How Convenient

By  |  December 8, 2011 | 

It’s an epiphany.  I had a striking, “ah-HA!” moment this week.  I’d liken it to my ever so brief understanding of the importance of hydrogen bonding for life to exist on earth, but I can’t remember the details well enough to fully understand it anymore.  Not so this time.  This one I’ll remember.

I’ve been digging through cost data for our practices along with benchmarks for the same.  In this case, I’ve been looking through the 2011 MGMA Cost Survey, but one could reference data from a variety of sources.  Regardless of the source, the trend is striking and undeniable.  Hospital owned practices have large reported deficits while independent or corporate-owned practices have balanced revenue and expenses.

“Yeah, whatever.  We have to operate on a subsidy to get by,” you say.  Well, hold on there.  Some hospitalist practices do not utilize hospital support payments and operate only on professional revenue. Meanwhile, other types of practices appear to be in the hospital support game too.  I found it interesting to see Cardiology, Family Practice, and Internal Medicine as hospital owned practices which are operating at significant deficits, yet these practices are NOT widely reported as receiving support from the hospital.

What gives?

Standard Accounting Practice.



The tables within the same specialty where there’s both hospital owned and NON-hospital owned groups tell the tale.  The hospital owned groups are losing money, big hand-over-fist money, while the independent groups eek-out a small remaining profit.  The hospital owned groups have some decreased costs with greatly reduced revenues compared to the non-hospital groups.  One could assume that the hospitals do a horrible job running their businesses, but that wouldn’t accurately explain the losses.  No one operates at a 10% loss and survives, let alone a 50%, 100%, or 200+% loss!  No, you close the doors and move on.  The bills have to be paid.  Food has to come home to the table.

One must assume that some of the costs and revenue for these practices is “off books” for that owned practice.  Meanwhile the master ledger for the hospital has to balance, and it does.  Most hospitals post a small percentage profit per year on operations.  So those losses on, say, a family practice office, must be offset somewhere else.  A different operation in the hospital must be posting a profit derived from the extra revenue they show relative to decreased costs on their part of the business.

WHERE did the revenue from the FP office go?

It went to radiology.  It went to the laboratory.  It went to a bunch of other hospital owned entities that directly benefit from delivering patient care to the FP’s patients based on the orders of the physician.  Those ledgers show a profit because they do not have to bear the cost of the ordering or referring providers, nor do they carry the recruiting, building, electricity, malpractice, workers compensation, retirement plan, health insurance, or other myriad costs of operating an independent practice.  No, these departments get to show the increased revenues without having to bear the entire cost of revenue generation for their department.

Why do hospitals do this?  Because it’s how they’ve always done it?  Yes, but only in part.  They continue the practice because it benefits the Board, which means it benefits the C-suite too.  Showing a profit on operations is good.  It speaks to efficiency and good stewardship and smart decisions on the budget.  Meanwhile, showing a loss on providers is, “well, err, ummm… Good.”  Heck, it might even be great!  It means the hospital couldn’t possibly afford to increase provider pay or hire another FTE to balance workload.  And no, you can’t take credit for the ancillary revenue generated from your practice because that would violate the “pay-per-click” guidance from Stark law… Nice try though.

It brings me back to another memory from my college days, that being Dana Carvey on Saturday Night Live’s “Church Chat” asking a leading question followed by an answer that he found less than optimal.  The standard response from Carvey, as always… “How Convenient.”


OK… Here’s “Choppin’ Broccoli” too.

Sheesh.  I’m showing my age.




  1. Brad Flansbaum
    Brad Flansbaum December 8, 2011 at 10:21 pm - Reply

    A few comments:

    1 “Cardiology, Family Practice, and Internal Medicine as hospital owned practices which are operating at significant deficits, yet these practices are NOT widely reported as receiving support from the hospital.”

    I dont buy it. The doc group buy up game is only starting, and its not as if this data is widely available for every practice, at every hospital. Do you have a source to make that claim?

    2) Granted, some hospitals have abysmal records running physician practices. However, in order to really draw conclusions from these disparate practices–hospital owned vs independent–you need to move beyond crude dollar and RVU measurements to get a sense of whether there is an economic loss vs. a surplus. The latter might be, and likely is non-pecuniary in nature–and hard to identify. Also, retention, satisfaction, outcomes, etc., are all a black box. While it is tempting to look at only a “10% loss,” there is usually more behind the numbers.

    3) Hospital budgets are complex, as you know well. I tend to view them like the US Treasury (think of your social security and Part A benefits). Yes, its a soup, but unless you understand the composite ingredients and the simmering process, your taste buds may be in for a rough ride. Why engage in budgetary shifts and sleight of hand. You can fill in those blanks. But is it possible that hospitals negotiate different rates for different service lines? Perhaps its partially supply and not just demand side as root cause. Granted, that is not the sole issue, and a small one at that, but it is illustrative of how this game is played.

    Regardless, you call attention to an important trend. If we are to understand the payment engine for different types of practices, we need to scratch deeper and ask why. We just dont know enough to draw firm conclusions now. Assumptions. Yes.


    PS–I am hospital employed, and I pay a hospital tax to keep the lights on, clean the bathrooms, and have that guy clean the Marlboro butts up, that exist, but really dont–cause thats against the rules.

  2. Troy Ahlstrom December 9, 2011 at 11:31 am - Reply


    As usual, you’ve obviously thought through things and have cogent points. I’d be willing to bet there’s much more you would say if you could keep it under 1000 words!

    Regarding your points:

    1) I’m not saying that hospitals don’t own or buy physician practices. Rather, it’s that they probably don’t admit to supporting all these types of practices as official support on their financials. Some practices were structured that way and show up on the official IRS Form 990 (see if you want to look one up), say the hospitalists and the cardiologists, while others are just separately owned and operated divisions of “Hospital Holding Corp, Inc.” Those physician office divisions look like they lose money on the cost reporting to MGMA. Whether they look like that on the hospital ledger for each group I can’t really say.

    2) Pecuniary [p??kju?n??r?] – adj
    1. consisting of or relating to money
    2. (Law) Law (of an offence) involving a monetary penalty
    [from Latin pec?ni?ris, from pec?nia money]

    Now that I understand you, I absolutely agree. I’m not sure I’d survive on the east coast, let alone in the public policy committee!

    3) Yes, the budgets are complex. We don’t really know what’s going on in there.

    In summary, I absolutely agree that these cost reports don’t tell the whole story. That’s actually my first point. I believe we are moving to a single payor, single budget bucket world for hospitals and providers. Isn’t it interesting that we are still using the arcane accounting of the multiple payor, separate hospital vs. provider office. It’s as if DRG’s, coding and documentation guidelines, PQRI, VBP, and the whole alphabet soup of the past 30 years hasn’t happened.

    We were always interdependent, but now we are fully integrated into the hospital. Of course providers make tangible impacts on the bottom line. A rational accounting would fairly allocate costs and revenues per FTE physician. We would have to work on lowering our costs per FTE while improving the revenue per FTE. But it needs to be a fair estimate of the actual number.

    Meanwhile, many administrators are bonused on keeping their budget bucket in line. Does the hospital lab director want to revamp her budget to allow some revenue to be siphoned off to a provider budget to reflect that provider’s contribution to the whole? I doubt it. And should we do that?

    Yes. I think we should.

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