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Issues & Cautions Associated with Medical Practice Affiliations with Hospitals & Alternatives New Jersey Medical Group Management Association Practice.

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Presentation on theme: "Issues & Cautions Associated with Medical Practice Affiliations with Hospitals & Alternatives New Jersey Medical Group Management Association Practice."— Presentation transcript:

1 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 (732) Peter Greenbaum, Esq. Wilentz, Goldman & Spitzer 90 Woodbridge Center Drive Woodbridge, New Jersey (732)

2 2 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

3 3 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

4 4 Continued Erosion of “Traditional” Medical Staff—Hospital Dynamics CEO & Executive Leadership Team Hospital Board SL Admin./Mgr. PT Med. Directors Other S.L./Dept. Admin./Managers All Other Support Members/Units Elected Officers & Committees President Vice President Secretary/Treasurer Dept. Chairs & Section Chiefs Other Elected MS Reps. Medical Staff Committees The Medical Staff Individual Members of the Medical Staff Patients/Payers Medical Staff/Hospital Interaction & Support for Shared Mission & Vision Overview of Traditional Medical Staff Structures & Relationships Approval of MS Bylaws & Regulations Pressures to Integrate 4

5 5 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 Mega Trends Affecting Physician- Hospital Relationships

6 6 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

7 7 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

8 8 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 Existing and impending physician shortages Mega Trends Affecting Physician-Hospital Relationships

9 9 Integration and Complexity Increases Prediction: Increasing Utilization, Sophistication & Complexity of Affiliation Models/Relationships 9 Hospitals/Systems Continue to Re-assess the Necessity of Utilizing a Broad Range of Affiliation Options with Physicians to Advance Their Shared Missions/Visions Affiliation Models

10 10 Model 9A: Direct Employment System/Hospital Independent Physician Group Independent Physician Group Payers Employment Agreement

11 11 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.

12 12 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

13 13 Model 9B: Physician Subsidiary with Parent Independent Physician Group Independent Physician Group Payers Employment Agreement Tax-exempt Parent Hospital Hospital Physician Board of Directors Physician Services

14 14 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 operations, finances and governance.

15 15 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

16 16 Model 9C: Physician Enterprise Model (PEM) Physician Practice Physicians as Practice Owners Pod Physician Practice Pod Physicians as Employees Practice Support Agreement Payer $ Hospital Payers Board of Directors Physician Services Hospital Physicians

17 17 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.

18 18 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

19 19 Model 9D: Professional Services Agreement Model (PSA) Hospital Formal Professional Services Agreement and Management Services Agreement Independent Physician Group Asset Purchase Agreement/Lease Agreement

20 20 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 wholly- owned 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.

21 21 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

22 22 Discussion of Ten Issues and Cautions of Professional Service Model 1. Group Considerations 2. Integration Considerations 3. Sale or Lease of Assets 4. wRVU 5. Budget 6. Term and Termination 7. Unwinding 8. Restrictive Covenant 9. Information Technology Issues 10. Operational Considerations

23 23 1. Group Considerations Pros More consistent cash flow Access to Hospital resources

24 24 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

25 25 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

26 26 2. Integration Considerations Leases Identify leases including office lease and equipment leases Will be assigned to Hospital Space construction/renovations

27 27 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”

28 28 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)

29 29 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

30 30 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)

31 31 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

32 32 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

33 33 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

34 34 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

35 35 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

36 36 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

37 37 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

38 38 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

39 39 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

40 40 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

41 41 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

42 42 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

43 43 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

44 44 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

45 45 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

46 46 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

47 47 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

48 48 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

49 49 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

50 50 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)

51 51 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

52 52 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

53 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)

54 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

55 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

56 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

57 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

58 58 Questions and Answers

59 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 (732) Peter Greenbaum, Esq. Wilentz, Goldman & Spitzer 90 Woodbridge Center Drive Woodbridge, New Jersey (732)


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