Hospitals and health systems are beginning to look closely at look-alike health centers, a relatively obscure provider type that can offer financial and strategic benefits while simultaneously improving care for underserved communities. Here’s our Guide to the ins and outs and pros and cons of look-alike status.
Federally Qualified Health Centers (FQHCs) are a vital part of the US healthcare system, offering primary care to more than 30 million people. With roots in the Civil Rights movement, some 1,400 nonprofit FQHCs are focused on providing patient-governed, culturally competent care for underserved populations. According to the Health Resources & Services Administration, FQHCs are the primary care provider for one in three Americans living in poverty and one in five rural residents.
Though most health centers are small (and probably struggling), some have grown into regional powerhouses. Sun River Health, the largest FQHC on the East Coast, has more than 40 clinics stretching from Long Island to the Hudson Valley. Based in tiny Peekskill, NY, Sun River has more than 2,200 employees and $373 million in revenue.
Historically, most FQHCs were started by physicians, churches, community activists, or public agencies. Recently, however, hospitals have been getting into the act by opening “look-alike” clinics, or LALs, that offer at least three major advantages:
LALs are still very much an emerging phenomenon. Just over 100 look-alikes are operating nationwide, and fewer than half were started by hospitals. Still, as a growing financial crisis threatens to overwhelm even the largest and strongest of health systems, we believe the LAL strategy is worth a closer look for some hospitals.
Independence Is a Must
First things first: A Federally Qualified Health Center – look-alike or otherwise – bears almost no resemblance to the traditional model of hospital-owned primary care.
By law, all FQHCs are self-governing nonprofit organizations with an independent board of directors. The board can range in size from 9 to 25 members, and at least 51% of directors must be patients of the clinic. HRSA defines these patient board members as “individuals who are served by the health center in terms of demographic factors, such as race, ethnicity, and gender.”
Of the remaining board members, no more than half can earn their living in healthcare. That rule prevents hospitals from spinning off a look-alike and stuffing the non-patient board seats with employees who vote as they are told. If you do the math, 25% of board seats is about the most that any hospital can expect to reliably control.
This type of arms-length relationship clearly goes against the trend of health systems seeking tighter alignment with primary care providers. Hospitals may be able to influence an LAL through partnership options that range from informal referral agreements to formal written contracts, but outright control? That’s out of the question.
Alike, but Different
While we’re on the subject of negatives, here are two more big ones: Look-alikes are a kind of health center “lite,” so they don’t qualify for malpractice coverage under the Federal Tort Claims Act, nor do they receive federal funding under Section 330 of the Public Health Service Act.
That’s a major disadvantage: In 2022, roughly 1,400 FQHCs shared $5.7 billion in so-called 330 Grants, while roughly 100 LALs received … nothing.
By some estimates, federal funding makes up 18% of FQHC revenue. Without access to those 330 Grants, LALs are operating with a significant financial handicap, which begs the question: Why would any health system even consider the look-alike model if it comes with all the regulations of a Federally Qualified Health Center, but only some of the benefits?
The answer goes back to federal funding. FQHCs are popular with lawmakers on both sides of the aisle, but funding isn’t lavish by Washington standards, nor is it certain. (Extensions and re-authorizations get voted on every two to three years.) Existing FQHCs are first in line for funding, so anyone hoping to start a new health center has to wait until Congress appropriates money for expansion sites, known as New Access Points.
As of this writing (November 2022), it has been more than three years since the last NAP competition closed on April 11, 2019, per HRSA’s grant funding search tool. If you’re a hospital hoping to start a Federally Qualified Health Center, that’s a long time to wait for an uncertain outcome, since competition for limited funding is likely to be intense.
The alternative is simply to forego the federal grants and malpractice coverage by launching a look-alike health center on your own schedule. “Applying for Look-Alike status is an option even when there are no funding opportunities for new access points,” notes the National Association of Community Health Centers (NACHC).
The look-alike model means that nonprofit hospitals can start their own health centers at any time – but should they? There’s no easy answer to that question, and hospital leaders will need to weigh mission, financial, strategic, and legal considerations that are unique to each market. The legal issues are beyond our expertise, but we do have some thoughts on the other three categories.
Mission Considerations for Look-Alike Health Centers
Kaiser Health News recently published an investigation of hospital look-alike clinics, and the tone was skeptical at best, suggesting a cynical effort to unload unprofitable patients. Having worked with hundreds of hospitals over the past three decades, we don’t think that’s fair. In our experience, the vast majority of hospital leaders are genuinely motivated to offer the best possible care to every patient, every time.
Unfortunately, our healthcare system doesn’t make it easy.
Uninsured and under-insured patients often have no physician relationship outside the hospital emergency room, which all but guarantees episodic, uncoordinated care. EDs are the worst possible “first stop” in our healthcare system: They aren’t equipped to offer follow-up or preventive counseling; they can’t serve as a patient-centered medical home; and they can’t address the social drivers of health in a meaningful way.
According to the most recent figures from NACHC, of the 30 million patients using a community health center:
Federal hospital reimbursement rates simply aren’t designed with those patients in mind.
The look-alike model solves that problem with a completely different reimbursement structure that encourages more frequent, more rational primary care. Yes, that helps the hospital bottom line by keeping patients out of the ER, but there’s nothing cynical about moving patients to a setting that’s specifically designed to keep them well and improve health outcomes.
We believe that any evaluation of the look-alike model has to start with mission. Look at your last three or four CHNAs and ask if you’re making progress on your community health goals. Look at your payer mix, your charity care ratios, and your ER usage – not with money in mind, but rather mission. If you’re simply applying Band-Aids over and over again for the same patients, then maybe you can serve them better through a health center than through the hospital.
Financial Considerations for Look-Alike Health Centers
As we noted above, 6 in 10 health center patients are covered by public insurance, so any hospital considering the look-alike model will want to understand how Medicare and Medicaid handle reimbursement.
We’ll start with Medicare, which offers a single prospective payment for each patient encounter, rather than reimbursing on a fee-for-service basis. For 2022, the national PPS rate is $180.16, and the rate is increased each year by the market basket. The PPS rate is adjusted for geography, but the national benchmark is useful for high-level financial modeling. All advanced practitioners (such as PAs or NPs) are paid at the same rate, and visits may take place in the clinic, in the patient’s home, or in a skilled nursing facility.
Many hospitals struggle with unprofitable physician practices, especially when a significant segment of the patient population is covered by Medicare. Older patients often show up with multiple aches and pains that could have a number of contributing causes. Diagnosis and treatment can be a time-consuming process that isn’t particularly remunerative for the care team.
For example, take the most common Evaluation & Management (E/M) appointments, when an existing patient presents with symptoms that require varying levels of history, examination, and medical decision-making. Per the CMS Physician Fee Schedule, here is what Medicare pays for E/M services in a non-hospital setting, without adjusting for locality:
Clearly, the most common Evaluation & Management appointments are far more lucrative in the health center setting versus a traditional physician practice. For hospitals that struggle with Medicare’s reimbursement policies, moving patients out of a traditional practice and into a look-alike clinic may help stop the financial bleeding.
Health centers also benefit financially from a reimbursement structure that rewards ongoing interaction with patients. Medicare not only waives the traditional 20% patient co-pay for preventive services such as wellness visits or initial physical exams but also boosts reimbursement by 34% for those services. So, an annual wellness visit for an established patient (G0439) is reimbursed at $241.41 for a physician working in a health clinic, compared to $132.54 in a traditional doctor’s office.
As for Medicaid, reimbursement for a new look-alike health center is harder to model because rates are set at the state level (with some federal guardrails) – but it’s also the most important piece of the puzzle. According to HRSA, Medicaid charges accounted for about 54% of net revenue at LAL health centers in 2021.
Similar to Medicare, Medicaid reimburses health centers prospectively for each encounter rather than for individual services. PPS base rates are established by two years of cost reports, which means fees can vary widely depending on each health center’s capacity and scope of services. In North Carolina, for instance, 45 different FQHCs receive Medicaid encounter fees ranging from $126.03 to $353.47 (ignoring a major outlier of $633.47 for the Cherokee Indian Health Authority).
Financial modeling may seem impossible due to the need for two years of cost reports, but there is another way. Rather than historical data, new health centers may have their rates set at “the average of other clinics in the same or adjacent areas,” per MacPAC. That makes it fairly easy to judge the financial viability of a look-alike clinic – and calculate the potential cost savings for an existing hospital.
Strategic Considerations for Look-Alike Health Centers
The financial analysis we outlined above is a kind of snapshot: You look at today’s data around payer mix, patient revenue, and so forth, then ask what would happen to those numbers under the reimbursement rules for a look-alike.
Strategic considerations are more like a movie. You’re looking ahead to the horizon and scanning all around you to monitor a changing environment. You’re thinking about the interplay among all the pieces of the healthcare system – and LAL health centers are one of the pieces that almost always get overlooked.
Every market will have its own unique challenges and opportunities, but here are five strategic questions to get you started:
- Do you have unused space? Shrinking demand for inpatient services has left many hospitals with excess building capacity that is expensive to maintain. Leasing that space to a look-alike clinic can generate revenue while providing convenient access to patients who need additional services such as pharmacy or labs.
- Do you struggle with recruitment? Look-alike health centers automatically qualify for the National Health Service Corps, which helps to repay student loans for providers who work in Health Professional Shortage Areas.
- Do you have excess administrative capacity? Look-alikes must be fully independent from a board governance standpoint, but contractual relationships seem to be wide open. By law, only the health center director needs to be directly employed; all other functions can be contracted out. We found one LAL that pays nearly $4.8 million annually to its erstwhile corporate parent for “system support services” including executive, legal and risk management, compliance and governance, human resources, and finance.
- Do you want to mitigate the risk of shifting to population health? Look-alike clinics can be jointly launched by hospitals and public health departments, allowing both parties to bring their unique strengths to the relationship. With both our public and private clients, we’ve seen a widespread desire for greater cooperation – and LALs might offer the perfect structure for a joint venture with real impact.
- Do you have for-profit competition? If any of these strategic considerations seem attractive in your case, remember that they’re not an option for for-profit health systems. Look-alike status is open only to public and nonprofit organizations, so you may have at least one competitive option that the HCAs and Tenets of the world do not have.
Conclusion
We believe that look-alike health centers could merit a much closer look by nonprofit hospitals (and public health departments, as well). The potential strategic and financial benefits are too great to ignore, but we want to circle back to the most important consideration of all: mission.
The health center movement seeks to provide a patient-centered medical home for people who typically lack access to care, according to the National Association of Community Health Centers. That makes them a key part of our healthcare system and a unique tool for controlling costs.
Every vision of healthcare transformation, including our own Healthytown model, rests on the foundation of better, more accessible primary care. Health centers are uniquely incentivized to deliver exactly that, thanks to higher reimbursement rates for every new patient and for annual wellness visits. Hospitals don’t have the same financial incentives, unfortunately. There are penalties for poor outcomes and rewards for shared risk, but nothing as straightforward as higher payments for preventive care.
The option of launching a look-alike health center is hardly a quick fix for struggling hospitals, but it may be worth a closer look. A simple first step would be scanning your service area for existing FQHCs. Because those health centers have the advantage of Section 330 Grants, you wouldn’t want to establish a competing look-alike – though some level of strategic partnership could achieve many of the same benefits.
