Issues & Cautions Associated with Medical
Practice Affiliations with Hospitals & Alternatives
New Jersey Medical Group Management Association
Practice Management Conference
April 18, 2013
Taj Mahal Hotel and Casino, Atlantic City, New Jersey
Michael F. Schaff, Esq.
Wilentz, Goldman & Spitzer
90 Woodbridge Center Drive
Woodbridge, New Jersey 07095
(732) 855-6047
mschaff@wilentz.com
Peter Greenbaum, Esq.
Wilentz, Goldman & Spitzer
90 Woodbridge Center Drive
Woodbridge, New Jersey 07095
(732) 855-6426
pgreenbaum@wilentz.com
Overview of Presentation
General Trends
•
Continued Erosion of “Traditional”
Medical Staff-Hospital Dynamics
•
Mega Trends
Overview of Affiliation Models
•
Direct Employment
•
Physician Subsidy
•
Physician Enterprise Model
•
Professional Services Agreement Model
2
Overview of Presentation
Discussion of Issues and Cautions of Professional
Service Model
•
Group Considerations
•
Integration Considerations
•
Sale or Lease of Assets
•
wRVU
•
Budget
•
Term and Termination
•
Unwinding
•
Restrictive Covenant
•
Information Technology Issues
•
Operational Considerations
Questions and Answers
3
Continued Erosion of “Traditional” Medical
Staff—Hospital Dynamics
Overview of Traditional Medical Staff Structures & Relationships
Approval of MS Bylaws & Regulations
The Medical Staff
Hospital Board
Pressures
to
Integrate
CEO & Executive
Leadership Team
SL Admin./Mgr.
PT Med. Directors
Other S.L./Dept.
Admin./Managers
Medical Staff/Hospital
Interaction & Support
for Shared
Mission & Vision
All Other Support
Members/Units
Patients/Payers
Elected Officers & Committees
 President
 Vice President
 Secretary/Treasurer
 Dept. Chairs & Section Chiefs
 Other Elected MS Reps.
 Medical Staff Committees
Pressures
to
Integrate
Individual
Members of the
Medical Staff
4
4
Mega Trends Affecting PhysicianHospital Relationships
1.
Increasing, Shared Economic Pressures
from “Eroding” Payer Mix
• Declining income
• Accountable Care
• 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
5
Mega Trends Affecting Physician-Hospital
Relationships
1. Increasing, Shared Economic Pressures from
“Eroding” Payer Mix (continued):
• Increasing needs/demands from physicians/practices for
income support (e.g., joint ventures regarding ancillary
services, 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
6
Mega Trends Affecting Physician-Hospital
Relationships
2. Increasing Operational / Infrastructure
Expenses further eroding “bottom line”
margins
•
High capital costs
•
Shared disappointments regarding initial EMR and
related IT integration initiatives
•
Reimbursement reductions for failure to implement
EHR in hospitals
7
Mega Trends Affecting Physician-Hospital
Relationships
3. 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
8
• Existing and impending physician shortages
Affiliation 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
9
9
Model 9A: Direct Employment
Employment Agreement
Independent
Physician Group
Payers
System/Hospital
Independent
Physician Group
Employment Agreement
10
Model 9A: Direct Employment
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.
11
Model 9A: Direct Employment
Key Provisions (continued):
•
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.
Level of Integration
12
Model 9B: Physician Subsidiary
with Parent
Tax-exempt Parent
Employment Agreement
Independent
Physician Group
Board of Directors
Hospital Physician
Physician Services
Independent
Physician Group
Hospital
Payers
Employment Agreement
13
Model 9B: Physician Subsidiary
with Parent
Key Provisions:
•
•
•
•
Hospital Parent entity controls both Hospital and
Physician Services Organization.
Physicians employed through a subsidiary of the
Hospital Parent via a formal individual employment
agreement.
Physicians share governance responsibilities with
Hospital in the Physician Services Organization.
The Hospital, as the owner, is responsible for the
physician’s practice requirements including
14
operations, finances and governance.
Model 9B: Physician Subsidiary
with Parent
Key Provisions (continued):
•
•
•
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, typically based on a
wRVU basis.
The physician assigns his or her professional fees
to the Physician Services entity.
Level of Integration
15
Model 9C: Physician Enterprise
Model (PEM)
Physicians as
Practice Owners
Board of Directors
Hospital Physicians
Practice Support
Agreement
Physician Services
Physician
Practice
Physician
Practice
Physician
Practice
Payer $
Hospital
Pod
Pod
Pod
Payers
Physicians as Employees
16
Model 9C: Physician Enterprise
Model (PEM)
Key Provisions:
•
The Physician Enterprise is separate from, but
owned by, Hospital.
•
Physicians are employees of the Physician
Enterprise, but retain ownership of their practice.
•
Physicians continue to manage their practice
through the Physician Enterprise.
•
The incentive to maintain effective physician
practice management is preserved.
17
Model 9C: Physician Enterprise
Model (PEM)
Key Provisions (continued):
•
The Practice Entity provides a turn-key package of
services, i.e., non-physician support staff, facilities,
equipment, and access to records for the Physician
Enterprise through an MSO agreement.
Level of Integration
18
Model 9D: Professional Services
Agreement Model (PSA)
Asset Purchase
Agreement/Lease Agreement
Independent
Physician Group
Hospital
Formal Professional
Services Agreement
and Management
Services Agreement
19
Model 9D: Professional Services
Agreement Model
Key Provisions:
•
•
•
Physicians retain their Group as a Professional
Corporation (PC), which employs, compensates
and governs the physicians.
The Hospital either directly, or through whollyowned subsidiary, purchases or leases the PC
assets, which must be based on Fair Market
Value (FMV) analyses, and converts to a
hospital based facility.
The Hospital purchases physician professional
services from the Group through a Professional
Services Agreement (PSA) and pays based on
wRVUs.
20
Model 9D: Professional Services
Agreement Model
Key Provisions:
•
The Group typically continues to employ and compensate
all non-physician/provider support staff and
administrative staff, who are leased to the hospital.
•
The Hospital reimburses the Group for all operating
expenses via an agreed upon annual budget structure.
•
Typically, the hospital negotiates all payer contracts and
bills/collects for all services.
•
Both parties execute a multi-year Professional Services
Agreement (PSA) and Management Services Agreement
(MSA) summarizing the key terms/conditions of the
relationship to ensure continuous service delivery by
individual practice specialties.
Level of Integration
21
Discussion of Ten Issues and Cautions
of Professional Service Model
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Group Considerations
Integration Considerations
Sale or Lease of Assets
wRVU
Budget
Term and Termination
Unwinding
Restrictive Covenant
Information Technology Issues
Operational Considerations
22
1. Group Considerations
Pros
•
•
More consistent cash flow
Access to Hospital resources
23
1. Group Considerations
Cons
•
•
•
•
Loss of autonomy
• Financial autonomy
• Compliance with Hospital billing policies
• Budgetary oversight
• Operational autonomy
Long lead time to go-live date
• Pre-contract and contract negotiations
• Post-execution activities including credentialing
and IT
• Go live
Start-up costs
Affects retirement
24
2. Integration Considerations
•
•
•
Pre-affiliation training of staff
Information Technology integration
• Hospital and Group IT systems to be linked
How will pre-affiliation accounts receivable be
collected
• Staff will have been assigned/leased to Hospital
• Computer/billing system will have been leased
or sold
• Request use of staff to assist and use of
computers/billing system
25
2. Integration Considerations
•
•
Leases
• Identify leases including office lease and
equipment leases
• Will be assigned to Hospital
Space construction/renovations
26
3. Sale or Lease of Assets
•
Will Group Sell or Lease the hard assets and
medical records
•
•
•
Must be Fair Market Value
Sale
• Immediate cash flow to practice
• Must “reacquire” (and pay) for assets on unwinding
• Hospital bankruptcy considerations
• Capital gains taxes
Lease
• No “large” up front payment
• Monthly cash flow to practice
• Easier on unwinding, as no assets to “reacquire”
27
3. Sale or Lease of Assets
•
•
•
Components of Lease
• Identify assets including Hard assets and
Medial records
• Identify lease payment
• Maintenance costs should tie back to budget
Components of Sale
• Identify assets to be sold
• Identify purchase price
• Does bulk sale apply
Are any assets leased or subject to a lien (e.g.,
equipment lease or line of credit)
28
4. Financial Considerations
wRVU Component
Establishment of wRVU conversion factor
• Must be Fair Market Value
• Often comprised of
•
•
•
•
Base amount
Benefit amount
Quality Incentive Amount
Credit given for
•
•
•
•
Physician-owner production
Physician-associate production
Physician Assistant and Nurse Practitioner production
“incident to” billing
29
4. Financial Considerations
wRVU Component
Establishment of wRVU conversion factor
• Is the wRVU amount fixed or subject to adjustment
• Hospital will often request that it can review wRVU
conversion factor to confirm it is in the XXth
percentile/Fair Market Value
• If it is subject to adjustment, Group must consider
• Review only after specified period
• Collars on the downward adjustment
• Termination if wRVU conversion factor is adjusted
(without restrictive covenant)
30
4. Financial Considerations
wRVU Component
Establishment of wRVU conversion factor
•
Group should consider CPI adjustment
•
wRVU benchmark tied to Centers for Medicare &
Medicaid Services published rates
•
Is the rate schedule tied/fixed to schedule in effect
on commencement or to each newly published rate
schedule
31
4. Financial Considerations
wRVU Component
When is the wRVU consideration paid
•
In arrears
• Creates cash flow issues for Group
•
Estimated monthly payments with
quarterly/annual/periodic true-ups
• Gives Group consistent cash flow
• If the true-up period is not frequent, again
creates cash flow issues for Group
32
4. Financial Considerations
wRVU Component
•
On Review/Off Review
• Some systems will initially pay on a monthly
estimate (percentage of historical wRVUs)
• Done until “off review”
• Once “off review”, then reconciliation done
• Logistical concerns
• Hospital determines whether “off review”
criteria has been satisfied
• Some physicians on review while others off
• Some services on review while others off
33
4. Financial Considerations
wRVU Component
•
Additional financial considerations
•
Group is responsible for determining the
compensation, benefits, vacation, sick, and
personal leave of Physicians
•
Group is responsible for withholdings, payment
of unemployment and other payroll taxes
•
Must make sure these additional financial
elements are factored into the wRVU amount
34
4. Financial Considerations
wRVU Component
•
How is aggregate consideration allocated internally
among Group physicians
• Based on relative productivity (wRVU or other)
• Other allocation as determined by Group
•
Group should receive monthly reports showing
each professional’s gross billings, net collections,
productivity and wRVU amounts
•
If agreements are with a Hospital subsidiary,
consider requesting a corporate guaranty from
Hospital
35
5. Financial Considerations
Budget Component
•
•
Overhead of Group is reimbursed by Hospital
Make sure all expenditures are accounted for
• Personnel Salaries
•
•
•
•
Office Manager, Receptionists, Admin, Techs
Billing Personnel
• Must determine if positions will be eliminated and/or
moved to Hospital payroll
Associates, Physician Assistants and Nurse Practitioners
• If wRVU credit is given, will the costs be reimbursed
Fringe Benefits
•
•
Health insurance, 401k, continuing education,
subscriptions, etc.
Payroll taxes
36
5. Financial Considerations
Budget Component
•
•
Expenditures (continued)
• Equipment Costs
• Leases
• Service contracts
• Repairs and maintenance
• Supplies (medical and non-medical)
• Medical waste disposal
• Rent
• Utilities
• Professional fees (legal, accounting and payroll)
• Other
Make sure accountant’s input is obtained
37
5. Financial Considerations
Budget Component
•
All leased items will be subject to a mutually
agreed annual budget
•
Initial budget typically set forth in documents, and
subsequent budgets are to be agreed on annually
•
Have detailed line item initial budget so annual
budgets thereafter have template to use
38
5. Financial Considerations
Budget Component
•
Need default if subsequent budget is not agreed to
•
Use of budget for the prior year, with possible adjustments:
•
•
•
•
•
Delete one-time capital expenditures during previous year
Add expected capital expenditures for upcoming year
Include items which are readily determinable (e.g.,
expenses subject to written agreements, etc.)
Adjustments to take into account increases or decreases
to compensation and benefits for all non-physician
personnel
Other expense items to be increased by fixed percent or
CPI
39
5. Financial Considerations
Budget Component
•
When is it paid
• Prior to month (e.g., in advance)
• In arrears (will create cash flow issues)
•
When is it reconciled
• Monthly, quarterly or annually (the longer the
reconciliation period, the more cash flow issues
to Group)
•
How strict is the budget process
• If Group exceeds line item, is Group responsible
for excess
• Consider pre-approved variance
40
5. Financial Considerations
Budget Component
•
Management Fee
• Must be commercially reasonable and FMV
• When is it paid
•
If agreements are with a Hospital subsidiary,
consider requesting a corporate guaranty from the
Hospital
41
6. Term and Termination
Term
•
Term is typically three to five years
•
What is the renewal process
• Evergreen or automatic termination
• Should have specified period prior to expiration
to discuss renewal
42
6. Term and Termination
Termination
•
Typical Hospital-side triggers include:
• Group default (notice and cure period)
• Loss of physician’s license, exclusion from
payors, failure to qualify for malpractice
• Should be a reasonable number of
physicians before termination
• Group bankruptcy
43
6. Term and Termination
Termination
•
•
Typical Group-side triggers include:
• Hospital default
• Loss of Hospital’s license and exclusion from
payors
• Hospital bankruptcy
• Change in wRVU factor
If agreements are with a Hospital subsidiary,
triggers must extend to Hospital
44
6. Term and Termination
Termination
•
•
Without Cause
• Is this acceptable to Group
• Consider prohibition in early years
• Consider termination payment
Mutual Triggers
• Change of Hospital structure/control
• Regulatory issues
• Hospital tax-exempt issues
45
7. Unwinding
Group to “reacquire” the practice on unwinding
•
•
Ability to purchase hard assets and patient charts
• All or select assets and charts
• Newly acquired assets which are used at office
What is the price
• Hard assets are typically at the Fair Market Value
• Charts are typically at the initially agreed-upon price
46
7. Unwinding
•
Re-assignment of office lease and applicable
equipment leases
•
Transition of information technology systems (including
billing, collecting and EMR systems)
• Will an EMR license be necessary
• Electronic data to be transferred to Group
•
Development of transition plan so minimal disruption
47
7. Unwinding
•
De Minimus Billing during affiliation
•
•
•
In a minimum amount necessary to remain
credentialed in each third party payor program
Any amounts collected would be remitted to
Hospital
Allows Group to remain credentialed and thus
immediately bill on unwinding
48
8. Restrictive Covenant
•
Prohibits affiliation with another Hospital system
•
•
•
•
•
Typically one to two years
Typically does not restrict re-engagement of
private practice
Should not apply on certain termination
triggers, including by Hospital without cause,
by Group for cause, regulatory issues and
Hospital tax-exempt issues
Should not apply if Hospital does not give a fair
renewal offer
Carve out larger medical groups and specific
systems, if applicable
49
8. Restrictive Covenant
•
Mutual non-solicitation of employees
•
•
Carve-out pre-affiliation employees that were
moved to Hospital payroll
Restrictive Covenant should only apply to Owners
(not to associates and other clinical personnel)
50
9. Information Technology Issues
•
Information Systems Integration
•
Does the Group continue using its own IT or
will it use Hospital IT
•
Pre-affiliation integration
• Hospital should pay costs of integration
• If equipment is needed, Hospital should pay
51
9. Information Technology Issues
•
Meaningful Use
•
Who is entitled to EMR meaningful use
incentive payments
•
•
Meaningful use earned pre-affiliation
Meaningful use earned during affiliation
52
10. Operational Considerations
•
•
Physicians
• Not able to add professionals without Hospital
approval
• Consider replacement of professionals who
have left
• Consider grandfathering slots/positions which
are actively being recruited at time of affiliation
Location of Services
• Hospital will want flexibility to require services
“at any location determined necessary”
• Group should limit to existing office(s) and
specific hospital campus(es)
53
10. Operational Considerations
•
•
Full or part time
Permitted outside activities
• Moonlighting
• Medical director at other facilities
• Teaching, charitable activities, expert testimony,
honoraria, lectures, paid interviews, publishing,
surveys, etc.
• Participation on reading panels, including
readings for stress tests, EKGs and
echocardiograms
• Specify Group/professional retains all income
54
10. Operational Considerations
•
Control over staff
•
•
Hospital will want the ability to remove
employees
Group should try to qualify and/or set
conditions
•
•
•
•
•
Endanger the health or safety of patients
Harm to Hospital’s reputation, etc.
Notice and cure period
All staff decisions must be made within the
framework of the approved budget
Generally not able to add without Hospital
approval
55
10. Operational Considerations
•
Control over equipment
•
•
Hospital will want ability to determine
if/when/what equipment is needed
All equipment decisions must be made within
the framework of the approved budget
56
10. Operational Considerations
•
Malpractice Insurance
•
•
Group must make sure this is a budgeted item
Who determines carrier
• Group typically will want same policy as
during pre-affiliation period
• If policy is to be changed, then need to
consider tail policy
57
Questions
and
Answers
58
Issues & Cautions Associated with Medical
Practice Affiliations with Hospitals & Alternatives
New Jersey Medical Group Management Association
Practice Management Conference
April 18, 2013
Taj Mahal Hotel and Casino, Atlantic City, New Jersey
Michael F. Schaff, Esq.
Wilentz, Goldman & Spitzer
90 Woodbridge Center Drive
Woodbridge, New Jersey 07095
(732) 855-6047
mschaff@wilentz.com
Peter Greenbaum, Esq.
Wilentz, Goldman & Spitzer
90 Woodbridge Center Drive
Woodbridge, New Jersey 07095
(732) 855-6426
pgreenbaum@wilentz.com