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Continued Breakdown Of Collections Guarantee & Subsidy Arrangements

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Continued Breakdown Of Collections Guarantee & Subsidy Arrangements

As mentioned in our previous article, in cases where the hospital-based physicians are not employed, hospitals frequently find the need to provide financial support through Collections Guarantees and Subsidy Arrangements to certain of its exclusive provider groups as the costs of providing the necessary services may exceed the collections realized by the group.

Difference from Call Compensation

Collections guarantees and subsidies are different from call coverage compensation in several respects.  First, call compensation constitutes payments to individual physicians for availability and uncompensated care provided during discrete periods of coverage (i.e., 24 hour periods) for a designated department or area of the hospital (e.g., Emergency Department).  A single physician group may only account for 25% of the total call coverage that is provided for a particular specialty.  In this respect, numerous individual physicians and practices may provide call coverage for the same specialty.

Conversely, collections guarantees and subsidies are usually restricted to one group practice’s exclusive coverage of a particular hospital department.  For example, this may include 24/7/365 coverage of the Emergency Department by a single emergency medicine group or 24/7/365 coverage of a hospital’s operating rooms and delivery rooms by a single anesthesiology group.  Finally, collections guarantees and subsidies include call coverage.  This means that if a pediatric group is contacted to provide 24/7/365 coverage of the pediatric inpatient unit including both 24/7/365 onsite coverage and on-call backup coverage, the associated collections guarantee or subsidy includes the practice’s estimated cost to provide call coverage component of the overall services.

Unlike traditional call compensation arrangements (i.e., which typically are intended to compensate physicians for the burden associated with providing call coverage), the intent behind collections guarantee and subsidy payments is to make the group “whole” so that their total revenue (i.e., the sum of what they collect for professional services plus what the hospital pays them) can support the costs to deliver the coverage.

Commercial Reasonableness

As detailed below, collections guarantees and subsidies are commercially reasonable for a number of reasons.  While employment of physicians may be the clear alternative to such arrangements, it is oftentimes preferable for hospitals to engage independent physician practices (e.g., a hospital may not wish to incur search and recruitment costs, or a hospital may have a longstanding relationship with an independent physician group).  Continuous onsite coverage is a common and reasonable expectation for the hospital departments identified in the table below.

Hospital Sites Commonly Supported Through Continuous Onsite Coverage

Department Specialty
Emergency Department Emergency Medicine
Inpatient Med/Surg Unit Hospitalists
Pediatric Inpatient Unit Pediatricians
Intensive Care Unit (ICU) Intensivists / Pulmonologists
Pediatric Intensive Care Unit (PICU) Critical Care Pediatricans
Neonatology (NICU) Neonatologists
Surgical Intensive Care Unit (SICU) General Surgery / Surgical Intensivists
Trauma Department Trauma Surgery
Labor and Delivery Obstetric-Gynecologists (OBGYN)

Additionally, some state departments of health have established minimum onsite physician staffing requirements for specific hospital departments.  California Children’s Services (“CCS”) requires board certified pediatric intensivists to be in-house for PICU coverage 24 hours per day, 7 days per week.[1]  CCS also requires continuous, in-house coverage for level III NICUs by a physician, neonatal nurse practitioner, or registered nurse with neonatal training as well as 24-hour on-call coverage by a CCS-paneled neonatologist.[2]

Poor Payor Mix

There are numerous hospitals throughout the country that have very poor payor mixes, meaning that a high proportion of their patients are covered under Medicaid or are uninsured.  A poor payor mix can be a key factor for physicians in their ability to provide coverage.  For example, a group of hospitalists could be very productive, with every member of the group consistently performing at or above 75th percentile productivity benchmarks (e.g., encounters, relative value units, hours worked), and yet not collect adequate professional fees to cover their reasonable costs in providing the requisite coverage.

Inhibited Production

Continuous coverage requirements do not necessarily correlate with cost effective staffing for physician groups.  Requiring onsite physician presence overnight may be deemed necessary, but it may not make financial sense for the practice if there is insufficient work for the overnight physician to stay productive and billable.  This is also true for backup call coverage.  Practices may need to arrange for at least one physician to be nearby at all times to provide supplemental coverage.

Requirements dictating multiple physician providers be present during estimated “peak times” can also lead to unproductive periods when peak times are slower than anticipated.  These factors combine to reduce the financial viability of providing onsite physician coverage, thus resulting in the need for financial support.

Hospital-Based Specialties

Collections guarantees and subsidies are generally less applicable to specialties that are office-based.  For example, while orthopedic surgeons and urologists may perform some surgery in a hospital setting, their dependence on hospital-based patients, relative to their overall practice, may not be significant.  Such specialists have office-based practices and may often perform surgeries in outpatient settings.  A standard on-call arrangement is probably sufficient to procure coverage when needed.

However, we note that there are exceptions to the general rule.  For example, a rural hospital which might otherwise have no access to general surgeon within 50 miles may need to provide financial support to a general surgeon to be available on-site or available within short notice at all times.  While there may be several forms of financial support contemplated (e.g., restricted or unrestricted call, recruitment guarantee), one such mechanism could be a collections guarantee or subsidy.

Additionally, given the recent push to improve quality of care, many hospitals are creating hybridized positions that require onsite presence.  For example, orthopedic surgeons have been sought to secure inpatient consultative (i.e., orthopedic hospitalists) and trauma (i.e., orthopedic traumatology) coverage.  Such coverage may not generate a sufficient level of collections to support the cost of specialized physician services.  HealthCare Appraisers has extensive experience in vaigating the various valuation concerns associated with specialized hospital-based services lines.


 

Collections Guarantee Example: 24/7 Anesthesiology Coverage

General Hospital has selected Advanced Anesthesiology Associates (“AAA”) as its exclusive anesthesiology provider.  After several years, AAA indicates that it cannot continue to meet the coverage requirements without reducing staff or receiving some form of financial support.

Analysis of AAA’s operating reports and financials indicate that it must employ 17 anesthesiologists to provide the necessary surgical and delivery coverage that General Hospital needs.   It was determined that the reasonable cost associated with staffing 17 anesthesiologists is $8.0 million.  This cost estimate includes salaries, benefits, and practice overhead costs associated with providing the services.

AAA also provides collections reports for the past several years indicating that its professional collections for services rendered at General Hospital are approximately $6.2 million per year.  Therefore, the implied shortfall is $1.8 million (i.e., $8.0 million cost to provide the services less $6.2 million in professional collections).  Further, we note that based upon the use of relevant benchmark data, the upper end of FMV may not be limited to a group’s actual or expected costs to provide services.

Monthly or quarterly collections audits are performed to make sure that the sum of AAA’s professional collections and the support payments from General Hospital do not exceed $8.0 million over the duration of a year.

Conclusion

As hospitals continue to redefine and improve the way that healthcare is delivered, arrangements such as collections guarantees and subsidies will continue to be commonplace.    While typical hospital-based specialties, such as anesthesia, have been subsidized for years, office-based specialties providing specialized hospital-based services (e.g., orthopedic hospitalists), are likely to continue.  These arrangements offer hospitals a viable alternative to direct employment and are consistent with the efforts underway to improve the delivery of healthcare, and monitor and control the costs associated therewith.  Nonetheless, hospitals must exercise caution to ensure that such arrangements offer financial terms that are commensurate with the level of services delivered and are consistent with FMV.

[1] CCS Manual of Procedures. Standards for Pediatric Intensive Care Units. Chapter 3 – Provider Standards. Section H.5.

[2] CCS Manual of Procedures. Chapter 3 – Provider Standards – Regional NICU. 3.25.1(H)(6) and H(8)