Hospital Hostages: Employed Medical Groups and Why Their Captors Should Be Worried

Kirat Kharode is the founder & CEO of Healtor— a technology company building a nationwide marketplace for medical and wellness office timesharing.

In hospitals across the United States, the financials of Captive professional corporation(s) or Captive PCs (sometimes referred to as ‘employed’ or Foundation medical groups) are often an awkward subject. According to Medscape.com, “a Captive PC is a mechanism for acquiring and managing practices. Although controlled by the hospital, it is frequently owned by a single doctor who is a hospital employee.”

I don’t know about all of you, but whenever I hear of a Captive I’m picturing a person with a blindfold over their eyes being held at ransom.

Some of the characteristics commonly attributed to captives with Stockholm Syndrome are:

• Helplessness
• Hopelessness
• Aggression
• Depression
• Dependence on captor

Perhaps it’s not a coincidence that physician burnout and physician employment in the United States are both at the highest levels in recorded history.

Often, medical group administrators are treated with far less importance in the management org / power structure of health system boardrooms than their hospital executive colleagues are.

These medical group executives can operationally oversee hundreds of physician practices connected to the hospital through their Captive organization. I’d argue that being a medical group administrator can feel like a thankless job because of these dynamics. Hospital executives (Captor) are squeezing you for increased revenue and ribbing you to cut losses. You’re constantly responding to challenges physicians face in their practice, from higher pay to parking issues (and everything in between).

With losses incurred per Captive provider averaging almost $200,000 per year, the overall losses of large hospital-controlled physician groups can be in the neighborhood of several hundreds of millions dollars annually or more. Conversely, the downstream revenue generated by these employed doctors can result in their “Captor” hospitals being in the neighborhood of several billion dollars of revenue annually. It’s the worst kept secret in health care but shhhh — we’re not supposed to talk about that.

We’re regularly sharing insights on healthcare real estate over on LinkedIn. Follow Healtor here.

The game between Captor and Captive plays out something like this. Hospital system executives sheepishly (I say that with love) pass two sheets of paper around a table. The first: the Captive medical group’s (or an employed physician’s) financial and productivity metrics. The second is the correlated hospital downstream impact.

‘Always keep them on separate sheets of paper’ seems to be the credo that hospital and Captive medical group executives believe will keep them compliant with Stark Law/ False Claims Act, and out of the proverbial orange jumpsuit (because hey, no one looks good in an orange jumpsuit). In private, like a true captive with Stockholm Syndrome, Captive physician practice administrators will quip that these losses are the “cost of doing business.” The productivity measures, which many Captive medical groups and their Captors use to track a physician’s productivity, are based on codes entered corresponding to patient visits. These are weighted based on a dollar amount per Work Relative Value Unit (wRVU), which is determined based on regional metrics put together by trade associations like the Medical Group Management Association (MGMA). An employed plastic surgeon, for example, may be paid $60 per wRVU versus a primary care doctor who is paid $40 per wRVU in the same region, since wRVU rates are specialty specific.

Ironically, primary care doctors are considered to be “high-value physicians” by Medicare, the largest payer in the country, because they are the gatekeepers to the entire healthcare ecosystem. United Health Group recently released research that high-value physicians can save the United States Medicare system $286 Billion dollars between 2020 and 2029. In any world where value-based reimbursement will succeed — and there is a true shift in reimbursement from a system based on volume (and being paid on fee-for service basis) to a risk/ value- based system — high-value providers like primary care doctors need to be aligned much more appropriately with the goals of the ecosystem.

A new round of decisions in the United States Third and Fourth Circuit courts should cause angina to hospital system executives who oversee Captive medical groups. The first case U.S. ex rel. Drakeford v. Tuomey in the Fourth Circuit, was a notable Stark Law/ False Claims Act case which highlighted major concerns for hospitals with employed doctors on productivity based compensation models, finding that they could very well trigger Stark law implications.

In the second case, more recently, U.S. ex rel. J. William Bookwalter, III, M.D. et al. v. UPMC et al., the Third Circuit court perpetuated Tuomey’s controversial volume or Value standard. Essentially (and this is the non-legal synopsis) that the wRVU-based compensation arrangement of employed neurosurgeons of the Captive of the University of Pittsburgh Medical Center, may plausibly factor the “volume or value of referrals” to UPMC hospitals for inpatient services/ neurosurgeries.

The result was that the plaintiff can in fact proceed towards discovery. The broader implication is that hospitals with Captive medical groups can no longer rest assured that employing physicians won’t implicate Stark Law’s ‘volume or value prong’ related to indirect compensation arrangements. While HHS is in the process of finalizing a monumental modernization of Stark law, there has been no suggestion that productivity-based compensation will be outlawed. The decision to uphold some of the construction of the Fourth Circuit’s logic in Tuomey could be an indicator that more circuits will follow the lead and reel hospital Captors in.

We’re regularly sharing insights on healthcare real estate over on LinkedIn. Follow Healtor here.

At the heart of this issue is a basic question: Would any other prudent business organization, not operating as a Captive, sustain hundreds of millions of dollars in losses for the pure benefit of another organization?

At Healtor, we’re working with several academic medical centers that are ahead of the curve to automate their medical office timesharing management and compliance. Even those timeshare arrangements that are between the Captive medical group and their own hospitals could soon be the subject of a whistleblower qui tam lawsuit alleging violations of Stark Law.

Additionally, as a non-referral source, our principal motive is to make it extremely cost effective for high-value providers to enter shared medical office spaces throughout the country, especially where there are physician shortages and high concentrations of Medicare patients.

At Healtor, we see ourselves as uniquely positioned to be a key strategic technology for a market network consisting of hospital systems, high-value providers, and regional Medicare Advantage and commercial plans.

The recent circuit court decisions should certainly be treated seriously and all Captor hospitals in similar situations are right to be prepared for what’s coming down the pipe.

Kirat Kharode is the founder & CEO of Healtor — a technology company building a nationwide marketplace for medical and wellness office timesharing.