Ahead to the Past? Physician Practice Acquisitions
By: Laureen A. Rimmer, Director, Coding, Accreditation and Clinical Services
David A. Bongiovanni, Chief Executive Officer and General Counsel
Ahead to the past … or is it? In any event, be prepared.
In the 1990s, hospitals, health systems and physician practice management companies made substantial investments, financially and strategically, in the acquisition of physician practices. This trend, which lasted more than a decade, was stimulated in large part by the proliferation of managed care, and also in part by the market’s reaction to the introduction of the ill-fated Health Security Act in 19931.
Although fueled by the larger healthcare organizations, physician practice acquisitions were pursued throughout the country by systems and hospitals of all sizes. The purchasers assumed that these acquisitions would: (i) create negotiating leverage with the managed care plans; (ii) generate patient referral streams from the acquired practices; (iii) produce increased revenues based on the purchasers’ plans to manage the acquired practices more efficiently; and (iv) produce a crucial part of the infrastructure needed to manage financial risk arrangements with the managed care plans.
However, in large part, this broad approach did not succeed, and by the end of the decade, these arrangements were crumbling. The purchasers lost millions of dollars and were compelled to unwind the transactions. Physician practice management companies experienced severe operational and financial difficulties. Hospitals and health systems were compelled to revise their managed care strategies. And, many physicians returned to owning and operating their own private practices and, in some cases, competing vigorously against the organizations that previously had acquired their practices.
What went wrong? And, why is this important today?
There are many reasons why these relationships failed. The following are among some of the more salient causes:
The failure to understand and properly structure physician compensation arrangements: (i) to achieve appropriately the desired level of productivity; (ii) to align properly the strategic and financial goals of the hospital and the physicians; and (iii) to accomplish the level of clinical and financial integration necessary to succeed;
Purchase price amounts for practices that made the hope for return-on-investment highly unlikely;
The difficulties experienced by hospital staff attempting to manage physician practices;
The problems encountered when hospitals used their billing systems to perform billing for physician practice services;
Overestimating the leverage that these acquisitions would bring to the table when negotiating participating provider agreements with the managed care plans; and
In some cases, the failure to take a close enough look at the practice’s revenue cycle and medical records management processes.
The lessons from the 1990s’ experience are important because the compass needle again points towards clinical and financial integration in the healthcare industry, with more vitality than in the 1990s. Health systems and hospitals are once again acquiring physician practices as part of their strategic plan to position themselves for success in the healthcare reform era. Larger physician practices, as well, are expanding through merger and acquisition to achieve the necessary depth of integration.
This movement to integration is driven by several factors, such as:
Healthcare reform is increasing the demand for primary care physicians, while creating new payment incentives through bundled and/or integrated payment arrangements for hospitals to coordinate care and to participate in accountable care organizations and other integrated arrangements;
Risk-based payment models are sweeping away per-unit payment arrangements;
Medicare reimbursement changes for physician services continue to be unpredictable, and reimbursement rates continue to decline in certain physician specialties;
Physicians are facing greater challenges managing their private practices (e.g., capital demands, skyrocketing malpractice insurance premiums, the stifling cost of complying with the increased flow regulations, to name just a few of the influencing factors);
Hospitals are developing strategies and implementing initiatives to increase their market share, and physician involvement is an integral component;
The costs of electronic medical records installation/compliance and new medical technology are enormous, especially for physician practices;
Expensive, sophisticated systems are required to track, manage and improve delivery costs and patient outcomes, in line with healthcare reform initiatives that tie reimbursement to quality and efficiency benchmarks; and
Consolidations in the commercial third party payor markets.
An understanding of the 1990s experience does not, in and of itself, provide a clear map to structuring and implementing a successful strategy for the upcoming decade under healthcare reform. Although, this knowledge is important in order to address some of the factors that influenced the outcome of many of those transactions in the 1990s.
The landscape remains a thicket of critical legal and business issues – often intertwined -- that require the assistance of competent lawyers, accountants and business advisors to work with you to develop a compliant structure that will support the achievement of your strategic goals. These issues include: the federal physician self-referral (or “Stark”) law; federal and state anti-kickback laws; the federal tax laws if the hospital or system is exempt from federal income tax (e.g., private inurement and private benefit); federal and state antitrust laws; state laws governing physician practice structures and the corporate practice of medicine; medical records management; fair market value assessments; and HIPAA considerations.
Sifting through these issues might distract the hospital from also focusing appropriate attention on other issues that are significant and could impact the financial and strategic value of the contemplated transaction, and perhaps even the hospital’s desire to proceed with the transaction.
To augment the due diligence related to the issues referenced above, you would be well served to review in advance of the acquisition the revenue cycle structure of the physician practice, including the physicians’ patient flow process and billing and documentation policies and practices. It is not uncommon for physician practices to experience shortcomings in these areas. Hospitals can and should include in the transaction documents provisions to guard against pre-existing exposures that are discovered during the post-acquisition period (e.g., indemnity provisions, escrow arrangements and the like). However, up-front attention to these particular areas of the physicians’ practice can identify and possibly resolve significant problems down the road.
A pre-acquisition assessment of the physicians’ revenue cycle, billing practices and medical records management will provide the hospital with valuable information to validate certain of its financial and operational expectations regarding the contemplated acquisition. This assessment will also help to identify billing and related compliance issues prior to the closing of the acquisition.
This type of assessment entails an onsite review of the physician’s patient flow and billing processes, as well as a compliance analysis of clinical and billing documentation. The objective is to conduct a comprehensive assessment of certain upfront components of the practice, focusing on areas such as:
Patient scheduling, pre-registration and registration;
Insurance verification process and collection of co-pays;
Information technology support and clinical documentation;
Historical denial trends, denial management and denial avoidance processes;
Accuracy and completeness of charge capture mechanisms and
Chart-to-bill audits to determine Evaluation & Management (E & M) level and billing accuracy, both retrospectively and concurrently.
Revenue Cycle Assessment
The revenue cycle assessment zeros in on various functional areas, including: patient scheduling/intake; verification/authorization; point-of-service (POS) collections; charge posting; accounts receivable; account follow up; denial avoidance, monitoring and management; and other critical revenue cycle areas.
The types of issues that may be identified include lack of controls and reconciliation of POS collections; inconsistent collection and validation of patient demographic information and insurance coverage; and a lack of a formalized compliance plan and staff education/training regarding compliant practices. The findings should then be compared to the industry’s best practices. Recommendations can be formulated and prioritized so that the hospital can be apprised of any functional deficiencies in the practice’s revenue cycle process, the appropriate corrective actions and, ultimately, the impact of any deficiencies on the value of the acquisition.
Medical Record Assessment
The medical record audit encompasses an examination of the detailed bill, the pre-scrubbed claim, the claim submitted to the payer, the remittance advice, the E & M leveling criteria, and the medical record for the designated professional claims. The audits should encompass a sufficient number of patient encounters for each physician in the practice over a designated period of time. Each encounter should be reviewed for the accuracy of Current Procedural Terminology (“CPT”) and Healthcare Common Procedure Coding System (“HCPCS”) procedure codes and modifiers assigned to the outpatient claims, compared to the documentation contained in the medical record; Evaluation of compliance with Medicare and Medicaid regulations related to medical necessity; Review of the ICD-9-CM diagnosis codes reported on the claim, compared to diagnosis information provided with the test orders.
The medical record audit findings will apprise the hospital of opportunities for improvement in the practice’s documentation and billing processes and claims coding, as well as potential compliance issues. The types of issues identified in these medical record audits may include over and/or under coding of the E & M levels. If the E/M coding pattern varies significantly from the norm of other physicians in a specialty, a Medicare audit can result. Based upon the Centers for Medicare and Medicaid Service, the norm is almost a bell shaped curve. If the coding pattern is to the right of this curve (i.e., provider codes a significantly greater percentage of encounters at higher levels than the norm), further sampling of the documentation for the encounters should be conducted to ensure that: (i) the documentation supports the level of service, and (ii) the level of service seems medically reasonable or appropriate.
If the coding pattern is to the left of the curve (i.e., provider codes a significantly greater percentage of the encounters at lower levels than the norm), further sampling of the documentation for the encounters should be conducted. In this case, the rationale for doing so is to ensure that providers are not routinely under coding and leaving money on the exam table in the process. Other types of coding issues include inappropriate use of modifier -25 to report a significant, separately identifiable E & M, on the same day as a procedure and/or professional charges for an EKG without a separate, identifiable, written retrievable report.
This information will help guide the hospital’s evaluation and assessment of the contemplated acquisition. Depending on the assessment’s findings, physician-to-physician education may be needed to improve the physicians’ compliance with appropriate documentation practices.
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Success in the healthcare reform era is based, in substantial part, on the ability of the providers to integrate successfully -- clinically, operationally, financially and strategically – to overcome the challenges of enhanced competition for patients, new reimbursement models, increased compliance requirements and the like. Unfortunately, success cannot be guaranteed, and the hospital’s ability to be successful is subject to a multitude of variables beyond the hospital’s control. However, there are steps that hospitals can take to mitigate the risk and to put the acquisition on firm ground. One step is to ensure that your due diligence includes an assessment of the practice’s revenue cycle and medical records management processes. Having this valuable information up front will help to avoid costly and troublesome problems and distractions after the acquisition closes.
BESLER Consulting provides a variety of customized services that can provide the appropriate mix of experience and audits to assist in the assessment of the revenue cycle and medical records management processes in a physician practice acquisition. For more information please contact Laureen A. Rimmer at (732) 392-8226 or firstname.lastname@example.org.
1 At the time that this article was published in the Beacon, the ultimate fate of the federal Patient Protection and Affordable Care Act had not been decided. The challenges to this law were argued before the United States Supreme Court during the week of March 26, 2012. Depending on the Court’s decision, more uncertainty and chaos could be introduced to an environment that already has an abundance of both.