Pros, Cons of Provider-Based Conversions

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When the local hospital approaches you about selling your practice and converting it to a provider-based outpatient department, you may want to hear them out. There are many benefits to becoming a department of the hospital, but what would it mean for you and the practice you worked tirelessly to build?

What Does It Mean to Be “Provider Based”?

A provider-based facility is a department of the hospital and provides healthcare services under the name, ownership, administrative and financial control of the hospital. Clinical services are billed under the hospital’s provider number. The department comprises the physical facility and the personnel and equipment needed to deliver the healthcare services.

When a physician practice is converted to a provider-based department of a hospital, the hospital can bill Medicare for the technical component of the services provided, which is reimbursed at a much higher rate than if billed by an independent physician practice. The reason for the difference is that when a hospital is reimbursed for the technical component, the payment includes the additional overhead and expenses associated with operating a hospital (e.g., administrative costs, maintenance expenses and the cost of housekeeping).

You Agree; Now What?

Saying goodbye to your brand. One of the provider-based requirements is that the facilities be held out to the public as departments of the hospital, such that when patients enter the facilities, they are aware that they are visiting a department of the hospital and will be billed accordingly. After years of building your brand, the hospital’s name and trademark will now be the face of the practice. This can be confusing for patients. However, it can also be a good thing, because patients often find comfort in knowing that their doctor’s office is now part of a larger platform for delivering professional services.

Employment arrangements. Once a physician practice converts to provider based, all non-physician staff must be employed by the hospital. However, physicians have flexibility when it comes to their own employment arrangements and can decide between hospital employment and a professional services arrangement. They often believe they will make more money in private practice than as a hospital employee, but that is not always the case. There are many advantages to being a hospital-employed physician, including:

• Eliminating overhead and other operating expenses;
• Not having to pay costly malpractice insurance premiums;
• Taking advantage of the hospital’s employee benefits package, including vacation time and health insurance; and
• Eliminating the stress of running your own practice.

These factors can lead to greater earning capacity as a hospital-based physician. So why doesn’t every physician close their practice and head over to the local hospital? The answer is often freedom. As hospital employees, physicians are bound to the hospital’s policies and procedures and often lose the autonomy they enjoyed in private practice. They become subject to hospital ownership changes and lose control over their staff, who must be employed by the hospital and report to its administrators.

The alternative to hospital employment is a professional services agreement (PSA). PSAs are not limited to provider-based facilities and are often used by physicians to contract with other entities to provide healthcare services. Although physicians will continue to be bound by many hospital policies and procedures and must report directly to hospital administration, they often prefer a PSA because it may avoid the perception of hospital employment and affords them greater autonomy. Such arrangements usually involve multiple physicians. When the hospital pays the practice, a single check is cut, but the physicians can control the manner in which the compensation is distributed. In addition, in the event of an issue between the hospital and the physician practice, a PSA is often easier to walk away from than hospital employment. Although the physician may not receive benefits afforded to a hospital employee (e.g., malpractice insurance, medical insurance and vacation time), he or she may retain certain superior benefits of the physician practice, such as a specifically designed pension plan.

Impact on patients. The goals of a provider-based conversion are to improve the quality of healthcare for patients and reduce provider expenses by spreading costs over a larger number of facilities. But what does this mean for the patients? There are certain negative impacts on patients that must be considered when contemplating a provider-based conversion. First, the patients will receive two bills as a result of the conversion—one from the hospital and one from the physician. Also, the patient will be responsible for a greater percentage of those bills than when the physician practice operated independently.

Patients will also realize definite benefits from the conversion. Patients of provider-based facilities benefit from an integrated health system. Medical records are fully integrated, and all records of treatment from any area of the hospital are easily accessible by physicians. This means that physicians know what tests and medications were ordered and what the results were and can easily consult with each other to coordinate care. Studies show that integrated healthcare can lead to better patient outcomes, which improve patient satisfaction. Also, in a provider-based facility, physicians must treat all Medicare patients the same for billing purposes. This means that physicians cannot treat some Medicare patients as hospital outpatients and others as physician office patients, depending on which method will lead to the higher reimbursement to the physician. This uniform billing requirement forces physicians to bill Medicare patients equally, regardless of more lucrative reimbursement methods.

Impact on the hospital. Although conversions can be extremely costly and time consuming, doing so expands the services provided by the hospital, allowing it to serve a greater percentage of the population. In addition, the higher reimbursement paid to the hospital for billing the technical component of the services provided at the converted facilities increases hospital revenue. The extra money can be used to improve or create new hospital service lines or enhance the hospital’s ability to care for indigent patients. Also, so long as the hospital is properly enrolled, it can purchase pharmaceuticals at a significantly reduced cost for administration in the provider-based facility.

Integrated healthcare can lead to better patient outcomes, which improve patient satisfaction.

Regulatory Considerations

Tremendous effort goes into converting an independent physician practice to a provider-based department of the hospital. The good news for physicians is that most of the work is performed by the hospital. The bad news is that the process can take months to complete. Physicians often find it frustrating to work with the various hospital departments to get the practice up and running in compliance with the provider-based regulations. The more a physician understands the provider-based criteria, the more he or she can help the hospital streamline the process. There are several key components to compliance:

1. Location: Unless an exception applies, the new department must be located within a 35-mile radius of the hospital.
2. Licensure: The physician practice must operate under the hospital’s license and provider number. This means the hospital will need to emend its license to include the new department. This may require the hospital to emend its accreditation with The Joint Commission to prove inclusion under the hospital license.
3. Ownership: Except for certain on-campus joint ventures, the new department must be completely owned and controlled by the hospital. The ownership change process must be started as early as possible, because this can involve a lengthy negotiation between the selling physician and the hospital.
4. Clinical integration: The clinical services at the new department must be integrated with the main hospital. This requires the following:
   1. Professional staff have privileges at the main provider;
   2. Hospital maintains oversight over the new department as it would any other department;
   3. Medical records are integrated or cross-referenced to the hospital’s medical records. This can be a significant undertaking, so ensure the hospital’s IT staff is involved as early as possible; and
   4. Department staff (other than the physician or physician assistants) must be employed by the hospital and receive the same employee benefits and salary structure as other hospital employees.
5. Financial integration: The new department must appear as an identifiable cost center on the hospital’s trial balance.
6. Timing: If eligibility for other federal programs is an incentive for the conversion, it is important to be mindful of the timeframes for implementing those programs.

These factors must be kept in mind when converting a physician practice to a provider-based department of the hospital.

Steven M. Harris, Esq., is a nationally recognized healthcare attorney and a member of the law firm McDonald Hopkins LLC. Contact him via e-mail at [email protected].