
Cartoon – Not Really Much of a Leader




The CEO of a medical testing lab and two affiliated sales executives have been hit with a civil judgement totaling $114 million for paying kickbacks to physicians for referrals.
The defendants are: Tonya Mallory, the former CEO of Richmond, Virginia-based Health Diagnostic Laboratory; and Floyd Calhoun Dent III, and Robert Bradford Johnson, co-owners of Alabama-based BlueWave Healthcare Consultants Inc., a third-party sales firm that contracted with HDL.
The facts:
https://hbr.org/2018/05/do-most-hospitals-benefit-from-directly-employing-physicians

How can hospitals and health systems generate a return on their investment in their physician enterprises? According to the most recent figures, from the American Medical Association, over 25% of U.S. physicians practiced in groups wholly or partly owned by hospitals in 2016 and another 7% were direct hospital employees. Yet, according to the Medical Group Management Association, hospitals’ multi-specialty physician groups lost almost $196,000 per employed physician.
As a result, some larger health systems’ physician operations are generating nine-figure operating losses, which are major contributors to the deterioration in hospital earnings. It is time for hospitals or health systems to rethink their strategy for their physician enterprises.
Let’s first revisit why independent physicians were receptive to becoming employees and why hospitals and health systems felt the need to hire them.
The surge in hospital employment of physicians predated Obamacare by at least six years, and had two key drivers. The first was independent baby-boomer physicians — particularly those in primary care — found themselves unable to recruit new partners. Newer physicians, heavily burdened by student debt, were not inclined either to take on entrepreneurial risk or the 60-hour work weeks independent practice entailed.
The second was cuts in Medicare payments for office-based imaging. Thanks to the Deficit Reduction Act of 2005, specialties such as cardiology, orthopedics, and medical oncology that relied on the revenue that imaging generated were hit hard. As a result, many found it advantageous to be employed by hospitals. Under Medicare rules, in addition to professional fees, hospitals can charge a Part B technical fee for their services and therefore can pay practitioners more than they could earn in private practice.
Then, beginning in 2009, the Obama administration’s policies increased the exodus of physicians from private practices to health systems. The “meaningful use” provisions of the HITECH Act of 2009 provided both incentives and penalties for physicians to adopt electronic records, but hospitals and very corporate enterprises had more resources to comply with meaningful-use requirements.
The value-based-payment schemes created by the Affordable Care Act also markedly increased documentation requirements and, as a result, the overhead of practices, driving more physicians into hospital employment models.
There have been a number of reasons hospitals have been hiring physicians. Some, particularly those in rural areas, had no choice but to turn physicians into employees. Retiring independent physicians were leaving large gaps in care in their economically challenged communities. Consequently, hospitals that did not step in to fill the gaps were in danger of closing.
Separately, some hospitals or systems sought to grab business from their competitors by acquiring physicians who hospitalized their patients at competing facilities. These physicians’ inpatient and, particularly, outpatient imaging and laboratory volume generated additional revenues for the acquiring hospital or system.
A third apparent motivation was to corner the local physician market in order to obtain more favorable rates from health insurers. This seemed to have been a major rationale for St. Luke’s Health Systems acquisition of Seltzer Medical Group, Idaho’s largest independent, multi-specialty physician practice group, which led to an anti-trust action.
Yet another reason for making physicians employees was to position the organization for capitated, or value-based, payment. Hospitals believed that “salarying” physicians would help control clinical volumes and thus make it easier to perform in capitated contracts.
Finally, some hospital and system CEOs were tired of negotiating with local independent physician groups or national physician-staffing firms like MedNax and TeamHealth over incomes and coverage of the hospitals’ 24/7 services such as the emergency department, the intensive care unit (ICU), and diagnostic services like radiology and pathology. Building an in-house staff of physicians seemed like an attractive alternative.
Many health systems have gotten into trouble because their strategic rationale for hiring physicians became a moving target. A hospital system we followed morphed from a ““grab market share” strategy to a “respond to competitive acquisitions” strategy to a “bailout” strategy for loyal independent physicians to a “increase bargaining power with payers” strategy to a “position for value-based care” strategy over a period of eight years. By the time it was done, it was the proud owner of a 700-plus physician group and losses of more than $100 million per year.
Hospitals lose money on their employed physicians because physicians’ compensation plus practice expenses and corporate overhead significantly exceed the collections of practices. These direct losses are, to a degree, an artifact of accounting, because hospitals frequently do not attribute any bonus for meeting “value-based’ contract targets, or incremental hospital surgical, imaging, and lab revenues to physician practice income.
However, even factoring in the accounting issues, much of the losses are attributable to “hosting,” rather than managing, practices effectively. Many systems employing physicians have done so without developing a cohesive physician organization and lack standardized staffing and operational support functions, such as effective purchasing and supply chain operations, effective scheduling systems, and centralized office locations.
Managing up the return, rather than managing down the loss, is the key to a successful physician strategy. Here’s how to do that.
Establish a clear strategic goal and a target return on investment. Physicians reside at the core of any successful health system. Yet as the Cheshire Cat said in Alice in Wonderland, “If you don’t care where you are going, then it doesn’t matter which way you go!” If you establish strategic goals for the physician enterprise, then the physician organization can be sized and located appropriately. As a result, the physician group may end up either a lot smaller or with a more defensible specialty and/or geographic distribution. Management should then quantify and budget the expected return on the practice’s operational loss.
Strengthen operations. Effective management of the physician group then becomes the essential challenge. For example, revenue-cycle issues such as inconsistent coding or missing data often damage the profitability of the medical group. Are systems in place to assure that medical bills are defensible and correct, and that patients understand what they owe and agree to pay? Seeing that encounters are adequately documented and translated into a fair and timely bill that patients are willing to pay is not rocket science. The return on investment for getting the revenue cycle right is often 3X to 5X.
Revamp compensation and incentives. Medicare’s policy for paying employed physicians will likely come under fresh scrutiny during the Trump administration. It is possible that Medicare’s relatively favorable payment for hospital-employed physicians will be reined in. If that happens, it might require a painful revisiting of employment contracts when they come up for renewal.
Performance incentives in those contracts should also match the strategic goals established above. For example, compensating physicians through a production-based model that encourages them to increase visits, procedures, or hospital admissions, while value-based insurance contracts (like those for accountable care organizations) demand reducing them could damage the overall performance of the health system.
Pursue reality-based contracts with insurers. The Affordable Care Act ushered in a profusion of narrow network, performance-based contracts with private insurers, with significant front-end rate concessions by hospitals. These discounts often far exceeded the potential rewards from the “value based” incentives in the contracts! Larger health systems also rushed to assemble “clinically integrated networks” (CINs), comprising their employed and contracted physicians as well as private practitioners in their markets, to participate in these new contracts. Treating physician group losses and CIN expenses as loss leaders for value-based contracts and then losing yet more money on those contracts, as is happening in many places, doesn’t make sense.
Both enrollment and financial performance under these contracts have been disappointing in most markets. Reviewing and pruning back these contracts, or renegotiating them to provide more adequate rates or to compensate hospitals for patient non-payment is an essential element of an effective physician-enterprise strategy. Hospitals and health systems also should ask: “Is the CIN functioning as intended? Is it adding value that patients notice or is it just an additional layer of administrative expense without compensating benefits for clinicians or patients?
Motivate employed and independent physicians. Finally, hospitals and systems must understand the value they are creating not only for their employed clinical workforce but also for the two-thirds of their physicians who are not full-time employees — those who are contracted, independent participants in CIN’s or in part-time administrative roles. What would motivate all these physicians to want to work with the organization over the long term?
Hospital and systems need a unified physician strategy and operating model that encompasses all these diverse arrangements. Beyond that, they must engage their physicians in planning and organizing care. Physician are complex, highly trained professionals. They cannot be mere employees; they must be owners of the organization’s goals and strategies.

Mergers, acquisitions, and partnerships (MAP) show no sign of slowing down, and their momentum is expected to increase in the coming years, according to the HealthLeaders Media report Mergers, Acquisitions, and Partnerships: Examining Financial and Operational Impacts. MAP activity is “driven by the move to value-based care and provider needs for greater scale and geographic coverage,” says Jonathan Bees, senior research analyst at HealthLeaders Media.
The report also includes findings from a HealthLeaders Media survey, which polled 190 senior executives on recent and future MAP activity. The majority of respondents (71%) say their organizations plan to increase MAP activity in the next three years, with 68% exploring potential deals and completing deals underway over the next 12–18 months.
Here are three key findings from the latest wave of MAP activity.
1. MAPs lead to positive clinical and financial results
When healthcare organizations commit to a MAP activity, they are equally focused on meeting financial and care delivery objectives. Organizations cite a variety of financial reasons for pursuing MAP planning or activity, including to improve financial stability (63%), to improve operational cost efficiencies (61%), to increase market share in their geographical area (60%), and to improve position for payer negotiations (59%).
The results show that larger organizations are more interested in expanding geographic reach compared to smaller entities, which are more focused on meeting financial goals. Respondents say their top care delivery objectives include improving their position for care delivery efficiencies (65%), improving clinical integration (55%), and improving their position for population health management (54%).
Respondents are generally positive about MAP financial and clinical results. Nearly half (46%) say their net patient revenue increased following a recent MAP activity, while 28% report it remained the same. Only 6% experienced a decrease. Moreover, 73% of respondents expect the cumulative total dollar value of their organization’s MAP activity to increase within the next three years. Clinical markers are up as well, with 35% reporting quality outcomes increased after a MAP activity and 40% saying they remained the same. Patient readmission results were mixed. Forty percent mention they stayed the same, while 18% saw a decrease, and 11% experienced an increase.
2. New partnership deals are emerging
The majority of recent MAP activities don’t fall under a merger or acquisition category, technically. Twenty-nine percent of survey respondents report their most recent MAP activity was a contractual relationship that wasn’t an M&A. “The use of non-M&A partnerships is expected to grow because this type of agreement is typically less expensive than traditional M&A and usually doesn’t require an exchange of assets or a change of local governance,” according to the report.
In the broader healthcare environment, transformative developments are also taking place, says Brent McDonald, head of Healthcare Strategic Advisory Services, managing director at Bank of America Merrill Lynch. “The U.S. healthcare landscape is certainly undergoing changes that are beyond the more traditional horizontal (hospital-to-hospital) mergers,” he says, pointing to Amazon’s announcement that it will enter the healthcare space, United/Optum’s acquisition of DaVita Medical Group, and the contemplated merger between CVS and Aetna.
3. Why most deals fall apart
As a MAP comes together, the due diligence period begins, and so does the potential for derailment. Financial liabilities and cultural issues are the leading causes for shutting down a MAP deal. The top three financial reasons MAPs are abandoned before or during due diligence are concerns about assumption of liabilities (21%), costs to support the transaction were too high (19%), and concerns about price (19%).
The operational reasons for backing out of a MAP include incompatible cultures (30%), concerns about governance (24%), and concerns about the operational transition plan (21%). Cultural clashes can occur at every level of the organization. “Oftentimes, you have cultural compatibility at the senior level (those who are consummating the deal), but find that culture throughout the remaining levels of the organization is not as conducive to a merger,” says Pamela Stoyanoff, MBA, CPA, FACHE, executive vice president, chief operating officer at Dallas-based Methodist Health System, and lead advisor for the HealthLeaders Media MAP survey. “That is something you don’t necessarily see until later, after the deal is done.”
Don’t lose sight of your key stakeholders
In this period of heightened MAP activity and an uncertain future, it’s important that healthcare organizations focus on building sustainable consumer-centered care models. It is critical to set strategic goals that strengthen an organization’s relevance with and attractiveness to employers and payers, as well as increase patient convenience and connectivity, says McDonald. “It would be prudent to keep a keen focus on positioning health systems with their key stakeholders in mind and on becoming/continuing as the healthcare delivery network of choice and a ‘must have.’ ”
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Virginia is on the cusp of expanding Medicaid after the Senate on Wednesday narrowly approved a budget that would allow the state to cover as many as 400,000 low-income people.
The House, which already voted in favor of expansion earlier this year, will have to vote again before the bill can go to Gov. Ralph Northam (D). Northam has made expansion one of the top priorities of his administration.
When it passes, Virginia will become the 33rd state, along with Washington, D.C., to expand Medicaid under ObamaCare.
The 23-17 vote for expansion is a major victory for Virginia Democrats and other ObamaCare advocates, who have been fighting for six years to convince enough Republicans in the state to accept federal money to pay for the expansion.
“We have the ability to move something through that’s very sure in these uncertain times,” said Sen. Emmett Hanger, Jr., (R), the sponsor of the Medicaid expansion compromise bill. “We can develop a uniquely Virginia plan. While it draws from the experience of many states that have been out there before us, it will serve our citizens.”
Northam’s predecessor, Gov. Terry McAuliffe (D), was unable to get Republicans in the state to expand Medicaid, but Democrats in the state have been gaining power and nearly flipped the state’s House of Delegates in November.
Under ObamaCare, the federal government originally covered 100 percent of the costs of states that expanded Medicaid beginning in 2014. In 2017, the federal share dropped to 95 percent; it will drop to 90 percent in 2020, but never fall below that amount.
The Virginia expansion relies on provider taxes as a way to raise money.
The expansion agreement comes at a cost for Democrats, as the state will eventually submit a waiver request to the federal government to impose work requirements and premiums on beneficiaries who earn more than the federal poverty level.
The Trump administration has made state innovation a priority and has promised to fast-track Medicaid waivers, especially those that will impose work requirements on beneficiaries.
Four states have been granted permission to do so — Arkansas, Kentucky, Indiana and New Hampshire — and six others have pending waivers.
Virginia has yet to work out the final details of the work requirement, but Senate proponents of the policy rejected arguments from expansion opponents that the requirement would be weak and unenforceable.
Northam has not said he supports work requirements, but he has said he will sign any legislation that expands Medicaid.
National Republicans have been attempting to derail Medicaid expansion in Virginia. White House Office of Management and Budget Director Mick Mulvaney in March urged Virginia not to pursue expansion, saying it was unsustainable, and that the administration is committed to addressing it.
Earlier on Wednesday, former Pennsylvania Sen. Rick Santorum (R) met with Virginia Republicans to speak about efforts in Washington to repeal ObamaCare, including the Medicaid expansion. Santorum has been working with conservative groups on a long-shot plan to keep repeal alive this year.

Five Californians—including a physician and a former fraud investigator—have been arrested and charged in a scheme that submitted bogus claims to health insurers and used some of the proceeds to provide patients with “free” cosmetic procedures, the Department of Justice said.
The arrest follows the unsealing of a federal indictment this week that details a multi-year scheme that lured patients into two San Fernando Valley clinics to receive free cosmetic procedures—including facials, laser hair removal and Botox injections—which were not covered by insurance.
The conspirators allegedly submitted at least $20 million in claims to the insurance companies, which paid approximately $8 million on those claims, the indictment said.
The scam used the patients’ insurance information to fraudulently billed insurers for unnecessary medical services or for services that were never provided. In exchange, the alleged scammers calculated a “credit” that patients could use to receive “free” or discounted cosmetic procedures, the indictment said.
One of the coconspirators, Gary Jizmejian, 44, of Santa Clarita, was a former senior investigator at the Anthem Special Investigations Unit, the anti-fraud unit within Anthem.
The indictment alleges that Jizmejian took bribes in exchange for providing his coconspirators with confidential Anthem information that helped them submit fraudulent bills to Anthem.
In September 2012, Jizmejian gave his coconspirators insurance billing codes—CPT Codes—that Jizmejian knew could be used to submit fraudulent claims to Anthem without Anthem detecting the fraudulent claims, the indictment said.
Jizmejian also allegedly gave his coconspirators the billing code for an allergy-related lab test and told them to submit to Anthem large numbers of bills with this CPT code. The coconspirators used this billing code to submit approximately $1 million in fraudulent claims to Anthem, according to the indictment.
Jizmejian allegedly helped mask the fraud at the clinics by helping coconspirators avoid responding to inquiries from fraud investigators, diverting attention of other Anthem SIU investigators away from the clinics, and closing Anthem investigations into fraud at the clinics, the indictment said.
When reached for comment, Anthem Blue Cross issued the following response:
The indicted coconspirators were identified as:
All five defendants are charged with one count of conspiracy to commit healthcare fraud and 13 counts of healthcare fraud. Each count charged in the indictment carries a statutory maximum sentence of 10 years in prison.


