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

35. QUESTIONS/ANSWERS