Understanding Physician
Hospital Affiliations
a presentation for
The Louisiana State Bar Health Law Section
Sarah Gorham Hunter, Esq.
SaHunter@Ochsner.org
(504)842-4279
Michael F. Schaff, Esq.
MSchaff@Wilentz.com
(732)855-6047
New Orleans, Louisiana
December 5, 2014
1
Overview
•
•
•
•
•
•
•
•
General Trends Affecting Physician–Hospital Relationships
Pros & Cons of Physician-Hospital Alignment
Selecting the Best Model of Alignment
Legal and Regulatory Compliance Considerations and Risks
Types of Integration Models
–
–
–
–
Employment/Sale of Practice
Clinical Integration/CINs
Co-Management Arrangements
Professional Service Agreements (PSA)
Alignment Mistakes
Final Thoughts
Questions & Answers
General Trends Affecting
Physician-Hospital Relationships
 Mega Trends Affecting Physician-Hospital Relationships Include:
•
Increasing, Shared Economic Pressures from “Eroding” Payer Mix
• Declining income
• Pressures/insecurity resulting from “reform” driven by CMS for cost control,
efficiency and “quality.”
• Continuing pressures from payers for P4P, “full networks” and clinical
efficiencies
• Increasing needs/demands from physicians/practices for income support (e.g
recruitment agreements for new physicians, requests/demands for “call
coverage” payments, Medical Directorship stipends, etc.)
• Competition between physicians and hospitals for ancillary revenue streams
• Misalignment of physician and hospital reimbursement methodologies, e.g.,
physician fee-for-service versus hospital-per-case
3
General Trends Affecting
Physician-Hospital Relationships
 Mega Trends Affecting Physician-Hospital Relationships Include:
•
Increasing Operational / Infrastructure Expenses–further eroding “bottom line”
margins
• High capital costs
• Shared disappointments re: initial EMR and related IT integration initiatives
• Reimbursement reductions for failure to implement EHR
4
General Trends Affecting
Physician-Hospital Relationships
•
The Changing Profile of “New” Physicians & Allied Health Providers
• Aging medical staffs
• Risk-adverse residents/fellows and new practitioners
• Increasing competition for physician talent – particularly for hospital-based
specialties
• Economics and lifestyle issues
• Erosion of medical staff allegiance – particularly among PCPs
• Limitations of compensation plans to drive desired behaviors
• Emergence of the physician generation gap
• Existing and impending physician shortages
5
Trends Affecting Physician-Hospital
Relationship Models
Hospitals/Systems Continue to Re-assess the Necessity of Utilizing a Broad Range of Affiliation Options with
Physicians to Advance Their Shared Missions/Visions
Prediction: Increasing Utilization, Sophistication & Complexity of Affiliation Models/Relationships
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9
Range of
Affiliation
Models
Traditional
Physician
Recruitment
Medical
Directors &
Personal
Service
Agreements
Projected
Utilization
Next 24-36
Months
No Growth
Slight
Growth
No Growth
Decrease
Slight
Increase
Decrease
Steady
Growth
Steady
Growth
High
Growth
Additional
Comments &
Rationale
Increasing
recognition of
need to rebuild
physician
relations
programs
Limited per
Stark and other
regulations
Slight decrease
in number of
physicians,
increase in pay,
and
accountability
Practices will
continue to
evaluate
whether to seek
practice support
due to financial
pressures
Typically
focused upon
favored margin
services
Dependent
upon extent of
clinical
integration
Continues to
increase despite
initial resistance
from hospitals
and systems
Continued
increase due to
focus on quality
and efficiency
Increasing
physician
employment
integration in
multiple forms
Management
Service
Organization
Center of
Excellence
Joint Payer
Contracting
Joint
Ventures
CoManagement
Agreement
Physician
Employment
Integration and Complexity Increases
6
Pros and Cons of
Hospital/Physician Alignment
•
•
Pros
–
–
–
–
Economics (Changes in Reimbursement)
Operations
Data Sharing
Revenue Sharing
Cons
–
–
–
–
–
Culture
Trust
Autonomy and Control
Slow Moving
Unwind Difficult
7
Selecting the Best Model of Alignment
•
•
•
•
Not all physicians are the same
–
–
–
–
Employed vs. independent
Primary care vs. specialists
Exclusive medical staff privileges vs. “splitters”
New recruits vs. veterans
Not all terminology has universal or standardized
meaning
Each model has pros & cons; none is perfect
The alignment process is often more important than the
model selected
8
How Much Autonomy Do Physicians Want?
How Much Do They Really Need?
•
•
•
In general, alignment with independent physicians
presents a greater degree of legal risk than simply
employing doctors
Although the fraud and abuse, tax and other laws apply
equally to all hospital-physician relationships, dealing
with physicians who want to remain more or less
autonomous presents more risk
State law concerns (particularly corporate practice of
medicine prohibitions) will often determine the choice of
models that can be used in a particular jurisdiction
9
Legal and Regulatory Compliance
Considerations and Risks
IRS 501c(3)
Regulations
• Prohibits potential private inurement and / or benefit from tax-exempt funds
• Scrutinizes FMV and self-interest relationships with “insiders” (e.g.,
physicians, etc.)
• Further implications re: restricted uses of tax-exempt financing (e.g.,
bond) funds
Medicare & Medicaid (M/M)
Anti-Kickback Law
• Prohibits payments for M/M Referrals
• Civil and criminal penalties
• Increases scrutiny / enforcement via “whistle-blower” suits
Civil Monetary Penalties
Statute
• Prohibits financial incentives to reduce care to M/M patients
• Limits “gain sharing” between physicians and hospitals
• May affect incentive programs for Medical Directors and other compensated
leaders
Stark Regulations
• Developed to reduce financial incentives based upon physician “selfreferrals” to entities with which they have a financial relationship
• Prohibits referrals of certain M/M “designated health services” including
inpatient and outpatient hospital services
Other Pertinent Regulations
• Compliance with state insurance regulations re: Risk Share, IPA, MSO
compliance
• Compliance with other state (e.g., corporate practice of medicine) laws
and regulations
• Compliance with other federal (e.g., antitrust) laws and regulations
10
•
Types of Integrated Models We Will
Focus on Today
Hospital (or hospital subsidiary) employment
of physicians
•
Clinical Integration
•
Professional Services Agreements
•
Co-Management Arrangements
Note: Most relationships will be formalized with a contract
11
Employment / Sale of Practice
Employment Agreement
Independent
Physician Group
Payers
System/Hospital
Independent
Physician Group
Employment Agreement
12
Employment / Sale of Practice:
Key Provisions
 Physicians employed directly through the hospital via a formal individual
employment agreement.
 The hospital, as employer, is responsible for the physician’s practice
requirements including operations, finances and governance.
 A standard employment agreement exists establishing compensation, benefits
and services to be provided by the physician.
 Physician salary must be based on Fair Market Value (FMV) compensation,
often calculated on a productivity basis such as work RVU, percentage of
collections or net revenue basis.
 The physician assigns his or her professional fees to the hospital.
13
Employment / Sale of Practice
•
Conduct due diligence of own medical practice to
confirm that purchase price is adequate
•
Liabilities post closing
•
Understand decision-making hierarchy
•
Assess current agreements
14
Employment / Sale of Practice
•
•
•
•
•
Review and assess goals and objectives of physicians
and the hospital
Assess financial impact, especially ancillary revenue
No safe harbor for the acquisition by a hospital
Total arrangement (acquisition costs plus subsequent
compensation) may be subject to scrutiny to determine
whether there are “disguised” payments for referrals
Problem areas: payments reflecting goodwill, covenant
not to compete; patient lists; patient records; other
“intangibles”
15
Employment /
Sale of Practice Agreements
•
•
Purchase Agreement for Practice
– Generally Asset Purchase
– Equipment
Diagnostic Imaging
Lab
Employment Agreement for Physicians
– Compensation
– Non-Compete
16
Lessons Learned From Physician
Employment
•
Develop strategic plan to address the need for uniform
compensation model vs. potential deviation for regional
assets or hard to recruit specialists
– Possible future conflict when you sacrifice a uniform
compensation model for an individual physician or group--most
likely, that Physician or group may not be a long term partner
– May want to have 20% of Compensation to be at Risk for their
behavior through a Modification (Source: Advisory Board)
– Define Compensation Parameters that uniformly apply to all
employed physicians: All-Avoid “Car Negotiation” Mentality
17
Lessons Learned From Physician
Employment (Continued)
•
•
•
Hospitals should develop metrics to justify employed
physician investment
Understand that unwinding/divorce is hard on all parties
and develop strong front end due diligence process (e.g.
including coding and compliance review)
Recognize Compensation Models over time most likely
will need to evolve from Production Based Model to
mirror changes in reimbursement system to Value Based
Payments
18
Clinical Integration/CINs
What is it?
•
•
•
•
Clinically integrated networks (CINs) bring together physicians (often
with hospital partners) to develop and sustain clinical initiatives that
enhance access to care, clinical quality, and cost control.
Much like ACOs, but not Medicare specific
The DOJ and FTC have broadly defined clinical integration as “an
active and on-going program to evaluate and modify practice patterns
by the network’s physician participants and create a high degree of
interdependence and cooperation among the physicians to control
costs and ensure quality.”
Thus, two primary purposes of clinical integration are to measurably
improve care while reducing costs
19
Clinical Integration Example:
Health System Subsidiary PHO
Physician
Group
Health System
100% Ownership
CIN
Subsidiary
Participation
Agreement
Payors
Potential Key Characteristics:
 Under this model, the CIN is a wholly-owned subsidiary of the Health System. All physician/physician group participants execute a
participation agreement with the Clinical Integration Network (CIN) Subsidiary that outlines the requirements to obtain preferred
reimbursement or incentive funds for provision of healthcare services.
 The use of “clinical integration” to support joint contracting has not been fully reviewed by federal regulators. Furthermore, these
relationships do not generally authorize the “network” to conduct “single signature” contracting on behalf of all providers, and
individual provider agreements are typically executed with the respective payors.
 Per the DOJ and FTC, CIN programs should include: (1) mechanisms to monitor and control utilization of health care services that are
designed to control costs and assure quality of care; (2) selection of network physicians who are likely to further these efficiency
objectives; and (3) significant investment of capital, both monetary and human, in the necessary infrastructure and capability to realize
the claimed efficiencies.
Co-Management Arrangements
Co-Ownership
CoManagement
Company
Co-Ownership
Independent
Physician Group
Co-Ownership
Independent
Physician Group
Hospital
Ownership
Hospital Service
Provision of
Management
Services
Key Provisions:
 A legal entity that is jointly owned by a hospital, physician group, or other investors providing management services to a hospital department
or service line (hospital may elect to forgo ownership).
 The parties share profits based on their relative capital contribution.
 The Co-Management Company may employ all or none of the personnel needed to deliver the service.
 The Co-Management Company is typically compensated on a base plus incentives for improving quality, satisfaction and efficiency.
 Hospital continues to own the service and bill payers.
 Management contract is generally for three to five years.
21
Co-Management Arrangements
Structure of Management Company
• Hospital may be an owner
• Delegate governance to management board or executive
committee with both hospital and physician representatives
• Board forms committees, such as quality assurance and
finance committees
• Customary form of entity is LLC
• Start-up capital (legal, consulting fees) paid by physicians
unless management company is also owned by hospital
22
Co-Management Arrangements
•
Duties of manager (Co-management agreements vary):
– Operational and financial oversight
– Consulting and making recommendations as to space,
personnel and equipment
– Adopting uniform clinical standards
– Participating in committees
– Hiring and firing
– On-site management
– UM and Quality Reviews
– Compliance
23
Co-Management Arrangements (cont’d.)
Compensation
• Hospital usually pays fixed compensation monthly to
management co., typically to pay company’s operational
expenses (e.g., staff salaries and benefits) and pays
physicians for administrative duties on an hourly basis
for committee and medical director time
• Hospital usually pays incentive or bonus compensation
quarterly or annually based on pre-established amount
conditioned upon meeting certain quality and
efficiency goals
24
Co-Management Arrangements (cont’d)
•
Compensation (Fixed + Incentive)
•
Incentive quality measures include:
– Operational process improvements
 Baseline levels determined by using facility’s
historical data or comparable regional or national data
 Include incentives for efficiency that do not result in reductions in
care, such as start times, wait times
– Reductions in infections or complication rates
– Satisfaction levels such as patient and staff
satisfaction surveys
25
Co-Management Arrangements (cont’d)
•
•
•
FMV: qualified, independent healthcare valuation firm
establish metrics, ranking, weighting, and compensation
amounts
Under AKS, equity returns to owners must be
proportionate to ownership and incentives should not
be structured in a way that rewards physicians for
increased volume
Under CMP, cannot make payments for reducing or
limiting medically necessary services to Medicare
beneficiaries or for reducing lengths of stay
26
Professional Services Agreements
•
Types of PSAs:
– Generic term usually used to refer to arrangements
where physicians provide services to a hospital and
the hospital pays the Physician or Practice for those
services
– More integrated PSAs include leased employee
arrangements and “synthetic employment”
arrangements
27
Common PSA Structure
Hospital
Board
Medical Group
Board
Clinical Services
and Non-compete
Agreement
Hospital
(Integrated with
Physician Division
Infrastructure)
•
•
•
•
•
•
PSA
MSO Services /
Aggregate
Compensation
(Rate per RVU)
Asset Ownership
Contracting
Billing
Recruiting Support
IT Support
Staffing &
Management
Management
Committee
•
•
•
•
•
Medical Group
(For-Profit Entity)
• Group Governance
• Physician Hiring &
Termination
• Income Distribution
• Clinical
Practice/Quality
• Malpractice
Approves Strategy/Finances
Oversees Operations/Business Planning
Establishes Compensation Principles
Achieves Value-Exchange Objectives
Is Typically Split 50/50 Between Hospital and Medical Group
28
Professional Services Agreements
“Synthetic Employment” Arrangements
•Physicians may retain their own practice and be
compensated by a hospital on a productivity (or wRVU)
basis for clinical services
•Hospital becomes billing provider in accordance with
Medicare reassignment rules
•Hospital may contract with the practice for administrative
services such as non-physician staff, equipment
and space leases, and other non-clinical
administrative duties
29
Professional Services Agreements
“Synthetic Employment” Arrangements
•wRVU rate paid to physicians for their Services typically
includes:
– cash compensation, retained practice expenses (e.g., med mal
insurance), taxes and benefits
•However certain payments may be fixed rather than part
of wRVU rate (e.g., med mal insurance, hospital’s portion of
Medicare and social security taxes)
•Hospital may contract with the practice for administrative
services such as:
– non-physician staff, equipment and space leases, and other nonclinical administrative duties
30
Professional Services Agreements
Legal Issues
•Must meet Stark and AKS fair market value requirements for
personal services arrangements.
•May be able to fall under Stark personal services, fair market
value, or indirect compensation exceptions
•Many times, a PSA cannot squarely meet an AKS safe harbor if
compensation is not a fixed amount. For example, wRVU
compensation is not deemed to be “set in advance.” But if the
wRVU value is FMV, the risk is minimal.
•If hospital bills, Medicare reassignment rules require joint and
several liability for Medicare overpayments and physician
assignment form
31
Professional Services Agreements
•
Ensure that the contract addresses the following KEY
issues:
– Addition of new physicians, advanced practice nurses,
or physician assistants
– Exclusivity
– Staffing issues
– Unwinding/termination
– Non-compete and other restrictive covenants
– Consider including compensation incentives such as
payment for quality and cost savings to influence desired
physician behavior
32
The Most Common Alignment Mistakes
•
•
•
•
•
•
•
•
•
Treating a medical group as just another department of the hospital
Assuming that one approach will work for all medical groups/
physicians
Blindly copying the competition’s model
Failing to build flexibility into the model
Choosing the wrong compensation model for
a particular medical specialty or service line
Failing to do adequate due diligence
Over-promising/under-delivering
Delivering an inconsistent message
Refusing to deal with “the elephant in the room”
33
Final Thoughts
•
•
•
•
•
•
Collaboration is key: only then will diverse teams or
networks of professionals achieve true integration
Financial dynamics must reinforce good behavior
If physicians and hospitals do not change, highly unlikely
overall system will work
No one size fits all
Tailored to meet the specific needs and expectations of
the parties
Integration must be paced at intervals that allow for
effective transition
34
QUESTIONS/ANSWERS
35