6/2/2008

Article published June 2, 2008, Modern Healthcare

By: Vince Galloro

Few would question the financial importance of recruiting physicians to rural hospitals. David Bachman is trying to put a dollar figure on that importance, while accounting regulations are making clear what the cost is, too.

Bachman is a senior equity analyst for Longbow Research, an independent research firm based, appropriately, in Independence, Ohio. Bachman recently published a report on the financial impact of physician recruiting on rural for-profit chain LifePoint Hospitals, Brentwood, Tenn. Bachman estimates that newly recruited physicians ramp up to a normal annual volume and revenue levels—called their expected “run rate”—in their third year after moving. Working with figures reported publicly by investor-owned hospital companies and private estimates made by physician recruiting firms, Bachman estimates that these physicians bring in, on average, at least $1 million a year in revenue.

“Consider $1 million in revenue the normal run rate, assuming about a 15%-16% (operating) margin—which includes the impact of higher recruiting costs—that translates into $150,000 per physician in (operating) earnings,” Bachman says in an interview.

In the smaller markets that feature LifePoint hospitals, Bachman adds, those physicians could be even more critical, perhaps $1.5 million in revenue or more annually.

Keeping physicians

Physician recruiting and the opposite side of the coin, physician retention, then, are the most vital indicators for the financial health of companies such as LifePoint, Bachman says (See chart). Physicians are in short supply in general, as an aging population increases demand just as many physicians who are themselves baby boomers are retiring. Exacerbating the problem is an increasing unwillingness of the physicians who are just now establishing themselves to work the 100-hour weeks that their predecessors readily put in, Bachman says. “You may have to attract three referring physicians for every two of the old-style workaholic-type physicians,” he says.

It’s especially tough to find and keep physicians in the smallest markets, as physicians prefer the camaraderie of a larger medical staff, as well as the amenities in larger communities, Bachman says. A company such as Community Health Systems, Franklin, Tenn., could be better placed to recruit and retain physicians with its hospitals located in small cities and on the far edges of major metropolitan areas, he adds.

Relocation benefits

LifePoint was one of the beneficiaries of an accounting change that affected the expensing of physician income guarantees for some providers. In November 2005, the staff of the Financial Accounting Standards Board issued an opinion that clarified the accounting for physician income guarantees, known as minimum revenue guarantees in accounting lingo. The guarantees, which are often a part of relocation agreements, should become a liability as soon as the contract is entered into, the staff opinion said. That allows this expense to be amortized over the length of the contract, rather than in the current fiscal year in which they were paid out, as some companies, such as LifePoint, were doing prior to the ruling. For LifePoint, most of those contracts were for five years, while the income guarantees were mostly paid out in the first year of the contracts, the company reported in a securities filing. In 2006, this change increased its pre-tax income from continuing operations by $5.3 million in 2006, according to the filing.

John Hawryluk, a partner in the healthcare practice of KPMG International, says that the change has had a financial impact for some providers, but it is a small one. The importance of the change is more in how it forces management to estimate the potential cost of relocation guarantees upfront and to disclose that potential to investors, Hawryluk says. Physician relocations are driven by operational need subject to the extraordinarily high cost of entering into contracts that don’t comply with a welter of regulations, including the Medicare anti-kickback statute, the Stark regulations and, for not-for-profits, the tax law against private inurement, Hawryluk adds.

The accounting change applies to not-for-profits as well as for-profits, says Michael Shamblin, an audit shareholder of accounting firm Pershing Yoakley & Associates. Shamblin works with tax-exempt providers. The opinion is in line with many other accounting pronouncements since the accounting scandals in the early part of this decade, Shamblin says. “For some not-for-profit entities, this was essentially an off-balance-sheet transaction. I think this standard says that if you’re going to guarantee that, you have to record that on the books as a liability,” Shamblin says. “I think it took an area where there were some inconsistencies and tightened it up.”

Source: Modern Healthcare, June 2008