Tim McCormack

Hospitals aren’t the only ones looking to buy up physician practices anymore.  Health insurers, private equity firms, and practice management companies are increasingly offering big upfront payments, long-term contracts, lucrative “joint ventures,” and other financial incentives to physician practices.  The compliance risks associated with hospital partnership are relatively straightforward and well-known.  The compliance risks of partnering with or working for non-hospital entities can be substantially more complicated, in part because the financial arrangements and “customers” of these entities vary widely.  A managed-care company participating in the Medicare Advantage program has different objectives and incentives than a practice management company operating hospital emergency departments or a venture capital fund that recently purchased a hospice company.  With different incentives come different compliance risks.  Physicians contemplating these kinds of sales must ask themselves: How does the acquiring company propose to increase practice revenue and more importantly, will they have to change their clinical approaches to accommodate those goals?

Insurance companies participating in the Medicare Managed Care (Medicare Advantage or MA) program are paid a fixed capitation amount per member per month, regardless of the amount of care their members receive.    However, through an incentive program called “risk adjustment” or “risk scoring,” these plans make substantially more money if their patients are treated each year for certain high-cost diagnoses, such as diabetes with complications, cancer, malnutrition, major depression or stroke.  These companies also receive financial incentives for meeting certain quality and service metrics known as Star Ratings.  A corrupt MA plan looking to increase its revenues may improperly pressure employed physicians to “upcode” their patients’ diagnostic information or fudge the numbers on quality or service metrics.

The Efficient Practice Management Company

Practice management companies routinely tout their services as increasing efficiency and thus practice profits.  Such claims are particularly intriguing in this age of increasing reliance on quality-based payment mechanisms.  However, as with the claims of the “unified insurer,” they must be scrutinized carefully.  For example, if a potential acquiring practice manager claims extra profit will come from enhanced clinical protocols, details are key.  What clinical conditions or treatments will be covered?  Who sets protocols?  How will protocols be enforced?  And, critically, what is the payment mechanism?  If the purchasing practice management company has a capitated or bundled per-episode contract with an insurance company, there may be profits to be made from well-constructed clinical protocols.

Conversely, a proposed “protocol” may be merely a command to order more, expensive tests, admit all short-stay patients as inpatients, refer patients to a hospice program regardless of whether they qualify, or use expensive, name-brand drugs instead of cheaper generic alternatives.  Such protocols will be viewed suspiciously by the Department of Justice where they result in the provision of more care than is medically indicated.  Even if practices instituted in the name of “quality medicine” are not illegal, physicians should be wary of the extent to which they are asked to cede their ability to make decisions they feel are in their patients’ best interest.

Private equity and venture capital groups increasingly view physician practices as lucrative investments.  Hospital-based physician groups with long-term contracts with their local hospitals to provide emergency room, anesthesia, or radiology coverage are a particularly ripe target.  Offers to buy such groups for significantly more than fair market value should be viewed skeptically.  The Department of Justice has stated on numerous occasions that above fair-market-value offers to purchase physician practices raise the presumption that the offer is inflated to account for the value of referrals, in this case, the hospital contract - and the corresponding right to bill Medicare, Medicaid, and other payers - in violation of the Stark law and Anti-Kickback Statute. 

Although such offers, which typically arrive with significant raises or lump-sum payments for physicians, may seem attractive, they should be attentive not only to compliance risks but to the potential vulnerability it poses to them as employees.  Namely, could the new owner recoup its up-front payment by firing the former physician owners and replacing them with new physicians at much lower salaries?

Most physicians think wistfully of the administrative headaches they could avoid by handing over the practice reins to a professional company.  In addition to the compliance risks discussed above, physicians should consider when deciding whether to “sell out” if they have an escape plan if the grass on the other side turns out to be infested with fraud. 

If the sales agreement or employment contract comes with hefty financial penalties for failure to abide by its terms, or restrictive non-compete clauses in the case of termination, a physician could easily find him/herself with no patients, no colleagues, no lease, no equipment, and a significant risk of being sued for trying to open a new practice in the same area.

Not only can these factors make it difficult for a physician to quit, they may also give the practice owner leverage to pressure physicians to turn a blind eye to improper practices, or even participate themselves.

Selling a physician practice can have real benefits for the physician sellers, the corporate purchasers, and even for patients.  However, physicians must be wary of the incentives driving the thirst for their practices and ensure that any inducements offered can be traced back to legitimate sources.  The costs of failing to do this due diligence can be catastrophic - including financial hardship, civil liability under the False Claims Act, or even criminal exposure. 

Tim McCormack is a partner in the D.C. office of Constantine Cannon.  He specializes in representing whistleblowers under the False Claims Act and other whistleblower reward statutes.

Molly Knobler is an associate in the D.C. office of Constantine Cannon.  She specializes in representing whistleblowers under the False Claims Act and other whistleblower reward statutes.

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Looking to get those administrative burdens off your plate? Before you sell to a non-hospital entity be leery of these compliance risks. 

Author | Tim McCormack

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Risks of Being Acquired by Non-Hospital Entities