Knowledge Expansion

Physician practice losses: How much red ink can a health system afford?

Insight Article

Benchmarking & Forecasting


Data Analytics & Reporting

Timothy Smith CPA, ABV
Series: Examining Losses in Health System Physician Practices
Installment #10

As reimbursement pressures continue to mount, health systems are looking at every aspect of their operations and asking critical questions. These reviews frequently lead to the physician enterprise, when health systems lose money on their employed physicians.

Today, many health systems are starting to ask whether they can afford to underwrite their physician enterprise on an ongoing basis. Can the health system sustain current levels of red ink into the future? At what point can a hospital system no longer afford to subsidize physician employment on a large scale?

To such questions, many industry participants respond by saying practice losses are inevitable. They’re simply a cost of doing business. Some participants will also point out that many hospital departments lose money, and so, physician practices should be viewed no differently.
Others will venture to say that physician practices are “loss leaders” or that health systems ultimately make up the difference elsewhere in the overall enterprise. “At the end of the day, it’s all one pot of money,” they say.

Based on the last article in this series, however, it should be readily apparent that offsetting practice losses by inpatient and outpatient referral profits from employed physicians is a bad idea. Crunching the numbers for individual physicians or groups is a key allegation in certain high-profile and costly whistleblower cases. Losses should not be justified on this basis. A health system, therefore, needs to think about its physician enterprise apart from referrals.

Indeed, talk of “loss leaders” and “making it up elsewhere” may lend themselves to accusations of talking in “code” or using euphemisms for payments for referrals. From an enforcement risk perspective, health systems are better off avoiding such thinking when it comes to evaluating their practice losses.

Yet, the common view that “everyone loses money on their physicians” leads many industry players to view practice losses with a sense of inevitability and even futility. They ponder, “What’s a health system to do?”

A financial dilemma emerges, however, when the health system contemplates a future of red ink from its physician enterprise relative to flat or even shrinking revenues and profitability across other service lines.

As a response to this dilemma, some industry players are now saying don’t worry. Losing money on physician practices is a problem that will go away on its own. The physician practice as an operating entity is soon to be a thing of the past. The move to value and the rise of alternative payment models will result in all physicians becoming employees of health systems. All reimbursement will essentially be bundled or like capitation and will be paid at the health system level. Physician practices will then cease to exist, along with the concept of practice losses.

The real difficulty with many of these popular responses to the problem of practice losses is that they usually cause inaction, avoidance, and rationalization. Health systems console themselves with popular industry talking points about practice losses and maintain business as usual. In the meantime, they continue to run rivers of red ink from their physician practices.

The reality is that the problem isn’t going away anytime soon.

This difficulty is particularly acute when the status quo is justified based on the idea that physician practices will soon cease to exist. This view essentially says the following: Because the future may look different, we can forget about the present and the near-term.

Yet, the current pace of the move to value is a slow-moving train. How many millions can a health system afford to lose while waiting for this train to arrive at the station?

This view also involves significant risk because no one really knows what the long-term future of US healthcare is going to look like. To be sure, it will look different than it is now. But, does anyone really have the right crystal ball to see the future that clearly? Hoping the future makes a problem go away is not a winning strategy for financial stewardship.

What’s the best response? It’s simply this--the time has come for health systems to tackle practice losses head-on and address the issue, rather than avoid it or hope it simply goes away.

The first step is to identify the specific reasons why individual practices lose money. You cannot address the problem if you don’t know the sources of the problem.

For our next installment in this article series, we’ll discuss how health systems can use loss-sourcing analysis to identify and quantify the contributors to practice losses.

Click the following to read previous articles in the series:

Physician practice losses: A tale of two owners

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: Intercompany accounting practices that result in hospital cost shifting

Physician practice losses: The impact of converting practice ancillaries to hospital outpatient depa

About the Author

Timothy Smith CPA, ABV
Principal TS Healthcare Consulting, LLC