Collections Guarantee & Subsidies In Healthcare

Every hospital faces the challenge of securing qualified hospital-based providers to efficiently staff clinical areas such as Radiology, Anesthesiology, Emergency Medicine, Hospitalist Care and Intensivist Medicine.  It is common for hospitals to enter into arrangements with physician groups in hospital-based specialties to secure clinical coverage. 

Hospitals which choose not to employ physicians in hospital and nonhospital-based specialties are increasingly turning to independent physician practices to obtain a combination of onsite and offsite coverage 24 hours per day.  If there are not enough patients to keep the physicians productive, or if the physicians treat a high proportion of Medicaid or self-pay/indigent patients, the healthcare providers may not collect enough professional fees to support themselves adequately.  When physician coverage is required, but the associated professional collections are not adequate to support the cost of providing the necessary coverage, hospitals and doctors can enter into Collection Guarantees and Subsidy Arrangements to support the ongoing provision of essential medical services.

Collections Guarantees Vs. Subsidy Arrangements

Collections Guarantees- Involve a hospital making regular (e.g., daily, monthly, quarterly, annual) support payments to a physician practice with a periodic audit of the practice’s collections.  This ensures the revenue collected by the health providers do not exceed a predetermined “guaranteed” amount.  If the physicians’ professional collections improve during a given period, there may be a payback mechanism or credit applied against future support payments.  Therefore, the collections guarantee support payments and the medical practice’s professional fees will never exceed the reasonable cost to provide the coverage.

Subsidies- Also involve periodic support payments, but the payment amount is usually fixed with no audit of the physician’s professional fees.  Subsidies are utilized when monthly or quarterly collection audits place too much administrative burden on the practice.  However, the absence of an audit mechanism increases the risk for over payment if the medical practice collects more fees than expected.  Subsequently, under a subsidy agreement, a hospital may elect to pay fixed support payments that may be relatively lower than would otherwise be paid under a collections guarantee.

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In the course of serving a population, hospitals with emergency departments are legally required under the federal EMTALA statute to provide screening and stabilizing treatment to patients presenting to the emergency department with emergency medical conditions. If a hospital offers a particular type of service or specialty at its facility, then EMTALA generally requires that the hospital provide coverage for that specialty 24/7/365, either directly or indirectly through the use of transfer agreements with other facilities. This requires that, whenever possible, hospitals provide medical and surgical physician coverage for a variety of medical disciplines.  While securing such coverage by engaging in various unrestricted (i.e., off-campus) call coverage arrangements, several hospital departments may require continuous onsite or restricted coverage.

Common FMV pitfalls

To establish if a collection guarantee or subsidy is warranted, an FMV analysis should be performed first to verify that there is a collections shortfall and then to determine a maximum potential support payment.  A hospital that enters into a subsidy or collections guarantee arrangement without an FMV opinon could unknowingly overpay the physician practice and facilitate physician compensation that is above market.  Thus triggering the risk of regulatory concerns, including violations of the Stark Law, Anti-Kickback Statute, and IRS private benefit guidance (as applicable to non-profit, tax-exempt entities).

Additionally, while it is a necessity for many hospitals to provide financial support to certain of its hospital-based physician groups, in our observations, the majority of these provider support agreements lack provisions to promote quality and operational improvements through financial reward. Although a portion of this potential "reward" can be handled as a holdback of physician payment that might have otherwise been paid automatically to the health professional for their services, a fair market value assessment may support higher maximum compensation if a significant portion of the payment is at risk.

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A Fair Market Value analysis should consider a practice’s collections, physician compensation, operating expenses, and productivity relative to the proposed coverage requirements.  It is essential that any payment from a hospital to a physician group match the level of services provided by the physician group.  For more information check out the continued breakdown of Collections Guarantee and Subsidy Arrangements

When evaluating potential appraisal firms for purposes of obtaining an FMV opinion related to collections guarantees or subsidies, it is incumbent to establish that such a valuation firm is capable of and experienced in delivering an opinion that covers the subjects mentioned above.  Successfully completing thousands of Collections Guarantee and Subsidy Arrangements a year, HealthCare Appraisers’ valuation professionals and tested methodology have withstood the most intense regulatory scrutiny.  Our clients look to our expertise to ensure compliance in an ever changing regulatory world.