Getting the Most Out of Physician Practice Acquisitions: Considerations for Converting Acquired Physician Practices into Provider-Based Clinics

Hospital Industry Viewpoint

August 25, 2015 (Updated)

Hospitals acquiring physician practices need to balance competing considerations when determining how to fit them in the larger organization. Financial considerations weigh heavily, but so do considerations about finding some place for physician autonomy. Decisions regarding provider-based status touch both of these areas, and each hospital’s facts and circumstances will influence what is the best decision in any individual case.

The adage that what is old is new again certainly holds true with respect to hospital acquisitions of physician practices. The recent uptick in this activity has emerged for a number of reasons, such as (a) the inception of accountable care organizations (ACOs), (b) the need for hospitals to connect with patients after discharge to avoid needless readmissions, and (c) the desire to make sure that a sufficient number of physicians are on staff as the physician shortage grows more acute. But, now that the hospital owns the practice, how should it operate it? Should it remain freestanding, or should it become more integrated into the hospital by converting it to a provider-based clinic?

Benefits of Provider-Based Status

The answer is more complex than one of revenue generation. Being provider-based absolutely has financial benefits. There is enhanced reimbursement under Medicare, as compared with freestanding physician space. There is also the possibility of capturing reimbursement for bad debt from Medicare as provider-based space. And, as of late, the impact of the 340B program on the ability to remain in the black cannot be overstated, especially for clinics that do a lot of infusions. Yet, against these financial incentives, one must weigh the significant regulatory obligations applicable to provider-based clinics, some of which reflect a real change in day-to-day operations.

The Patient Experience

One set of obligations that can create challenges relates to the relationship between the clinic and its patients. Perhaps the most significant hurdle created by becoming provider-based is that suddenly the patient’s co-insurance obligations will rise precipitously, as the patient will suddenly receive co-payment invoices from both the hospital and the physician. The effect of this change can be partially addressed by setting up a system that charges commercially insured patients one way and federally insured patients another way. Such a system does, however, raise compliance challenges that each hospital will need to resolve in a way that is appropriate for that hospital.

A similar issue involves properly identifying the provider-based space for the patient. For a number of different reasons, freestanding clinics often occupy the same building (and sometimes even the same suite) as a provider‑based clinic. Frequently, the two clinics share space, such as a common waiting room. Medicare rules require that provider-based space be held out to the general public as such. Thus, these shared-space arrangements may fall in a gray area, which potentially jeopardizes the enhanced payment, even retrospectively, for the care rendered in the provider-based portion of the space. Indeed, we have seen letters issued by a Centers for Medicare and Medicaid Services (CMS) Regional Office retrospectively denying provider-based status for this reason. Determining in advance the patient’s likely perception of what is and is not provider-based is crucial in such arrangements.

Limits on Physician Autonomy

Just like the patient, the physician’s satisfaction is key to a successful provider-based clinic arrangement, but the regulatory requirements may impinge on that satisfaction. One item that often creates some consternation is the change in what the physician gets paid for. Under Stark rules, the physician’s compensation cannot include compensation tied to ancillary services ordered by the physician and furnished at the hospital. Yet, these services, if furnished by the physician in a freestanding clinic, could have qualified for the in-office ancillary services exception. Therefore, the physician could have received a portion of those ancillary service revenues, assuming certain rules were followed. Thus, determining other ways to make sure that the physician is compensated appropriately and in line with his or her expectations becomes important. The physician will also need to become accustomed to losing clinical and administrative autonomy because of complex and comprehensive clinical and administrative integration rules that must be met to maintain provider-based status. In other words, there will absolutely be differences in the day-to-day operations for the physician after a conversion.

Hospital Oversight Obligations

The converse of the physician’s loss of autonomy is the hospital’s obligation to exercise oversight. Doing so requires sufficient resources. Depending on the circumstances, that may not always be so easy, such as when the clinic is several miles away from the hospital. Distance may also render it difficult to comply with the requirement that patients who need hospital services at the clinic must be sent to the main hospital. If another hospital is closer to the clinic and has all the necessary resources for that patient, compliance with this requirement actually results in inconvenience for the patient. Other infrastructure issues that could be resource-intensive for the hospital include converting the physician’s practice to the hospital’s electronic medical record system and figuring out how to continue to access pre-acquisition medical records after the conversion. Advance planning for all of these changes will help avoid major disruptions in care on the first day of provider-based status.

Is There Always a Financial Benefit?

One final point about the purported financial benefits of provider-based status for any health system that is in, or contemplating becoming, an ACO: The financial benefit through fee for service Medicare may be partially offset by a reduced ACO bonus payment. ACO bonuses are determined largely through savings on Medicare expenses. Yet, if patients were treated in physician practices in the base year, the conversion to provider-based status will likely increase those costs, which makes the ACO’s apparent cost savings appear smaller. The calculation of the financial benefit is therefore quite complex, and any model that calculates this benefit should be robust to ensure that benefits achieved from provider-based status more than offset the costs, as partially described above.

Author and Editor
Andrew Ruskin

Albert W. Shay