It's been almost five years since HHS warned that the acquisition of physician practices by hospitals could violate federal anti-kickback statutes.
The December 1992 statement, contained in a letter to the Internal Revenue Service from D. McCarty Thornton, HHS' associate general counsel, created a stir among hospitals that were scrambling to form integrated delivery networks.
Thornton suggested that paying physicians more than fair market value for practices or paying them high salaries once they are employed might violate the law. "It's illegal to pay now for future referrals," he said at a healthcare legal conference in 1994.
But so far, sources say, the government hasn't prosecuted a single hospital for overpaying for a physician practice in order to generate referrals.
While HHS' ongoing fraud investigation appears to be targeting hospital-physician joint ventures for potential violations of anti-kickback rules, hospital ownership of practices has gone untouched.
That's despite mounting evidence that hospitals almost always lose money on physician practices.
"Right now, government prosecution is heading more toward the area of false billing and other stuff, and they only have so many people," says Gerald Peters, a San Francisco attorney who advises providers. Also, regarding hospital-owned practices, Peters says, "Nobody's gotten caught doing anything really egregious."
It appears, however, that the government might be ready to take a closer look. HHS' fiscal 1998 work plan includes a study that will be the first in a series of reports "aimed at determining what vulnerabilities to Medicare result from this growing trend."
The report will detail the number and types of physician practices owned by hospitals, physician compensation arrangements and hospitals' business objectives in pursuing physician practices.
The authors of a private study published this month suggest the government might find hospital managers with something up their sleeves.
The Columbus, Ohio-based Center for Healthcare Industry Performance Studies concluded that physician practices acquired by hospitals are much more likely to be unprofitable than those acquired by medical groups or physician management companies. Further, it found hospitals tend to pay higher physician salaries once they buy a practice (See chart).
The center posed several possible explanations why hospitals acquire practices that lose money for them. First, the pressure to create integrated delivery systems can drive hospitals to select unprofitable practices. Management also may believe there are substantial opportunities to raise practice revenues or decrease costs to make the practices profitable.
But a third possibility is that management may think the practices offer substantial opportunities for additional referral revenues for the hospitals.
"This last strategy is, of course, illegal," notes William Cleverley, a certified public accountant who co-authored the study.
Others are quick to downplay the notion that many hospitals have bought practices merely to pump up inpatient volume.
Richard Clarke, president and chief executive officer of the Healthcare Financial Management Association, says hospitals in the past have paid more for practices and have paid higher physician salaries than the market would have allowed. But he says the main driver was the need to form integrated networks for managed-care contracting.
"I don't believe that hospitals are acquiring practices with the idea that they're going to generate inpatient referrals. They're getting lots of good legal advice on that," Clarke says.
Accounting differences among hospitals, medical groups and physician practice management companies could explain some of the variation in profitability, Peters notes. For example, hospitals often remove ancillary revenues from a practice's financial statements.
Further, Clarke says hospitals appear to be smartening up, paying market rates for practices and shortening salary guarantees for doctors once they become employees. He believes the acquisition pace has slowed in the past six months as hospitals adopt a philosophy of virtual integration rather than unified ownership.