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Key Internal Control Problems for Hospitals in Physician Relationships

Regulated transactions with physicians are now common for hospitals. With the significant number of physician practice acquisitions and other affiliations, the number of regulated transactions with physicians has gone up exponentially. In this current era of regulatory enforcement, hospitals and health systems have an increased, potentially crippling risk in terms of the financial damages.

Financial relationships with physicians exist throughout the hospital, and nearly all can be classified as a regulated transaction that, if not properly managed, could result in violations of Stark and anti-kickback statutes that may result in treble damages and $11,000 per claim in penalties. The Office of Inspector General has noted this area in its FY 2012 workprogram.

Elements of a Regulated Transaction

Hospitals and health systems generally understand that the acquisition of a practice, subsequent employment and other financial relationships are regulated transactions. Therefore, most do a good job with fair market value (FMV) compliance with these contracts on the front end of these new physician relationships.

However, in a recent, nonscientific series of interviews with hospital executives, seven in 10 hospitals indicated there likely were inadequate safeguards to monitor compliance after the relationship began. This is where most compliance risk is present—after the initial transaction closes. To be in compliance with applicable regulations, all financial relationships with physicians should be closely monitored and periodically reviewed.

Three Common Internal Control Problems

As part of a robust, enterprise-wide physician risk management system, here are the top three internal control problems BKD has seen in the last 12 months regarding regulated transactions.

1. Contract Renewals

This is an opportunity to review both the substance of an arrangement and the financial terms. Fees paid under any physician contract must be at FMV in light of existing facts and circumstances. An FMV evaluation of contracts should include a review of the actual services or goods rendered as part of the arrangement to make sure what is actually transpiring is reflected in the contract terms.

Common Problems

A.  FMV Review Timing – Often, an FMV analysis is not performed or performed after the fact. Whether prepared internally or externally, FMV analyses performed after the fact create a tremendous amount of pressure for the analyst to arrive at the “right” answer.

B.  Change in Facts and Circumstances – Contract time is when you can reflect on what happened under the prior contract and what will be the agreement going forward. Did physicians add extenders or staffing? Did they meet production goals? The key is identifying where things stand today relative to when the deal was entered into work relative value unit (wRVU); consider those answers in light of proposed compensation.

2. Departure from Contract Terms

While unregulated businesses have dynamic employment and other contractual relationships in which the services and expectations can change over time naturally, some changes in the health care industry can actually create compliance risk. These changes can lead to improper compensation calculations according to the original contract terms.

Common Problem – Change in Physician Extender Utilization

It is common for a busy physician to add a nurse practitioner to increase a clinic location’s capacity. This is not a problem in and of itself, but problems can emerge several steps down the road.

We know there are payors that will not recognize an extender as a unique provider, so the patients he or she sees are billed under the supervising physician. For a physician paid under a wRVU model where he or she receives a dollar per wRVU, the physician could unintentionally be receiving compensation for both their own wRVUs and the extender’s. There is an internal control failure here that can and should be reviewed.

This scenario could be construed as overpayment to the physician. Overpayments to physicians call into question any protected referrals to the hospital (such as imaging and labs) and potentially create significant exposure for a hospital under the False Claims Act.

3. Stacked Contracts

Hospitals often engage physicians for a multitude of services these days as health systems strive for clinical integration. These contractual relationships include employment, medical directorship, on-call arrangements, joint ventures, building and equipment rentals, co-management arrangements, professional services arrangements and others.

When these other arrangements are related to an employed physician, the regulated transaction becomes more complex. Contracts should be reviewed in conjunction to confirm that the total package is at FMV and clearly document there is no coordinated effort to reward physician referrals through a series of aggressive contractual arrangements.

Common Problems – If employed physicians participate in a separate contractual call arrangement with separate payments for call services rendered, there are two key areas of concern:

A.  Stacked Payment – If a physician is paid for being on call during normal business hours and the physician is actively seeing patients, there’s potential the physician is being paid twice for the same time period.

B.  Overpayment – The architecture of on-call payments compensates providers for two fundamental components, the inconvenience of being on call and the uncompensated and undercompensated care rendered to unassigned patients. To the extent an employed physician is being paid on a per wRVU basis, they already are being protected against uncompensated and undercompensated care. That is, to the extent that a universal call coverage rate is paid to an employed physician, there may be a per se overpayment based on the overall call rate (the higher the on-call rate, the greater the risk of overpayment).

Internal Control Action Steps

Many hospital providers believe they have inadequate safeguards to monitor physician relationship compliance. However, providers often are in denial and indicate everything is perfectly fine. The cost of noncompliance around physician relationships is high. The cost-benefit analysis to committing resources in the area of enterprise-wide physician risk management tilts strongly towards making an investment in an experienced advisor.

Health systems should actively manage risk related to physician arrangements. Take the time to review contracts, keep them organized, pay attention to stacked arrangements and understand how wRVUs are calculated. Contact your BKD advisor for help with FMV analysis, contract reviews, physician compensation plan implementation and other regulation compliance issues.

This post was written by: and

Randy is a senior managing consultant with BKD National Health Care Group. He provides fair market value analyses of compensation for a variety of regulated hospital-physician transactions. Randy also has experience providing advisory services such as physician compensation plan design, strategic affiliation processes, development of management arrangements and on-call programs.

Gwyn has provided tax and consulting services for health care providers and other industries for more than five years. Her experience includes tax filings and multistate tax compliance for medium- to large-size companies. Gwyn also assists large corporate clients in FAS 109 and FIN 48 compliance.

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Recent Comment

  • Karen Vance says:
    This would be under §484.18 of the Conditions of Participation describing regulations for the Plan of Care. Below is the Standard that addresses your issue: "§484.18(b) - Agency professional staff promptly alert the physician to any changes that suggest a need to alter the plan of care." From the State Operations Manual (guidance for state surveyors) "The
    February 24, 2011 on Webinars

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