0. Association of Washington Public Hospital Districts CEOs and Administrators Retreat PRIMARY CARE DEVELOPMENT IN NON-URBAN MARKETS
May 23, 2007
Kevin M. Kennedy, Principal
Lori K. Nomura
1111 THIRD AVENUE, SUITE 3400
SEATTLE, WASHINGTON Telephone
Fax

1. Agenda Background Organizational Models Other Support Structures
Financial Analysis
Which Model is Best for You?

2. Background

3. Background Physician Shortages
Changes in physician supply and demand patterns in recent years are driving nationwide shortages in many specialties.
Physician Supply
Stagnant medical school admissions.
Decreasing physician work effort.
Increasing number of part-time physicians.
Top Five Searches by Volume in 2004–20051
Number of Physician Searches Conducted
Physician Demand
Growing aging population.
Technological advances.
Prevalence of chronic diseases.
1 Merritt, Hawkins & Associates (MHA), 2005 Review of Physician Recruitment Incentives. NOTE: Based on 1,743 physician search and consulting assignments that MHA represented from April 1, 2004, to March 31, 2005.
Implication
Physician recruitment will become more competitive as physician shortages increase.

4. Background Subspecialization
With PCP reimbursement rates flat and compensation nearly half that of many medical subspecialties, medical students are increasingly choosing to specialize.
Specialty Certification Plans of Graduating Medical Students2
Median Physician Compensation1
1 MGMA Physician Compensation and Production Survey: Report Based on 2005 Data, national data.
2 Source: Association of American Medical Colleges, AAMC Data Book, January 2005.
Implication
Physician specialization will increase the shortage of PCPs.

5. Background Mounting Financial Pressures
Due to rising practice costs and declining reimbursement, physicians have had to dramatically increase their productivity to maintain the same level of compensation. Moreover, PCP compensation has barely kept up with inflation, averaging only a 2.6% increase per year.
Median PCP Production and Income
Median Specialist Production and Income
1995–2005 Percentage Increase: 66%
1995–2005 Percentage Increase: 72%
1995–2005 Percentage Increase: 26%
1995–2005 Percentage Increase: 47%
Compound Annual Growth Rate: 2.6%
Compound Annual Growth Rate: 4.7%
Source: MGMA Physician Compensation and Production Survey for the years 1995–2005.
NOTE: Primary physician compensation has been growing at the same rate as the Consumer Price Index, which rose 27% from 1994–2004.
Implication
Physicians are likely to be drawn to regions with higher reimbursement rates.

6. Background Critical Questions
Is your medical staff willing and able to recruit:
To replenish itself from turnover and retirement?
To meet community needs?
To support your programmatic and service goals?
Do the economics of your area (payor mix, patient demand, overhead factors) support market levels of physician compensation?
If the answers to the above are uncertain, what can the hospital do to ensure an adequate supply of physician manpower?

7. Organizational Models

8. Medical Staff Credentialing
Organizational Models Independent Practice
Medical Staff Credentialing
Hospital
Physician
Practices
Hospital Privileges
Payors
Contracting
Group Governance
Physician Compensation
Clinical Coordination
Facilities
Billing
Staffing and Management
Characteristics
Physicians are independent and typically apply for hospital privileges.
Hospital may provide limited financial or operational support subject to significant regulatory constraints.
Physicians are responsible for managing their own practices.

9. Organizational Models Independent Practice – Model Arrangements
Clinic Model
Licensing Requirements
Financial Implications
Organizational Structure
Management Requirements
Independent Practice
None.
Physicians are credentialed by hospital for practice privileges.
Revenue is highly dependent upon physician productivity and payor mix.
No supplemental payment arrangements.
Solo or group practice.
Smaller practices (one to three providers) are usually managed by physicians with “lead” staff members.
Larger practices typically have dedicated office or business managers.
Practices are responsible for managing all aspects of business, including contracting, group governance, physician compensation, clinical coordination, facilities, billing, and staffing and management.

10. Common Practice Policies and Procedures
Organizational Models Integrated Medical Group
Medical Group
Group Governance
Physician Compensation (Group-Based)
Common Practice Clinical/Administrative Oversight
Common Practice Policies and Procedures
Characteristics
Similar to the clinic-without-walls model, except:
The group incorporates common policies and procedures across all sites of practice.
The group centralizes most administrative functions.
Group expenses are typically shared among group physicians.
Compensation plan is based on factors that stress group success.

11. Organizational Models Integrated Medical Group – Model Arrangements
Clinic Model
Licensing Requirements
Financial Implications
Organizational Structure
Management Requirements
Integrated Medical Group
Creation of a single medical group with one tax ID number.
No supplemental payment arrangements.
Physician compensation is group-based.
Practice expenses are shared across all physicians.
Common fee schedule across all practices.
Some economies of scale achieved through centralization of various administrative functions, including billing, purchasing, and shared staffing.
Common operating and practice policies and procedures are established.
Normally has a main practice facility, but satellite offices are common.
Centralized governance structure.
Medical group employs all staff.
Most administrative functions are centralized, including contracting, billing, accounting, facilities management, recruitment, practice management, and planning.
Dedicated management team, possibly with graduate training and professional certification.

12. Organizational Models Rural Health Clinics
Hospital-Based
Independent
- OR -
Physician
Practices
Hospital
Contracting
Billing
Staffing and Management
Facilities
Contracting
Group Governance
Physician Compensation
Clinical Coordination
Facilities
Billing
Staffing and Management
Payors
(cost-based
payment per visit)
Characteristics
Rural Health Clinics (RHCs) can be independent or hospital-based.
RHCs were established to stabilize access to outpatient primary care in underserved rural areas and encourage the use of physicians, physician assistants (PAs), nurse practitioners (NPs), and certified nurse-midwives.
Under the program, the U.S. Centers for Medicare & Medicaid Services (CMS) designates private and nonprofit clinics meeting certain conditions for certification as RHCs.
RHCs are eligible for enhanced Medicare and Medicaid reimbursement (cost-based payment per visit).
CMS contracts with the Washington State Department of Health Facility Services Licensing to survey clinics to determine whether they meet federal requirements.
Requirements include location, organizational affiliation and governance, staffing requirements, medical direction, and provision of required services (including some emergency care).

13. Organizational Models Rural Health Clinics – Model Arrangements
Clinic Model
Licensing Requirements
Financial Implications
Organizational Structure
Management Requirements
RHC
Eligibility established through the Washington State Department of Health Facility Services Licensing.
Clinic must be located in rural or nonurban area as defined by U.S. Census Bureau and be within a Federal Health Provider Shortage Area (HPSA) or Medically Underserved Area (MUA).
Freestanding and provider-based RHCs’ cost-based Medicare reimbursement capped at $74.29 per encounter for 2007; Medicaid reimbursement is not capped and is based on clinic’s cost-based rate per visit (2006 average for WA state is $82.06).
Private office reimbursement based on Medicare RBRVS fee schedule and Medicaid fee schedule.
May be for-profit, non-profit, public, or private.
Provider-based RHCs are certified as part of a hospital, SNF, or home health agency.
All other RHCs are classified as free-standing.
At least one NP, PA or certified nurse-midwife must be on site to see patients 50% of the time the clinic is open (waiver is possible).
A physician medical director must be on site at least once every 2 weeks.
Productivity standards of 4,200 visits per FTE employed physician and 2,100 visits per FTE employed midlevel.
On-site service requirements include common outpatient diagnostic and therapeutic services (X-ray, laboratory).
Basic ED services must be provided, including treatment for common life-threatening injuries/illnesses.
Source: Washington State Department of Health, Office of Community and Rural Health, 2006.
Development of an RHC from start to finish typically takes about 1 year.

14. Organizational Models Provider-Based Clinic
Independent Provider-Based Clinic
Hospital-Employed Provider-Based Clinic
Medical
Group
- OR -
Hospital
Hospital
Clinic
Clinic
Professional
and Technical
Fees
Technical
Fees
Payors
Professional
Fees
Payors
Characteristics
Changing from an office-based practice to a provider-based practice may yield financial advantages.
It is important that hospital and physician organizations jointly consider the impact of all factors, including the effect on patients, organizational requirements, and operational requirements.
CMS has defined strict requirements for qualification as a provider-based practice. These requirements outline:
Licensure.
Ownership and control.
Administration and supervision.
Financial integration.
Facility location.
Additional licensure/accreditation requirements of provider-based sites.
Joint Commission on the Accreditation of Healthcare Organizations (JCAHO).
State licensure requirements.

15. Organizational Models Provider-Based Clinic – Model Arrangements
Licensing Requirements
Financial Implications
Organizational Structure
Management Requirements
Provider-Based Clinic
Clinic must be operated as a department of the main provider (i.e., hospital or other provider).
Clinic must be operated under same licensure as main provider.
CMS must approve clinic application for provider-based status.
Clinic must meet all the same regulatory and inspection requirements as the main provider (e.g., JCAHO, CMS, College of American Pathologists).
Clinic must be located either “on campus” and within 250 yards of main buildings, or within 35 miles of the main campus of the provider.
Clinics within 35 miles must meet the 75/75 test, requiring that at least 75% of patients served by the main campus and by the remote location reside in the same ZIP codes.
Provider-based reimbursement provided in two components: APC payment (Part A) and physician professional fee payment (Part B), instead of global fee for freestanding clinics.
Increased payments of 50% or more can be realized in certain instances.
Medical practices with high Medicare populations benefit most from converting to provider-based status (internal medicine, family practice vs. OB and pediatrics).
Must have the same organizational structure and integration as other hospital departments.
Clinical services must be integrated with main provider: management, QA, UR, medical records.
Financial systems are integrated with main provider; income and expenses are shared; accounting and reporting of financial data are combined.
Reporting relationships for the clinic and hospital must be the same in terms of intensity, frequency, and accountability.
Administrative services such as HR, finance, payroll, and purchasing must be handled by the same personnel.

16. Organizational Models FQHC
Community
Board
FQHC
Payors
Characteristics
FQHCs are similar to RHCs but have additional requirements:
Must provide dental services.
Certain proportion of care must be administered by midlevel providers.
Must have a community board.
FQHCs are “safety net” providers, such as community health centers, public housing centers, and outpatient health programs.
The main purpose of the FQHC is to enhance the provision of primary care services in underserved urban and rural communities.
Medicare pays FQHCs an all-inclusive, per-visit amount based on reasonable costs with some exceptions. Rates vary depending on actual costs, but have been observed to range from $60 to $150 per visit.

17. Organizational Models FQHC – Model Arrangements
Clinic Model
Licensing Requirements
Financial Implications
Organizational Structure
Management Requirements
FQHC
Clinic must be in a medically underserved area or medically underserved population
Designated Community Health Centers, Migrant Health Centers, Health Care for the Homeless Programs, Public Housing Primary Care Programs, and Urban Indian and Tribal Health Centers currently receiving section 330 grants are automatically certified as FQHCs.
Existing clinics meeting FQHC requirements can request certification as FQHC Look-Alikes.
Patient fees must be discounted based on federal poverty guidelines.
New clinics can qualify for up to $650,000 in start-up funding.
Enhanced Medicare and Medicaid reimbursement.
Malpractice coverage assistance.
Discounted prescription drug purchases.
Clinic must be public or nonprofit.
Board of directors must be established, composed of greater than 50% of active, registered patients.
Clinics may be rural or urban.
No specific staffing requirements.
Clinics must provide primary care to all age groups.
Other service requirements include dental, mental health, substance abuse, and transport services.
Clinic must be open a minimum of 32 hours per week.
Productivity standards of 4,200 visits per FTE employed physician and 2,100 visits per FTE employed midlevel.

18. Other Support Structures

19. Other Support Structures MSO
Management
Services
MSO
Hospital
Physician
Practices
Billing
Staffing and Management
Practice Consulting
Contracting
Group Governance
Physician Compensation
Clinical Coordination
Facilities
Payors
Characteristics
Physicians would be independent but contract for office management services.
Physicians would pay the MSO a fee for selected services.
Existing hard assets may be repurchased by physicians.
Physicians would own accounts receivable (A/R) and patient charts.
Hospital creates an MSO, which could be a function of the hospital, a subsidiary, or a separate legal entity.
The MSO provides administrative and practice management services to area physicians, such as billing and staffing support (current clinic staff might be transitioned to MSO employment under this arrangement).
Physicians pay the MSO an overhead fee for services provided at fair market rates.
The MSO model can create economies of scale for multiple physician groups and allows physicians to focus on the clinical aspects of their practices.

20. Other Support Structures MSO – Model Arrangements
Clinic Model
Licensing Requirements
Financial Implications
Organizational Structure
Management Requirements
MSO
None.
No supplemental payment arrangements.
Physicians pay fee to hospital for selected management support services.
Fee paid to hospital must be at fair market rate.
Ability to generate economies of scale from aggregating the needs of smaller practices; sometimes offset by higher hospital cost structure.
MSO could be a function within the hospital, a subsidiary, or a separate legal entity.
Physicians retain independence, but contract for management services.
Physicians continue to own and manage their group.
Physicians own A/R and patient charts.
Billing, staffing, management, and practice consulting services provided by the hospital.
Internal support functions (group governance, physician compensation) continue to be provided by group.
Allows physicians to focus on delivery of clinical services.

21. Other Support Structures ISO
ISO Support
ISO
Hospital
Physician
Practices
Information Services Platform/Staff
Electronic Medical Record (EMR) Implementation
Physician System Support
Contracting
Group Governance
Physician Compensation
Clinical Coordination
Facilities
Payors
Characteristics
Physicians remain independent from the hospital but contract for information services.
Contracted services typically include:
Hardware.
Software.
EMR.
Patient accounting.
Information services training and support.
Physicians pay the hospital a fee for information services.
Physicians own and operate their group(s).

22. Other Support Structures ISO – Model Arrangements
Clinic Model
Licensing Requirements
Financial Implications
Organizational Structure
Management Requirements
ISO
None.
Physicians pay fee to hospital for selected IT support services.
Recent regulations allow for below-cost subsidies and reduced physician investment.
Minimizes investment required for physician EMRs.
Probable operating subsidy required from hospital.
ISO could be a function within the hospital, a subsidiary, or a separate legal entity.
Physicians retain independence, but contact for IT services.
Physicians own and manage their group.
All IT functions, which typically include the information services platform, EMR support/ implementation, and physician system support, are provided by the hospital or other IT agency.
Medical group performs all administrative support functions (billing, contracting, staffing, facility management).

23. Other Support Structures PSA
Clinical
Services
PSA
Medical
Group
Hospital
Administrative
Services and Aggregate
Compensation
Group Governance
Physician Compensation
Clinical Coordination
Contracting
Billing
Staffing and Management
Facilities
Payors
Characteristics
Under the PSA model, a group of physicians is linked to the hospital through a PSA.
Physicians are relieved of all nonclinical responsibilities.
The PSA model offers many of the benefits of employment with more physician control over compensation and governance.
The hospital employs all staff, owns payor contracts and hard assets, and provides all support services.
The hospital makes periodic payments to the group, based on the terms negotiated in the PSA.
Physicians maintain their group structure and internal compensation distribution plan.

24. Other Support Structures PSA – Model Arrangements
Clinic Model
Licensing Requirements
Financial Implications
Organizational Structure
Management Requirements
PSA
None.
Hospital contracts with medical group to provide clinical services in return for compensation and administrative support.
Payors contract directly with hospital.
Hospital makes aggregate payments to medical group (normally on a per-RVU basis) based on terms of PSA.
Operations and financing are integrated with hospital, yet physicians retain independent group structure.
Physicians control the distribution of compensation and medical group governance.
The hospital employs all staff, owns hard assets, and provides all support services.
Physicians perform clinical work only; all administrative support functions are performed by hospital (billing, contracting, staffing, facility management).

25. Other Support Structures Physician Employment
Hospital
Existing
Physician
Practices
Practice Purchase Price
Compensation and
Management Services
Clinical Services
and Input
Characteristics
Hospital purchases existing practices at fair market value and employs the physicians. Office staff are also typically employed by Hospital.
A compensation plan is developed for the physicians that is productivity-based, but may also involve a base salary component.
Physicians collaborate with Hospital administrators to set strategic and operational goals and to provide input regarding day-to-day operations.

26. Other Support Structures Physician Employment – Model Arrangements
Clinic Model
Licensing Requirements
Financial
Implications
Organizational Structure
Management Requirements
Physician Employment
None.
Physicians must be credentialed by hospital.
Medical practice assets are purchased by the hospital at fair market value.
Compensation plans are developed based on characteristics of each specialty but are typically weighted toward productivity.
Virtually ensures market levels of compensation and benefits to physicians.
Best-performing hospital-employed groups can break even when ancillary revenues are considered.
Physicians become employees of hospital.
Physician-led quasi-governance mechanisms can be developed to secure physician input into operational and strategic goals of organization.
Physicians report to hospital administration.
Dedicated management.

27. Financial Analysis

28. Financial Analysis
The organizational models vary significantly in their revenue and expense characteristics.
Each model has unique reimbursement features for Medicare and Medicaid. For FQHC and RHCs, the reimbursement rate is based on detailed cost information submitted as part of your application.
Although the reimbursement is often considerably higher than a freestanding, independent clinic, it is important to note that expenses are often also higher due to operating restrictions, including:
Mandated services (such as dental) or staffing patterns (midlevel providers).
Integration with hospital and hospital cost structure (provider-based).
YMMV – do the math!

29. = Funds Available for Physician Compensation and Benefits
Financial Analysis Reimbursement Characteristics
The table below illustrates the flow of revenues and practice expenses for the various clinic models.
Clinic Model
Medicare
Medicaid
Commercial/ Other
Independent Practice
RVU × Federal Rate (Professional Fee)
RVU × State Rate (Professional Fee)
RVU × Contracted Rate
Provider-Based Clinic
RVU × Federal Rate (Professional Fee)
APC Weight × Federal Rate (Facility Fee)
APC Weight × State Rate (Facility Fee)
RHC – Freestanding
Federal Cost-Based Encounter Rate (Capped at $72.76)
Cost-Based Encounter Rate (Washington State Average = $82.06)
RHC – Provider-Based
Cost-Based Encounter Rate (Washington State Average = $106.49)
FQHC
Federal Cost-Based Encounter Rate (Capped at $97.13)
Cost-Based Encounter Rate (Washington State Average = $144.50)
40 – 50% higher
than freestanding
Total Revenue
− Practice Expense
= Funds Available for Physician Compensation and Benefits

30. Financial Analysis Profitability
In this analysis, the projected profitability was greatest for the provider-based and the FQHC models.
Clinic Model
Clinic Revenue
Practice Expenses
Profit Before Physician Compensation and Benefits
Percentage Variance to Base Case
Independent Practice
$318,249
$151,806
$166,444 --
Provider-Based Clinic
$464,839
$182,167
$282,672
70%
RHC – Freestanding
$385,336
$166,806
$218,531
31%
RHC – Provider-Based
$405,706
$197,167
$208,540
25%
FQHC
$490,291
$233,656
$256,636
54%
Estimated
NOTE: Totals may not be exact due to rounding.

31. Which Model is Best for You?

32. Things to Consider Hospital or Physician ownership?
Strongest financial return?
Location?
Rural
HPSA
MUA/MUP
Productivity standards?
Hospital licensure requirements?
Service requirements/limitations?

33. Summary of Clinic Organization Models
Location
Ownership/ Governance
Staffing
Productivity Standards
Payment Medicare
Payment Medicaid
Physician Office
No limitation
Hospital or physician
No limitations
No standards
Physician fee schedule
Medicaid fee schedule
Provider-Based
Urban or rural
Within 35 miles of hospital or other criteria
Hospital owned
Accountable to hospital governing body
Tech = CAH = cost + 1% PPS = APC Prof = fee scale + 12% if global bill by CAH
Tech = cost Prof = Medicaid fee scale
RHC Provider-Based
Rural and
HPSA/ MUA (updated every 3 years)
Hospital owned;
accountable to hospital governing body
NP, PA or CNM 50% of open hours
4,200/employed physician FTE
2,100/employed midlevel FTE
Cost of up $74.29
No limit if < 50 beds
FFS rate based on 1999/2000 data
RHC Freestanding
HPSA/ MUA (must be updated every 3 years)
Cost up to $74.29
FQHC
MUA or MUP
No for-profit entity
> 50% of board are FQHC patients
< half of remaining members work in healthcare
No FQHC employees
MD, NP, PA, CNM, social worker for psychologist available all open hours
32 hours/week minimum
Rural up to $99.17 Urban up to $115.33
Medicaid PPS