1. Hospital / Physician Integration: Getting to 1+1=2 is not always easy! By LYNDA M. JOHNSON

2. From 2012-2014, 2014 independent practice physicians dropped from 49 to 35% and this trend is expected to continue.

3. WHY? MACRA, the Medicare Access and CHIP Reauthorization Act, sets forth the methodology which replaces the SGR for physician reimbursement, a 963 page rule, is daunting and uncertain.

4. CMS’ proposed Quality Payment Program, consolidates three existing physician payment models: 1.The Physician Quality Reporter System (“PQRS”); 2.The Physician Value-Based Payment Modifier; and 3.The Physician Meaningful Use (“MU”) program.

5. This Quality Payment Program provides two paths for physician payments when it is fully implemented in 2019: 1. Merit-Based Incentive Payment System (“MIPS”); or 2. Alternative Payment Model (“APM”).

6. CMS expects most physicians will choose the MIPS path, under which physicians will select 6 outcomes- oriented measures to track, which will carry upside and downside risk.

7. The APM path will include more flexibility for physicians, however, as we have said, the “devil is in the details” which are not yet known.

8. This uncertainty is driving more and more physicians to integrate with hospitals and that is what we will focus on today.

9. We will discuss three different models of physician-hospital integration: 1.Employment Model 2.Professional Service Agreement Model 3.Co-Management Agreement Model

10. In each of these models, getting to 1+1=2 is not always easy!!!

11. Let’s start with the Employment Model:  Employing physicians secures their loyalty to the hospital  Employing can potentially increase volumes under the current fee-for-service payment system  Allows hospitals to provide integrated, high quality and cost efficient care under a value- based delivery system

12. Physician Employment may take many different forms: 1. Direct employment by the hospital; 2. Employment by a hospital wholly-owned tax- exempt subsidiary; 3. Employment by a hospital wholly-owned taxable entity; or 4. Employment by an aligned foundation.

13.  Asset purchase agreements are the dominant purchase structure.  Should have third party valuation to support purchase price for assets.  Goodwill payments are rare, however payment for medical records is quite common.  Accounts receivable are not acquired.

14.  Three to five year employment agreements are common.  Specific compensation metrics are re-indexed usually annually based on productivity.  Signing and retention bonuses are sometimes paid.  Non-compete provisions are common.

15. Productivity-based methods of structuring physician compensation under Employment model: 1. Compensation per work relative value units (wRVUs); 2. Compensation as a percentage of gross charges; 3. Compensation as a percentage of net collections; and 4. Compensation per encounter.

16. Of these alternatives, paying compensation per wRVU is preferred for a number of reasons: 1. It is directly linked to patient-acuity level maintained by the physician and is payer mix neutral; 2. It is highly correlated to reimbursement for the services provided; and 3. It is flexible enough to allow “shadow wRVUs” to compensate physicians for achieving quality goals, support of strategic initiatives, excess travel time, or whatever is considered important to the hospital.

17. If employment model is used, consider formation of a physician compensation committee that meets on an on-going basis, not just during re-negotiation. Goals related to quality, access, cost, service and other metrics are continually reviewed to make sure hospital and physician goals remain aligned.

18. Professional Services Agreement, a/k/a “Employment Lite”  A high level of physician-hospital integration that falls just short of employment.  Formalized by a Professional Services Agreement.

19. Four recognized and commonly utilized variations on the Professional Services Agreement model: 1. Global Payment PSA Hospital contracts with practice for services in exchange for a “global payment rate,” which includes all physician compensation and benefits as well as all practice overhead expenses.

20. Four recognized and commonly utilized variations on the Professional Services Agreement model: 2. Practice Management Arrangement Hospital employs physicians; practice entity is retained and contracts with hospital for management services; administrative practice staff are not employed by hospital, as the practice provides these personnel to hospital for a fee.

21. Four recognized and commonly utilized variations on the Professional Services Agreement model: 3. Traditional PSA Hospital contracts with physicians for professional services; hospital employs staff and “owns” the administrative structure.

22. Four recognized and commonly utilized variations on the Professional Services Agreement model: 4. Hybrid Arrangements Hospital employs/contracts with physicians; practice entity spun-off into jointly owned MSO (management services organization); various scenarios of mixing and matching of services.

23. Overall benefits of Employment Lite models:  Physicians maintain their independence from the hospital by remaining either an employee of the practice or controlling their management infrastructure, which would enable them to go back into private practice easily.  While these models are more complex than straight employment, their structures offer great flexibility, which physicians often prefer (at least initially) going into such an alignment arrangement.

24. Overall benefits of Employment Lite models :  Under some PSA models (specifically the Global Payment and Traditional PSAs), physicians can keep their existing benefit plans in place.  The structures are similar to employment, yet there are very specific differences that often are prevailing in preferences for the physicians.

25. Overall benefits of Employment Lite models:  The PSA structures can be viable segues to full employment; many physicians need time to make certain that the hospital partner is the “right” long- term affiliate.  While perhaps slightly less stable than employment, the PSA models offer a high level of stability relative to the hospital and physician relationship going forward.  These models avail opportunities to increase revenue (within legal bounds) as well as to control costs.

26. Overall benefits of Employment Lite models:  The PSA models present opportunities for physicians and hospitals to expand services together without being totally fully aligned (i.e., employment).  The ability to unwind and effectively disengage from the relationship is greater under the PSA models than straight employment, particularly if there is no post-termination non-compete.

27. Overall benefits of Employment Lite models:  While the ability to unwind exists, there are usually agreements that require high levels of commitment and inhibiting factors relative to the overall ability for the practice to partner with someone else (e.g., exclusivity and non-compete terms are typical traits of the PSA models).

28. Overall benefits of Employment Lite models:  By nature, the Traditional and Global Payment PSA models provide the physicians a level of independence and autonomy that employment simply cannot provide.

29. Overall benefits of Employment Lite models:  Although not as favorable as full employment from the hospital or health system standpoint, the PSA models provide them full integration with the practice.  Often the PSA models are actually more attractive because they reduce the typical economic and financial risk of owning and managing a medical practice (especially applicable with the Global Payment and Practice Management Arrangement PSA models).

30. Overall benefits of Employment Lite models:  The PSA models will not preclude the establishment of fully-aligned models and other important structures, such as patient centered medical homes and ultimately, ACOs.

31. Comanagement Agreement Comanagement agreement involves a contractual agreement between a hospital and management services company (typically a new company) or a group of individual physicians. The physicians agree to perform clinical and management services with specific improvement targets in exchange for a predetermined fee.

32. Other considerations include the following:  The new company includes both physicians and professional management. It may include physicians from a single practice or from multiple practices.  There are defined deliverables and performance levels. These contracts include service-level agreements tied to specific quality, operating and financial goals that form the basis for renewal or extension of the agreements.  Comanagement agreements can be as simple as assisting the hospital in developing a new program or care center or can be as extensive as managing an entire service line or ambulatory service venture.

33. Other considerations include the following:  Limited, if any, capital investment is typically required of physicians.  These arrangements can be set up as management services agreements or as consulting engagements.  Equity return rates can only be earned if material levels of equity are at risk for nonperformance; otherwise, payments must be tied to work effort.  The arrangement must be well-defined with a high degree of specificity.

34. Other considerations include the following:  Duties must require the involvement of physicians.  The overall required level of work effort and the individual hours incurred by each physician must be reasonable.  The compensation rate per hour must meet standards for fair market value.  Contemporaneous time reporting must be maintained.

35. Comanagement is a relatively quick and proven method for hospital-physician collaboration. It usually takes about 90 to 120 days to establish the program, draft the documents and commence operations — a time frame which may be shorter than with other approaches.

36. Comanagement arrangements continue to draw increased regulatory scrutiny, so expert counsel should be sought to ensure legal and regulatory compliance.

37. QUESTIONS Lynda M. Johnson Friday, Eldredge & Clark, LLP Ljohnson@fridayfirm.com 501-370-1553