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Hospital Finances Medical Economics Physician Finances

Beware Of Health Care Sharing Ministries

Health care sharing ministries are an alternative to regular health insurance but they are a poor substitute for most patients and an annoyance (at best) for most hospitals and physicians. The basic idea is that people of similar religious beliefs pool their money in order to help each other pay for their medical bills. The concept arose from Amish and Mennonite communities that do not normally participate in programs like health insurance.

As an example, a number of years ago, I was the attending physician in our medical intensive care unit when a young Amish man was transferred from a rural hospital with a cardiac sarcoma, a rare malignant tumor of the heart muscle that is usually incurable and fatal. He lived on a mechanical ventilator for a couple of weeks before dying and in the process, generated a huge medical bill. Like most Ohio Amish at the time, he did not have health insurance. A few months after his death, an older Amish man walked into the MICU carrying a bundle of cash and handed it to the unit clerk. Their community had taken up collections to pay for his hospital charges. This was their normal practice to pay for medical bills.

About 30 years ago, this concept expanded to other Christian communities in the United States and became known as health care sharing ministries (HCSMs). When the Affordable Care Act was passed in 2010, it was estimated that about 100,000 Americans participated in HCSMs but that number has grown to now more than 1.7 million Americans. Participants are attracted by the like-minded religious beliefs of other members and by the lower monthly costs compared to regular health insurance.

Any time the word “ministries” is included as an attributive noun, it implies that the other noun that it is describing is virtuous, righteous, and morally principled; however, all too often, HCSMs are anything but. Instead, HCSMs can limit patient access to healthcare, burden patients with unexpected healthcare costs, and leave physicians unpaid.

What is a health care sharing ministry?

There are currently 107 HCSMs certified by the U.S. Department of Health and Human Services. HCSMs are registered as 501(c)(3) non-profit charity organizations. Rather than paying monthly health insurance premiums, participants pay monthly membership fees. These fees are usually less expensive than health insurance premiums. Membership is limited to people who share a common religious faith and often must attest to regular attendance at a specific church. Because they are not considered to be regular health insurance companies, HCSMs are not regulated by state insurance commissioners in most states. When participants incur medical bills, they then submit those bills to the HCSM for payment.

There are a number of coverage restrictions. HCSMs can decide what conditions they will and will not cover and frequently do not cover healthcare expenses for conditions that they find morally objectionable, such as abortions, out-of-wedlock maternity expenses, contraception, sexually-transmitted diseases, obesity-related conditions, or smoking-related diseases. HCSMs are also not required to cover pre-existing conditions or cap out-of-pocket costs.

The problem with health care sharing ministries

On the surface, HCSMs sound like a fabulous idea – it is like getting health insurance without having to pay for all of the bureaucratic overhead costs. Furthermore, it eliminates having to pay for other members’ healthcare costs that are incurred by “immoral” behavior. But there is a dark side of HCSMs that can be financially ruinous to patients. Here are some of the specific problems with HCSMs:

  1. They do not have to cover pre-existing conditions. Most HCSMs will have definitions of pre-existing conditions such as any disease that you have had to be treated for anytime in the past 3-5 years. As a result, participants tend to be young, otherwise healthy individuals whereas older people who are more likely to have diabetes, hypertension, or high cholesterol can be denied. Some HCSMs will cover the care of certain pre-existing conditions (such as hypertension) but those participants are charged a higher monthly fee.
  2. Many conditions are not covered. Each HCSM can decide what conditions will and will not be covered. Some of the common uncovered conditions include those that result from tobacco use, drug abuse, alcohol use, obesity, or “non-Biblical lifestyles”. Most HCSMs do not cover mental health expenses. Durable medical equipment is often not covered. Most HCSMs will have a limit on the number of months any new medical condition will be covered – for example, only covering the first 3 months of prescription medications for newly diagnosed diabetes.
  3. Maternity care is often limited. Pregnancy is considered a pre-existing condition by most HCSMs and so they will not pay maternity expenses for the first 10 months of a participant’s membership. In addition, maternity costs are often only covered for married women. Abortions are generally not covered, with no exception for rape.
  4. Preventive care is generally not covered. This can include regular physical exams, check-ups, health screenings, cancer screenings, well-child visits, and vaccinations.
  5. Provider network restrictions. Some HCSMs will only cover expenses from in-network physicians and hospitals. These are usually very limited in number, making it difficult for participants to find a participating doctor. This is especially true if the participant requires hospitalization and may not have a choice in their ER physician, surgeon, hospitalist, anesthesiologist, radiologist, or pathologist. Other HCSMs will allow participants to see any physician and then the HCSM will attempt to negotiate fees with the physician or hospital after the fact.
  6. Participants get charged “standard charges”. Every hospital and every physician group has publicized standard charges for every service and procedure. The thing is that the only people who have to pay standard charges are those who are uninsured – patients with health insurance always pay less. The reason is that every health insurance company will negotiate contracts with every hospital and every physician group and those contracts will include an agreement for the maximum amount that the insurance company will pay for every service and procedure. If the hospital’s “standard charge” is less than the insurance company’s contractual limit, then the patient and the insurance company only has to pay the standard charge. However if the standard charge is higher than the contractual limit, then the patient and the insurance company only have to pay the amount of the contractual limit. Because of this, every hospital and every physician group in the country sets their “standard charge” higher than the most that they can get from their highest-paying insurance company contract. To put this in perspective, most hospitals and physician groups set their standard charges at several times higher than the maximum amount that Medicare will pay. In other words, no one with health insurance pays the sticker price – only the uninsured pay the sticker price. HCSM participants are considered to be uninsured so they have to pay the standard charge amounts. The result is that HCSM members get charged a lot more for any given service or procedure than people with health insurance are charged.
  7. No guarantee of payment. The HCSMs are not legally obligated to pay for medical bills. In months when the member fees are less than the members’ health expenses, the members may only receive a prorated amount of the funds to cover their healthcare bill. As a result, the members never know up front how much of their medical bill will be covered by the HCSM and how much they will be responsible for themselves.
  8. The maximum coverage amount is usually capped. Most HCSMs will have a maximum amount that will be paid for any given participant’s healthcare costs – for example, a $50,000 per year and $1,000,000 lifetime limit. Any healthcare costs above these limits are the responsibility of the individual participant. When being billed “standard charges” by the hospital and the physicians, few patients can get through an ICU admission for less than $50,000.

HCSMs are bad for doctors and hospitals

One of the most basic metrics in healthcare finance is the number of days in accounts receivable (AR). This is how many days it takes to get paid after a bill is sent out and generally ranges between between 30 – 70 days. If your average days in AR is greater than 50 days, it is a sign of problems in your revenue cycle department. As the treasurer of our Department of Internal Medicine, I would monitor our days in AR every month. For insured Americans, the hospital (or doctor) first sends the bill to the insurance company (or Medicare) and then bills the patient for the amount of their co-pay or deductible. Medicare and insurance companies are generally pretty quick in getting those bills paid. But with HCSMs, the patient gets billed and not the HCSM. The patient then submits their bill to the HCSM to have the their bill “shared” with the other HCSM participants. This process can take months and as a result, days in AR can skyrocket.

The patient is responsible for the doctor bill or hospital bill and will be charged the amount of the “standard charges”. This is often tens of thousands of dollars that most people do not have sitting in their checking accounts. HCSMs will often advise their members to request that the bill get written off as charity care or to set up a payment plan with the doctor or hospital rather than pay the full amount of the bill. That way, the member does not have to pay the full amount of the standard charges all at once and can spread out payments until the HCSM determines whether it will cover the bill and if so, how much of the bill it will cover. If the patient does not initially pay their medical bill on time with out-of-pocket funds, then the hospital or physician group typically sends that bill out to a collection agency which takes a percentage out of whatever money it collects on that bill, reducing the amount that the doctor or hospital ultimately gets paid. If the patient sets up a monthly payment plan, then the hospital or physician group’s cash flow suffers since payment may be spread out over a year or longer. In addition, the hospital or physician group has to pay someone to send out the monthly payment plan bills to the patient and monitor whether or not the patient actually pays those bills – this adds additional overhead expenses in the revenue cycle department.

For catastrophic illnesses, the HCSM will have a limit on the amount that it will cover, for example, $50,000.Once that limit is exceeded, the patient becomes responsible for everything over that amount. This can often be considerably more than patients have in savings with the result that they have to sell some of their assets in order to pay their medical bills. This can result in very late payment to the hospital or physician group and can result in legal fees incurred by the hospital or physician group. As an example, I had a patient who was a healthy farmer in his 40’s that decided to go without health insurance. He unexpectedly developed pancreatitis complicated by respiratory failure and was in the ICU for several weeks. If he had health insurance, the negotiated charges would have been about $300,000 and he would have had out-of-pocket co-pay expenses of a few thousand dollars. But since he was uninsured, we legally had to bill him the hospital’s standard charges which totaled more $1 million. He eventually had to sell the farm that had been in his family for generations in order to pay his medical bills and it took the hospital 2 years to finally get paid.

Many HCSMs will negotiate fees on behalf of their members, but only after the member submits their medical bills. This can result in a lot of frustrating haggling between the HCSM and the hospital or doctor. It would be like trying to run a restaurant and having the customers trying to negotiate a lower price for their meal after they have finished eating. Any business prefers to negotiate the price of a service before they provide the service rather than several months after they provide that service; doctors and hospitals are no different.

HCSM lessons from Ohio, Missouri, and Colorado

Liberty Healthshares is an HCSM based out of Ohio. It served 70,000 Christian faith families between 2014 and 2020. It had an annual budget of $56 million and employed 470 workers. Members sued Liberty alleging failure to pay for medical bills and that Liberty funneled money to the company’s founders. The State Attorney General additionally reached a settlement agreement with Liberty agreeing to pay thousands of dollars in fines. Last year, ProPublica reported that the family that founded Liberty used tens of millions of dollars of members’ monthly fees to buy the family a marijuana farm, $20 million in real estate, and a private airline company. Since it was an HCSM, it was not subject to the regulatory oversight required of traditional insurance companies and as a result, it got away with misuse of funds for years.

Medical Cost Savings was an HCSM based out of Missouri. Last year, its founder pleaded guilty in federal court to an $8 million wire fraud conspiracy that cheated hundreds of members. Medical Cost Savings paid only 3.1% of healthcare claims and in some years paid none of its claims at all. The founder and his co-conspirators pocketed more than $5 million.

Colorado is unique among states in that it requires financial reporting by HCSMs operating in the state. In the most recent annual report by the Colorado Department of Regulatory Agencies, Colorado HCSMs collected $78 million in annual membership fees in 2022 and paid out $66 million to cover members’ medical bills. However, in that same year, members submitted $180 million in healthcare bills to these HCSMs. In other words, the HCSMs only paid 37% of submitted medical bills. In Colorado, HCSMs used advertising, social media, and “producers” (independent brokers) to recruit new participants. Four of the 16 HCSMs operating in Colorado reported the amount they paid these producers, totaling $1.8 million. HCSMs also reported marketing themselves to employers to offer to their employees. Some HCSMs required members to first request charity care and financial support from local governments and consumer support organizations in paying the member’s health care bills before the HCSM would consider paying those bills.

Caveat emptor

Let the buyer beware is nowhere more pertinent than health care sharing ministries. Operating outside of the insurance regulatory environment, they can pretty much cover whatever healthcare costs they choose to cover and are particularly susceptible to fraud and abuse of funds. Although most HCSMs are legitimate non-profit organizations run by well-meaning members of religious faiths, some are run by scammers who prey on the devout by appealing to their faith-based values.

So, are HCSMs appropriate for anyone? The only people who should even consider using an HCSM instead of health insurance are those who are young, have no medical conditions, take no medications, are not obese, do not have sex outside of marriage, are non-smokers, non-drinkers, and are willing to pay for their preventative healthcare out-of-pocket. Even then, if you are hospitalized for a serious injury, diagnosed with a chronic disease like cancer, or hospitalized with an unexpected serious infection then it could still cost you hundreds of thousands of dollars and result in financial ruin. Using an HCSM is better than being totally uninsured, but not by much.

For hospitals and physicians, taking care of patients who use HCSMs causes an additional overhead expense and often results in no payment at all. In the best of circumstances, the HCSM results in a delayed payment for services rendered that puts an added burden on the revenue cycle staff. As a doctor, I’ll take a patient with regular medical insurance over a patient with an HCSM any day. Even Medicaid beats an HCSM.

January 13, 2024

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Hospital Finances Medical Education

What Hospitals Need To Know When Hiring Foreign Medical Graduate Physicians

International Medical Graduates (aka, foreign medical graduates) account for 325,000 of all practicing physicians in the United States or about 25% of the U.S. physician workforce. However, not all specialties are equal. In the most recent internal medicine fellowship match, the majority of endocrinology and nephrology positions were filled by international medical graduates, indicating that in the future, most endocrinologists and nephrologists in the U.S. will be international medical graduates. Almost every hospital in the nation has at least one international medical graduate on the medical staff and in many hospitals, there are more international medical graduates than U.S. medical graduates. As a result, hospitals must be familiar with the visa requirements when hiring an international medical graduate.

First, and I cannot stress this enough, get legal help. If the hospital’s in-house attorney does not have the expertise, then hire an outside immigration attorney. The cost of overlooking a seemingly minor piece of paperwork or failing to meet a filing deadline can result in the hospital no longer being able to employ a particular international medical graduate. Furthermore, immigration laws are subject to the vagaries of Congress and the U.S. Presidential office. So, the rules one year may be different than the rules the next year.

First, some definitions

There are dozens of different types of visas in the United States but only a few of them apply to physicians. Here are the most common:

J-1 Visa sample

J-1 visa. This is the most commonly used visa for non-U.S. citizens who went to medical school in another country. The J-1 visa is a training visa and is used by international medical graduates who do residencies and fellowships in the United States. This visa is only valid during residency and fellowship – the physician must return to his/her own country within 30 days of completing training. In addition, the physician holding a J-1 visa cannot be have any employment other than their residency or fellowship. In other words, they cannot moonlight. The maximum duration of the J-1 visa is 7 years, which allows completion of most residencies and subspecialty fellowships. After completion of their training program, the J-1 visa holder must return to practice medicine in their own country for at least 2 years, after which time, they are eligible to apply for a U.S. H-1B visa that would permit them to return to the United States to practice medicine. There is an important exception to this requirement, the “J-1 waiver”. This waiver allows the physician to stay in the U.S. to practice medicine without having to return to their own country after completing training (see below).

H-1B visa. This is a work visa and allows a foreign national physician to practice medicine in the United States for a maximum of 6 years. Requirements to obtain an H-1B visa include (1) passing all three USMLE exams, (2) meeting state medical board licensure requirements, and (3) obtaining certification by the Educational Commission for Foreign Medical Graduates (ECFMG). The physician must have completed an ACGME-certified residency and/or fellowship in the United States. Canadian physicians are unique in that completion of a Canadian residency and/or fellowship is acceptable in most states. A physician on an H-1B visa must have a sponsoring employer that files an H-1B petition on behalf of the physician and that completes a Labor Condition Application (LCA) attesting that the employer will fulfill Department of Labor prevailing wage requirements. Physicians with H-1B visas can only practice in the specific geographic location listed on the LCA. H-1B visa holders can apply for an immigrant visa which is the next step in obtaining U.S. citizenship.

Green Card sample

Immigrant visa (“green card”). This visa allows a foreign citizen to remain permanently in the United States. After 3-5 years, an immigrant visa holder can apply to become a naturalized U.S. citizen. To obtain an immigrant visa, the international medical graduate physician must have a sponsoring employer. The employer must first submit a Permanent Labor Certification (PERM) attesting that the physician will be hired for a permanent full-time position and then the physician must file an I-140 form ($700) followed by an I-485 form ($1,140). Although there is no cost to file the PERM, there is a requirement that the physician’s job be advertised to ensure that no U.S. citizen physician is willing to take the job and a need for an attorney to complete the process – this can total an additional $4,000 – $5,000. There is no specified amount of time that the physician must remain employed by the sponsoring employer however the law’s intent is that it is a permanent job.

O-1 visa. These are less commonly used and are reserved for non-citizens possessing “extraordinary ability” in the sciences, arts, business, education, or athletics. This can be applied to physicians with unique skills, particularly in medical research. The advantages of O-1 visas is that there is no annual limit to the number that can be approved, there is no requirement for the physician to return to their home country (unlike the J-1 visa), there is no need to do a comparative wage attestation (unlike the H-1B visa), and there is no time limit to the O-1 visas which can be held indefinitely. The standards for the O-1 visa are quite high for physicians and generally require publication of research that demonstrates exceptional ability.

NAFTA TN visa. This visa is reserved for physicians from Mexico or Canada. The TN program was established by NAFTA as a temporary work authorization. Mexican citizens must obtain a TN visa. Canadian citizens do not require a TN visa but can elect to obtain one at a U.S. port of entry. A TN visa permits employment in research or teaching. Direct patient care is allowed only when it is incidental to teaching or research. Canadian or Mexican physicians who intend to mainly perform patient care should apply for an H-1B or O-1 visa instead.

The J-1 waiver

Many international medical graduates on a J-1 visa during their residency and fellowship will return to their home country for the required 2-year period after completion of training. However, some elect to stay in the United States without returning to their own country by obtaining a “J-1 waiver“. This generally involves working for a government organization or working in an underserved area of the country. Physicians must also obtain a “no-objection” statement from their home country. The J-1 waiver then allows the physician to apply for an H-1B visa without having to return to their own country for 2 years. There are several pathways to get a J-1 waiver:

  • Persecution waiver. If the physician believes that he/she will be subject to persecution based on race, religion, or political opinion if he/she returns to their home country, then the physician can apply for a persecution waiver. These are uncommon.
  • Veterans Administration (VA) waiver. The VA will sponsor waivers for both primary care and specialist physicians. Because of this, the VA is generally the J-1 waiver of choice for specialists. There is a 3-year commitment.
  • Health and Human Services Administration (HHS) waiver. The HHS will sponsor waivers for only primary care physicians (family medicine, internal medicine, pediatrics, psychiatry, and OB/GYN). Physicians cannot have performed a fellowship. There is a 3-year commitment and physicians must practice in a Health Professional Shortage Area (HPSA) with a score of 7 or higher. The HPSA areas are shown in the county map to the right (click on the image to enlarge). The authorized employers and their HPSA scores can be searched for by county on the HPSA Find website.
  • Conrad 30 Waiver Program. Each state is allocated 30 Conrad waiver positions every year and each state has its own state-specific application requirements. Positions can be offered to both primary care physicians and specialists although in many states, primary care applicants are given preferential treatment. Applicants must work in a Health Professional Shortage Area, in a Medically Underserved Area, or serve a Medically Underserved Population. Medically Underserved Populations are those that face economic, cultural, or linguistic barriers to health care such as people experiencing homelessness, low-income, Medicaid-eligible, Native American, and migrant farmworkers. Medically Underserved Areas/Populations and their index of medical under service scores can be searched on the MUA Find website. Specific areas are designated by their GEOID number. Physicians must work full-time for at least 3 years.
  • Appalachian Regional Commission (ARC) waiver. This is limited to specific counties in the Appalachian area (click on the map to enlarge). Although designed for primary care physicians, specialists are sometimes accepted. Full information can be obtained on the ARC website. The physician must work full-time in a Health Professional Shortage Area.
  • Southeast Crescent Regional Commission (SCRC) waiver. This is limited to states in the southeastern United States. This waiver is designed for primary care but specialists are sometimes also accepted. Full information can be obtained on the SCRC website. Physicians must work in a Health Professional Shortage Area, in a Medically Underserved Area, or serve a Medically Underserved Population for a minimum of 3 years.
  • Delta Regional Authority (DRA) waiver. This is limited to states in the Mississippi River basin. Both primary care and specialists are accepted. Full information can be obtained on the DRA website. The physician must work full-time at a site in a Health Professional Shortage Area, Mental Health Professional Shortage Area, Medically Underserved Area, or Medically Underserved Population.

There is a substantial cost to the employer to obtain a J-1 waiver. The ARC, SCRC, and DRA each require a $3,000 application fee. There is no fee for the Conrad 30 or HHS waiver application. However, all of these programs have a requirement that the employer advertise the position nationally and demonstrate that no American physician is available to fill the position. Advertising expenses and legal expenses typically run about $8,000 – $10,000.

Academic medicine and international medical graduates

Foreign medical graduates at academic medical centers are treated slightly different than those employed by other hospitals or other clinical employers. First, they may be eligible for an O-1 visa or a TN visa, both of which are generally only used by physicians at academic medical centers. Most academic medical centers have experience employing foreign medical graduates because of the large number of these physicians who are residents or fellows in training programs. In the most recent internal medicine and pediatrics fellowship match, 26.2% of physicians matching to an available fellowship position were foreign medical graduates. In last year’s residency match, 14.5% of physicians matching to a PGY-1 position were foreign medical graduates.

Board certification/eligibility is usually required by hospitals for employment in order to perform patient care. In addition, health insurance companies may require physicians to be board certified or board eligible in order to participate in their insurance plans. In order to be board eligible, a physician must have completed a U.S. residency and/or fellowship. However, for some specialties, an exception can be obtained by foreign physicians practicing at an academic medical center who completed their residency or fellowship in another country. For example, the American Board of Internal Medicine permits foreign physicians working at a U.S. academic medical center to be eligible to take the board examination if they have an academic rank of at least assistant professor and are employed full-time for at least 3 years supervising medical trainees in clinical settings. The American Board of Surgery had a similar pathway for foreign medical graduates at academic medical centers however they did not accept applications for this pathway in 2023.

A complex process

As state above, legal counsel is essential when employing a physician who is a foreign medical graduate and not a U.S. citizen. If required documents are not submitted on time, it could result in the physician being sent back to their own country or not being eligible for the next step in the process of obtaining U.S. citizenship. Because of the need for an attorney with expertise in immigration law, as well as the need for job advertisement and various application fees, it can be costly to hire a foreign medical graduate. However, it can be hard to attract U.S. physicians to practice in medically underserved parts of the country, leaving hospitals with no other option than hiring foreign medical graduates. An advantage of these physicians is that the employer sponsorship requirements for work visas makes them less likely to resign than U.S. physicians, thus reducing physician turnover. Because of this, the added cost of hiring a foreign medical graduate may actually be less than the recruitment costs of a revolving door of U.S. physicians.

Given the high demand for foreign medical graduates, sending your hospital’s in-house attorney to attend a course in immigration law could be the best investment you will make this year.

December 18, 2023

Categories
Hospital Finances Physician Finances

How Should Physicians Negotiate With The Hospital?

A reader recently emailed me to ask how his hospitalist group should negotiate with the hospital to get paid to do extra shifts. It turns out that this is a great question and one that applies to any physician group that provides shift-work care: emergency medicine physicians, anesthesiologists, intensivists, etc.

There are many situations where physicians could be asked to work extra shifts: unexpected inpatient census surges, resignation or retirement of other physicians, maternity or paternity leave, jury duty, illness or injury, FMLA leave, etc. In a private group practice, the physician partners generally just distribute the extra work among each other and pay themselves accordingly. However, for hospital-employed physicians, there is usually a physician contract dictating the expected number of shifts each physician will work each month.

The COVID pandemic put a new wrinkle in work expectations for hospital-employed physicians. Hospitals faced loss of income from cancelation of lucrative elective surgical procedures and diagnostic tests. The hospitals had no money to pay for extra shifts. In addition, most hospitalists, intensivists, and ER physicians felt a moral obligation to work extra shifts to cover the surge in COVID admissions, even if it meant little or no extra pay. But the COVID pandemic is now receding and physicians need to recalibrate expectations for compensation for extra shifts worked. Each hospital is a little different and there are several variables that will affect your best course of action.

This post is directed toward hospitalists who are asked to work extra shifts but could equally apply to any other physician specialty that is employed on a shift-work basis. In preparing to approach the hospital administration about getting paid for extra shifts, there are a number of considerations that you need to think about.

Are there multiple hospitalist groups? If so, the hospital could play the groups against each other so it would be important to have a unified approach to the compensation issue around extra shifts.

Are you hospital-employed or employed by an independent group that then contracts with the hospital? This is essentially who writes your paycheck. If you work for a separate, independent group, then the best approach is to have the group’s CEO, manager, or attorney deal with the hospital executive director or hospital CEO. If you are hospital-employed, then it is usually up to the lead physician to do the negotiation.

When in the calendar year are the contracts up for renewal? If it is January 1st, then insist on including extra compensation for extra shifts as part of the written contract. If it is later in the year, then you’ll have to decide whether to negotiate an addendum to your current contracts or whether to wait until the next contract cycle.

When does the hospital do its budget for the next fiscal year? Most academic hospitals use July 1st to correspond with the academic year and the University’s annual budget but private hospitals may have their budget cycle beginning on January 1st or some other time of the year. It is much easier for hospital administrative leaders to include a line item on the budget for anticipated overtime expenses. If you try to negotiate after the hospital budget is completed, then the administrative leaders would need to use money in their discretionary/emergency funds to pay for it and the hospital leadership will usually be less open to doing this since they get requests from all directions for that money on an almost daily basis

What do the competing hospitals do? Find out what other regional hospitals offer their hospitalists for doing extra shifts. This information often has the greatest impact on how receptive the hospital administration is to paying for extra shifts. Hospital administrators love benchmarks so find compensation benchmarks wherever you can.

How willing/able are you to walk away. This depends on the size of your geographic region – if there are a lot of local hospitals and hospitalists are in high demand, then you have greater negotiation power, particularly if those other hospitals are offering richer contracts. See if other regional hospitals have posted job descriptions for open hospitalist positions that includes payment for extra shifts – presenting the hospital administration with these kind of documents can be pretty persuasive.

Can you re-structure your shifts to make doing extra shifts more palatable? Options could include having some of the day shift hospitalists leave when they get their work done, rather than waiting until a defined shift change-over time (such as 6:00 or 7:00 PM). To do this, you have to have 1 or more hospitalists stay until check out time to cover admissions, inpatient calls, etc. This can have the impact of then having short and long daytime shifts and you can use the hours saved during the short shifts to apply to extra shifts. This is entirely dependent on the preferences of the hospitalists – for many years, we had 2 hospitalist groups – one group wanted to stick with a set 12-hour shift model and get payment for extra shifts required for census surges. The other group wanted to allow some of the hospitalists to leave once their work was done in the afternoon, allowing those hospitalists to get home in time for their kids getting off school and daycare; these hospitalists worked more shifts per month but the average shift was shorter. Also, if you have 2 or more hospitalists covering night shifts, is it possible to convert one (or more) of them into a shorter swing shift – in most hospitals, the majority of the nighttime ER admissions come between 6 PM and midnight so it may be possible to use hours saved by shortening the shifts to use toward extra shifts.

Do you need to get paid to do extra shifts or do you need another hospitalist? If you are dealing with one of your hospitalists being out for 6 months on FMLA, it may make more sense to bring in a locum tenens for 6 months rather than spread the work out among the rest of the hospitalists. If the hospital census is growing, maybe you would be better off hiring a part-time hospitalist. One of our hospitalist groups had several “1099 physicians” who were on our regular medical staff but were independent contractors who the group could ask to do shifts here and there when needed and were then paid per shift worked, rather than a fixed annual salary (thus getting an IRS 1099 form rather than a W-2 form at the end of the year). The hospital administration is likely used to using “traveler nurses” to supplement the nursing staff so the concept of 1099 physicians will not be foreign to them.

How does the hospital deal with extra shifts for other physicians, nurses, and pharmacists? If these hospital-employed professionals get paid for doing extra shifts during patient census surges, then use this as a bargaining point to have a similar arrangement for the hospitalists. Also, how does the hospital deal with other hospital-employed physicians who do shift work (for example, anesthesiologists and ER doctors)? The hospital will likely want to have consistency so if they are already paying ER physicians who do extra shifts, then you can use this to justify your request.

Be sure you know what you are asking for. How much are you asking to get paid for working extra shifts? For example, if the original expectation is that the hospitalists work 15 twelve-hour shifts each month with a compensation of $325,000 per year, that works out to $1,800 per shift.  So, will you ask for $1,800 per extra shift worked or ask for time and a half at $2,700 per extra shift worked? Will you want more per shift for undesirable shifts such as night shifts and holidays?

When possible, make extra shift voluntary. Some physicians value money more than time and others value time more than money. Mandating extra shifts can be viewed as punitive whereas monetarily incentivizing extra shifts can be viewed as an employment perk by physicians looking to increase their income by internally moonlighting. At our hospital, we had some hospitalists who were happy to get paid to work several extra shifts per month and some physicians who did not want to work extra shifts, no matter how much extra they would get paid.

How does the hospital manage physician professional income? Know how much money your group brings in from professional billing  – few (if any) hospitalists can cover their salary by professional billing alone and so most (or all) require supplemental monetary support from the hospital. Know how much your hospitalists bring in per day shift and per night shift, particularly if the hospital is doing the billing for your doctors and the professional revenue is being routed through the hospital’s finance department. These data will dictate how much you will ask the hospital to pay for extra shifts. If extra shifts are required due to an unexpected inpatient census surge, then there will be additional revenue from physician billing during those shifts and this will offset the amount that the hospital would be asked to compensate physicians who work those shifts. On the other hand, if the extra shifts are due to a hospitalist being out on maternity leave, then the anticipated revenue from physician professional billing would already have been budgeted for and the hospital would need to provide more for physicians who work the extra shifts.

Meet with the right people. This requires you to know who in your hospital administration has the authority to make the decision. This is usually a hospital chief operating officer but could be the hospital CEO. Many physicians think that they need to approach the chief financial officer but the CFO usually just passes those requests to someone else, like the CEO. The titles vary from hospital to hospital so schedule a meeting with the person who can actually respond to your request.

Data, data, data. Go into this meeting armed with data about how many extra shifts are being done per month or per year, how many hours your hospitalists are working, etc. It is useful to have a benchmark for this, such as the annual MGMA physician compensation report that lists the average hours per week hospitalists work.

Beware of becoming a clock-puncher. Physicians have historically been considered professionals when it comes to employment models. That means that their workday ended when they got their work done, rather than at some specified hour of the day. On the other hand, hourly workers clock in and clock out, getting paid for the number of hours that they work per day. Physicians who work shifts fall into a gray zone between these. The danger of too rigidly demanding payment for extra hours worked is that you run the risk of ceding autonomy to the hospital administration. The hospital CEO does not punch in and out of a time clock at work and if the CEO considers you to be employed in a professional model, then the two of you can be on an equal footing in a negotiation. On the other hand, if the CEO considers you to be an hourly worker, then the CEO owns you.

Make the right kind of appeal. Making demands and threats to the hospital administration usually gets their defenses up and makes them resistant to monetary requests. It is better to appeal to their humanity and to preservation of hospital quality. For example, employee burnout is an existential treat to hospitals so consider opening your meeting with the hospital administrative director with something like “We’re really concerned about some of our hospitalists who are showing signs of physician burnout due to the extra shifts that they are required to do and we’re worried that it will affect their performance and affect patient quality of care. We need some help figuring out a way to address physician burnout.” If you’re lucky, the hospital administration will offer extra compensation and think that it was their idea (rather than yours).

Extra payment for shifts done to cover hospitalists who are out due to FMLA or sickness is tricky. If the hospital views the hospitalist group as an independent business entity, then they will view their deal is with the group to provide coverage for a specific number of shifts per month and it is up to the group to figure out how to cover those shifts when a hospitalist is out on maternity leave, illness, or injury. If that is the case, then the group needs to anticipate the average amount of FMLA and sick time per year and build that into the annual contract as a cost of doing business. If the hospitalists are hospital-employed, then you have more power to negotiate FMLA/sick time coverage since the hospital is the “business owner” of the hospitalists. Your hospital likely does not require its nurses to do extra uncompensated shifts when one of the nurses is out on FMLA and you can use that as a point in your favor when meeting with administrative leaders.

Most physicians are uncomfortable asking for additional compensation; we would rather ask for additional patient care resources, such as additional nurse practitioners, a new operating room, or a new MRI machine. Many physicians go through their entire career without ever asking someone for a raise. Consequently, negotiating with the hospital for compensation for extra shifts worked can feel foreign. The key to overcoming this is preparation and the considerations above will help you to be prepared.

November 6, 2023

Categories
Hospital Finances Medical Economics

Working From Home: Short-Term Benefits But Long-Term Costs

During the COVID pandemic, working from home was mandatory for many workers. But now that the pandemic is fading, working from home is becoming optional. In our hospitals, some employees could not work from home, for example: nurses, respiratory therapists, pharmacists, radiology technicians and lab technicians. But other jobs could be done remotely, for example: scheduling, revenue cycle, customer service, and finance. Should these workers now return to work in the hospital?

In many industries, remote working has now become the norm. Historically, the U.S. average office space vacancy rate was 12.5%. In the first quarter of 2023, that rate is now 18.5%. New office construction has plummeted and many downtown office buildings are being converted into apartments. 39% of American workers have “tele-workable” jobs that can be done remotely. During the height of the pandemic, 55% of these workers with tele-workable jobs did work from home. Currently, 35% of these workers continue to work from home. Overall, 22 million Americans work from home all the time and many more have “hybrid” work, meaning that they work from home some days and work in the workplace building other days.

Advantages of working from home

Every job is a little different and some jobs have more benefits from working remotely than other jobs. There are benefits to both the employer and the employee to working from home. For the employer, advantages include:

  • Reduced need for office space and conference rooms
  • Reduced need for parking space
  • Reduced utility expenses
  • Reduced need for security staff and janitorial services
  • Reduced use of sick time by employees who are either on COVID isolation or have other infections with only mild symptoms
  • Reduced use of personal time-off by employees to stay home with a sick child
  • Improved employee satisfaction
  • Ability to draw workers from a larger geographic area

For the employee, there are even greater advantages:

  • Reduced commuting transportation costs
  • Elimination of daily commute time
  • More time with family and pets
  • Reduced expense of commercially-prepared food (lunches, coffee, snacks)
  • Reduced cost of work attire
  • Potential for fewer work-time interruptions by co-workers
  • Greater flexibility of working hours
  • Flexibility of living location
  • Greater flexibility to take care of errands and appointments
  • Reduced exposure to infected co-workers (not only COVID but also influenza and common colds)

Disadvantages of working from home

As the pandemic has been winding down, many employers are requiring their employees to return to the office, at least some days of the week. The reason is that for many employers, there are disadvantages to remote working that out-weigh the advantages. Some of these disadvantages to the employer include:

  • Potential for some employees to not work the expected number of hours per week
  • Potential for worker distraction by children, spouses, pets and other temptations of home
  • Reduced ability to have group “brainstorming”
  • Reduced spontaneous interactions with other employees
  • Potential for communication errors from inability to pick up on non-verbal communication
  • Reduced mentoring of junior employees by more experienced employees

For the worker, there can also be disadvantages, including:

  • Reduced access to mentoring by senior employees
  • Reduced visibility to company leaders for promotion consideration
  • Reduced networking with other employees outside of one’s own department
  • Social isolation and loneliness
  • Elimination of on-site work perks such as office supplies, coffee, company fitness centers
  • No daily change of scenery
  • Expenses such as computers and video equipment

So, who should and who should not work from home?

Every year, the senior leaders of our hospital would get together for an all-day retreat. We would set our goals for the upcoming fiscal year as well as the strategies and tactics we would use to achieve those goals. Part of that process included succession planning for hospital managers and directors. We would identify not only those employees who we thought had potential for promotion in their own department but also those employees who demonstrated skills that predicted success in a different department. The workers who were most typically considered were those who we knew from interpersonal interactions in the hospital or who we had been able to directly observe at work. Working from home can put the employee at a disadvantage when senior leaders do succession planning and consider employees for promotion.

Working from home is a trade-off of advantages and disadvantages. The balance between those advantages and disadvantages will differ between different employers and departments; it can also differ between different employees in the same department. Every employer and every department within the employer needs to determine where that balance lies in order to decide about continued utilization of working from home. For most employers, offering the option of working from home can insure access to highly qualified employees who, because of geographic location or personal preference of remote working, would otherwise not consider working for that employer. For the employee, choosing to work from home may be preferable at a time in their life when their priorities are the flexibility of work hours and time savings from the lack of a commute. However, for employees who need the benefit of workplace visibility and mentoring for promotion and career advancement, working in the workplace is often preferable.

Work from home is not a one-size-fits-all proposition. Most employers (including hospitals) should neither require all employees to come to work in the workplace nor require all employees to work from home. Just because someone can do their job working from home does not mean that they should do their job working from home. The U.S. unemployment rate is currently 3.4%; the last time the rate was lower was in 1953. With the unemployment rate at a historic low, employers experience stiff competition for the best employees. By not offering a work-from-home option, employers restrict the pool of job applicants and risk resignation of some existing employees. But by not offering in-workplace options, employers miss opportunities for professional growth of their employees which in the long-term can stifle innovation and expertise development.

The COVID pandemic has showed us that working remotely is possible for our hospitals. With the worst of the pandemic behind us, we now must decide which jobs can be performed remotely and which employees are best served by working remotely. Hospitals and employees also need to realize that the short-term advantages of working from home can sometimes come at long-term costs.

May 21, 2023

Categories
Hospital Finances

America’s Rural Hospitals Are On Life Support. Is The Medicare Rural Emergency Hospital Program The Cure?

Rural hospitals in the United States are closing at an alarming rate. 190 of them have closed since 2005. In 2019 alone, 18 rural hospitals closed. Federal COVID relief funds brought a brief respite with only 3 rural hospitals closing in 2021 and 7 closing in 2022. But now that those relief funds have largely been exhausted, we are back on track to see an increasing number of closures this year. The Center for Healthcare Quality and Payment Reform estimates that there are 600 rural hospitals (one-third of all U.S. rural hospitals) at risk of closing in the near future.

Each hospital has different reasons for closing but in general, it is due to persistent losses on patient care services and insufficient financial reserves. Rural hospitals are generally smaller than metropolitan hospitals. The American Hospital Association reports that half of rural hospitals have fewer than 25 beds. It is generally not cost-effective to maintain 24-hour services such as radiology, lab testing, blood banking, respiratory therapy, and pharmacy for a very small number of inpatients as these services require a critical mass of patients to cover their expense. Rural hospitals account for 35% of the nation’s hospitals but account for 59% of hospital closures. Data from the University of North Carolina’s Shep’s Center shows that Texas has had the largest number of rural hospital closures at 27 followed by Tennessee at 15 and North Carolina at 11.

One of the most important functions of rural hospitals is to provide emergency care. For patients with conditions such as trauma, myocardial infarction, stroke, pulmonary embolism, and gastrointestinal bleeding, timely initial medical care at even a small emergency department can mean the difference between life and death. When a rural hospital closes, not only do rural residents have to travel farther to receive healthcare, but the rural community also loses a major employer. That often results in hospital workers moving to urban areas in order to stay employed.

To address this evolving crisis in rural healthcare, CMS created the Rural Emergency Hospital program that went into effect in January 2023. Under this program, Medicare pays hospitals $3.27 million per year and increases payment for patient care services to 105% of the usual Medicare reimbursement. In exchange, the hospitals have to maintain a staffed emergency department and no longer admit patients for inpatient care.

Requirements to qualify as a rural emergency hospital:

  • Have met criteria as a critical access or small rural hospital with no more than 50 beds on December 27, 2020
  • Do not provide inpatient care
  • Do not exceed an average observation length of stay of greater than 24 hours
  • Be located in a state that licenses rural emergency hospitals and be licensed as such
  • Be enrolled as a Medicare provider
  • Have a transfer agreement with a level I or level II trauma hospital
  • Maintain a staffed emergency department 24 hours a day, 7 days a week that meets Critical Access Hospital emergency care criteria
  • Have blood bank, radiology, laboratory, and pharmacy services
  • Have a physician, nurse practitioner, clinical nurse specialist, or physician assistant available 24 hours a day immediately by phone and within 30 minutes to travel on-site

The downsides of becoming a rural emergency hospital

The biggest sacrifice in becoming a rural emergency hospital is giving up inpatient care. That means no obstetrics, no intensive care unit, and no inpatient surgeries. These are often the best-paying services that hospitals provide. Becoming a rural emergency hospital does not eliminate a lot of the regulatory requirements that burden inpatient hospitals. Rural emergency hospitals are still subject to periodic site visits by Medicare inspectors – the CMS conditions of participation document that describes all of the specific regulations reviewable during site visits is 118 pages long. Fortunately, most of these conditions are similar to or the same as conditions for regular inpatient hospitals so most hospitals will have already met these requirements prior to converting to a rural emergency hospital.

Any patient who requires an inpatient admission must be transferred to a full-service hospital. For residents of the community, that can mean driving an hour or more to deliver a baby or to have a surgery that might require admission to the hospital afterward. It can mean an hour-long ambulance ride to be admitted for a COPD exacerbation or flare of heart failure. This can be isolating for patients requiring hospitalization when family and friends must now travel long distances for hospital visits.

For the physicians who practice in that community, it means no longer providing inpatient care. Although many primary care physicians may be happy to be relieved of the demands of taking care of their handful of inpatients, it can be disruptive to the continuity of care of those patients. Family physicians in the community would no longer be able to deliver babies. For some physicians, this can mean a loss of an important percentage of their professional revenue that in the past came from inpatient services. It will become very difficult for specialists such as cardiologists, OB/GYNs, general surgeons, and pulmonologists to maintain financially viable practices in communities lacking an inpatient hospital.

Should your hospital become a rural emergency hospital?

There are a number of factors to consider when a hospital contemplates conversion to rural emergency hospital status:

Is it legal in your state? One of the key requirements to become a rural emergency hospital is that the hospital must be located in a state that licenses them. Only 7 states have approved licensing as rural emergency hospitals: Arkansas, Illinois, Kansas, Michigan, Nebraska, South Dakota, and Texas. Other states are likely to pass legislation permitting rural emergency hospitals in the near future but this is currently a barrier for hospitals not in one of these 7 states. If your state does not license rural emergency hospitals, then start lobbying your state legislature now so that your hospital have the option of converting to a rural emergency hospital in the future.

Did your state adopt Medicaid expansion? States that did not adopt Medicaid expansion had higher numbers of rural hospital closures than those states that did adopt Medicaid expansion.

Since 2005, the 11 states that did not adopt Medicaid Expansion accounted for 51% of all rural hospital closures in the United States. States that adopted Medicaid had an average of 2.4 rural hospital closures whereas states that did not adopt Medicaid expansion had an average of 8.7 rural hospital closures. Americans living in rural areas have a higher poverty rate (15.4%) than those living in metropolitan areas (11.9%). This poverty disparity is greatest for Black Americans living in rural areas (30.7%) versus Black Americans living in metropolitan areas (20.4%). Overall, since 2007, per capita income in rural areas is 25% lower than in urban areas. As a consequence, states that did not expand Medicaid now have a higher percentage of low-income, uninsured people living in rural areas. People lacking health insurance still get sick and injured, however. When they require hospitalization, the hospital does not get paid. This has led to disproportionate financial failure of rural hospitals in states that did not adopt Medicaid expansion. As an example, Texas has the highest percentage of uninsured population in the country (20%) and also had the highest number of rural hospital closures since 2005 (27 hospitals).

Hospital size matters. The 190 rural hospitals that have closed since 2005 were mostly small with an average of 36 beds. 79% of all closed hospitals had fewer than 50 beds and 55% had 25 or fewer beds. When the hospital inpatient census becomes low, hospitals frequently run a deficit since it is difficult to provide comprehensive 24-hour a day services for a small number of patients. The fewer the number of inpatient beds, the more likely a hospital will financially fail and close.

It’s all about the financial statement spreadsheet. Every rural hospital in the U.S. is different. Some have non-patient care revenue in the form of endowments, county support, state support, or religious organization support. Others are fortunate to have a high percentage of commercially-insured patients. Some have had forward-thinking leaders who have avoided financial losses by careful resource allocation and building up their number of days cash on hand. Each hospital must look at its unique financial situation to determine whether they are better off accepting the $3.27 million and giving up their inpatient beds to become a rural emergency hospital or continuing their inpatient services and passing on the $3.27 million.

What will Medicare Advantage plans cover? Emergency department visits, observation stays, and outpatient services are covered by Medicare Part B for those Medicare recipients who have traditional Medicare. However, 45% of Medicare enrollees are now covered by Medicare Advantage plans (Medicare Part C). These plans dictate which physicians the patients are allowed to see, what outpatient services will be covered based on prior authorization, what co-pays are required by the patient, and what deductibles are required by the patient. Hospitals contemplating conversion to rural emergency hospital status need to do an inventory of Medicare Advantage plans used by the hospital’s patient population and ensure that payment for emergency and outpatient services from these plans will cover the cost of providing those services. A good place to start is to look at the denial rates at your hospital by the various Medicare Advantage plans in your community. A Medicare Advantage plan that has historically denied a high percentage of emergency and outpatient services will continue to do so if the hospital becomes a rural emergency hospital. Hospitals also need to ensure that the physicians, nurse practitioners, and physician assistants who provide emergency services are in-network for those Medicare Advantage plans.

A rural emergency hospital is better than no hospital

American healthcare is increasingly dominated by large multi-hospital health systems. This has been a result of a trend of hospital mergers and acquisitions over the past 25 years. Many small rural hospitals have either outright gone out of business or have been acquired by and then closed by larger health systems. But when a rural hospital closes, the healthcare needs of the people in its community does not go away.

CMS has thrown America’s rural hospitals a lifeline that can help them continue to provide emergency services and outpatient services to their communities. Although this will not be as good as having local inpatient services, it is better than nothing.

March 13, 2023

Categories
Hospital Finances Physician Finances

Non-Compete Clauses For Doctors

Recently, the Federal Trade Commission has proposed a rule that would ban all non-compete clauses in employment contracts. These clauses have been common for physicians, so what would the impact be?

A non-compete clause is a type of restrictive covenant that prevents an employee from working for one of their employer’s competitors. Non-compete clauses typically specify a duration of time that the former employee cannot work for a competitor (typically 1 year) and the geographic range that the former employee is prohibited from working in. A related clause is the “non-solicitation clause” which prohibits employees from taking customers (patients) with them if they leave their job. Non-solicitation clauses can also be written to prohibit a former employee from recruiting other current employees to come work for them.

Summary Points:

  • Many physicians are bound by contractural non-compete clauses
  • The FTC has recently proposed elimination of all non-compete clauses
  • For many specialties, non-solicitation clauses are more appropriate than non-compete clauses
  • For other specialties, non-compete clauses provide important financial protection for hospitals
  • Academic hospitals may be more impacted than non-academic hospitals by non-compete clause elimination

Although results of different surveys of physicians vary, the best estimate is that approximately 40% of U.S. physicians are bound by a non-compete clause. A frequently raised question is: “but is it enforceable?”. The answer is… maybe. In the United States, each state has its own laws regarding non-compete clauses with several states (such as Oklahoma, North Dakota, and California) banning them altogether. The enforceability of non-compete clauses is also state-specific and usually based on legal precedents from previous judicial decisions in that particular state. In general, physicians do not want to have non-compete clauses in their contracts but employers (hospitals or group practices) do want to have non-compete clauses.

I have been on both sides of the physician non-compete clause controversy – as a physician who had to sign my own employment contract and as an employer who had to help write physician contracts. As a practicing physician, I had two components of my clinical practice: as an inpatient critical care physician working in our hospital intensive care unit and as an outpatient pulmonologist who was one of the very few in Central Ohio specializing in interstitial lung disease. These two components of my practice had very different implications for non-compete clauses. As an employer, I had roles as the treasurer of our clinical department, an elected board member of our health system’s physician practice group, and the medical director of one of the hospitals in our health system. Each of these employer-related roles gave me a different vantage point on physician non-compete clauses. After dealing with the pros and cons of these clauses for more than 30 years, here are some of my thoughts.

When are physician non-compete clauses NOT appropriate?

Fundamentally, non-compete clauses are used to prevent harm to the employer. For some physicians, leaving one hospital to go work for another hospital in the same city poses little to no risk of harm to their employer. This is primarily true for specialties that do not depend on physician referrals, particularly if there is no significant physician shortage in that particular speciality. For these specialties, non-compete clauses should either be non-existent or should be less restrictive. Typically, these physicians are hospital-based and the patients that they care for are not referred specifically to them by some other physician. Instead, they get patients who choose to come to that particular hospital but do not choose to see that specific doctor. Many of these physicians do shift work. Examples include:

  • Hospitalists
  • Critical care physicians
  • Emergency medicine physicians
  • Radiologists
  • Pathologists
  • Anesthesiologists

If one of these physicians leaves to go work for the hospital’s competitor, they do not take patients with them. The hospital may have financial harm from having to recruit another physician in the same specialty to take their place but the hospital is unlikely to lose patients who would chose to go to a different hospital simply because that physician now practices there. The hospital can also be financially harmed if its most experienced and most productive physicians leave since that hospital will likely have to replace those physicians with younger, less experienced and less productive physicians. However, this would be equally the case whether the senior physician leaves to work in a hospital across the street or leaves to work in a hospital in a different part of the country, outside of the hospital’s geographic area of patient referrals.

Much of the criticism of physician non-compete clauses have come from primary care physicians and it is not really clear whether primary care physicians ever need a non-compete clause. There have been emotional stories of family physicians who wanted to leave their hospital-owned practice to work in public health clinics caring for uninsured patients but were contractually prohibited by the hospital. However, the reality is that most primary care physicians leave for another practice because of better working conditions or better pay. As long as a primary care physician does not take their patient panel with them, there is little effect on a hospital because it is relatively easy for that hospital to hire a new primary care physician to assume care for that patient panel. In this case, a non-solicitation clause that prohibits the primary care physician from actively taking their patient panel with them would be more appropriate. These non-solicitation agreements generally do not prohibit a patient from voluntarily seeking out that primary care physician at their new practice location but do prohibit the physician from actively trying to persuade (solicit) that patient to follow the physician to their new practice.

When ARE physician non-compete clauses appropriate?

Two situations when non-compete clauses do make sense for physicians are when the hospital has invested money in a physician’s training or invested money in a physician’s practice ramp-up period. In both of these situations, the hospital can experience direct financial harm if a physician leaves to go work for a competitor.

One example of employers investing money in physician training is military medicine. Medical students agree to work for the military for a specified number of years and in exchange, the military agrees to pay for all or some of the medical student’s educational expenses. Another example is when a hospital pays for a physician to get advanced training in order to fill a clinical or administrative need at that hospital. For example, a hospital that sends one of its physicians to get training in quality assurance to prepare the physician for a hospital quality directorship. Or when the hospital decides to buy a surgical robot and sends one of its surgeons to get trained to use the robot. In these situations, the hospital has a direct financial investment in that physician’s training and the hospital should expect to receive a return on that investment.

In many specialties, physician contracts will include a practice ramp-up, whereby the hospital will subsidize that physician’s income for a specific number of years while that physician builds their practice and develops a referral base. The duration of time for this ramp-up depends on the specific specialty. For example, it may only take a new gastroenterologist 1 year to build up a sustainably-sized patient panel. On the other hand, it may take 5 years for a plastic surgeon specializing in aesthetic surgery to build a sustainable referral base. A typical ramp-up contract would be for a relatively large subsidy for the first year of practice and then smaller amounts for subsequent years. For hospital-employed, salaried physicians, the ramp up is often expressed as annual RVU targets. For example, a hospital-employed gastroenterologist might be contractually expected to generate 6,000 wRVUs the first year and then 8,000 wRVUs in subsequent years. During that first year, the gastroenterologist’s salary is guaranteed and not dependent on RVU production. For non-hospital-employed physicians, the ramp up is often in direct monetary payments. For example, the hospital might pay the plastic surgeon $200,000 year 1, $150,000 year 2, $100,000 year 3, and $50,000 year 4. In either case, the hospital has a direct financial investment in developing the physician’s practice and once again, the hospital should expect a reasonable return on that investment.

If physicians take patients with them to a new hospital, the original hospital will lose money. Those patient now go to a different hospital for their lab tests, their x-rays, and their surgeries. This “down-stream revenue” can be substantial – not only as a loss of income to the hospital but also as a loss of patient care income to the pathologists, radiologists, surgeons, and specialists who practice at that hospital and are dependent on that patient population remaining at their hospital. This can occur with primary care physicians who have a large patient panel. But it can also occur with outpatient specialists who maintain large populations of patients who regularly see them in the office. As with primary care physicians, a non-solicitation clause may be more appropriate for these specialists than a non-competition clause.

Specialists can also create financial harm to a hospital by leaving and taking their referrals with them. Specialists cultivate referral bases over years of practice. So, for example, if a joint replacement surgeon who has established a referral network of rheumatologists and primary care physicians leaves to go work for another hospitals, those rheumatologists and primary care physicians will now be sending their patients needing joint replacement surgeries to a different hospital. As an alternative to non-compete clauses, non-solicitation clauses can be written to prohibit specialists from actively seeking referrals from their previous referral base. When a physician in our practice group resigned, announcement letters to that physician’s patients had to be written by or approved by the practice administrators so that the physician could not advertise to patients about their new practice location.

So, what is the solution?

Physician non-compete clauses should not be a “one size fits all” proposition. Most physicians do not need a non-compete clause as there are more effective ways to ensure their loyalty. For those physicians who do need non-compete clauses, the details of those clauses should be tailored to the degree of financial loss faced by the hospital (or employing group practice) should they leave.

For specialties that do not warrant non-complete clauses, paying end-of-the year bonuses is a good way to ensure that the physicians remain with the hospital for at least one year. It costs money to recruit and hire physicians when considering the cost of job advertising, interviewing, travel, moving expenses, signing bonuses, and on-boarding. But an unhappy physician is not going to be a productive physician and moreover, that unhappy physician can poison the culture of the hospital’s medical staff – in the long run, a poisoned culture can be very expensive. Ensuring that physicians remain employed for at least one year of employment in order to get their bonus gives the hospital enough time to recruit another physician to replace the one who is leaving. If the physician leaves before 1 year is up, the hospital can use the money it would have paid that physician in bonus pay for new physician recruitment, instead.

For specialties that do warrant non-compete clauses, sometimes other restrictive covenants can be equally effective or even more effective. For example, a non-solicitation clause in a primary care physician’s contract can prohibit that physician from taking their panel of patients with them to a new employer. This can mean prohibiting the physician from taking patient medical records with them and contacting patients to offer to see them at the physician’s new office. Non-solicitation clauses can also be used to prohibit the physician from recruiting other physicians or hospital employees to come work at their new place of employment.

When hospitals agree to provide a financial ramp-up as a physician builds their practice, it is reasonable for that hospital to insert a non-compete clause. Before our health system put non-compete clauses in our physician employment contracts, we would regularly have surgeons and specialists who would receive ramp-up subsidies totaling as much as $400,000 over several years. All too often, as soon as the surgeon or specialist completed their ramp-up period, they would be recruited by another hospital in town that would pay them a $50,000 signing bonus. This was a bargain for the other hospital since it only had to pay a small signing bonus and did not have to pay the more expensive ramp-up, thus saving that hospital a net $350,000. However, hospital want to have to keep an unhappy surgeon or specialist on the medical staff. So, a solution is to have a buyout for the non-competition clause to offset the hospital’s initial investment in that surgeon or specialist. This buyout should be equal to the amount that the hospital has subsidized that physician with a diminishing amount after the ramp-up period commiserate with the hospital’s subsequent return on investment from the physician’s contribution to the hospital’s patient care revenue. For example, let’s take a surgeon specializing in surgery of the right little toe who needs 3 years to build his toe surgery referral base and get his OR team efficient with toe surgeries. His buyout might look like this:

Ramp-up periods are used not just to build referrals but also to build expertise. In my experience, it takes about 7 years for a newly trained surgery resident or fellow to reach maximum surgical efficiency as an attending physician. In those 7 years, the surgeon is building their operative team and learning how to hone his or her skill: Which patients to operate on and which to not operate on. How to reduce the operative time it initially takes to perform a particular surgical procedure. How to anticipate and avoid surgical complications. For non-surgical specialists, the time to reach maximum productivity may be a bit shorter. But regardless, in the first several years after completion of formal training, the physician is still learning and the hospital generally is covering part of the cost of that on-the-job training. Even if the heart surgeon is paid based on wRVU productivity and thus gets paid less in their first few years after fellowship, the hospital loses money from paying the OR nurses and anesthesiologist to do 2 open heart surgeries in a day rather than 3 open heart surgeries in the same amount of time while the surgeon is learning how to be efficient.

Hospitals should be willing to waive buyouts and non-competes under certain circumstances. For example, a few years ago, we had a non-productive but somewhat famous specialist at our hospital who we were losing money on and we considered terminating him. A hospital 5 miles away was simultaneously recruiting him, believing that they were making a hiring coup by poaching a famous doctor from us, not realizing that he was a financial disaster. We waived his non-compete and did not ask for a buyout because we were happy to have him gone (and now dragging down the competition’s finances). Similarly, academic physicians who have worked at a university medical center for several years and then get passed up for academic promotion should have any non-competes waived.

Non-compete geographic limits

Most physician non-compete clauses contain geographic restrictions that correspond with the hospital’s patient population geography. For example, a community hospital might have a 10-mile restriction if most of its patients live within that 10-mile radius. On the other hand, a tertiary referral hospital might have a 50-mile radius non-compete restriction if it depends on referrals from a lot of community hospitals within that 50-mile radius.

Geographic limits should also be based on the specialty. For example, a primary care physician probably will not draw patients from further than 10 miles from their current practice whereas a specialist might draw patients from 100 miles away. This can be particularly true for a physician specializing in a very unique condition such as a kidney transplant surgeon or an interstitial lung disease pulmonologist (such as myself), who may be the only physician practicing in that specialty in a several county area.

What is considered a reasonable geographic distance in non-compete clauses is often contentious and the cause of many employment-related lawsuits. A non-compete clause for the kidney transplant surgeon specifying metropolitan Columbus might be reasonable but specifying all of Ohio is probably unreasonable.

Hospitals will not voluntarily eliminate physician non-compete clauses

No hospital wants to be the only hospital in town to eliminate non-compete clauses. Otherwise, there would be unidirectional movement of physicians from that hospital to all of the other hospitals in town that do have non-compete clauses. So, for those hospitals that would be willing to drop their non-compete clauses from physician employment contracts, if the FTC makes non-compete clauses illegal, then they could finally eliminate non-competes without worrying about being at a competitive disadvantage to their hospital competitors. In other words, the FTC ruling would essentially level the playing field.

Academic hospitals and non-academic hospitals will be affected differently. Historically, many physicians have left jobs in academic medicine to go into private practice at non-academic hospitals. But the reverse is very rare: physicians generally do not give up their private practice to go into academic medicine. There are always exceptions – our health system acquired a local private practice electrophysiology cardiology group and a local vascular surgery group, for example. But by and large, physician movement between academics and private practice is a one-way street. If physician non-compete clauses are outlawed, then academic hospitals will be at risk of losing more physicians to local non-academic hospitals but the reverse is unlikely to occur. On the other hand, physician movement between different non-academic hospitals is very common. Individual physicians leave one group practice to join another group practice. Hospitals contract with one hospitalist group one year and a different group the next year. Elimination of non-compete clauses will likely affect physician movement between different non-academic hospitals fairly similarly. As a consequence, no academic hospital ever wants to give up its physician non-compete clauses but non-academic hospitals will be willing to give up non-competes as long as all of the other non-academic hospitals in town have to also give up theirs.

Because of this one-way movement of physicians from academic to non-academic hospitals, these two types of hospitals will have ramp-up costs affected differently by global elimination of non-compete clauses. Academic hospitals who lose physicians to non-academic hospitals immediately after their ramp-up costs are paid will stand to lose those ramp up costs. However, if a non-academic hospital pays ramp-up costs for a physician who is then poached by another non-academic hospital, then the original hospital can poach a different doctor from the second hospital so that the ramp-up costs end up balancing out. Because of this, academic hospitals will likely lose more money in ramp-up expenses than non-academic hospitals if non-compete clauses are outlawed.

The economic risk of eliminating all physician non-compete clauses

No one has a crystal ball to predict all of the effects of a blanket elimination of non-compete clauses and history shows us that with every government policy decision comes unintended consequences. Here are some of the possible effects of eliminating physician non-compete clauses:

Increased healthcare costs. One of the concerns of the FTC’s proposed complete elimination of non-compete clauses is that it will be inflationary at a time when our economy is reeling from the highest inflation rates in 40 years. After all, a primary goal of banning non-compete clauses is to increase worker wages by increasing employer competition for those workers. Employers would then transfer the increased expenses of employee wages to consumers by increasing the price of goods and services. However, American medicine is a weird economy, and consumer prices are not as tightly bound to employer expenses. In the U.S., 45% of healthcare expenditures are paid by federal, state, or local governments with the largest component being Medicare and Medicaid. The price Medicare pays doctors and hospitals for any given medical service or procedure is determined every year by Congress and hospitals get paid the same amount no matter what their costs are to provide that service or procedure. If hospital costs go up because they have to pay doctors more, Medicare does not pay that hospital more money. Instead, hospitals increase the amount that they charge commercial insurance companies and self-pay patients. The danger of eliminating physician non-compete clauses is therefore an increase in commercial health insurance premiums to working Americans and an increase in the cost of healthcare to those who pay for healthcare out of pocket.

Lower pay for new physicians. The second risk of physician non-compete clauses is that it could reduce income for newly trained physicians, particularly surgeons and specialists. Hospitals would no longer be incentivized to pay for ramp-up periods for new surgeons or specialists and thus there could be a wider income separation between physicians straight out of residency and fellowship compared to those who have been out in practice for several years. Although it can be argued that this is the physician’s own cost of going from inexperienced/inefficient to experienced/efficient, those same physicians who are newly trained are those who are making student loan payments and thus have less disposable income to begin with. In academic medicine, these income gradations already exist with Assistant Professors earning less than Associate Professors who in turn make less than full Professors. If non-compete clauses go away, these seniority-based salaries may become more prevalent in non-academic medicine.

Higher pay for sub-specialists. Losing a hospitalist or an ER physician to a local competitor does not affect a hospital’s financial margin much but losing a reconstructive plastic surgeon or a joint replacement orthopedic surgeon can have a huge financial impact. Hospitals will be incentivized to pay more to those physicians who bring in the most money for the hospital. Because surgical procedures usually have the greatest financial margin for hospitals, subspecialty surgeons could see an increase in their salaries.

Better coffee in the physician lounge. If non-compete clauses are eliminated then physicians will be not only drawn to work for those hospitals that provide the highest salaries but also those hospitals that have the best physician amenities. This could mean providing free parking, bigger offices, free food, and more vacation time. It is often said that trying to run a hospital full of a bunch of doctors is like trying to run a business full of a bunch of CEOs. Without non-competes, those doctors will increasingly expect to be treated like CEOs.

More hospital mergers. One way to prevent a local competing hospital from hiring your physicians is to buy that competing hospital. If you have a monopoly on the local healthcare market, then you don’t have to worry about losing your physician employees since they would have to sell their house, uproot their kids, and move to a different community to get a job with a different hospital. For larger hospitals and hospital systems, the amount that they pay to physicians is a relatively small part of the annual budget. But for smaller hospitals that are just scraping by financially, the additional costs required to retain their doctors could be enough to force them to merge with larger health systems or even close.

Non-compete clauses should not impede reasonable competition

In a free market economy, employees will go to work for the employer who offers them the best job for the best salary. The strength of a free market economy is that this competition for the best employees is the invisible hand that encourages employers to provide optimal working conditions and pay more for the best workers. Excessive use of non-compete clauses creates employment monopolies and in the long-run, monopolies end up hurting the average consumer and hurting the overall economy.

Free market employment encourages innovation and efficiency. It is why the United States has been the envy of the world for the past 150 years when it comes to revolutionary inventions, technologic breakthroughs, and economic success. Injudicious use of non-compete employment clauses risk turning “workplace of choice” initiatives into “workplace of force” realities which can stifle innovation and efficiency.

But employers should reasonably expect to recover their financial investments. No one would expect a factory to spend $250,000 to buy a new machine and then be required to give that machine away 3 years later to a competitor for free. And we should not expect one hospital to spend $250,000 to train a physician only to have that physician go work for a competitor once completing their training. So, there has to be a compromise. Non-compete clauses should not be applied to all physicians but neither should they be eliminated completely.

Non-compete clauses (with options to buyout those clauses) should be reserved for those situations when hospitals invest a significant amount of money in a physician’s career development. For other physicians, non-solicitation clauses can protect the hospitals without negatively impacting a free-market competition for physician employment. Eliminating all physician non-compete clauses is unwise… but so is the indiscriminate use of non-compete clauses across the board to all physicians in all specialties. I hope that the FTC finds a way of protecting the right of physicians to chose their workplace while protecting the right of hospitals to recover their financial investments in physician career development. The answer to the physician non-compete controversy is not that they should always be used nor should they never be used but rather that they should sometimes be used.

February 15, 2023

Categories
Hospital Finances Physician Finances

Public Service Loan Forgiveness (PSLF): What Doctors And Hospitals Need To Know

The Public Service Loan Forgiveness (PSLF) is a federal program that forgives student loans for people who work for government or non-profit organizations. There are several eligibility requirements but many physicians qualify and can have hundreds of thousands of dollars of educational debt eliminated. How can a physician maximize the amount of money forgiven? Should PSLF eligibility be a factor in job selection? Should hospitals and other healthcare organizations promote PSLF eligibility as an employment incentive? As usual, the answers are all in the details.

Summary Points:

  • Many physicians employed by not-for-profit hospitals and government hospitals are eligible for Federal Direct Loan forgiveness
  • This can result in a physician saving hundreds of thousands of dollars
  • Repayment decisions made by physicians in training can significantly affect the amount of loan forgiveness in the future
  • Physicians need to understand the implications of PSLF when choosing jobs after training
  • Hospitals can leverage the PSLF program for physician recruitment and retention

 

What is the PSLF program?

Public Service Loan Forgiveness is a program sponsored by the U.S. Department of Education. It was created by the College Cost Reduction and Access Act of 2007. This is a different program than the one-time student loan forgiveness program proposed by President Biden that would forgive up to $20,000 to anyone with student loan debt. In order to be eligible for the PSLF, an applicant must be employed by a qualifying employer for 10 years. Therefore, the first applicants became eligible in 2017, ten years after the law was passed. There were problems initially and 99% of the first 28,000 applicants were denied. Congress attempted to fix these problems with new legislation in 2018 but confusion and misinformation about eligibility requirements persisted. In, 2019, President Trump’s proposed budget included elimination of the PSLF program; however, the democrat-majority House of Representatives did not cut the program. By April 2020, only 2,215 borrowers had student loans forgiven under the PSLF, a denial rate of 98.5% since program inception. To address many of the problems with the PSLF, the federal government granted a temporary waiver for PSLF applications between October 6, 2021 and October 31, 2022. This waiver allowed application approval for people who were previously denied PSLF because of issues such as past late payments on loan installments. There are new, permanent changes to the PSLF program that will go into effect in July 2023 that will further address some of these issues. The current eligibility requirements are:

  1. Have a William D. Ford Federal Direct Loan. Other federal student loans are not eligible but may be able to be consolidated into a Direct Loan to become eligible.
  2. Be employed by a qualifying employer. These include federal, state, local, or tribal governments and not-for-profit organizations. This also includes the U.S. military and the Peace Corps.
  3. Work full-time for that employer.
  4. Repay loans under a qualifying income-based loan repayment plan. To qualify:
    1. Each payment must be for the full amount owed for that payment period
    2. Payments must be made no later than 15 days after the payment due date
    3. Payments must all have been made while employed by a qualifying employer
  5. Previously make 120 loan installment payments (i.e., 10 years of repayments). All of these must have all been made after 2007 (inception date of the PSLF).
  6. Have used a qualifying income-driven loan repayment plan. The type of repayment plan is critical and many common repayment plans are not eligible for PSLF including the Standard Repayment Plan for Direct Consolidation Loans, the Graduated Repayment Plan, the Extended Repayment Plan, and the Alternative Repayment Plan. Repayment plans that are eligible for PSLF include:
    1. Pay As You Earn Repayment Plan (PAYE Plan)
    2. Revised Pay As You Earn Repayment Plan (REPAYE Plan)
    3. Income-Based Repayment Plan (IBR Plan)
    4. Income-Contingent Repayment Plan (ICR Plan)
  7. Submit a PSLF certification and application form every year to the Department of Education. This form requires entries by the borrower and also requires a signature from an authorized official of the employer who has the authority to certify the borrower’s employment. It is important that the borrower knows who to go to in the organization to get this signature:

Once the PSLF is approved, the federal government then forgives whatever amount remains on the Federal Direct Loan. Therefore, an important strategy is to make the lowest allowable amount in monthly payments so that there is the greatest amount left on the loan after 120 payments. The forgiven amount is not subject to federal income tax.

Many physicians are eligible

One of the results of the COVID pandemic was an acceleration of the trend for physicians to be employed by hospitals rather than private physician practices. A study reported in 2022 by the Physician Advocacy Group found that 75% of U.S. physicians are employed by a hospital or other corporate entity (such as a health insurer). Currently, 341,200 physicians (52% of U.S. physicians) are employed by a hospital.

The American Hospital Association reports that there are 6,093 hospitals in the United States. Of these, 1,228 are for-profit hospitals, 2,960 non-governmental not-for-profit hospitals, 951 state/local governmental hospitals, and 207 federal governmental hospitals. In addition, there are 635 non-federal psychiatric hospitals and 112 other hospitals (such as prison hospitals); many of these are also either not-for-profit or operated by a state or federal government. In other words, more than 70% of American hospitals are qualifying employers for PSLF purposes.

Medical school is expensive. Currently, 73% of medical school graduates have educational debt at the time of graduation. The average debt is $250,990 ($202,450 for medical school and $48,540 for undergraduate school). Many physicians funded their education at least in part through Federal Direct Loans. These loans are for $5,500 – $12,500 per year for undergraduates and up to $20,500 per year for graduate or professional students. The total maximum is $138,500. They are particularly attractive because they have lower interest rates than private educational loans and do not have as strict credit history requirements as private educational loans. Most students use a strategy of maximizing their Federal Direct Loan amounts before taking out more expensive and more restrictive private loans, for example, from a bank or credit union. There are other federal student loans that allow the student to borrow larger amounts of money. For example, a grad plus loan from the U.S. Department of Education can be for the entire amount of the cost of professional school. Other federal student loans (such as FFEL Program loans or Perkins Loan Program loans) are not themselves eligible for PSLF but can be consolidated into a Federal Direct Loan, thus increasing the amount of money that can be eventually forgiven using PSLF.

There are other loan forgiveness programs that physicians may be eligible for such as the National Health Service Corps Loan Repayment Program (underserved communities), the National Health Service Corps Students to Service Loan Repayment Program (primary care physicians in physician shortage areas), the National Health Service Corps Substance Use Disorder Workforce Loan Repayment Program (substance use disorder treatment facilities), the National Health Service Corps Rural Community Loan Repayment Program (substance use disorder treatment facilities in rural areas), the Indian Health Service Loan Repayment Program (Native American communities), the Armed Forces Loan Repayment Program (military physicians), and State Student Loan Forgiveness Programs (states with physician shortages). The PSLF program has the broadest inclusion criteria and is available to more physicians than the other loan forgiveness programs since the PSLF does not require moving to an underserved area, working in substance use disorder treatment, or joining the military.

I’m a medical student. How does the PSLF affect me?

The PSLF is designed to forgive student debt. Medical education is expensive and most of the educational debt generated by physicians is from medical school (rather than undergraduate college). It is important to be strategic when incurring educational debt. Here are some specific tactics that medical students can use:

  • Maximize PSLF-eligible loans. This means starting with the William D. Ford Federal Direct Loans. Only use other student loans after you have taken as much as permitted from the Federal Direct Loans. Try to avoid private loans if at all possible.
  • Consolidate other federal student loans into a Federal Direct Loan as soon as possible. Many loans can be consolidated into a Federal Direct Loan and this can greatly increase the amount of money that will eventually be eligible for PSLF. However, consolidation resets your PSLF eligible payments to zero so if you have already made payments on your Federal Direct Loan and then consolidate, you will lose credit for all of those payments you have previously made. Ideally, you should consolidate all loans immediately after graduation from medical school, before you make your first loan repayment installment in residency.
  • Keep your total debt as low as possible. Private medical schools are more expensive than public medical schools and do not necessarily result in a better education. Do a careful analysis of the total cost of each medical school when selecting which schools you apply to. Keep your living expenses low by living with roommates, cooking your own meals, and making purchases judiciously.
  • Don’t forget scholarships. Unlike loans, scholarships do not need to be repaid. A $50,000 scholarship beats a $50,000 loan every day. Check with your medical school’s office of financial aid and apply for any scholarships that you are eligible for.
  • Know whether your residency employment will be eligible for PSLF qualification. Most residencies are at not-for-profit hospitals but if your residency is at a for-profit hospital and your employer during residency is that hospital, then your loan payments made during residency will not count toward the 120 necessary to be eligible for PSLF. Moreover, you lose the advantage of making your lower monthly loan payments when your income is lower during residency and as a result, when you do eventually apply for PSLF, you will not be able to have as much money forgiven. When applying to residencies, ask if the organization that you get your paycheck from either is a government employer or is a tax-exempt employer under Section 501(c)(3) of the Internal Revenue Code.

I’m a resident. How does the PSLF affect me?

As soon as you start residency, you are employed and thus must start making payments on your student loans. However, with income-driven repayment plans, the amount you pay each month depends on your annual income. Here are some tactics to pay the least over your 10-year repayment period in order to have the greatest amount forgiven under PSLF:

  • Start making loan payments early. Do not opt for using grace periods or deferment to delay starting payments. The amount of monthly payments depends on how high your income is. Your strategy should be to make as many payments as possible when your income is low during residency and make as few as possible when your income is higher as an attending. By using this tactic, you will have a larger amount still owed on your loan when you become eligible for PSLF and therefore will have a larger amount that can be forgiven.
  • Don’t pay Federal Direct Loans off early. It feels really, really good to be debt-free and it can be tempting to try to make extra, early payments on student loans during residency and as a new attending physician. However, if you work for an employer that qualifies you for PSLF, then every early loan payment that you make is less money that can be forgiven once you are 10 years out of medical school. With PSLF, it is far better to be debt-smart than to be debt-free.
  • Keep your annual income low. As a resident, it can be tempting to do a few moonlighting shifts each month to buy a new car or to go on a Caribbean vacation. But the money earned from those moonlighting shifts increases your annual taxable income and therefore increases your monthly payments on an income-driven repayment plan. This will result in a lower amount of loan forgiveness after you have made 120 monthly payments and are eligible for PSLF. On the other hand, contributing to a 403b, 457, or traditional IRA can reduce your annual taxable income, resulting in a lower monthly repayment amount which then increases the total amount of your loan that can be forgiven by PSLF. Each physician weighs the benefits of extra disposable income against the cost of higher loan payments differently.
  • If your spouse makes a lot of money, consider filing separately for federal income taxes. This keeps your own taxable income low and thus keeps the amount of your monthly payments as a resident low. The result is that a larger amount of your loan can be forgiven by PSLF. By filing separately rather than jointly, you may pay slightly more in income taxes as a resident but the amount of money eventually forgiven could be much greater.

I’m a physician. Should I base a career choice on the PSLF?

The PSLF program is attractive to doctors since it has the potential to wipe out hundreds of thousands of dollars of educational debt. But for a physician completing residency or fellowship, basing a job choice on whether or not that job will result in PSLF eligibility can be hazardous. There are several reasons why a new physician should not base a career decision mainly on PSLF eligibility.

  • It might go away. A PSLF applicant must first work for a qualifying employer for 10 years. Ten years is an eternity when it comes to federal funding. It is 3 different presidential terms and 5 different congressional terms. Inevitably, there will be swings in which political party controls the presidency and the U.S. House of Representatives. The PSLF has been on the chopping block before and it may be again before new physicians entering the workforce this year become eligible.
  • Don’t sell your dreams. Maybe you have always aspired to take over a solo practice in your home town. Maybe your ideal job is to work for a for-profit healthcare company such as HCA. Maybe you would like to work part-time for a few years when your children are young. In these situations, you won’t be eligible for the PSLF. But if PSLF eligibility means taking a job that you won’t be passionate about or compromises your desired work-life balance, then the cost of PSLF may be too high.
  • You might change your mind. I am a unicorn – a doctor who stayed at the same health system as a medical student, resident, fellow, and attending physician for 41 years. Few physicians stay with the same employer for their entire career. Historically, between 40% and 70% of physicians change jobs in their first 5 years of practice. During the first 2 years of the COVID pandemic alone, 43% of physicians changed jobs. Maybe your spouse has to relocate to a different city. Maybe you don’t get along with your colleagues. Maybe your hospital closes. If you change jobs in the first 10 years of practice and your new employer is not a qualified employer for PSLF purposes, then you won’t be eligible for PSLF. On the other hand, once your loans are forgiven by PSLF, you are free to go work for whoever you want, wherever you want.
  • You might be financially better off without PSLF. Government jobs usually pay less than private practice jobs for physicians. Not-for-profit hospitals often pay physicians less than for–profit hospitals. With PSLF, you will still need to make required repayments every month for 10 years and the amount that you will be forgiven is only the amount remaining on your Federal Direct Loans at the end of those 10 years. In the long run, you may come out ahead financially by taking a job that does not qualify for PSLF but pays a few thousand dollars a year more than a job that qualifies for PSLF. This is particularly true if the amount of money you take out for Federal Direct Loans is relatively modest, for example, less than $50,000. On the other hand, if you estimate that your student loan balance after your first 120 monthly payments will be $500,000, then taking a private practice job in order to earn an extra $20,000 per year compared to an academic job does not make financial sense.
  • You aren’t compulsive with paying off bills. To be eligible for PSLF, you have to make your repayments in full, every month. If you miss monthly payments or run out of money at the end of the month and can’t make a full payment, then you lose eligibility.
  • You’re prone to getting caught up in moral dilemmas. When the federal government forgives educational loans, it means that the American taxpayers are paying for your education. For some people, this is perceived as a handout and physicians earn enough that they may feel they don’t deserve a handout. Elected officials from 11 states declined to participate in Medicaid expansion because they were ideologically opposed to taking federal tax money to care for the poor in their state. If you are a person who won’t be able to sleep at night if the federal government helps pay for your medical school debt, then the PSLF may not be for you.
  • Shorter rather than longer residency. The 120 payment clock starts ticking once you graduate from medical school. As a resident and fellow, you earn less than an attending physician but with an income-driven repayment plan (such as PAYE or REPAYE), you also have smaller monthly loan payments while still in training. If you enter a specialty that requires 3 years of residency, then you will have 7 years of high monthly payments as an attending physician before you are eligible for PSLF. However, if you enter a specialty that requires 7 years of residency and fellowship, then you will only have 3 years of high monthly payments as an attending physician before PSLF eligibility. Physicians with the longest residencies/fellowships have the most to gain financially from PSLF.

The bottom line is that hoping to qualify for PSLF should never be the main factor in career decision making. However, when it comes down to two equally attractive jobs, qualifying for PSLF can be a tie-breaker.

I employ physicians. How can I leverage PSLF?

If you are the medical director of a not-for-profit hospital, use your hospital’s PSLF qualification as a physician recruitment incentive. Here are some tactics you can use to your advantage:

  • Tell physician recruits that the hospital meets PSLF employer qualification. Many residents and fellows do not fully understand the differences between for-profit and not-for-profit hospitals and often accept jobs without even knowing which type their new hospital is. There is also a difference between working for a not-for-profit hospital and working at a not-for-profit hospital. A physician employed by a private practice medical group that works at a not-for-profit hospital will not qualify for PSLF.
  • Advertise that the hospital signs the employment certification each year. This is a required element of the PSLF application. By telling physician recruits up front that you are aware of the need for these annual certifications and are willing to sign them in a timely fashion, you indicate to the recruits that you are knowledgeable about the PSLF process and will be there to assist them without creating any barriers. Medical directors and hospital administrators have hundreds of forms that need to be signed every month and they often get behind in completing them in a timely fashion – make sure that physician recruits know that you place a priority on the PSLF certification signatures.
  • Have a designated physician loan navigator. Hospitals often agonize over whether or not to pay a physician a one-time $20,000 signing bonus. But PSLF can amount to as much as a $650,000 savings to a physician with no cost to the hospital. Therefore, ensuring that physicians meet eligibility and apply correctly can translate to millions of dollars of financial benefit to the medical staff. Designating a staff member from the hospital’s finance department or medical staff office to devote a percentage of their FTE to helping physicians manage their loans can be a terrific hospital investment. Responsibilities could include helping physicians consolidate federal loans into Direct Loans, helping fill out PSLF applications, ensuring employer certification signatures get done, helping physicians develop strategies to ensure full and timely monthly payments, etc.
  • Provide regular PSLF updates. There is no class on financial health in medical school. Most newly trained physicians do not fully understand investing, taxes, retirement planning, or personal budgeting. Because the first borrowers only became eligible for PSLF in 2017, many physicians are not even aware that the program exists, particularly if they graduated from medical school before 2017. By incorporating news about developments in the PSLF program into your medical staff meetings, you send a signal to the physicians that the hospital cares about them. Doctors talk to each other and when your medical staff tell their friends that the hospital cares about physician financial health, it helps you to attract top physicians. PSLF then becomes a line item for the medical director’s annual “Workplace of Choice” goals.

Never turn down free money

If you are a physician with Federal Direct Loans and have been employed by a government or not-for-profit healthcare organization for the past 10 years, then you may be eligible for free money with no strings attached. You have won the lottery without having to buy a lottery ticket. This kind of thing rarely happens in life so don’t let the opportunity pass by. If you are a medical director or administrator at a not-for-profit hospital then many of your doctors are eligible for free money. If you help them get it, it will foster their loyalty for years to come.

February 12, 2023

Categories
Hospital Finances Inpatient Practice

Understanding The 2023 Medicare Hospital Readmission Penalty

Every year, the Centers for Medicare & Medicaid Services (CMS) penalizes hospitals with excessively high readmission rates. The monetary penalty for every U.S. hospital in 2023 was recently released by CMS. In theory, a higher penalty should indicate lower quality and vice-versa. However, the methodology used in calculating the penalties is complex and nuanced with the result that the readmission penalty may not be entirely reflective of a hospital’s overall quality of care.

Summary Points:

  • For 2023, 60% of U.S. hospitals were eligible to receive a financial penalty for excessive 30-day readmissions.
  • 75% of eligible hospitals received a Medicare penalty.
  • The average hospital penalty is 0.43% of 2023 Medicare revenue.
  • COVID impacted the readmission penalty formula in several ways.
  • There are a number of problems with the readmission penalty methodology and potential solutions are discussed that could improve the Hospital Readmissions Reduction Program

 

Background

One of the provisions of the Affordable Care Act of 2010 (aka “Obamacare”) was to direct CMS to penalize hospitals with high rates of patients requiring readmission to a hospital within 30 days of an inpatient hospital stay. The first penalties were assessed in 2013; this is the 11th year of the penalty program. The calculations are only made for a few specific diagnoses and are based on data during 3 previous years. CMS calculates the amount of every hospital’s penalty in October or November each year and then that penalty is applied to the following year’s Medicare payments. The maximum penalty is 3%, meaning that for a hospital receiving the maximum penalty, CMS will reduce the amount that it pays that hospital for all of the Medicare services the hospital charges by 3% the next calendar year. Because many hospitals operate on razor-thin margins, even a relatively small reduction in what it gets paid by Medicare can be financially devastating. This is especially true for hospitals that operate on a July to June fiscal year, such as most academic medical centers, that can find themselves with an reduction in Medicare payments in the middle of the fiscal year. This can make it very difficult for these hospitals to accurately forecast their annual budgets since they do not know what they will get paid from Medicare services during the second half of their fiscal year.

You can look up every U.S. hospital’s readmission penalty for 2023 here. CMS uses a 4-step process to determine the amount of each hospital’s penalty.

The actual equation that CMS uses to calculate each hospital’s penalty is complex with the result that even most hospital administrators do not fully understand it:

Lurking behind the equation are a lot of subtleties that affect how the public should interpret the readmission penalty.

COVID affected the calculations

Normally, CMS looks at historical readmission data from between 2 and 5 years in the past. Thus, normally, CMS would base the 2023 readmission penalty on data from July 2018 to June 2021. This has always been a source of criticism since the penalty is based on what a hospital did 5 years ago rather than what it has done more recently in the past 2 years. Consequently, a hospital with poor readmission performance 5 years ago could have a large readmission penalty even if its readmission performance was stellar during the past 2 years.

The first 6 months of the COVID pandemic was a trying time for most hospitals. Many exceeded their maximum inpatient capacity. To care for inpatients, many had to recruit doctors and nurses who did not normally provide inpatient care. Because of this, CMS excluded all data from January 2020 to July 2020. As a result, rather than being based on 3 years of historical readmission data, this year’s penalty is based on 2.5 year of data.

A second effect of COVID was on the diagnoses used for penalty determination. Normally, CMS looks at readmission rates only for patients with one of six diagnoses: acute myocardial infarction, heart failure, pneumonia, COPD, coronary artery bypass surgery, and hip & knee replacement surgery. COVID disproportionately affected patients coded with pneumonia. As a result, CMS dropped pneumonia as one of the diagnoses used for readmission calculations. Therefore, the penalties were based on 5 diagnoses this year rather than 6.

A third effect of COVID on the readmission penalty calculation was that any patient with COVID as a primary or secondary admission diagnosis was eliminated from the hospital’s readmission calculation. Thus, a patient admitted with an acute myocardial infarction who was found to also have COVID on admission was excluded from the hospital’s data.

A fourth effect of COVID was on comorbidity determination. CMS adjusts every individual patient for that particular patient’s medical co-morbidities. So, for example, a patient with an admission for COPD who requires mechanical ventilation is expected to have a higher readmission rate than a COPD patient who does not require mechanical ventilation. Similarly, a patient undergoing knee replacement who is over age 65 and has diabetes is expected to have a higher readmission rate than a knee replacement patient who is younger than age 65 and not diabetic. This year, CMS added history of COVID within the past year as one of the co-morbidities used in the readmission calculation for all five of the readmission diagnoses. Thus, a patient admitted with COPD who had a COVID infection 8 months previously would be expected to have a higher 30-day readmission rate than a COPD patient who had never had COVID in the past.

Not all hospitals are included

CMS excludes about 40% of U.S. hospitals from the readmission penalty program. These include pediatric hospitals, Veterans Administration hospitals, psychiatric hospitals, rehabilitation hospitals, long-term acute care hospitals, and critical access hospitals. In addition, a hospital must have had more than 25 eligible patients for each of the 5 diagnoses. Thus, a hospital that only performed 24 coronary artery bypass surgeries during the 2.5 year period would not be subject for readmission penalties for CABG surgeries. CMS also excludes all hospitals in Maryland from readmission penalties because of an agreement between CMS and Maryland.

It is impossible for hospitals to monitor their readmission rates

Every autumn, hospitals await the CMS report on their readmission data with no advance knowledge of what the hospital’s readmission rate will be. These are sent to the hospital as a “Hospital Specific Report”. For most other quality metrics, hospitals can continuously monitor their performance internally. For example, any hospital should be able to determine on any given day what their mortality rate, C. difficile incidence, and emergency department wait times are. But readmission rates are unique. Medicare looks at admission to any hospital within 30 days of an inpatient discharge, not just the the hospital that the patient was originally admitted to. The original hospital will know if a patient gets admitted again to that hospital but has no way of knowing if a patient gets admitted to some other hospital. For example, if a patient is discharged from the Ohio State University Medical Center, OSU can track any readmissions to an OSU hospital. However, if that patient gets admitted to a non-OSU hospital in Cincinnati, OSU will not know about it. On the other hand, Medicare gets billed by every hospital that a patient is admitted to so Medicare will know whenever a patient is admitted to any hospital in the United States. This phenomenon has little impact on small, rural or community hospitals since a patient admitted to that hospital will likely return to that same hospital given that it is the only hospital in the region. But for tertiary care or referral hospitals, patients often live hundreds of miles away and readmissions are more likely to occur at their local community hospital rather than at the tertiary care hospital. Thus a tertiary care hospital will have no idea what its readmission rate performance is until CMS sends out the Hospital Specific Reports.

Hospitals normally institute a continuous quality improvement process for quality metrics. This requires real-time monitoring of that quality metric so that the hospital can continuously change its procedures and policies to make their quality outcomes better. This turns out to be difficult for reducing 30-day readmissions because the readmission data that Medicare gets is 2-5 years old. To make an analogy, imagine how difficult it would be for a coach to improve his or her basketball team if the coach did not know the outcome of each game until 5 years after it was played.

All hospitals are not treated the same

One of the main criticisms of the initial formula that CMS used in the first years of the readmission penalty was that hospitals that cared for a large number of poor people were disproportionately penalized compared to hospitals caring for a largely affluent patient population. Poor individuals are less likely to have insurance, less likely to be able to afford medications, less likely to have transportation for doctor office visits, and less likely to have a primary care physician. All of these factors contribute to higher hospital readmission rates but these are factors that are largely not under the hospital’s control. In response to this criticism, several years ago, CMS changed the methodology used in readmission calculation to adjust for the percentage of poor and underserved patients that each hospital cares for. The current methodology uses the percentage of “dual-proportion” patients. This is based on the percentage of Medicare patients that also have full Medicaid benefits. Medicaid is used as a marker for low-income patients. CMS divides U.S. hospitals into one of five quintiles based on the percentage of a hospital’s dual proportion patients. Quintile #1 includes hospitals with fewer than 14% of its Medicare patients having dual coverage with Medicaid. Quintile #5 includes hospitals with more than 31% of its Medicare patients having dual coverage with Medicaid.  The breakdown of hospitals based on their percentage of dual proportion is seen in the graph below:

All hospital stays are not treated the same

Medicare classifies each patient’s hospital stay as either an “inpatient” stay or an “observation” stay. The rules for how to classify any given patient are complicated but in general, a patient who is expected at the time of arrival to the hospital to be in the hospital for less than 2 midnights is considered to be in observation status. Overall in the U.S., about 84% of hospital stays are designated as inpatient and about 16% are designated as observation. The financial difference in the two types of hospital stays is very significant, both for the hospital and for the patient. An observation stay is considered an outpatient visit and is thus subject to Medicare Part B billing rather than Medicare Part A billing. This means that the patient in observation status is responsible for all medication charges and is responsible for a 20% co-pay of the cost of the hospital stay. CMS pays the hospital much less for an observation stay than for a regular inpatient stay. Observation stays are less expensive for Medicare because much of the healthcare costs are passed on to the patient.

Because observation stays are considered outpatient visits from a Medicare perspective, these hospital stays are not included in the hospital readmission calculation. For a readmission to count, both the initial hospital stay must be an inpatient stay and the second hospital stay within 30 days must also be an inpatient stay. This is also the same when CMS calculates a hospital’s mortality rate – only inpatient stays are included and deaths occurring when a patient is in observation status do not count against the hospital’s mortality rate.

Hospitals can “game the system” by putting certain patients in observation status in order to improve their readmission data and their mortality data. For example, take a patient who is admitted for a COPD exacerbation on February 1st. That patient then comes back to the hospital on February 20th after having a cardiopulmonary arrest following a drug overdose. The patient is intubated, receives mechanical ventilation, and placed in the ICU but it is clear that the patient has had severe brain and heart damage and is not expected to live beyond 24 hours. The person overseeing the hospital’s quality data will advise the ICU physician to admit the patient as an observation stay so that the hospital stay does not count as a readmission and so that the death does not count as an inpatient mortality. On the other hand, the person overseeing the hospital’s finances will advise the ICU physician to admit the patient as an inpatient stay so that the hospital gets paid more from Medicare. Whichever of the two hospital administrators is most persuasive (or most vocal) will usually win out. The result is that hospitals that more liberally designate patients as being in observation status can lower their CMS readmission penalty. The goal of Medicare auditors is to pay hospitals as little as possible so they will penalize hospitals who put patients in inpatient status who should really be in observation status. However, those auditors do not care if a hospital puts patients in observation status who should really be in inpatient status since it saves Medicare money.

This can also be an effective strategy for hospitals that have a low volume of patients with one of the five diagnoses used in the readmission calculation. For example, if a hospital has 24 heart failure inpatient admissions over a 3-year period, then putting the next heart failure patient in observation status ensures that the hospital will not have any heart failure readmission penalty since there would still be fewer than 25 heart failure inpatient admissions during that 3-year period. The cost to the hospital is that they might get paid $4,000 less by putting that patient in observation status rather in inpatient status. But by avoiding a 0.2% readmission penalty for all medicare charges for the next year, that hospital might avoid a total $80,000 penalty. That is a $76,000 net return on investment for putting that one patient in observation status rather than inpatient status!

For some hospitals, it is cheaper to pay the penalty

In the United States, the average hospital has 19.8% of revenue from Medicare, 13.1% from Medicaid, and 68.4% from private commercial insurance. The hospital with the highest annual net patient revenue in the U.S. is New York Presbyterian Hospital at $5.7 billion. However, the average U.S. hospital’s total annual patient revenue is much lower at about $200 million. Thus, the average hospital has annual Medicare revenue of about $40 million ($200 million x 19.8%). A maximum Medicare readmission penalty of 3% would therefore be about $1.2 million for that average hospital. Only 17 hospitals were fined the full 3% for 2023 and only 231 hospitals will pay more than 1% penalty. 25% of hospitals will pay no penalty at all. The average hospital penalty is 0.43%.

Given that the average hospital has $40 million in annual Medicare revenue and that the average hospital has a 0.43% Medicare penalty in 2023, that average hospital will have a $172,000 penalty. Implementing a readmission reduction program in a hospital can be very costly. It requires hiring data analysts to monitor readmissions, instituting costly discharge transition clinics, and increasing the percentage of patients in observation status. For many hospitals, the total cost to reduce readmissions sufficiently to avoid a CMS penalty can be considerably more than the expense of the penalty. In general, the larger the hospital and the higher the percentage of Medicare patients in a hospital’s payer mix, the more likely it will make financial sense for a hospital to devote a lot of money into a readmission reduction program. Furthermore, because the readmission penalty is based on the hospital’s performance between 2-5 years previously, it will take 5 years before money spent today on a readmission reduction program will fully affect the annual CMS penalty. And it is likely that CMS will continue to revise the readmission penalty formula so that the formula will look considerably different over the next 5 years.

How can the process be improved?

Medical care in the United States is more expensive than anywhere else in the world and it is essential for our economy that we reign in healthcare costs. Because hospitalizations are expensive, reducing unnecessary hospital admissions is central to controlling those healthcare costs. Readmissions to the hospital within 30 days of hospital discharge are frequently avoidable if processes are in place to ensure that patients get appropriate outpatient care. This includes filling medication prescriptions, keeping office appointments with medical providers after discharge, access to outpatient physical & occupational therapy, etc. Penalizing hospitals for excessive readmissions is one way to reduce costs by incentivizing hospitals to institute processes that reduce hospital readmissions. However, after eleven years of the CMS Hospital Readmissions Reduction Program, it is clear that the program can do better. Some specific improvements include:

  1. Provide hospitals with real-time readmission data. This is probably the single most important change that CMS can make and it really should not be terribly difficult. Ideally, hospitals should know what their current readmission rates are every month so that the hospital can employ continuous improvement processes to reduce those readmissions. The current model of basing the penalty on a hospital’s readmission rates from 2-5 years in the past makes improving readmissions very difficult. Ideally, CMS should provide every hospital with its current rolling 3-year average readmission rate and this should be updated monthly.
  2. Eliminate observation status hospital stays. Currently, hospitals spend an enormous amount of money to determine whether any given patient should be in observation status or inpatient status. Medicare loves observation status because CMS does not have to pay as much to hospitals for patients in observation status as opposed to inpatient status. Instead, those additional costs are passed on to the individual patient. So, the net overall cost to the country as a whole is the same, regardless of whether a patient is in observation or inpatient status. When the overhead expense of monitoring and policing observation stays is included, the overall cost of having observation status actually increases the country’s overall healthcare costs. When it comes to readmission rates, some hospitals game the system by preferentially putting readmitted patients in observation status instead of inpatient status. It is time to eliminate observation status and simply pay hospitals for patient stays, regardless of whether or not the patient’s hospital stay crosses two midnights.
  3. Base the penalty on the overall readmission rate rather readmission rates for only 6 diagnoses. Every hospital is different. Not all hospitals perform coronary artery bypass graft surgery and not all hospitals perform knee & hip replacement surgery. Currently, hospitals focus their readmission rate reduction strategies on just the 6 conditions that CMS penalizes them on. Savvy hospitalists know that they can readmit patients who have had a stroke, diverticulitis, or a drug overdose every week without having to worry about any penalty. By using overall readmission rates (for all diagnoses), the quality process will be simpler for hospitals and will benefit all patients and not just those patients who have one of the 6 conditions that CMS currently uses in readmission penalty determination. However, CMS would need to determine a different method of risk-adjustment for comorbidity since the current method is by using specific comorbidities for each of the 6 eligible diagnoses.
  4. Eliminate hospital exceptions. Currently, about 40% of U.S. hospitals are not subject to readmission penalties. This is understandable for pediatric hospitals (few, if any, Medicare patients) and Veterans Administration hospitals (funded by the VA and not by CMS). Psychiatric hospitals are excluded because they do not normally admit patients with the 6 conditions that CMS bases the readmission penalty on. Long-term acute care hospitals, rehabilitation hospitals, and critical access hospitals are also excluded. Ideally, CMS should use data for both Medicare and Medicaid patients since it can track readmissions for both groups. By focusing on total readmission rates rather than the 6 currently used diagnoses, many of the currently exempted hospitals can be included in the readmission reduction program. However, there may need to be different readmission rate benchmarks for psychiatric hospitals, long-term acute care hospitals, etc.

January 4, 2023

Categories
Hospital Finances Inpatient Practice Physician Finances

How Do You Define A Hospitalist FTE?

A reader recently emailed me to ask: “How do you define a hospitalist FTE?” It turns out that it is a great question with a very nuanced answer. Twenty years ago, an FTE was whatever a physician wanted it to be. Physician earnings were directly tied to physician billing and so a physician would work as much as they wanted in order to generate the income that they wanted. But over the past 2 decades, revenue from physician professional services has not changed appreciably – in 2002, Medicare reimbursed physicians at $36.20 per RVU; in 2022, an RVU was worth $34.61.

To put that in perspective, $1.00 in 2002 is worth $1.66 in 2022 whereas an RVU is now worth $1.59 less than it was in 2002! In order to keep physician incomes constant, hospitals have had to increasingly subsidize physicians. As a result, most physicians are now hospital-employed, rather than independent practitioners. This is especially true for hospitalists who rarely, if ever, are able to support their full salary on billings alone. In the past, the physicians defined what working full-time constitutes but today, it is the hospitals that define what working full-time means for a hospitalist.

Hospitals typically subsidize hospitalist groups based on the number of FTEs (full-time equivalents) that are required in order to cover the hospital’s inpatients. But defining exactly what an FTE is can be complicated and often a source of disagreement between the hospital and the hospitalist group. There are a number of equally valid ways of defining “full-time” and no one definition works best in every hospital. There are several steps to determine the best model in your hospital.

Step 1: Determine the number of patients per hospitalist per day

The number of patients each hospitalist should see per day will vary considerably from hospital to hospital and from nursing unit to nursing unit. There are 19 factors to consider when determining this number as outlined in a previous post:

      • Case mix index
      • Residents versus no residents
      • Admitting service versus consultative service
      • Presence or absence of advance practice providers
      • ICU versus general ward patients
      • Day shift versus night shift
      • Observation status versus regular inpatient status
      • Ease of documentation
      • Shared electronic medical record with primary care physicians
      • Non-clinical duties
      • Shift duration (hours)
      • Hospitalist experience
      • Patient geographical location within the hospital
      • Average length of stay
      • Inpatient census variability
      • RVU productivity
      • Quality of case management
      • Local hospitalist employment market
      • Patient demographics

There has to be flexibility, however, and rigid adherence to a given number of patients is a recipe for dissatisfaction on both the part of the hospital and the part of the hospitalist. If the hospital inpatient census falls, then the hospital will be unhappy that each on-duty hospitalist is not seeing enough patients. On the other hand, if the inpatient census surges, then the hospitalists will be unhappy since they have to see more patients than they agreed on in their contracts. Many hospitals will have a “risk-call” hospitalist each day who is on standby to come in to work if needed when the inpatient census is higher than normal.

Step 2: Determine how the hospitalists will be scheduled

Early in the hospitalist era, scheduling was simple: a shift was 12 hours long and there were two shifts – a day shift and a night shift. Hospitalist schedules have gotten a lot more complex in recent years as outlined in a previous post. Now, hospitalists often have 8-hour short day shifts and evening swing shifts to cover ER admissions in the early evenings. As a result, scheduling hospitalists has become much more complex. Here are some of the scheduling models:

The 12-hour shift model. This was the original hospitalist scheduling model and typically will have two 12-hour shifts per day, a day shift and a night shift. The day shift is typically 6:00 AM to 6:00 PM or 7:00 AM to 7:00 PM. The night shift starts when the day shift is over. Day shifts and night shifts are treated equally but since night shifts are considered less desirable by most hospitalists, there needs to be a “shift differential” to provide extra payment for covering night shifts. Many hospitals will also provide additional pay for hospitalists who work on holidays. Because most patient care (work rounds, interdisciplinary rounds, daily charting, discharges, family meetings, etc.) occurs during the day shift, hospitals will typically have 1 night shift hospitalist for every 3 -4 day shift hospitalists. High acuity patient care areas, such as the intensive care unit, may require 1 night shift hospitalist for every 1 day shift hospitalist.

The long-shift, short-shift model. In this model, one or more hospitalists works the entire 12-hour day shift but other hospitalists leave earlier in the day, after their work is done. The short-shift hospitalists check out to one of the long-shift hospitalists when leaving. The long-shift hospitalist is then responsible for any admissions that come in later in the day. Some hospitalist groups will have the short-shift hospitalists continue to take phone calls from nurses, the lab, and consultants after they leave the hospital; other hospitalist groups will have the long-shift hospitalists cover calls. Some hospitals will have a specific check-out time for the short-shift hospitalists, for example, 3:00 PM. Other hospitals will have the short-shift hospitalists check out whenever their work is completed, whether that be 1:00 PM or 5:00 PM. An advantage of this model is that it avoids having a lot of hospitalists sitting around doing nothing in the late afternoon, after all of their work is done. In addition, this model is very attractive to hospitalists with children, since they can be home when the kids get out of school.

The swing-shift model. In most hospitals, the peak in admissions from the emergency department occurs between 3:00 PM and midnight. After midnight, the admissions slow down, the inpatients go to sleep, and the hospitalist workload drops. To optimize patient care coverage, some hospitals will create a “swing-shift” to cover the surge in admissions during the evening. Every hospital’s pattern of ER admission is different so swing-shifts could be from 3:00 to midnight, 5:00 to 10:00, etc.

The comprehensive services model. In many hospitals, the hospitalists do more than just serve as the attending physician for inpatients. For example, they may perform medical pre-operative consultation in an outpatient pre-admission testing clinic. They may provide medical consultation for surgical inpatients. They may have a designated “triage attending” to serve as a liaison between the hospitalist services and the emergency department or the outside referring hospitals. Or they may provide on-site supervision of infusion centers. In these situations (except for triage attending), the duration of a shift is determined by whenever the work is done, rather than by a specific time of day or number of hours. In general, these other services require fewer than 12 hours per day. These types of services are often attractive to hospitalists with young children since they are generally able to get home earlier than they would with a traditional 12-hour inpatient hospitalist shift.

Step 3: Determine how a 100% FTE will be defined

Once the hospital has determined how many inpatients a rounding hospitalist should cover and how the hospitalists are to be scheduled, the next step is to determine what will constitute a 100% FTE hospitalist. There are several ways of defining an FTE.

The shifts per month model. This works best when all of the hospitalists work 12-hour shifts. A full-time hospitalist is typically defined as 15 or 16 shifts per month (180 – 192 shifts per year). It generally takes about a half hour to check out at the end of every shift with the result that a 12-hour shift is really a 12.5-hour shift. This works out to about 43 – 46 hours per week on average. Some hospitals will grant additional time off for vacations and CME with the result that full-time may be fewer shifts per year, for example, 170 shifts.

The hours per month model. This model works when there there are different hospitalist shifts of varying durations. In this model, a hospitalist may be scheduled for shifts of a variety of durations up to some pre-agreed upon number of total hours per month. This results in a great deal of scheduling complexity and often requires considerable effort by the scheduler to ensure equity among the hospitalists. Many jobs define an FTE as 40 hours per week, however, most physicians work more than that. Although physician time surveys vary, most find that physicians average closer to 50 hours per week. If we extrapolate from the 15 – 16 twelve hour shifts per month model that results in 43 – 46 hours per week, then this would equate to 2,236 – 2,392 hours per year. Rigid adherence to a specific number of hours per year is difficult. Unlike other hospital employees, hospitalists do not punch in and out on a time clock. There are always some days when a hospitalist needs to stay in the hospital past the end of their shift to finish charting, complete the H&P on a late admission, or provide care for a critically ill patient. In addition, some hospitalists may check-out early to one of their peers once they complete their daily work.

The number of billed wRVUs model. If you look in the annual MGMA physician salary survey, you can find the mean, median, 25th percentile, 75th percentile, and 90th percentile of work RVUs  produced by physicians in every specialty. Using wRVUs as a general guide of FTE productivity can be useful for many specialties but as discussed in a previous post, it is inadvisable to pay individual hospitalists by the wRVU. Nor is it advisable to use wRVU targets to define an FTE. If wRUVs are used to benchmark hospitalist productivity, the RVU targets need to be for the entire hospitalist group and not for individual hospitalists. There is too much variation in RVU production intrinsic to different types of hospitalist shifts – fewer RVUs with night shifts, more with ICU shifts, and none for triage attending shifts. In other words, rather than requiring each of your 10 hospitalists to produce 4,300 wRVUs per year, instead require the entire group of hospitalists to produce 43,000 wRVUs per year.

The traditional workweek model. Most outpatient physicians define full-time as traditional office hours, working Monday through Friday, 8:00 – 5:00. With physician offices often closed on weekends, evenings, and holidays, this works fairly well for outpatient medicine. This model is harder to apply to hospitalists because illnesses requiring inpatient care are just as likely to occur on weekends and holidays as they are on weekdays. Therefore, hospitalists need to cover every day of the year. Nevertheless, some hospitals will have a core group of hospitalists who cover Monday through Friday day shifts. Part-time hospitalists or moonlighters cover weekends. And nights are either covered by home call, by inpatient advance practice providers, or by nocturnists. This model can sometimes work in smaller hospitals that care for lower acuity patients but is impractical in larger hospitals. The weekday hospitalists typically take care of their daily rounds and any admissions. They then leave the hospital in the afternoon, after their work is done. A typical full-time hospitalist in this model might work 46 weeks with 4 weeks of vacation, a week of CME, and a week for holidays. This equates to 230 working days per year.

The academic hospitalist model. In many teaching hospitals, the attending physicians on medical inpatient services are hospitalists who oversee care provided by internal medicine, family medicine, or pediatric residents. In this situation, the residents typically cover a given inpatient service for 4-week blocks. The attending hospitalist typically covers the teaching service daily for 2 weeks, although at some hospitals, the hospitalist covers the service for shorter (1 week) or longer (4 week) blocks. Because residents are in the hospital to perform H&Ps and care for any acute medical problems, the hospitalist can often leave the hospital after rounding with the resident and completing charting. This results in the hospitalist typically being in the hospital for 5 – 8 hours per day. The attending hospitalists generally provide back-up coverage to the residents at night by home call, either individually for their particular inpatient service or on a group rotational night call basis. Unlike the traditional workweek model, the academic hospitalist model generally requires both weekday and weekend coverage in order to ensure continuity of patient care and continuity of resident education. Thus, full time is considered less than 46 weeks and may be anywhere from 6 months (182 days per year) to 8 months (243 days per year) of service time.

Step 4: Determine how a part-time FTE will be defined

Once there is agreement between the hospital and the hospitalists on what will constitute a full-time FTE, it then becomes easier to assign a percent effort to part-time physicians and to determine how those part-time hospitalists will be paid.

For compensation of hospitalists who work less than 100% FTE, the easy answer is to make their base pay the same percent as their FTE. However, that can pose more cost to the employer since there are certain employer-paid expenses that are fixed, regardless of whether a hospitalist is 100% or 70% FTE. For example, the employer’s portion of health insurance premiums and life insurance premiums is the same for part-time employees as it is for full-time employees. Similarly, the employer’s cost of recruitment and credentialing is the same whether the hospitalist is 100% or 70%. In other words, it costs the employer more to have 2 hospitalists who each work 50% FTE than to have 1 hospitalist who works 100% FTE. Most hospitals are willing to cover those higher costs in order to keep high-performing hospitalists who wants to work part-time, particularly if there is a reasonable chance that the hospitalist will eventually return to 100% FTE in the future. For example, an experienced hospitalist who is a parent who wants to cut back to 70% for a few years until his/her child is older.

One size does not fit all

From the above discussion, it is clear that no one single model is best for all hospitals. Each hospital (and each hospitalist group) must examine its own unique inpatient service coverage needs in order to select the definition of “full-time” that fits best. From the hospital standpoint, it is important to be flexible and work with the hospitalists to be sure that they are happy with the model. From the hospitalist standpoint, it is important to ensure that a model that optimizes their work-life balance does not interfere with optimal patient care.

Because hospital censuses ebb and flow from year to year and because new hospitalists are hired from year to year, it is important that every hospital re-examines how full-time is defined periodically to ensure that the agreed upon model best fits the dynamic nature of inpatient medicine.

December 10, 2022

Categories
Hospital Finances

How Do Hospitals Make New Equipment Purchases?

New technology is constantly improving healthcare delivery to patients. But new technology is expensive, whether it is a new MRI machine, a new surgical robot, or a new hip replacement implant. The processes that hospitals use to choose new equipment, supplies, and technology are complicated and hospitals can seem impenetrable to manufacturers new to the market.

Each hospital is different but in general, the more expensive an item, the more layers of approval are required. At the highest level of approval is the hospital board of trustees (or board of directors). These boards are largely comprised of non-physicians who bring outside expertise in business, finance, law, and community engagement. Decisions about new property purchases, new building construction, and major renovation will be made at the board level. These are decisions that involve long-term strategic planning for the hospital.

The next highest level of approval is the hospital CEO who generally makes decisions about major capital purchases, clinical program expansion, and moderate-sized renovation. Although the items approved by the CEO often require approval by the hospital board, most of the time, the board approval is merely a formality and the board generally accepts the recommendation of the CEO.

The next level of approval is the hospital administrative director. For medical centers with multiple hospital facilities, there may be separate administrative directors for each hospital, all reporting to the CEO. For smaller hospitals, the administrative director and the CEO are the same person. At this level, decisions are made about minor equipment purchases, minor renovation, and supply vendors.

The lowest level of approval is the individual unit managers. This can be the nurse manager of a patient care ward, the operating room manager, the emergency department manager, radiology manager, pharmacy manager, etc. These managers will typically make decisions about hiring and termination of individual staff and can make decisions about minor supply and equipment purchases, although such purchase decisions may require final approval by the hospital administrative director.

Academic hospitals can be even more complicated with the dean of the medical school and the department chairs having variable influence in the purchase decisions of the hospital. Some hospitals or medical centers will have a chief operating officer and/or a chief administrative officer in addition to a chief executive officer. Many hospitals will have a chief technology officer who can also influence purchase decisions. This variability in organizational structure from one hospital to another can result in vendors (and often the hospital’s physicians) being unsure who is ultimately making decisions.

Hospital medical directors generally do not have final approval authority for major purchases but they do have a great deal of influence in those purchases. Frequently, the clinical need for a new renovation, a new piece of equipment, or a new line of supplies will be initially identified by the physicians who then express those needs to the medical director who in turn makes recommendations to the administrative directors or to the CEO.

Understand the budget cycle

Every new purchase must fit somewhere into the hospital’s budget. Once again, every hospital is a bit different but budgeted purchases generally fall into one of three categories: major capital purchases, minor capital purchases, and annual discretionary spending. Each of these categories will appear on the hospital’s annual budget. Academic hospitals run on a budget calendar that is aligned with its university’s academic calendar, usually July through June. Non-academic hospitals more commonly run on a January through December business calendar.

For every hospital, there is an aspirational budget timeline and a reality budget timeline. Hospitals will aspire to start the budget process on the first day of the new business year and aspire to have final approval of the budget by the board of trustees or board of directors several months before the start of the next business year. The reality is that this rarely happens and the budgets often do not get final board approval until the last minute, and sometimes not until after the start of the next business year. A realistic budget timeline is as follows:

6-months before the start of the business year. The budget process generally begins about 6-months prior to the start of a new business year. For academic hospitals, this is January and for non-academic hospitals, this is July. At this time, the hospital will ask for budget item requests for the next year. Requests can come from a variety of people including unit managers, the medical director, or individual physicians. The requests will include the estimated cost of each item. Simultaneously, the hospital will begin estimating the amount of revenue that it anticipates in the next business year based on projected patient volumes.

4-months before the start of the business year. After all of the requests for new personnel positions, new equipment purchases, and space renovation have been received, the hospital administrative director must prioritize these requests. In some hospitals, the administrative director has unilateral prioritization power but more commonly, there will be a core group of hospital leaders who will prioritize the requests by consensus. Again, all hospitals are different but the core group may consist of the medical director, nursing director, hospital chief financial officer, assistant administrative director, etc.

3-months before the start of the business year. Once requests have been prioritized, the request list then goes to the hospital CEO. In larger health systems and medical centers with multiple hospital facilities, there may be multiple request lists submitted from each of the hospital locations. The CEO must then create a master prioritization list comprised of budget item requests from all of the various medical center locations. This is generally done by having a group of high-level leaders vote on each of the budget items. This group may consist of individual hospital administrative directors, the health system’s CEO & CFO, the health system’s chief administrative officer, the health system’s chief medical officer, and the health system’s chief nursing officer. It is generally the CEO’s and CFO’s responsibility to determine how much money can be allocated for capital purchases for the upcoming year. Once that amount is determined, the prioritized items are approved by their rank until the total budgeted amount for all capital purchases is reached.

2-months prior to the start of the business year. Once the proposed budget is created by the CEO and CFO, it is then submitted to the hospital board for final approval. Once approved, the hospital administrative directors and unit managers are empowered to proceed with purchasing contracts, utilizing the hospital’s purchasing department and supply chain department.

The hospital administrative directors are also given an amount that they can use for discretionary purchases during the upcoming business year. In general, the hospital board will not want to be bogged down having to approve every new colonoscope for the endoscopy suite and every new instrument tray for the operating room. Therefore, hospitals will create a “threshold amount” above which requires approval by the board on the annual budget and below which is left to the discretion of the hospital administrative directors and the unit managers. It is up to them to decide the prioritization for these items that are below the threshold amount. The value of the threshold can vary from hospital to hospital and from year to year. Some amount is always held out for emergency purposes, for example to replace a broken ultrasound machine in mid-year.

Vetting new equipment and technology

Every item on the hospital’s capital budget has to be justified. “Because I want one” is not reason enough to buy a new surgical robot for a surgeon or to buy a new gamma knife machine for a radiation oncologist. For some items, the vetting process takes place at a committee level. For example, the decision about whether to stock a new drug for inpatients is commonly made by the pharmacy and therapeutics committee. The decision about whether to change to a different brand of suture is commonly made by the operating room committee. Many hospitals will have a “new technology committee” or similar committee to weigh the cost and benefits of new equipment prior to proposing that item of equipment on the next year’s budget. The biomedical engineering department usually needs to sign-off on proposed purchases to be sure that the item is compatible with the infrastructure of the hospital. There are several factors that are considered in this vetting process.

  1. Does it do what they say it will do? One of the catch phrases in healthcare is “evidence-based medicine”. This generally means having publications in medical journals proving that a piece of equipment is safe and effective – preferably from a randomized, double-blind study.
  2. Does it improve patient care? Hospitals are in the business of improving the health of patients. Does the new equipment provide a more effective cure for disease? Reduce the risk of a patient dying? Relieve patient suffering?
  3. Will it save money? For example, if a new chemistry analyzer uses less reagents and requires less manpower to operate, it can reduce the clinical lab’s costs to perform chemistry tests. If the analyzer costs $600,000 but will lower operating expenses to perform tests by $700,000 every year, then it saves money.
  4. Will it bring in new income? For example, by purchasing a hyperbaric oxygen chamber, the hospital’s wound center would be able to begin billing for hyperbaric wound treatments. This represents a new billing opportunity for the hospital.
  5. Has a fair market analysis been performed? Radiation therapy machines are not reviewed by Consumer Reports or Wire-Cutter. It can be difficult for hospitals to know whether the price they are being quoted is fair. Sometimes, it takes calling leaders at other hospitals to find out what they paid for similar equipment.
  6. What is the cost of consumables? For example, does a new laboratory analyzer require that the lab switch to more expensive reagents? Or, does a new surgical robot require the robotic instrument arms to be replaced  with new arms after a certain number of uses? What about the cost of cleaning and storage? These are all hidden costs that can make a seemingly inexpensive piece of equipment be quite expensive in the long run.
  7. Does it improve patient safety. For example, a new point-of-care ultrasound in the intensive care unit may not bring any new revenue to the hospital but by using it, the physicians can perform central venous catheterizations with fewer complications. This can translate to better metrics on publicly reported safety measures and reduced costs of treating those complications.
  8. Does it improve patient experience? For example, if a program to purchase hand-held tablets for inpatients to use to access their medical record and to view health instruction videos improves patient satisfaction, that can result in higher scores on the HCAHPS survey.
  9. Does it improve staff satisfaction/safety? For example, if new security cameras in the parking lot make staff feel safer going to and from their cars at night, this can create greater satisfaction and improve the hospitals workplace-of-choice ratings. As a result, it can be easier for the hospital to attract new employees.
  10. Does it integrate with the hospital’s IT system? For example, a point-of-care ultrasound device that can directly upload ultrasound images into the hospital’s electronic medical record has greater value than one that requires images to be printed and then scanned into the EMR.
  11. Does it allow the hospital to provide a unique service? For example, if a no other hospital in the area has a surgical robot, then by purchasing one, the hospital can promote its robotic surgery program as an example of its use of cutting edge technology to differentiate it from other the other hospitals in advertising campaigns.
  12. Does it reduce length of stay? For example, if a new model of a mechanical ventilator allows patients with respiratory failure to be extubated 1 day faster than the previous ventilators, then patients will have a lower ICU length of stay, thus reducing the hospital’s cost to care for those patients.
  13. Does it improve operational efficiency? For example, purchasing “workstations on wheels” that nurses can take into different patient rooms to do charting (rather than charting at desktop workstations in a central charting area) can improve nursing efficiency.
  14. Does it replace personnel? For example, if a central video monitoring system eliminates the need for individual one-on-one sitters for confused or suicidal patients, then one staff member can do the work of several, thus reducing personnel costs.
  15. Does it avoid a disruption in patient care? For example, when remodeling our cardiac catheterization lab, we leased a mobile catheterization lab housed in a trailer that we placed in the hospital parking lot. This allowed us to continue to do cardiac catheterizations on inpatients during the months that the regular cath lab was closed down.
  16. Is the vendor reliable? For example, in the past, as the manufacturer provided good customer service? Timely installation? Prompt repairs?
  17. Are there additional downstream costs? For example, if a new cardiac MRI machine requires the hospital to recruit and hire a new technician trained in using the machine and hire a new cardiologist who has done a cardiology MRI fellowship, there can be considerable costs over and above the machine itself.
  18. What are the environmental specifications? For example, do the temperature and humidity thresholds require modifications of the HVAC systems in the area that the equipment will be located in? New alarm sensors? New electrical wiring? Higher water pressure? This is where the hospital’s clinical engineering department can be helpful.
  19. Is the manufacturer willing/able to guarantee profitability? For example, if a new software program for patient bed placement advertises that it can reduce waiting times in the emergency department for patients being admitted, is the company willing to reduce the price of the software if the promised waiting time goals are not met?
  20. Who pays for maintenance and repair? For example, colonoscopes frequently break and need to be repaired – will the manufacturer cover these repairs or does the hospital have to purchase a separate, expensive repair contract? Does the manufacturer supply loaner colonoscopes when a colonoscope is out for repairs?
  21. Does the manufacturer provide staff training? For example, a surgical robot requires not only specialized physician training but also specialized training for surgical assistants. A manufacturer that provides free training and certification courses or on-site training can save the hospital money in the long run.

In a disaster, the purchasing rules change

Budgets are fine when the future goes as planned but when the unexpected happens, the normal purchasing process is too laborious. Fires, floods, tornados, pandemics, and other natural or man-made disasters require immediate acquisition of equipment, supplies, and other resources. For example, when the COVID pandemic hit, our hospital had to acquire a mobile outdoor drive-up testing unit that was made from a converted transportation container and we also had to purchase new lab analyzers to perform hundreds of COVID tests each day. When a broken water pipe flooded our kitchen, we had to lease a mobile kitchen trailer that we parked by the loading dock to prepare inpatient meals. These were purchases that needed to be completed and installed within hours or days and that could not wait until the next month’s board of trustees meeting. Sometimes these expenses are eventually covered by insurance but frequently the hospital has to draw from its “days cash on hand” funds to cover costs. These funds are held as emergency resources to cover expenses that cannot be covered by the much smaller amount budgeted for more minor emergency expenses on the annual budget.

Decisions about these emergency purchases are generally made by the hospital executive director, CEO, or CFO. With no time to go through the usual channels, the decision is often based on recommendations from individual physicians or staff members. Frequently, hospitals will have a “disaster team” to manage the hospital’s response to a disaster. Equipment and technology purchase recommendations will often be channeled through the disaster team to the administrative leader who is authorized to make those purchases.

The Joint Commission requires hospitals to perform at least 2 emergency response exercises (disaster drills) every year. I have participated in dozens of of these exercises over the past 3 decades. Each disaster drill simulates a different scenario. We have had a simulated plane crash at the Columbus airport, a simulated bombing at the state fairgrounds, simulated  terrorist mass shootings, a simulated tornado striking downtown, and simulated communicable disease outbreaks. In an ironic twist of fate, we had a simulated “super-flu” outbreak for an emergency response exercise 2 years before the COVID pandemic – it is eery just how closely the simulation foreshadowed the actual pandemic. During these simulations, the disaster teams ask themselves questions such as: what would we do if we needed… a portable morgue, 30 additional mechanical ventilators, 50 additional ICU rooms, or 5 more operating rooms? From these disaster drills, hospitals compose lists of equipment and vendors so that in the event of a true disaster situation, the hospital already knows who to call.

What can the hospital do when it cannot afford to purchase a new item?

Advances in medicine and technology happen at break-neck speed. Just like personal computers, automobiles, and cell phones, next year’s medical device models promise that they can do more and do better than last year’s models, whether that device is a CT scanner, a bronchoscope, a surgical robot, or a telemetry monitor. When the hospital decides it really needs one of these items but cannot fit it into next year’s budget, there are options.

  1. Negotiate a better price. Member-based supply chain analytic organizations can provide data on equipment pricing and can allow for group purchasing. For example, Vizient, Inc. is an organization whose members include 97% of academic medical centers and more than half of all U.S. acute care hospitals. Vizient member hospitals can benefit by purchasing equipment and supplies from vendors using Vizient-negotiated prices.
  2. Rent it. There are a number of ways to acquire the use of equipment without buying it outright. There are lease-by-month/year contracts, lease-to-own contracts, and pay-per-use contracts. An advantage of these options is that the annual cost of the equipment will then often fall below the annual budget “threshold amount” and thus give the hospital administrative director latitude to acquire the equipment without having to go through higher authorities.
  3. Buy used. Many times refurbished used equipment can adequately fill the clinical needs of the hospital. This can be especially true if the equipment will be only intermittently used.
  4. Buy last year’s model. When the next year’s cars come out, car dealers discount the previous year’s models to clear their lots. Medical equipment manufacturers do the same thing. Frequently, the new model of a piece of equipment will have features that are not essential to the clinical needs of the  hospital and the previous year’s model will suffice at a lower cost.
  5. Depreciate accurately. Knowing the life expectancy of a piece of equipment is essential in determining its true cost. For example, a CT scanner that costs $1.2 million that can be depreciated over 10 years is less expensive in the long run than  CT scanner that costs $1 million but is depreciated over 5 years.
  6. Get a demonstration unit. As a medical director, I was frequently asked by a physician to buy a particular piece of equipment. If that physician is particularly eloquent, particularly vocal, or particularly influential, then I was not always sure if the hospital really needed that piece of equipment. That concern can often be settled by arranging for the equipment to be brought in for a demonstration period by the vendor to determine if the equipment would really be used as much as was said. This can avoid making costly purchases of devices that go unused. Several years ago, one of the physician groups at our hospital insisted that they HAD TO HAVE a $500,000 piece of equipment in order to provide standard of care services. They gave me projections on the annual number of procedures that they would use it for and how many years it would take the hospital to recoup the investment. I successfully lobbied senior leadership and the hospital purchased the equipment. Four years later, that physician group had not used the equipment a single time and I’ve regretted that purchase ever since.

Hospital purchases are unique

Major equipment purchases made by hospitals are different from purchases made by other organizations, companies, or individuals. The value of a piece of equipment is judged differently than in any other industry. Benefits in patient length of stay, hospital throughput, and patient satisfaction from equipment or technology can often be just as valuable as increased revenue from equipment or technology. Moreover, physicians have considerably more clout than rank and file employees in other organizations or companies. Knowing how to define the true value of equipment or technology is the key to making wise and informed purchases.

November 11, 2022