1. 1 Why Physician Employment Is Not A Strategy By Itself John Kirsner Partner, Squire Sanders Michael Strilesky Manager, Charis Healthcare John Kirsner Partner, Squire Sanders Michael Strilesky Manager, Charis Healthcare

2. 2 Today’s Objectives 1.Market Conditions Impacting Physician Employment and Integration 2.Key Revisions of Healthcare Reform Considerations that Impact Alignment 3.Clinical Integration, Co-Management as Alternative to Physician Employment 4.Strategic Considerations for the Future 1.Market Conditions Impacting Physician Employment and Integration 2.Key Revisions of Healthcare Reform Considerations that Impact Alignment 3.Clinical Integration, Co-Management as Alternative to Physician Employment 4.Strategic Considerations for the Future

3. Keys to the Future: Reduced Fragmentation and Comprehensive Integration 3 Present State: Fragmented Care Future State: Patient Centric Care

4. The Next Step: Moving to More Integrated and Performance Based Models Independent Medical Staff Medical Directorships, Subsidies, Management Contracts Under- Arrangements, Joint-Ventures Clinical Institute, Co- Management Foundation Low Integration High Employment Income GuaranteeFixed SalaryProductivity (FFS) Care Coordination / Bundling

5. Why The Push To Employment: Physician Income Declining Source MGMA 2009 5 Comp% Change Work RVU % Change Comp per wRVU % Change Neurosurgery13.0%2.8%12.1% Gastroenterology26.0%7.5%6.9% General Surgery-2.4%1.9%0.9% Otolaryngology8.6%12.4%0.1% OB/GYN5.5%4.2%-0.7% Urology4.6%12.8%-0.8% Neurology5.2%14.4%-1.5% Cardiology15.3%9.3%-2.1% Orthopedic Surgery4.4%8.6%-3.8% Family Medicine5.8%19.7%-5.0% Internal Medicine-1.0%20.4%-7.7% 19912009 $565k $250k $125k $185k PCP Production Specialist Production vs. Compensation 2007-2008 PCP Production vs. Compensation 1991-2009 PCP Compensation

6. 7 Steps: Developing a Successful Employed Medical Group VisionStructure Leadership (Physicians and Administration) Culture Compensation and Incentives Measure and MonitorDemonstrate Value Source: Sg2, Building a Successful Employed Medical Group 6

7. It’s Now the Law: ACO and Bundling Demonstration Projects  Group of providers with the organization to contract as a unit, monitor performance (“ACO”)  ACO will share aggregate savings with Medicare that result from the integrated structure  Sufficient primary care physicians to serve 5,000 Medicare Part B beneficiaries  Three year agreement  Existing leadership and management structure that includes clinical and administrative systems  Must meet certain quality measures and demonstrate patient-centered care  Group of providers with the organization to contract as a unit, monitor performance (“ACO”)  ACO will share aggregate savings with Medicare that result from the integrated structure  Sufficient primary care physicians to serve 5,000 Medicare Part B beneficiaries  Three year agreement  Existing leadership and management structure that includes clinical and administrative systems  Must meet certain quality measures and demonstrate patient-centered care  Group of providers including a hospital, a physician group, a skilled nursing facility, and a home health agency  One bundled payment to the group for an “episode of care” for participating Medicare beneficiaries  Episodes of care are defined as  One of ten applicable conditions selected by the Secretary  Care beginning three days prior to admission to a hospital and ending thirty days following discharge from the hospital  Must meet certain quality measures

8. Payment Flow in a Bundled World I: Bundled Facility Fees 8 Inpatient Procedure Post-Acute Care Payor 1.Results in “supergroups” and clinically integrated PHOs 2.Hospital owns/ controls/contracts with all facilities 3.Physician-hospital collaboration more important than ever Primary Care Surgeon Specialist Professional Fees Bundled Facility Fees Downstream Risk

9. Payment Flow in a Bundled World II: Bundled Professional and Facility Fees 9 Inpatient Procedure Post-Acute Care Payor 1.Hospital owns/controls/ contracts with all facilities 2.Hospital owns/controls/ contracts with physician practices 3.Can an independent Group be strong or large enough to survive? 4.Foundation Model/ ACO as End Game? 5.Is there capacity for Foundation/ACO everywhere? All Payments (Professional and Technical) Bundled Downstream Risk Specialist Group Practice I Primary Care Group Practice I Surgeon Group Practice II

10. Repeal of Hanlester  Healthcare Reform amended the Anti-Kickback Statute’s intent standard, such that, in violating the Anti-Kickback Statute, a person need not have actual knowledge of the Statute or a specific intent to violate the Statute  This effectively overturns Hanlester  Historically, other courts and the OIG have reviewed the facts, circumstances and safeguards surrounding an arrangement in evaluating Anti-Kickback Statute compliance  While this will likely continue, there will be a “sorting-out” period with respect to risk analysis, and parties should take a thoughtful, cautious and comprehensive approach when evaluating Anti-Kickback Statute compliance  Healthcare Reform amended the Anti-Kickback Statute’s intent standard, such that, in violating the Anti-Kickback Statute, a person need not have actual knowledge of the Statute or a specific intent to violate the Statute  This effectively overturns Hanlester  Historically, other courts and the OIG have reviewed the facts, circumstances and safeguards surrounding an arrangement in evaluating Anti-Kickback Statute compliance  While this will likely continue, there will be a “sorting-out” period with respect to risk analysis, and parties should take a thoughtful, cautious and comprehensive approach when evaluating Anti-Kickback Statute compliance

11. Clinical Integration  FTC allows joint contracting where clinical integration exists  Defined as a “network implementing an active and ongoing 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.” Statements of Antitrust Enforcement Policy in Health Care (August 1996) at Statement 8, § B.1.  FTC allows joint contracting where clinical integration exists  Defined as a “network implementing an active and ongoing 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.” Statements of Antitrust Enforcement Policy in Health Care (August 1996) at Statement 8, § B.1.

12. Clinical Integration – Key Characteristics  Selective, scalable membership  Delivery of evidence-based care  Infrastructure for coordination and collaboration  Performance transparency system  Meaningful performance-based incentives  Selective, scalable membership  Delivery of evidence-based care  Infrastructure for coordination and collaboration  Performance transparency system  Meaningful performance-based incentives

13. Clinical Integration – Necessary Components  Clinical protocols and benchmarks  Governance and staffing infrastructure  Data monitoring and reporting  Contractual model and accountabilities  Technology infrastructure  Payer contracting vehicle  Performance-improvement tools and processes  Performance-based pay structures  Clinical protocols and benchmarks  Governance and staffing infrastructure  Data monitoring and reporting  Contractual model and accountabilities  Technology infrastructure  Payer contracting vehicle  Performance-improvement tools and processes  Performance-based pay structures

14. Treatment in a Clinically Integrated Network Primary Care 14 Surgeon Specialist Patient Flow Post-Acute Care EMR Performance Improvement Clinical Pathways Implications 1.Access to health records by individual physician and group 2.Access by all physicians in CIN 3.Access between groups 4.Access by Hospital 5.Physician-driven

15. What Facilities Want: Structural Physician Collaboration  Hospitals and Health Systems are seeking greater collaboration  Survey of Facilities - Either already implementing/are considering within 2 years:  Co-Management Relationship: 22%/27%  Office Leasing: 40%/22%*  Equipment Lease: 15%/14%*  Joint Venture: 21%/37%  Under-Arrangement: 18%/10%* *Discouraged after most recent Stark regulatory changes Source: Advisory Board, Toward True Shared Governance: Emerging Oncology Service Line and Physician Alignment Models (2009).  Hospitals and Health Systems are seeking greater collaboration  Survey of Facilities - Either already implementing/are considering within 2 years:  Co-Management Relationship: 22%/27%  Office Leasing: 40%/22%*  Equipment Lease: 15%/14%*  Joint Venture: 21%/37%  Under-Arrangement: 18%/10%* *Discouraged after most recent Stark regulatory changes Source: Advisory Board, Toward True Shared Governance: Emerging Oncology Service Line and Physician Alignment Models (2009). To Edit Footer Text: Select View/Header and Footer/Check Mark Footer Box/Edit Text 15

16. Co-Management Intended to Drive Comprehensive Integration 16 Hospitals Engages Physicians to on Quality Metrics (not currently reimbursed) Maintains Open Lines of Communication Provides Attractive Workshop to Practice Physicians Desire Improved Efficiency and Operations Impacts Work-life balance & Income Establish Market / Competitive Advantage WIN-WIN

17. ©2010 Squire, Sanders & Dempsey L.L.P. Co-Management Leadership Structure General Surgery Orthopedics LLC Management Company Urology 17 Executive Director Budgeting Human Resources Managed Care Contracting

18. ©2010 Squire, Sanders & Dempsey L.L.P. Co-Management Legal Structure Service Contract to Manage Cancer Center Cancer Center Pays the LLC for: Base management fees Expense reimbursement Incentive compensation meeting service line management benchmarks Management Company LLC Specialists Equity Equity Return (Incentive Payout) Specialists Management Contract $ 18

19. Healthcare Reform…The Goal To Edit Footer Text: Select View/Header and Footer/Check Mark Footer Box/Edit Text 19 Prerequisite Tactics The Goal 3. 2. 1. Reduce Preventable Readmissions Value-Based Purchasing Reduce Hospital Acquired Conditions Bundled Payments Accountable Care Organizations Improve Quality Reduce Costs Increase Healthcare “Value” Electronic Health Records Source: HFMA Regulatory Sound Bites I September 2009

20. Economic Comparison of Integrated Strategies ACO PCMH INSTITUTE EMPLOYMENT 20 Requires Significant Market Risk Spread Across Multiple Providers Patient Centered Medical Home (Population or Disease Focused) Bundled Payments for Technical and Professional Component Fixed or Incentive Compensation (Fee for Service Model)

21. Getting Here from There… EMG: Employed Medical Group, MSO: Management Services Organization 22 COST QUALITY GROWTH 2010 2015 Optimizing EMG & MSO Strategy Co-Management Integrated Physician Network Accountable Care Organization

22. John M. Kirsner, Esq. Squire, Sanders & Dempsey L.L.P. Partner, Health Care Practice Group (614) 365-2722 jkirsner@ssd.com Contact Information Michael Strilesky Charis Healthcare Manager (330) 650-1752 michael.strilesky@charishealthcare.com