Forum Focus – Examining the value of the hospital-affiliated medical practice: Why hospital-owned medical groups report operational losses

By David N. Gans, MSHA, FACMPE

As hospital system professionals plan for the future, their strategic initiatives frequently include operating a physician practice. This strategy usually involves purchasing physician practices or expanding medical groups that are already owned by the system. With a corporate focus on the bottom line, it is important to note that while many hospital-owned medical groups operate at a financial deficit — with total expenses exceeding practice revenue — their value far exceeds the numbers on a balance sheet.

For a system executive to understand what happens in a medical group, it is important to dig deep into the data and gather more than its financial statements.

The MGMA 2012 Cost Survey Interactive Report Based on 2011 Data provides a comprehensive picture of the financial performance, payer mix and revenue cycle for medical groups in all settings. Comparing information from hospital-owned and physician-owned medical groups provides you with more context for what drives financial performance. It provides a perspective for the ongoing value medical groups bring to the table — from the benefits of admissions, ordered ancillary services and more.

The graph below shows how median total medical revenue per full-time-equivalent (FTE) physician is 66 percent lower in hospital-owned multispecialty groups compared with similar physician-owned practices, and how hospital-owned medical groups have lower median total operating costs than physician-owned medical groups.

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Since all medical groups compete in the same labor market to hire and retain providers, we see similar physician compensation and benefits. The survey data show that hospital-owned groups have a slightly higher percentage of primary care physicians (58 percent) than physician-owned medical groups (51 percent), which helps explain the slightly lower total compensation figures for hospital practices. The graph also shows the financial bottom line, with hospital-owned multispecialty groups reporting a median overall loss per FTE physician of $174,430 compared with a slight operational gain for physician-owned medical groups.

There are myriad reasons for the difference in financial performance for hospital- and physician-owned practices, and some of the most obvious are shown below. There are substantial differences in productivity, payer mix, revenue cycle and clinical activity in hospital- and physician-owned multispecialty groups, all of which impact financial performance.

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MGMA-ACMPE data show that provider productivity, measured by median physician work resource-based relative value scale (RBRVS) RVUs per FTE physician, is 16 percent less in hospital-owned medical groups. Some of the difference in productivity can be attributed to a greater percentage of primary care doctors in these groups and different financial incentives in hospital-owned practices, which are more apt to have salaried physicians vs. physicians paid on production incentives.

The Cost Survey report shows that hospital-owned medical groups have similar insurance payers as their parent organizations, which is different than the payer mix reported by physician-owned practices. Hospital-owned multispecialty groups have 5 percent less Medicare, 10 percent less commercial insurance, 39 percent more Medicaid and much more charity care than physician-owned medical groups. The combined effect of these differences is that hospital-owned practices generate less revenue from the same work than physician-owned groups due to differences in the levels of payment from different payers.

Lower payment levels are exacerbated by a difference in the revenue cycle. Hospital-owned groups reported a median adjusted collection rate of 96.7 percent compared with 98 percent in physician-owned groups. There are valid reasons why this occurs, but the bottom line is that hospital-owned practices collect less revenue for the same charges.

The largest difference in revenue comes from clinical activity. Physicians in hospital-owned medical groups have 20 percent more medical procedure gross charges performed outside the practice, which reflects the fact that their physicians practice in hospital ambulatory care clinics and use provider-based billing. This usually means the hospital bills separate facility fees — and the practice bills a lower professional service fee amount — for these services. By billing facility and professional service fees, hospital systems receive more payment than physician-owned groups for the same service, but the medical group only reports the professional service amount which results in lower practice revenue.

A common change made when hospitals purchase private medical groups is to minimize ancillary services performed in doctors’ offices and to transfer these services to other entities in the hospital system. There are good reasons for this strategy — centralizing laboratory and radiology services enable integrated systems to gain economies of scale, which can lower costs and improve quality. However, the lower volume of ancillary services, which are integral to the practice, has a substantial impact on a medical group’s revenue.

Median laboratory procedure gross charges per FTE physician are $104,218 less in hospital-owned multispecialty groups, and median radiology procedure gross charges per FTE physician are $89,612 less. The sum of these values multiplied by the gross collection percentage indicates that hospital-owned practices report almost $100,000 less in ancillary services revenue than physician-owned multispecialty groups.

It’s deceptive to look only at a practice’s financial statements and assume that is the whole story. The physician enterprise brings ongoing value to an integrated system, which extends far beyond its reported financial performance. The accounting reports are just the beginning of a rich tale and it is important to look at the total contribution of the physician practice to the system before making a conclusion on if the practice contributes or detracts from the system’s bottom line. Now, more than ever, we must rely on data to navigate these complex matters and with professionally-certified practice managers at the helm, we can better assess the way in which physician practices impact the larger health system.

 

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David N. Gans, MSHA, FACMPE, is a senior fellow in industry affairs at MGMA-ACMPE. He can be reached at dng@mgma.com.