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1 Understanding Physician Hospital Affiliations a presentation for
The Louisiana State Bar Health Law Section Sarah Gorham Hunter, Esq. (504) Michael F. Schaff, Esq. (732) New Orleans, Louisiana December 5, 2014

2 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

3 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

4 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

5 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

6 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 Integration and Complexity Increases 6

7 Pros and Cons of Hospital/Physician Alignment
Economics (Changes in Reimbursement) Operations Data Sharing Revenue Sharing Cons Culture Trust Autonomy and Control Slow Moving Unwind Difficult

8 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

9 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

10 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 “self-referrals” 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

11 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

12 Employment / Sale of Practice
System/Hospital Independent Physician Group Payers Employment Agreement 12

13 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.

14 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

15 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”

16 Employment / Sale of Practice Agreements
Purchase Agreement for Practice Generally Asset Purchase Equipment Diagnostic Imaging Lab Employment Agreement for Physicians Compensation Non-Compete

17 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

18 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

19 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

20 Clinical Integration Example: Health System Subsidiary PHO
Physician Group CIN Subsidiary 100% Ownership 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.

21 Co-Management Arrangements
Co-Management Company Co-Ownership Hospital Independent Physician Group Hospital Service Provision of Management Services Ownership 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

22 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

23 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

24 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 Physicians compensated for management of a hospital’s service line or department (such as cardiology, oncology, orthopedics, outpatient surgery) Management company is a separate entity (LLC is most common) formed and owned by physicians, or the entity may be owned jointly by the hospital and physicians Fixed monthly payment and incentive payments for meeting quality and efficiency goals

25 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

26 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

27 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

28 Common PSA Structure Hospital Board Medical Group Board PSA
Clinical Services and Non-compete Agreement Hospital (Integrated with Physician Division Infrastructure) PSA Medical Group (For-Profit Entity) MSO Services / Aggregate Compensation (Rate per RVU) Group Governance Physician Hiring & Termination Income Distribution Clinical Practice/Quality Malpractice Asset Ownership Contracting Billing Recruiting Support IT Support Staffing & Management Management Committee Approves Strategy/Finances Oversees Operations/Business Planning Establishes Compensation Principles Achieves Value-Exchange Objectives Is Typically Split 50/50 Between Hospital and Medical Group

29 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

30 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 non-clinical administrative duties

31 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

32 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

33 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”

34 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


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