Understanding Physician Hospital Affiliations a presentation for Sarah Gorham Hunter, Esq. [email protected] (504)842-4279 Michael F. Schaff, Esq. [email protected]

Understanding Physician Hospital Affiliations

a presentation for

Sarah Gorham Hunter, [email protected]

(504)842-4279

Michael F. Schaff, [email protected]

(732)855-6047

New Orleans, LouisianaDecember 5, 2014

The Louisiana State Bar Health Law Section

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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

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

General Trends Affecting Physician-Hospital Relationships

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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


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• 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


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Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9

Traditional Physician

Recruitment

Medical Directors & Personal Service

Agreements

Management Service

Organization

Center of Excellence

J oint Payer Contracting

J oint Ventures

Co-Management Agreement

Physician Employment

Projected Utilization Next 24-36

Months

No GrowthSlight

GrowthNo Growth Decrease

Slight Increase

DecreaseSteady Growth

Steady Growth

High Growth

Additional Comments &

Rationale

Increasing recognition of

need to rebuild physician relations

programs

Limited per Stark and other

regulations

Slight decrease in number of physicians,

increase in pay, and

accountability

Practices will continue to evaluate

whether to seek practice support due to financial

pressures

Typically focused upon

favored margin services

Dependent upon extent of

clinical integration

Continues to increase despite initial resistance from hospitals and systems

Continued increase due to focus on quality and efficiency

Increasing physician

employment integration in multiple forms

Range of Affiliation

Models

Trends Affecting Physician-Hospital Relationship Models

Integration and Complexity Increases

Prediction: Increasing Utilization, Sophistication & Complexity of Affiliation Models/Relationships

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Hospitals/Systems Continue to Re-assess the Necessity of Utilizing a Broad Range of Affiliation Options with Physicians to Advance Their Shared Missions/Visions

Pros and Cons ofHospital/Physician Alignment

• Pros– Economics (Changes in Reimbursement)

– Operations

– Data Sharing

– Revenue Sharing

• Cons– Culture

– Trust

– Autonomy and Control

– Slow Moving

– Unwind Difficult

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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

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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

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Legal and Regulatory Compliance Considerations and Risks

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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

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

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Employment / Sale of Practice

System/Hospital

Independent Physician Group


PayersPayers

Employment Agreement

Employment Agreement

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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.


• Conduct due diligence of own medical practice to confirm that purchase price is adequate

• Liabilities post closing

• Understand decision-making hierarchy

• Assess current agreements

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• 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”

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Employment / Sale of Practice Agreements

• Purchase Agreement for Practice – Generally Asset Purchase– Equipment

Diagnostic Imaging Lab

• Employment Agreement for Physicians– Compensation– Non-Compete

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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

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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

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Clinical Integration/CINsWhat 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

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Clinical Integration Example:Health System Subsidiary PHO

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.

Payors

Physician Group

CINSubsidiary

Health System

100% Ownership Participation Agreement

Co-Management Arrangements

Co-Management

CompanyCo-Ownership

Co-Ownership

Hospital


Co-Ownership Independent Physician Group

Hospital ServiceHospital Service

Provision of Management

ServicesOwnership

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.

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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

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• 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

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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

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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

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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

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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

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Common PSA Structure

Hospital Board

Medical Group Board

Hospital(Integrated with

Physician Division Infrastructure)

Medical Group(For-Profit Entity)

PSA

Management Committee

Clinical Services and Non-compete

Agreement

MSO Services / Aggregate

Compensation (Rate per RVU)

• Asset Ownership• Contracting• Billing• Recruiting Support• IT Support• Staffing &

Management

• Group Governance• Physician Hiring &

Termination• Income Distribution• Clinical

Practice/Quality• Malpractice

• Approves Strategy/Finances• Oversees Operations/Business Planning• Establishes Compensation Principles• Achieves Value-Exchange Objectives• Is Typically Split 50/50 Between Hospital and Medical Group 28


“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

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“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

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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

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• 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

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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”

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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

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QUESTIONS/ANSWERS

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Documents

Understanding Physician Hospital Affiliations a presentation for Sarah Gorham Hunter, Esq. [email protected] (504)842-4279 Michael F. Schaff, Esq. [email protected]