“Aligning Hospitals and Providers”
by Sean Weiss, Partner & VP of Compliance
While the industry is split between physician practices remaining independent versus being acquired and thus being employed, there are other type arrangements that are taking place which have been around for quite a while (mid-00’s); I am referring to Co-management Agreements. These type agreements are also referred to as “Service Line Agreements” and they are a popular way for providers to integrate with hospitals without becoming employed. Often, you will find multiple service line agreements in place and split among different specialties (Ortho, Cardio, GYN, Hospitalists/Primary Care, etc.) whereby each is co-managing that specific line of service at the hospital. In a typical agreement, physicians are compensated based on their time engaged in assisting in the management of the service line. The reason for creating these co-management agreements is to achieve certain metrics (quality or volume) or other things such as:
- Reducing costs for the hospital
- Improving physician/provider experience
- Improvement in quality of care at a lower cost
In the majority of Co-management agreements, the rates are fixed but often include incentives for achieving objectives set out in the agreement. In my experience, the contract duration can span 1-3 years and often are mutually agreed upon with regard to their renewal. Built into the agreements are compensation adjustments based on an annual percentage or cost-of-living index increase. When looking at these types of agreements, two specific areas are always raised by the physician getting ready to enter into the agreement:
- Is it fair?
- Is it legal?
In answering these questions, I need to be very careful so I will take a non-legal approach to answering:
- Is it fair? Fairness is subjective but we do have measures that we can look to with regard to calculating compensation such as Fair Market Value (FMV) or commercial reasonableness. With regard to the compensation, there is as outlined above a “Base” fee and then an “At Risk” fee:
- Base fee – a fixed annual base fee that is consistent with the fair market value of the time and efforts participating physicians dedicate to the service line development, management, and oversight process
- “At Risk” fee – a series of pre-determined payment amounts contingent on achievement of specified, mutually agreed, objectively measurable, program development, quality improvement and efficiency goals
- Is it legal? My suggestion is to reach out to an attorney competent in transactional law with strong familiarity with health care laws and statutes. Some of the key areas to be aware of regarding Co-management agreements include but may not be limited to:
- Federal Anti-Kickback Statute (AKS)
- Stark Law
- Provider-based Status Rules
- Tax Exemption Laws
- Civil Monetary Penalty Statute
Once you have worked with your team of experts to establish the compensation formula and have done your diligence regarding potential regulatory compliance and legal issues setting out to establish Co-management agreements becomes a bit easier, or does it? Obviously, you have to find a group of physician specialists willing to engage in managing the Service Line(s), then there’s the team of consultants, CPA/FMV experts and consultants to engage for the negotiation process. In negotiations both sides need to feel good about what they are signing on for and agreeing to. This means the agreement cannot be or feel one-sided. Remember, the objective to a Co-management agreement is that, if done correctly, both sides will benefit significantly.
When setting out to accomplish the establishment of the relationship, the physicians need to come together as a collective group and should determine their leadership and entity (typically these are LLC formations) structure and needs to include a management or steering committee. In the majority of arrangements I’ve looked at over the years, these groups are 100% physician-owned and the physicians are equal partners who fund the new group via capital contributions in the neighborhood of $4000 – $6000 per member. The attorney you select will structure new corporate governance and a subscription agreement regarding any offering deadlines based on their collaboration with the managing members or the lead physician in the group. Because this entity is fully operational and engaged in working with the administration at the hospital, it is strongly suggested to hire an administrator to engage in daily operational activities.
If this is the first time you are engaging in this type of agreement, it is important to also know what the other side is or should be doing. Hospitals will often engage legal counsel to draft the Co-management agreement, engage with an FMV firm to evaluate members of the physician entity, have a financial analysis for the service line performed, and negotiate with the physicians on the services to be provided under the agreement. Some of the specific aspects to the hospital Co-management agreement would include but may not be limited to:
- Participation in and with the development of clinical outcomes, care guidelines, and in-service education;
- Management of the operations;
- Evaluation of new and emerging technology;
- Vendor selection for all aspects of the service line;
- Participation in or the development and/or implementation of the business plans;
- Participation in or the development of the operating budget formation and capital to run and expand the program;
- Physician recruitment and specialized training (DaVinci or other techniques);
- Managing referral sources;
- Patient satisfaction surveys; and
- Outreach programs
Valora Gurganious, Senior Management Consultant with DoctorsManagement, LLC , has also “seen co-management agreements call for the physicians to commit to training and lecturing at least once per quarter to Residents and Fellows (at teaching hospitals), ER Physicians and Hospitalists. This contractual commitment to peer education is another strategy the hospital may specify in the agreement in order to reduce medical errors, to better coordinate patient care, to improve outcomes, and ultimately to reduce costs for the hospital.”
In closing, Co-management agreements provide a lot of reasons to engage in one if your hospital is looking at them. Even maybe if they’re not, it could be worth bringing it to their attention. First, there are OIG Opinions regarding their legality and how to meet all the restrictive covenants and regulations required under these type agreements. Second, they establish trust between hospitals and physicians as well as physicians with other physicians not in the same group practice. Third, they allow physicians an opportunity to participate in the management of the hospital with minimal risk and investment. Finally, these type agreements are typically quality and performance-driven, which no one can deny this has been and is the direction health care is headed with Value Based Payments (VBPs), MIPS and MACRA, which are all focused on the care of patients and the overall physician experience. While no one truly knows what tomorrow will bring, it is safe to say right now and for the foreseeable future, physicians are working towards remaining or gaining their independence from hospitals and health systems but both still heavily rely on the other to provide quality care to patients and ensure their viability.
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