdotal reasonings on the topic: Certain economies of scale from consolidation of imaging, cross-training of employees. Some of the reports available in MGMA DataDive show that gross charges in physician-owned practices have a strong correlation to much higher lab chargers per doctor in physician-owned groups ($318,000) compared to $20,000 in a hospital system.

    This isn’t a factor of hospital doctors not ordering tests, Gans said – they just aren’t done in the practice.  

    Smith pointed to MGMA DataDive Cost and Revenue figures showing a “huge difference” in total RVUs for multispecialty groups between hospital-owned groups and physician-owned groups. Ancillary diagnostic tests certainly could account for those differences: “It makes sense from a hospital’s perspective” to do essentially the same service but get reimbursed at a higher rate and lower costs.

    At the same time, hospitals may use provider-based billing with a separate facility fee. In this case, Medicare reduces the total RVU commensurate with the amount that’s going to be billed for the facility fee. “So even though wRVUs are the same, you get fewer total RVUs if you’re part of a hospital system – therefore, less payment for Medicare and less payment from commercial insurers for the same amount of work,” Gans said. “This impacts that practice in the bottom line, because it starts at the top line, get paid less for the same amount of work. But you still have to incur those costs.”

    Through all these compensation concerns is a potential regulatory issue, Smith added. “What hospitals are doing is they're continuing to pay the physicians as if the ancillaries were being provided in the group,” Smith said. “The challenge there is that under Stark [Law], in order for physicians to be able to receive compensation off net profits from ancillaries, they have to meet the in-office ancillary exception under Stark and they have to meet the group practice definition, which covers (among other things) how those ancillary dollars can be divided up among the physicians.” When ancillaries are stripped out under HOPD [hospital outpatient department], do they meet those requirements? And is it fair market value to continue to pay for ancillaries that don't meet those requirements?”

    Revenue imbalance

    Gans noted that there is also a measurable difference in the amounts collected on bill charges in hospital-owned and private practices. Some of this can be attributed to a higher percentage of Medicaid in hospitals compared to private practices (14% versus 6% of total revenues, per the survey data); however, adjusted collection percentages also provide insight into where practice losses occur.

    “In private practice physician-owned groups, it's 98% — in hospital systems, it’s 96.7%,” Gans noted. “They're getting paid about 1% less — 1% times hundreds of thousands of dollars equates to a sizable amount of this operating loss.”

    Smith noted that demographics can be very tricky when assessing payer mix, even within a single metropolitan area. “There are certain suburbs, where you're going to have a great payer mix,” whereas other suburbs will have a very different payer mix. “A health system that's losing money in one of these affluent suburbs, I don't think can make the claim that they have a payer mix problem.”

    Ultimately, the entrepreneurial focus within a physician-owned practice is seen as a driver of better revenues compared to hospitals. When the physicians own the practice, “they're much more apt to focus on collections,” Gans said. Echoing that sentiment, Smith noted that there’s anecdotal thinking that hospitals may not take the same type of approach to negotiating commercial payer rates for doctors as the private practice groups.

    “The think-tank literature on commercial payer rates will tell you that what drives those is really this dynamic between the relative bargaining power of the providers, the payers and the employers,” Smith said. With a large chunk of insurance paid through self-insured large companies, “health systems can actually effect higher rates by virtue of their negotiating leverage, which is typically related to size, and we’re even now seeing some of these regional and national systems trying to negotiate at regional levels.

    “Do they focus on getting the best dollars for their doctors, or are they using their doctors as bargaining leverage for higher rates on the hospital side?” Smith questioned.


    Another key component of this variance between hospital-owned and private practices is cost. “The cost of a lot of hospital-related services are often buried in the practice” if not accounting for employed physicians receiving medical directorship pay, call coverage pay or clinical co-management services in their paychecks, Smith said. “You often don't see the health system crediting the practice with intercompany revenue for the value of those services,” he said. “The comp cost is there but you don't see it up on the revenue line.”

    Another differentiator for systems and hospitals can be about image and marketing, Gans added. “The depth of the carpet in the waiting room, the newness of the magazines, the fact that the doors are all solid wood,” Gans listed, all can be choices leading to higher costs compared to a physician-owned practice that may not invest quite as much into aesthetic elements in the facility.

    Practice losses: How much is real?

    Taking a global view of these factors, Smith believes many of the reported losses in hospital-owned practices are indeed real. It can be a function of health systems often paying based on median compensation survey data rather than the local market for compensation. “That’s a real loss driver,” Smith said.

    But with any instance, Smith says that it’s vital to look at specific data points and begin to fix the things a practice executive can. “You’ve got to do the detailed, hard work of analyzing what's going on. … If you're not crediting your physicians on an intercompany level with the value of the hospital co-coverage and the hospital medical directorships, you want to do that,” Smith said. Having that compensation sit on the physician practice side of the ledger versus the hospital costs can skew true costs.

    “Figure out why you're losing money and be able to tell your boards, for example, why you're losing money in your physician enterprise,” Smith said. “If the feds show up, you can tell the feds, ‘here's why we're losing money.’ And if you've done the work, you can understand what's going on with your practices, as opposed to just speculating.”

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