Publications & Articles

The Great Hospital Alignment Gamble

In the mid 1990s, we experienced a very similar fad. Back then, it was called "PHO" which stood for "Physician – Hospital Organizations". Hospitals wanted to secure and expand their referring physician base (i.e. salesmen) while siphoning off management fees. The concept presented was that physicians who joined up with their affiliated hospitals (where they had attending privileges) could get better incomes out of the newly-minted managed care insurance companies because of the larger economic presence provided under the umbrella of the hospital organizations. The doctors could still practice independently, but had to have most, if not or all, of their managed care contracts and resulting payments, processed through these PHOs. Many physicians didn´t want to face HMOs on their own, nor did they understand how to negotiate with them, so they tentatively joined with their hospital PHO. After a few minor successes, these PHOs were getting set to really flex their economic muscle, when something unexpected happened.

The insurance carriers swiftly bypassed these PHO groups and successfully lobbied state politicians to pass laws that essentially considered any provider organization with 35% or more market share would be in violation of the law if they attempted to negotiate for higher fees.


Suddenly, hospital promises of high income security through economic strength were gone and their PHO organizations became nothing more than over-priced secretarial services filling out managed care applications. How do I know? My company was called in to sweep up the mess from a large network of hospitals which lost about $23 Million in their PHO mis-adventure. We completed their credential applications, acquired provider signatures and correctly filed forms with each carrier as they had promised under contract. Then all paperwork was properly distributed to each physician and properly organized in file drawers (Scanning wasn´t done much back then).

Once the physicians learned that they would be no better off with their hospital PHO than on their own, they dumped the PHOs and went on their own.

Will history repeat itself?

Let´s look at the elements that make up current hospital "Alignments" and you can decide for yourself. Unlike the last time, the hospitals have learned that they need to have greater control over independently minded physicians (Who like to think on their own by asking questions about reality such as "If revenues don´t add up – how will you be able to continue to pay me at such a high level?"). So this time around, the hospitals are trying to lock-in physicians as long-term employees with 3, 5, 10 and 15 year employment contracts often termed, "Alignment Agreements". Hospital legal eagles have buried the fine print, actually spaced out over several contractual sections, so the hospital can still modify or just wiggle out of their deal, if they need to. And they WILL need to.

Also, unlike the last time, when the hospitals failed to lock up the primary care providers, they have done a much better job stroking the PCPs and getting them on board. This gives the hospitals greater ability to direct traffic to their Alignment-based services. Also, unlike the last time, the hospitals aren´t getting the innovative, early adopters – the Go-Getter physicians who want to be ahead of the curve, but instead are signing up many older docs who are tired of insurance billing games or who plan on retiring in a few years. So the word on the street is that if you want to retire early and can deal with oppressive, buffoonish hospital administrators, go ahead and sign your life away. At least you won´t have to worry about billing and computers and EHR systems, and increasing malpractice costs, and . . . etc. Or, will you?

You will.

Legal weasel man who wrote the Hospital´s contracts made sure that they can pass those costs on to their "Employees" and the evidence is just starting to demonstrate this reality. In August 2012, we´re already hearing about checks going out late and of 20% pay reduction rumors circulating through many leading Alignment organizations. As money problems occur, those costs have to be passed on. Part of the problem centers on how deals are presented to physicians. To fully understand this, you need to understand how RVUs, Work RVUs and gamesmanship with numbers apply to Alignment offers.

Most physicians who are approached by hospital "Alignment" organizations are being promised incomes of about $50 (and in a few cases $60 or more) per Work Relative Value Unit (W-RVU). The "W-RVU" is a CMS number that only measures the work component of any given CPT code while leaving out other components such as malpractice insurance and practice overhead costs. This is NOT the same as $50 per RVU which includes all RVU components and is how 99% of all doctors measure their productivity. To make this clear, let´s do some math, but first some background.

RVU Primer:
RBRVS or Resource Based Relative Value Scale was created at Harvard University in 1985 and implemented by Medicare on January 1, 1992 as a fee modeling system to replace their archaic "Prevailing Fee Schedule" which was a financial disaster (for Medicare). The idea was to convert each CPT code into a number (Relative Value Unit) that could be multiplied by a standard "Conversion factor" to arrive at a dollar amount that would be paid for each CPT code. So changing prices each year would take just changing this one standard "Conversion factor" instead of reprogramming their computers for thousands of CPT codes.

So to get an RBRVS equation simplification, we would write it as:

CPT Code: 12345 with an RVU of 2 x Conversion Factor of $34.00 = $68.00

And next year, if the conversion factor changed to $35.00, the Medicare payment would go to $70.00.

Not a bad idea. But like all things government, they had to keep messing with it.

Today, most people think of RVUs which are the UNITS per CPT code within the framework of RBRVS. These RVUs have 3 parts plus a geographic adjustment multiplier for differences in cost-of-living across America as follows:

  • 1. Work RVU (Typically about 52% of the total RVU)
  • 2. Practice Expense or PE RVU (Typically about 44% of the total RVU)
  • 3. Malpractice RVU (Typically about 4% of total RVU).

The actual formula looks more like this:

Conv Factor x ((W-RVU+PE-RVU+M-RVU) x Geo Adjustmt) = $ Payment Allowed

With the New Jersey geographic adjustment factored in for fiscal 2012, a mid-level office visit, CPT: 99213, would be priced as:

Practice Exp
Payment (Rounded)
$34.0376 x (1.0127 + 0.4981 + 0.0732) = $53.92

So, if the typical Work RVU is worth about 52% of each CPT code´s payment, the Practice Expense RVU is worth about 44% and the Malpractice RVU is worth about 4% and we assume a Total RVU of 1.000, then we can express:

Practice Exp
Payment (Rounded)
$34.0376 x (0.5200 + 0.4400 + 0.0400) = $34.0376
$34.0376 x 100% = $34.0376

From here on, let´s just round up $34.0376 to $34.04 (Which looks more like money)

How Hospitals Present "Alignment" Payments: Now, back to hospital Alignment games with numbers. Remember, the hospitals offering about $50 per Work RVU as an enticement to sign up physicians? And since many doctors are NOT thinking of each component part that makes up total RVUs, but are remembering that Medicare´s current conversion rate is about $34.04 for total RVUs, so the "Deal" from the hospital looks pretty sweet. Yes?

No! No way. Here´s why:

The basis is not the same. We need to re-calculate as follows:

$34.04 / 52% = $65.46

Conv Factor divided by 52% W-RVU per CPT Code = $65.46

Just in case you didn´t get that, let me put it another way. For a hypothetical CPT Code worth a WORK RVU equal to 1 the hospital would have to pay the provider $65.46 to equal the same value as $34.04 per 1 TOTAL RVU.

Still don´t get this hospital Rip-off?

Try this:

$34.04 x ( 100% / 52%) = $65.46

Conv Factor multiplied by the quantity of 100% divided by 52% = $65.46

Think: if you were being paid $34.04 for a service with 100% of it´s component parts and you are still being paid $34.04 for the same service but now only matching it up with 52% of it´s parts (W-RVU), what would 100% of that W-RVU part be worth? To get this answer, you must DIVIDE 100% by 52% = 192% then Multiply that 192% by $34.04 = $65.46.

Because the hospitals are playing an apples-and-oranges games with RVU denominators, they can offer the appearance of a large incentive number, say $50 - $55 per WORK RVU when in fact they are PAYING LESS THAN MEDICARE and STILL MAKING $10 to $15 per CPT Service!

I´ve even heard of some slimy hospital hucksters trying to convince physicians that Work RVUs should only be worth about 52% of $34.04 or $17.70 because they are just doing simple multiplication of 52% x $34.04 = $17.70 which is WRONG! This is worse than all previous hospital inspired Jedi Mind Tricks!

If you are still having math or logic issues, with the above statement, then call my office because I know my company can make you more money. But trust me, my calculations are correct.

That being said, how can we figure what percentage of Medicare rates hospitals are paying if they exercise their fine print legalese and cut their Work RVU pay-outs to $40.00 as they have done in North NJ?

Here´s the calculation:

$40.00 x 52% Hosp $ Paymt per W-RVU multiplied by 52% Percent
——————— =61% divided by equals of MC
$34.04 Current Medicare Conversion Factor Paid

So, the only way a physician can "Do better" financially by Aligning with his or her respective hospital, is to get as close to $65.46 per Work RVU as possible. This equates to Medicare rates. If the physician already has negotiated contracts with commercial insurance carriers that pay between 100% to 150% of Medicare fees, the W-RVU figure would have to go up considerably, say to $75.00 - $85.00, just to break even.

Please remember that the hospital is still picking up the Part A money that they wouldn´t have normally received. Also, most hospitals are self-insuring and have to pay for their space and billing operations whether it´s in use or not, and you can see that their expenses do not rise very much for employing physicians in the "Alignment" model.

The reality is that we wouldn´t be discussing this issue, IF insurance carriers had not dramatically increased in-network deductibles which they felt they had to do to hoard money in anticipation of President Obama´s Affordable Care Act. This increase in deductibles severely punishes patients who receive hospital services. So to attract more patients, hospitals turned toward an idea presently as part of the Affordable Care Act (Obamacare) which is "Accountable Care Organizations" (ACOs) which aims at bringing savings through efficiencies with Hospitals and Physicians. The hospitals just took this ACO concept a step further and figured they could squeeze money out of unsuspecting physicians while securing their flow of patients.

Here´s the Alignment Gamble: Once a physician signs up with their Aligned Hospital, they may gain some "Security", but they lose their independence and business support system. No more trained people who are accountable to them, no more familiar and working computer systems, office space, phone systems, nor the ability to write-off expenses, etc. Yes, they lose the costs that go with maintaining a practice, but the continuing costs are much smaller than starting over from scratch. And, if an Aligned physician wants to leave their hospital, it may be next to impossible to get a divorce. Also, once the economy recovers, there will be no increase in pay to Aligned physicians.

On the other hand, resisting hospital pressures to join-up makes some physicians feel like outcasts. And as insurance companies have paid less each year, Alignment offers may look appealing, at least until you really look at the figures. I wager that most physicians would not like to work for 77% of Medicare (Based on $50 per Work RVU deal). But keeping one´s independence, the ability to write-off expenses, having accountable staff and the opportunity to earn more if you so desire, makes sense especially when the economy improves.

Political Predictions: I predict that if President Obama is re-elected, that Alignment schemes will continue for several years, but ultimately fail when Medicare cuts kick in. There won´t be enough money to make the system work. Moreover, there are increasing numbers of news articles that question the ethical and legal appropriateness of hospitals charging patients (and their insurance carriers) higher global fees under the Alignment model. These fees can be 30 – 50% or more for the same procedures that are presently performed in the physicians´ office (prior to Alignment). Legal investigations of these "Alignments" have already begun in California. If deemed "illegal", there could be grave financial implications for all involved. Furthermore, if broken up, physicians will face extremely difficult times reestablishing themselves with insurance carriers, new billing profiles, fee rates, plus everything needed to set-up their practices again.

Should Mitt Romney win the Whitehouse and gain enough traction in the Senate to repeal Obamacare, this game ends sooner, but with a better ending because insurance carriers, who have been stockpiling money in anticipation of Obamacare, will have a lot more money to pay traditional and HMO health claims, which makes this Alignment game unnecessary.

Since US Politics weighs heavily in how this plays out, I can only surmise that just like ill-fated PHOs of the past, Alignment Organizations will also have their demise come from an unexpected set of conditions (i.e. legal, political or economic changes). And eventually, physicians will begin to realize that hollow hospital promises of high Work RVU Payments are nothing more than a shell game.

If you decide to play the game, at least now you know more about the dealer and the true figures involved.

Bill Wendt
Castlerock Management Corp