1. HFMA Heart of America Healthcare Trends Impacting Physician Compensation and How to Ensure Compliance Presented By: Steve Rice, Executive Vice President & COO Chad Stutelberg, Executive Vice President & Practice Leader Exclusive to Healthcare. Dedicated to People. SM

2. Agenda About INTEGRATED Healthcare Trends Impacting Physician Compensation Trends in Physician Compensation Compensation Pitfalls Steps to Ensuring Compliance Discussion/Questions 1

3. Exclusive to Healthcare. Dedicated to People. SM ABOUT INTEGRATED 2

4. Exclusive to Healthcare. Dedicated to People. SM Who We Are INTEGRATED provides a range of interconnected solutions – compensation, employee, and physician engagement, labor, governance, physician services, and executive placement – that together help you align people, pay, and performance throughout your organization 3 PHYSICIAN SERVICES Maximize performance and physician affiliations PHYSICIAN SERVICES Maximize performance and physician affiliations TOTAL COMPENSATION & REWARDS Enhance your organization’s success with complete compensation solutions TOTAL COMPENSATION & REWARDS Enhance your organization’s success with complete compensation solutions GOVERNANCE & LEADERSHIP Gain confidence with the complexities of healthcare governance GOVERNANCE & LEADERSHIP Gain confidence with the complexities of healthcare governance HR CONSULTING Enhance the power of the people- side of your business HR CONSULTING Enhance the power of the people- side of your business MSA EXECUTIVE SEARCH Connect with the firm that specializes in healthcare leadership placement MSA EXECUTIVE SEARCH Connect with the firm that specializes in healthcare leadership placement ENGAGEMENT SURVEYS Quantify and improve engagement to drive business performance ENGAGEMENT SURVEYS Quantify and improve engagement to drive business performance MERGER & ACQUISITION ADVISORY Maximize your operational and financial performance MERGER & ACQUISITION ADVISORY Maximize your operational and financial performance

5. Exclusive to Healthcare. Dedicated to People. SM We are the leading national physician compensation authority for healthcare organizations – Clients in all 50 states that encompass the full spectrum of healthcare organizations from large integrated health systems to small rural community hospitals – Largest client base of not-for-profit healthcare organizations including more than 350 major healthcare organizations with a total of more than 900 hospitals and over 500 physician groups We provide consulting services in many areas around physician practices: – Cash compensation model design and implementation – Conducting fair market value and commercial reasonableness assessments – Development and review of various physician affiliation arrangements – Conducting physician practice operations assessments – Development and review of physician leadership/administrative positions – Assisting in the development of physician governance and leadership structures Over the last 20 years, we have conducted over 35,000 assessments covering almost every medical specialty and in all types of practice settings; we have conducted more fair market value opinion assessments than any other firm in the country Physician Services Overview 4

6. Exclusive to Healthcare. Dedicated to People. SM HEALTHCARE TRENDS IMPACTING PHYSICIAN COMPENSATION 5

7. Exclusive to Healthcare. Dedicated to People. SM Physicians and Hospitals are Both Focused on Alignment/Integration Healthcare Trends 6

8. Exclusive to Healthcare. Dedicated to People. SM Heath System’s Bottom Line Increase in self insured benefit plan costs Competitors participating in ACOs and other shared savings models Payers buying PCP groups Competitors buying PCP groups Shift in payor mix – more Medicare and Medicaid Competitors advertising as low cost/high quality alternative Payers driving patients to a lower cost alternative Patients with high deductibles and more access to information Pressures on Health Systems 7 Healthcare Trends

9. Exclusive to Healthcare. Dedicated to People. SM Physicians and Hospitals are Both Focused on Alignment/Integration 8 Physician PerspectiveHospital Perspective Work-Life Balance High Quality of Care Job Satisfaction Increased or Consistent Income Benefits and Retirement Lower Costs High Quality of Care More Outpatient Revenue Market Share Improved Patient Access/Productivity Source: The Advisory Board Company and INTEGRATED Healthcare Strategies Healthcare Trends

10. Exclusive to Healthcare. Dedicated to People. SM Increasing Use of Quality Incentives in Physician Compensation Plans 9 Organization has not yet developed measures to take advantage of value based payments No dollars at risk for quality Some physicians are placed on models that reward for quality Represents 5-10% of cash opportunity The majority of compensation models use quality incentives Represents 10%- 15% of cash opportunity Quality measures have been developed over a long period of time and are present in all compensation arrangements Up to 20% of compensation at risk Maturity of Organization Healthcare Trends

11. Exclusive to Healthcare. Dedicated to People. SM Increasing Demand for Advanced Practice Clinicians (“APCs”) 10 With the shift to a value-based payment model, healthcare organizations will need to focus on efficiency, evidence-based treatment protocols, and coordination of care Using more APCs to treat patients will allow for more physician time for patients with chronic illnesses (even with the physician’s supervision responsibilities) and encourage patient-centered coordination of care Most hospitals have increased the size of their APC workforce in the past year, are planning to increase the number in the future and recruiting APC’s has become one of the biggest areas for recruitment firms Healthcare Trends

12. Exclusive to Healthcare. Dedicated to People. SM Healthcare Trends Healthcare Reform is Affecting How Organizations Compensate Their Physicians The potential move to Accountable Care Organizations (“ACOs”) over the next few years has required organizations to place a greater emphasis on: – Accountability – Quality of care – Effective cost management – Reliable performance measures This will impact compensation plans in the following areas: – Rewarding providers for high quality care – Rewarding physicians for supervision of APCs – Shifting to a more predictable payment structure as hospitals receive more predictable revenues – Rewarding physicians for reducing total healthcare and utilization costs and potentially managing patient care outside of the clinic/hospital (which could reduce “productivity”) 11

13. Exclusive to Healthcare. Dedicated to People. SM TRENDS IN PHYSICIAN COMPENSATION 12

14. Exclusive to Healthcare. Dedicated to People. SM Pay for Performance is critical: – According to the 2013 Physician Compensation and Production Survey put out by the Medical Group Management Association (“MGMA”), approximately half of all medical practices reported in the survey compensate their physicians based on 100% productivity models – Work relative value units (“wRVUs”) still dominant – although many organizations shifting to net professional collections or a “market” wRVU rate that is benched to professional collections – “Quality” becoming a much bigger component of compensation – Other incentives (e.g., expense management, network / system based incentives, etc.) Definition of “Performance” is changing: – Not just about “pure productivity” anymore – “Quality” compensation, bundled payments, etc., becoming more important and require performance in new areas including: Improved health status for the defined population being served Percentage of patient care delivered within accepted clinical care protocols Patient satisfaction scores Physician satisfaction scores Reduction in readmissions Volume measures – panel size / patients under management 13 Trends in Physician Compensation

15. Exclusive to Healthcare. Dedicated to People. SM Focus on a few key performance areas with multiple metrics Typically range from 5% to 10% of a physician’s compensation – Most organizations “phase in” and start with smaller amounts (e.g., $15,000 to $40,000 per physician for surgeons) and gradually increase amount over time These incentives are generally not additive, and must be “covered” (at least in part) with physician productivity, and/or are only paid if group financial triggers are obtained These incentives can be “goal” oriented (e.g., only paid if goal is achieved, or process oriented) Data and measurement systems will be critical to plan success Must be a material part of physician compensation plan & equitable across system Must be “real”, actionable, and measurable The incentives must be developed with input by physicians Quality Incentive Key Criteria: 14 Trends in Physician Compensation

16. Exclusive to Healthcare. Dedicated to People. SM Trends in Physician Compensation Reimbursement Issues Impacting Physician Income – Reduced reimbursement for physician services pushing more physicians to employment According to the MGMA 2012 & 2013 Physician Compensation and Production Surveys, the percentage of medical practices reported in the survey as being owned by physicians decreased from approximately 25% to approximately 17% over the most recent two-year period of survey data – Payments shifting to “qualitative” areas and requires physicians to pursue new sources of revenue (e.g., Meaningful Use Funds, payer quality incentives, etc.) – More healthcare organizations are reviewing their “investment” per physician and are basing compensation on their ability to pay competitively and what is best for the long term viability of the network Compensation Models Becoming More Complex/Have More Components: – Clinical, administrative / medical directorship, call, teaching, research, APC supervision, recruitment, etc. – While this may be appropriate, “multiple” contracts/payments for services has increased compliance / fair market value issues This is a major area for outside regulators 15

17. Exclusive to Healthcare. Dedicated to People. SM Trends in Physician Compensation Call Pay Call pay is and will continue to be a significant issue for physicians on a national basis Below is a listing of statistics on call coverage/pay, as reported in the 2012 Physician On-Call Pay Survey Report put out by Sullivan, Cotter & Associates (“SCA”): – Overall, two-thirds (66%) of physicians providing on-call coverage receive on-call pay – More than one-half (56%) of survey participants report that their on-call pay expenditures have increased in the past 12 months – More than one-half (58%) of survey participants have expressed difficulty finding physicians to provide call coverage – More than one-quarter (28%) of organizations indicated that at least some physicians must provide a specified number of days of uncompensated coverage before receiving call pay (i.e., excess call pay) Employed physicians do, at times, receive some additional payment for providing excess call coverage to hospital Emergency Departments that is above and beyond what would reasonably be expected in the market 16

18. Exclusive to Healthcare. Dedicated to People. SM Trends in Physician Compensation APC Supervision Pay In general, supervision of APCs has increased dramatically over recent years in both employed and independent settings Physicians utilize APCs as a means to make their practice more productive, improve patient access, improve volumes, etc. Compensating physicians for the supervision of APCs is prevalent (60% to 70%) in many of the organizations we work with Payments are typically structured in one of the following formats: – Fixed annual payment – Revenue less expense model – Payment per wRVU From a valuation standpoint, we review both the physician’s and APC’s productivity in order to ascertain the impact of the supervised APC on the physician’s practice Benchmarking Total Physician Income Critical Analyzing all forms of physician payments critical – with current environment still primarily productivity driven, an analysis of physician compensation to productivity should be conducted for each specialty/physician – see sample on next page 17

19. Exclusive to Healthcare. Dedicated to People. SM Market Median $40.03 Lower than Expected Compensation 75th Percentile $47.38 25th Percentile $35.17 P50 = $194.3 P25 = $162.0 P75 = $238.5 P90 = $295.1 P25 = 4,059P50 = 4,882P75 = 5,852P90 = 6,980 Higher than Expected Compensation 18 Physician Benchmarking Example

20. Exclusive to Healthcare. Dedicated to People. SM COMPENSATION PITFALLS 19

21. Exclusive to Healthcare. Dedicated to People. SM Pitfall # 1: Stacking of Compensation Arrangements CASE STUDY: Southwestern Health System Contracted with a single physician to provide multiple services: −Emergency room coverage, dedicated colonoscopy service, hospitalist services, call coverage, and multiple medical directorships On a stand alone basis, each agreement was within fair market value When reviewed on a total compensation basis, the physician was earning $650,000 Physician is an employee, non-board certified in internal medicine 20

22. Exclusive to Healthcare. Dedicated to People. SM Pitfall # 2: Paying Medical Directorship Compensation For Non-Medical Directorship Functions CASE STUDY: East Coast Hospital System Physician paid 95 th percentile medical director rate for neurosurgical medical director services Physician producing over the 90 th percentile clinically Billed over 1,000 hours of medical director duties, exceeding the cap in the agreement by 500 hours When audited, found the following: − Some days he billed over 24 hours of medical director services (“The Impossible Day”) −Billed $15,000 for preparation for an employee recognition dinner Both board and CEO approved overriding the agreement time cap without reviewing the time records New Board, New CEO 21

23. Exclusive to Healthcare. Dedicated to People. SM Pitfall # 3: Misuse Of Market Data CASE STUDY: Southeastern Health System Employed physicians under a WRVU model with tiered productivity pay out levels, based on physician productivity (i.e., median productivity earns median payout rate) No application of appropriate modifiers The model, which was designed by an outside consultant, allowed the physicians compensation per WRVUs payout rate to be directly tied to the physicians work productivity (i.e., 90 th percentile payout for 90 th percentile productivity) This resulted in compensation that was well above the market range As a result of this “poorly structured compensation model”, a federal investigation occurred 22

24. Exclusive to Healthcare. Dedicated to People. SM Compensation by Physician Type: Family Practice w/o Obstetrics New Physician Moderately Experienced Physician Experienced Physician Accomplished Physician Right out of residency 25 th - 50 th salary guarantee Minimal production Below average quality 3-5 years out of residency Moderate levels of comp. Average production Average quality 10 years out of residency High levels of comp. High production Good quality 10+ years out of residency Highest levels of comp. Highest production High quality Compensation $175,000 $200,000 $235,000 $300,000 Productivity 3,000 5,000 6,000 7,100 Calculated Rate $58/wRVU $40/wRVU $39/wRVU $42/wRVU 90 th Percentile50 th Percentile49 th Percentile52 nd Percentile Pitfall # 3: Misuse Of Market Data 23

25. Exclusive to Healthcare. Dedicated to People. SM Pitfall # 4: Too Many Negotiators CASE STUDY: Northeastern hospital Multiple persons involved at different levels in negotiating the deals Not everyone knew the entirety of the whole transaction −Someone of importance within the organization “fell in love with the deal” When the negotiators all got together, recognition of the deal being rich suddenly results in a panic within the organization Recognition of having not included compliance or legal in the process results in the deal being delayed, restructured, and not executed −Because of the verbal agreement, sometimes health systems go ahead with the deal even though they know they are at increased risk Physician continues to “bad mouth” administration, stating that they changed the deal at the last minute 24

26. Exclusive to Healthcare. Dedicated to People. SM Pitfall # 5 : “Bad Deal On Top Of Bad Deal” CASE STUDY: Southeastern trauma center Highly competitive market place for physician affiliation Hundreds of compensation arrangements with employed and contracted physicians Basis for setting compensation was premised on local competitors rates −“I know a guy over there who makes a million” No confirmation of payment at competing organizations (i.e., no paper) Not an exact match of the position requirements at each institution (i.e., call coverage, productivity, teaching requirements, etc.) Resulted in bad deals being negotiated and a federal investigation Health system paid $$$’s in Southeast 25

27. Exclusive to Healthcare. Dedicated to People. SM Other Pitfalls in Physician Compensation Plans Sloppy contract management system −Physician compensation plans not adjusted based upon new facts  One physician still being paid after death Too much guaranteed compensation −“You get what you pay for” −Hospitals now focusing on financial performance – providing “opportunity” not “entitlement” Quality incentives poorly designed and without physician involvement −Meaningful, measurable and actionable Lack of data systems to support compensation plan Plan overly complicated and confusing −KISS principle – elevator speech Trying to develop one model for all physicians Getting “ahead” of the market −Moving to ACOs/bundled payments in a fee for service environment Lack of identified “physician profile” Lack of transparency Lack of physician involvement/governance Too many “special deals” 26

28. Exclusive to Healthcare. Dedicated to People. SM SAMPLE OF REGULATORY ACTIVITY CHRIST HOSPITAL-HEALTH ALLIANCE −$110M settlement with Department of Justice (“DOJ”) TUOMEY HEALTHCARE SYSTEM −$44M judgment on Stark Claim (original) −$250 judgment now under appeal (2 nd Trial) SPARTANBURG REGIONAL HEALTHCARE SYSTEM −$780,000 settlement –Hospital provided free IT services w/o contract; DOJ alleges kickback ERLANGER MEDICAL CENTER −$40M settlement with DOJ −Allegations of Stark and Anti-Kickback Statute violations UNIVERSITY OF MEDICINE & DENTISTRY OF NEW JERSEY −$8.3M settlement with DOJ −Allegations of Stark, Anti-Kickback Statute & False Claims Act Violations COVENANT MEDICAL CENTER - IOWA −$4.5M settlement with DOJ −Allegations of Stark & False Claims Act Violations Impact of Not Incorporating Physician Compensation Framework 27

29. Exclusive to Healthcare. Dedicated to People. SM STEPS TO ENSURING COMPLIANCE 28

30. Exclusive to Healthcare. Dedicated to People. SM Steps in Assessing Physician Compensation Step One Gather all pertinent facts, including, but not limited to: – Physician background/CV – Record of prior year(s) earning levels – Record of prior year(s) productivity (e.g., wRVU’s, professional collections, time and effort) – Demonstrated clinical outcomes – Qualitative performance – Other activities (e.g., medical directorships, outreach, teaching, research, etc.) Confirm the facts through due diligence – Internal and external review 29

31. Exclusive to Healthcare. Dedicated to People. SM Steps in Assessing Physician Compensation Step Two Apply the Common Sense Test – “Does this deal make sense?” – Meet with the physician – Engage all stakeholders early on in the valuation process Identify the accountable executives, “Who has the historical perspective?” and “Where does the buck stop?” – Address whether the proposed plan is consistent with the organization’s typical approach to like transactions – Identify and/or define the strategic rationale 30

32. Exclusive to Healthcare. Dedicated to People. SM Steps in Assessing Physician Compensation Step Three Conduct Market Analysis – Benchmark physician data to market Total compensation (cash + benefits) Physician productivity – Ensure full understanding of any and all other forms of compensation – Utilize available tools Use all relevant and available sources and tools to include: – Published survey sources – 990 reports – Specialty specific separate survey cuts – External proprietary data sources – Custom surveys 31

33. Exclusive to Healthcare. Dedicated to People. SM Steps in Assessing Physician Compensation Step Four Step back and revisit entirety of the analysis, to include all relevant facts and circumstances related to the transaction – Ask the following from an objective, outside perspective: “Does the transaction and the corresponding analysis make sense?” “Is there rational reasoning behind our decision?” – What are the key reasons in support of paying the physician at the proposed level? – Is the payment rationale and sustainable? (e.g., If it all goes bad in a year, then what?) – Does the structure of the arrangement make sense? – Have we identified and considered alternatives that may be more economically sustainable? 32

34. Exclusive to Healthcare. Dedicated to People. SM Steps in Assessing Physician Compensation Step Five The key to a strong defense of any physician compensation arrangement is thorough documentation Documentation to include: – Business case for doing the transaction – Internal and external valuation reports – Legal review – Historical perspective to set the context related to the execution of the transaction The documentation should be comprehensive, persuasive, and support the course of action 33

35. Exclusive to Healthcare. Dedicated to People. SM 5 Strategies to ensure FMV Strategy #1 – Limit use of e-mail/watch communications In every investigation we have been involved in, e-mail communications were used by the government as a key component of their fact finding and building of their case – Many physicians/executives will put certain statements in e-mail that they would not otherwise say in conversation If you have a “bad” chain of e-mails, actively and aggressively address issue and document how the issue was addressed Train/educate your employees/physicians on proper use of e-mail Some clients have actually called off certain deals because of “bad” e-mails 34

36. Exclusive to Healthcare. Dedicated to People. SM 5 Strategies to ensure FMV Strategy #2 – Document Intent/Business Case/Community Benefit Too often when we review an agreement there is little in the file regarding why the agreement is necessary, supports the hospital’s mission and improves patient access and care – This can result in “selective amnesia” Documenting the intent of the agreement and how it benefits the community is a key component to ensuring fair market value – The government spends a lot of time looking at these issues, and in absence of documentation can assume the worst – 35

37. Exclusive to Healthcare. Dedicated to People. SM 5 Strategies to ensure FMV Strategy #3 – Use qualified counsel/consultants and limit number of negotiators Too often hospitals create physician agreements without the help of qualified healthcare legal counsel and consultants In some instances the hospitals that are investigated relied on outside advice – turns out it was bad advice Limit number of individuals that can negotiate physician contracts – keeps consistency and helps prevent deals from getting done in back room and on golf course 36

38. Exclusive to Healthcare. Dedicated to People. SM 5 Strategies to ensure FMV Strategy #4 – Keep it simple Many of the agreements that get reviewed are overly complex Complexity can appear as if you are trying to “back into a number” and/or raise commercial reasonableness concerns If physicians don’t understand how they are paid they are more likely to complain If auditors don’t understand compensation model they will assume the worst e.g., only for referrals 37

39. Exclusive to Healthcare. Dedicated to People. SM 5 Strategies to ensure FMV Strategy #5 – Have a contract management database/system and a Process for Reviewing/Approving Physician Compensation Arrangements Most hospitals have no idea how many agreements they have and no consistent process for reviewing and approving physician arrangements Hospitals can get in trouble when they realize that they have more than one contract with a physician group – e.g.,“stacking” - or find out that they have multiple contracts for the same service – More than 1.0 FTE services provided by a physician – not enough time in the day – Contracts for similar/same services e.g., two Sleep Medicine Directors Some hospitals have forgotten when contract expires, when compensation needs to be updated/adjusted, or when other contract terms change such that when the agreement is reviewed it is out of compliance This type of system allows you to monitor payments – One client paid a physician for services for one year after they were dead Continually update file as changes are made to compensation, strategy, business model etc. Have a process and follow it – see sample on following page 38

40. Exclusive to Healthcare. Dedicated to People. SM Sample Process 39

41. Exclusive to Healthcare. Dedicated to People. SM DISCUSSION/QUESTIONS 40