issues & cautions associated with medical practice affiliations with hospitals &...

Issues & Cautions Associated with Medical Practice Affiliations with Hospitals &

Alternatives

New Jersey Medical Group Management Association

Practice Management ConferenceApril 18, 2013

Taj Mahal Hotel and Casino, Atlantic City, New Jersey

Michael F. Schaff, Esq.Wilentz, Goldman & Spitzer90 Woodbridge Center Drive

Woodbridge, New Jersey 07095(732) 855-6047

[email protected]

Peter Greenbaum, Esq.Wilentz, Goldman & Spitzer90 Woodbridge Center Drive

Woodbridge, New Jersey 07095

(732) [email protected]

2

Overview of Presentation

General Trends• Continued Erosion of “Traditional”

Medical Staff-Hospital Dynamics• Mega Trends

Overview of Affiliation Models• Direct Employment• Physician Subsidy• Physician Enterprise Model• Professional Services Agreement

Model

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Overview of Presentation

Discussion of Issues and Cautions of Professional Service Model

• Group Considerations• Integration Considerations• Sale or Lease of Assets• wRVU• Budget• Term and Termination• Unwinding• Restrictive Covenant• Information Technology Issues• Operational Considerations

Questions and Answers

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Continued Erosion of “Traditional” Medical Staff—Hospital Dynamics

CEO & Executive Leadership

Team

Hospital Board

SL Admin./Mgr. PT Med.

Directors Other S.L./Dept. Admin./Manage

rsAll Other Support

Members/Units

Elected Officers & Committees President Vice President Secretary/Treasurer Dept. Chairs & Section Chiefs Other Elected MS Reps. Medical Staff Committees

The Medical Staff

Individual Members of the Medical

Staff

Patients/Payers

Medical Staff/HospitalInteraction & Support

for Shared Mission & Vision

Overview of Traditional Medical Staff Structures & Relationships

Approval of MS Bylaws & Regulations

Pressures to

Integrate

Pressures to

Integrate

4

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1. Increasing, Shared Economic Pressures from “Eroding” Payer Mix

• Declining income• Accountable Care• 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

Mega Trends Affecting Physician-Hospital Relationships

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1. Increasing, Shared Economic Pressures from “Eroding” Payer Mix (continued):• Increasing needs/demands from

physicians/practices for income support (e.g., joint ventures regarding ancillary services, 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

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2. Increasing Operational / Infrastructure Expenses further eroding “bottom line” margins

• High capital costs• Shared disappointments regarding initial

EMR and related IT integration initiatives• Reimbursement reductions for failure to

implement EHR in hospitals

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3. 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 Growth Slight Growth

No Growth Decrease Slight Increase

Decrease Steady 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

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

Affiliation Models

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Model 9A: Direct Employment

System/Hospital

Independent Physician Group


Payers

Employment Agreement


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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.

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Key Provisions (continued):

• 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.

Level of Integration

13

Model 9B: Physician Subsidiary with Parent



Payers Employment Agreement


Tax-exempt Parent

Hospital

Hospital Physician

Board of Directors

Physician Services

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Key Provisions:

• Hospital Parent entity controls both Hospital and Physician Services Organization.

• Physicians employed through a subsidiary of the Hospital Parent via a formal individual employment agreement.

• Physicians share governance responsibilities with Hospital in the Physician Services Organization.

• The Hospital, as the owner, is responsible for the physician’s practice requirements including operations, finances and governance.

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Key Provisions (continued): • 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, typically based on a wRVU basis.

• The physician assigns his or her professional fees to the Physician Services entity.


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Model 9C: Physician Enterprise

Model (PEM)

Physician Practice

Physician Practice

Physicians asPractice Owners

Pod Pod

Physician Practice

Pod

Physicians as Employees

Practice Support Agreement

Payer $

Hospital

Payers

Board of Directors

Physician Services Hospital

Physicians

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Model 9C: Physician EnterpriseModel (PEM)

Key Provisions: • The Physician Enterprise is separate from, but

owned by, Hospital.• Physicians are employees of the Physician

Enterprise, but retain ownership of their practice.

• Physicians continue to manage their practice through the Physician Enterprise.

• The incentive to maintain effective physician practice management is preserved.

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Model 9C: Physician EnterpriseModel (PEM)

Key Provisions (continued): • The Practice Entity provides a turn-key

package of services, i.e., non-physician support staff, facilities, equipment, and access to records for the Physician Enterprise through an MSO agreement.


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Model 9D: Professional Services Agreement Model (PSA)

Hospital Formal Professional Services Agreement and Management

Services Agreement


Asset Purchase Agreement/Lease Agreement

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Model 9D: Professional Services Agreement Model

Key Provisions: • Physicians retain their Group as a

Professional Corporation (PC), which employs, compensates and governs the physicians.

• The Hospital either directly, or through wholly-owned subsidiary, purchases or leases the PC assets, which must be based on Fair Market Value (FMV) analyses, and converts to a hospital based facility.

• The Hospital purchases physician professional services from the Group through a Professional Services Agreement (PSA) and pays based on wRVUs.

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Model 9D: Professional Services Agreement Model

Key Provisions: • The Group typically continues to employ and

compensate all non-physician/provider support staff and administrative staff, who are leased to the hospital.

• The Hospital reimburses the Group for all operating expenses via an agreed upon annual budget structure.

• Typically, the hospital negotiates all payer contracts and bills/collects for all services.

• Both parties execute a multi-year Professional Services Agreement (PSA) and Management Services Agreement (MSA) summarizing the key terms/conditions of the relationship to ensure continuous service delivery by individual practice specialties.


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Discussion of Ten Issues and Cautionsof Professional Service Model

1. Group Considerations2. Integration Considerations3. Sale or Lease of Assets4. wRVU5. Budget6. Term and Termination7. Unwinding8. Restrictive Covenant9. Information Technology Issues10. Operational Considerations

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1. Group Considerations

Pros

• More consistent cash flow• Access to Hospital resources

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1. Group Considerations

Cons• Loss of autonomy

• Financial autonomy• Compliance with Hospital billing policies• Budgetary oversight

• Operational autonomy• Long lead time to go-live date

• Pre-contract and contract negotiations• Post-execution activities including

credentialing and IT• Go live

• Start-up costs• Affects retirement

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2. Integration Considerations

• Pre-affiliation training of staff• Information Technology integration

• Hospital and Group IT systems to be linked• How will pre-affiliation accounts receivable be

collected• Staff will have been assigned/leased to

Hospital• Computer/billing system will have been

leased or sold• Request use of staff to assist and use of

computers/billing system

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2. Integration Considerations

• Leases • Identify leases including office lease

and equipment leases• Will be assigned to Hospital

• Space construction/renovations

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3. Sale or Lease of Assets

• Will Group Sell or Lease the hard assets and medical records• Must be Fair Market Value• Sale

• Immediate cash flow to practice• Must “reacquire” (and pay) for assets on

unwinding• Hospital bankruptcy considerations• Capital gains taxes

• Lease• No “large” up front payment• Monthly cash flow to practice• Easier on unwinding, as no assets to “reacquire”

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3. Sale or Lease of Assets

• Components of Lease• Identify assets including Hard assets and

Medial records• Identify lease payment• Maintenance costs should tie back to budget

• Components of Sale• Identify assets to be sold• Identify purchase price• Does bulk sale apply

• Are any assets leased or subject to a lien (e.g., equipment lease or line of credit)

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4. Financial ConsiderationswRVU Component

Establishment of wRVU conversion factor• Must be Fair Market Value• Often comprised of

• Base amount• Benefit amount• Quality Incentive Amount

• Credit given for• Physician-owner production• Physician-associate production• Physician Assistant and Nurse Practitioner

production• “incident to” billing

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Establishment of wRVU conversion factor• Is the wRVU amount fixed or subject to adjustment

• Hospital will often request that it can review wRVU conversion factor to confirm it is in the XXth percentile/Fair Market Value

• If it is subject to adjustment, Group must consider• Review only after specified period• Collars on the downward adjustment• Termination if wRVU conversion factor is

adjusted (without restrictive covenant)

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Establishment of wRVU conversion factor• Group should consider CPI adjustment• wRVU benchmark tied to Centers for Medicare &

Medicaid Services published rates• Is the rate schedule tied/fixed to schedule in effect

on commencement or to each newly published rate schedule

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When is the wRVU consideration paid• In arrears

• Creates cash flow issues for Group• Estimated monthly payments with

quarterly/annual/periodic true-ups• Gives Group consistent cash flow• If the true-up period is not frequent,

again creates cash flow issues for Group

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• On Review/Off Review• Some systems will initially pay on a monthly

estimate (percentage of historical wRVUs) • Done until “off review”• Once “off review”, then reconciliation done• Logistical concerns

• Hospital determines whether “off review” criteria has been satisfied

• Some physicians on review while others off

• Some services on review while others off

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• Additional financial considerations

• Group is responsible for determining the compensation, benefits, vacation, sick, and personal leave of Physicians

• Group is responsible for withholdings, payment of unemployment and other payroll taxes

• Must make sure these additional financial elements are factored into the wRVU amount

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• How is aggregate consideration allocated internally among Group physicians• Based on relative productivity (wRVU or other)• Other allocation as determined by Group

• Group should receive monthly reports showing each professional’s gross billings, net collections, productivity and wRVU amounts

• If agreements are with a Hospital subsidiary, consider requesting a corporate guaranty from Hospital

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5. Financial ConsiderationsBudget Component

• Overhead of Group is reimbursed by Hospital• Make sure all expenditures are accounted for

• Personnel Salaries• Office Manager, Receptionists, Admin, Techs• Billing Personnel

• Must determine if positions will be eliminated and/or moved to Hospital payroll

• Associates, Physician Assistants and Nurse Practitioners• If wRVU credit is given, will the costs be reimbursed

• Fringe Benefits• Health insurance, 401k, continuing education,

subscriptions, etc.• Payroll taxes

37


• Expenditures (continued)• Equipment Costs

• Leases• Service contracts• Repairs and maintenance

• Supplies (medical and non-medical)• Medical waste disposal• Rent• Utilities• Professional fees (legal, accounting and payroll)• Other

• Make sure accountant’s input is obtained

38


• All leased items will be subject to a mutually agreed annual budget

• Initial budget typically set forth in documents, and subsequent budgets are to be agreed on annually

• Have detailed line item initial budget so annual budgets thereafter have template to use

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• Need default if subsequent budget is not agreed to• Use of budget for the prior year, with possible

adjustments:• Delete one-time capital expenditures during previous

year • Add expected capital expenditures for upcoming year• Include items which are readily determinable (e.g.,

expenses subject to written agreements, etc.)• Adjustments to take into account increases or

decreases to compensation and benefits for all non-physician personnel

• Other expense items to be increased by fixed percent or CPI

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• When is it paid• Prior to month (e.g., in advance)• In arrears (will create cash flow issues)

• When is it reconciled• Monthly, quarterly or annually (the longer the

reconciliation period, the more cash flow issues to Group)

• How strict is the budget process• If Group exceeds line item, is Group responsible

for excess • Consider pre-approved variance

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• Management Fee• Must be commercially reasonable and FMV• When is it paid

• If agreements are with a Hospital subsidiary, consider requesting a corporate guaranty from the Hospital

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6. Term and Termination

Term• Term is typically three to five years

• What is the renewal process• Evergreen or automatic termination• Should have specified period prior to

expiration to discuss renewal

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Termination• Typical Hospital-side triggers include:

• Group default (notice and cure period)• Loss of physician’s license, exclusion from

payors, failure to qualify for malpractice• Should be a reasonable number of

physicians before termination• Group bankruptcy

44


Termination• Typical Group-side triggers include:

• Hospital default• Loss of Hospital’s license and exclusion

from payors• Hospital bankruptcy• Change in wRVU factor

• If agreements are with a Hospital subsidiary, triggers must extend to Hospital

45


Termination• Without Cause

• Is this acceptable to Group• Consider prohibition in early years• Consider termination payment

• Mutual Triggers• Change of Hospital structure/control• Regulatory issues• Hospital tax-exempt issues

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7. Unwinding

Group to “reacquire” the practice on unwinding

• Ability to purchase hard assets and patient charts• All or select assets and charts• Newly acquired assets which are used at office

• What is the price• Hard assets are typically at the Fair Market Value• Charts are typically at the initially agreed-upon

price

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7. Unwinding

• Re-assignment of office lease and applicable equipment leases

• Transition of information technology systems (including billing, collecting and EMR systems) • Will an EMR license be necessary• Electronic data to be transferred to Group

• Development of transition plan so minimal disruption

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7. Unwinding

• De Minimus Billing during affiliation• In a minimum amount necessary to remain

credentialed in each third party payor program

• Any amounts collected would be remitted to Hospital

• Allows Group to remain credentialed and thus immediately bill on unwinding

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8. Restrictive Covenant

• Prohibits affiliation with another Hospital system

• Typically one to two years• Typically does not restrict re-engagement of

private practice• Should not apply on certain termination

triggers, including by Hospital without cause, by Group for cause, regulatory issues and Hospital tax-exempt issues

• Should not apply if Hospital does not give a fair renewal offer

• Carve out larger medical groups and specific systems, if applicable

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8. Restrictive Covenant

• Mutual non-solicitation of employees

• Carve-out pre-affiliation employees that were moved to Hospital payroll

• Restrictive Covenant should only apply to Owners (not to associates and other clinical personnel)

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9. Information Technology Issues

• Information Systems Integration• Does the Group continue using its own IT

or will it use Hospital IT• Pre-affiliation integration

• Hospital should pay costs of integration• If equipment is needed, Hospital

should pay

52

9. Information Technology Issues

• Meaningful Use• Who is entitled to EMR meaningful use

incentive payments• Meaningful use earned pre-affiliation• Meaningful use earned during

affiliation

53

10. Operational Considerations

• Physicians• Not able to add professionals without Hospital

approval• Consider replacement of professionals who

have left• Consider grandfathering slots/positions which

are actively being recruited at time of affiliation

• Location of Services• Hospital will want flexibility to require services

“at any location determined necessary”• Group should limit to existing office(s) and

specific hospital campus(es)

54


• Full or part time• Permitted outside activities

• Moonlighting • Medical director at other facilities• Teaching, charitable activities, expert

testimony, honoraria, lectures, paid interviews, publishing, surveys, etc.

• Participation on reading panels, including readings for stress tests, EKGs and echocardiograms

• Specify Group/professional retains all income

55


• Control over staff• Hospital will want the ability to remove

employees • Group should try to qualify and/or set

conditions• Endanger the health or safety of patients• Harm to Hospital’s reputation, etc.• Notice and cure period

• All staff decisions must be made within the framework of the approved budget

• Generally not able to add without Hospital approval

56


• Control over equipment• Hospital will want ability to determine

if/when/what equipment is needed• All equipment decisions must be made

within the framework of the approved budget

57


• Malpractice Insurance• Group must make sure this is a budgeted

item• Who determines carrier

• Group typically will want same policy as during pre-affiliation period

• If policy is to be changed, then need to consider tail policy

58

Questionsand

Answers

Issues & Cautions Associated with Medical Practice Affiliations with Hospitals &

Alternatives

New Jersey Medical Group Management Association

Practice Management ConferenceApril 18, 2013

Taj Mahal Hotel and Casino, Atlantic City, New Jersey

Michael F. Schaff, Esq.Wilentz, Goldman & Spitzer90 Woodbridge Center Drive

Woodbridge, New Jersey 07095(732) 855-6047

[email protected]

Peter Greenbaum, Esq.Wilentz, Goldman & Spitzer90 Woodbridge Center Drive

Woodbridge, New Jersey 07095

(732) [email protected]

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