Physician Hospital Integration

©2010LarsonAllenLLP
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WICPA Conference
Regulatory Overview on
Hospital Physician Joint
Venture
August 20, 2009

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Agenda
• Introduction/Factors Driving Collaboration
• Potential Relationship Structure Models
• Range of Relationship Models
• Legal Considerations

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Introduction
Factors Driving Collaboration

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Introduction
• More practices are developing closer affiliations with or
are being acquired by hospitals and health systems
• Reasons for affiliations include:
– Reform on the horizon
– Access to Capital: Need for an EMR and other capital
purchases
– Call coverage
– Primary care and/or Specialty coverage needs
– Growth of physician management in hospitals – voice in
recruiting and governance
– Reducing hospital – physician competition
– Need for market share/volume growth
– Assistance with contracting
– Provider based status
– Eliminating competition around provision of ancillary services

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Key Attritubutes Driving Hospital Physician Group
Collaboration
• Declining physician incomes
• Lack of success recruiting new physicians
• Short term income reductions related to recruitment of
new physicians limiting growth
• Limited access to key resources
– Human
– Capital
– Technology
• Competition between physicians and hospitals for the
same revenue streams
• Generational and multi-specialty internal group dynamics
• Fear of risks of ownership for younger physicians
• Changing markets towards outpatient service delivery
• Dominant payer in the market with shrinking
reimbursement for physicians

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“No matter how innovative, equity-oriented, or
financially beneficial the physician-health system
relationship may be, they will fail in the absence of
mutual trust and feelings of shared destiny that are
engendered by the environment in which the
relationships are forged. In institutions with strong
physician-hospital relations, each party is confident
that the other's decisions and actions are generally
designed for the benefit of both.”
Holm, Craig E. and Brogadir, Stuart P. "Laying the Foundation for Successful Physician-Health System Partnerships,"
Journal of Healthcare Management. 45(1):
January/February, 2000.

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Potential Benefits of Closer Affiliation
Physician Benefits
• Enhanced Security
• Greater Income Predictability
• Improved Lifestyle
• Recruitment of additional
colleagues
• Stabilized Referral Patterns
• Joint Marketing / Branding
Strategy
• Economies of Scale
• Leverage With Payers
• Revitalization of Morale
• Group purchasing power
Hospital Benefits
• Support Mission
• Meet Growth Need
• Enhance Future Supply of
Physicians/Improved Recruitment
• Eliminate competition/threat of
competition for ancillaries
• Align Incentives
• Connect With Physicians at Different
Points in Career
• Stabilize Primary Care network
• Increased downstream revenue
• Maintain local control of health care
system

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Overlapping Interests
Strategic Economic
• Increase Market Share
• Expand Regional Presence
• More Value to Health Plans
• Expand Clinical Relationships
• Improve Physician Recruitment / Retention
• Stabilize Practice
• Capture Cost / Investment
Synergies

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Overlapping Relationships
Clinical
Relationships
Business
Relationships
• Hospitalists
• Disease Management
• Oncology
• Clinical Research
• Specialist Relationships
• EMR
• Ancillary Services
• EMR
• Practice Management Service
• Professional Services Agreements
• Ambulatory Surgery Centers
• Shared Equity

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Physician Values
•Providing the best care for their
patients
•Personal control over what they do
and how they practice
•Limited control by others
•Doing well in comparison
with peers
•Sense of fairness in relationships
•Environment of clinical inquiry
•Opportunities for dialogue and
ability to influence decisions that
affect them
•Maintaining collegial relationships
with peers
•Choice of those with whom they work
Hospital Values
•Providing the highest quality
medical care possible for
patients and the community
•Developing a seamless network
of care with other health care
systems
•Ensuring the qualifications of
those who provide care in the
hospital or as part of the system
•Doing well in comparison with
peers
•Fostering teaching and research
•Serving customers and seeing
all relationships as relationships
with customers
Providing the
Best Care
•Effectively
•Efficiently
•Compassionately
In an
Environment of
•Excellence
•Respect
•Satisfaction
Can We Meet Somewhere in the Middle?
Fundamentals of Physician Practice Management, Table 10.1

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How Might All of This Affect the Delivery Side?
• Market consolidation accelerates leading to
more vertically integrated delivery systems.
• Integrated systems pursuing wholesale
restructuring of: the governance models,
management structures and strategies. More
physicians embedded in the leadership and
management models.

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Issues / Considerations/ Potential Barriers
• Financial Risks
• Legal Considerations
• Governance & Control (Trust)
• Strategy Change
• Change of Leadership

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Key Questions to Determine Affiliation Approach
• Will current organizational structures be the most
effective model for serving our community in the future?
• What is the medical community’s vision for health care in
our community?
• What are the goals and objectives of a closer affiliation
between the hospital and its physicians?
• If applicable, what are the implications of the hospital’s
public status on potential hospital physician integration?
• Culture - Is the organization ready for this?
• What are the barriers to make this happen?
• Are the long-term plans of both parties compatible?
• What is the reaction if we do not integrate now?

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Potential Relationship
Structure Models for Physician
Practices/Hospitals

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The Range of Affiliation Models
Collaborators
Joint Ventures
Provider Based
Clinic
Professional
Services
Agreement
Employment
Model
Integrated
System
REAL ESTATE TRANSACTION

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Physician Relationship Models
Autonomy Integration
Accountabilit
y
MSO Model
Real Estate
Professional Services
Arrangement
Joint Venture
Integrated System
Contracted
Physician
Employment

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Hospital
Operations
Hospital
Clinic
Operations
Common
Operations
All MDs would
remain
Employees of
Separate
Organizations
All Clinic employees would
Become employees of
clinic division of hospital
All Assets would be
transferred to hospital
Physician Practice(s)
Professional Services Model with
Provider Based Billing

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Hospital
Operations
Hospital
Clinic
Operations
Common
Operations
All MDs would
remain
Employees of
Separate
Organizations
Physician Practice(s)
Paid $ per RVU @ Market
rate Productivity and
Reimbursement by
Specialty
Long Term Contract for
Services
Professional Services Model with
Provider Based Billing (cont.)

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Professional Services Model
• Pros
– Physicians can receive a
higher comp per RVU
– Greater alignment, groups
remain independent
– Recruitment and retention
– Easily replicated with other
physicians
– Hospital cost of operations
• Cons
– Feds may change the rules
– Contracts have to be re-
negotiated
– Risk of increasing overall
cost
– Groups perceive loss of
control - operations
– Increased cost to patients
– Hospital cost of operations

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Employment Model
• Physicians become hospital employees or
employees of hospital controlled subsidiary
• Can be coupled with provider based clinics,
creating Medicare reimbursement benefit
• Creates highest level of fund flow flexibility,
although physician income still must meet
market test
• Typically involves hospital purchase of practice
and real estate (if physician practice owned)

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Integrated Delivery System
• New non-profit system created with non-profit hospital division and
non-profit physician division
• Typically involves significant governance change:
• Creates high level of fund flow flexibility, must meet market test
• Can be coupled with provider based clinics, creating Medicare
reimbursement benefit
• Typically involves practice acquisition and physician owned real
estate acquisition (if any)
System
Board up to 50% minus 1 physicians
Hospital
Board
Practice
Board

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Legal Issues

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Legal Factors Affecting New Relationships
• Health Care Laws
– Stark
– Anti-kickback
– Medicare coverage and billing rules, including anti-
markup
– Corporate practice of medicine doctrine
• Other Laws Applied to Health Care Industry
– False Claims Act
– Antitrust
– Tax exemption (intermediate sanctions)
– Tax-exempt bond rules (private use limits)

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Other Legal Factors Driving New Structures
• Provider-Based Status – including provider-
based rural health clinics
• Critical Access Hospital (“CAH”) Status
• Privatization – public hospitals becoming private
• “Under Arrangements” Rules – specialty service
contracts
• “Gainsharing” – contracting for service line
management and/or shared program savings

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Provider-Based Status
• Departments and facilities considered “integral
and subordinate” part of hospital
• Off-campus clinics (either built or acquired) have
been hot-button issue for CMS
• The lure of provider-based status:
– Hospital receives outpatient facility fee
– Physician services billed with site-of-service modifier
and reimbursement reduced accordingly
– Net reimbursement generally higher
• Disadvantage of double co-pays for patients

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Criteria for Being Provider-Based
• Licensure – usually under hospital license, consistent
with state law
• Operation under ownership and control of hospital –
governance; final decision-making authority; etc.
• Administration and supervision – under direct
supervision of hospital as “main provider”
• Clinical integration – hospital staff privileges and same
clinical oversight
• Financial integration – hospital P&L
• Public awareness – identified as hospital site
• Location – off-campus locations are subject to more
stringent requirements; some sites will not qualify

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Drawbacks of Provider-Based Status
• Must comply with EMTALA regulations
• Must comply with hospital’s provider agreement
and conditions of participation
• DRG payment window applies (72- hour window)
• Off-site departments (except RHCs) must notify
patient of co-insurance amount prior to service
• Must meet applicable hospital life-safety code
requirements – can be costly
• Medicare patients billed a facility fee and subject
to double co-insurance

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Services “Under Arrangements”
• Transaction under which hospital contracts with
third party to provide specific services to hospital
patients
• Specialized services are often provided under
arrangements
– E.g., specialized imaging; cardiac catheterization;
lithotripsy; radiation therapy; intra-operative monitoring
• Hospital purchases service at fair market value
and bills for it
• “Provider-based” and “under arrangements” are
different, but distinctions can be confusing

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“Under Arrangements” and Stark
• Entity providing services may be an independent
organization or jointly owned by hospital and third
party (e.g., physician entity)
• Stark issues – services not “designated health
services” (“DHS”) on their own become DHS
when provided by hospital as inpatient or
outpatient services
• Not generally an issue in past, because “entity”
billing for service (and therefore covered by
Stark) was hospital, and physicians do not have
ownership in hospital, but …

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“Under Arrangements” Under Fire
• New definition of “entity” effective October 1, 2009
– Current definition: only the entity that bills or submits a
claim is furnishing DHS under Stark
– New definition: deemed to be furnishing DHS if
“performed the services” – e.g., under arrangements
– CMS refuses to define “performed the services,” saying
it should have its “common meaning” and providers
know when they’ve performed the service
• Converts physician ownership in entity providing
services “under arrangements” into deemed
ownership interest in hospital
• Stark Law has very few ownership exceptions

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“Gainsharing”
• “Incentive payment” and “shared savings”
programs – Service Line Co-Management, etc.
• Intended to align incentives
– hospitals paid DRG – at risk
– physicians paid fee for service – no stake in hospital
costs
• Chief legal barriers:
– Stark Law, anti-kickback, tax-exemption; and
– Civil Monetary Penalty law – prohibits payments by
hospitals to induce a physician to reduce or limit items
or services furnished to their Medicare and Medicaid
patients under the physician’s direct care

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“Gainsharing”
• Many concerns for potential abuse:
– “stinting”
– “cherry picking”
– “steering”
– “quicker & sicker discharges”
• Gainsharing deals were banned for a time, now
are being done on limited basis with many
safeguards
• Specific Stark Law exception has been proposed
but not final yet

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Critical Access Hospital (“CAH”) Status
• Cost-based reimbursement from Medicare –
often yields higher revenues
• Intersection with provider-based rules
– After January 1, 2008, all off-campus CAH provider-
based facilities (e.g., acquired clinic) must be 35 miles
from nearest hospital or CAH
– Required distance is 15 miles in mountainous terrain
• However, rural health clinics (RHCs) are not
subject to this requirement
• Therefore, incentive to qualify remote clinic as
RHC if possible

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Privatization
• Conversion of public hospitals (county, municipal,
district, state university) to private, non-profit, tax-exempt
status
Pros Cons
• Contracting flexibility
• Escape open meeting laws
• More H.R. flexibility
• Often reduce staff costs
• Easier to JV with physicians
• Escape “safety net” status
• Loss of public funding
• Loss of taxing authority
• More antitrust exposure
• Tax exemption under fire
• More uncertain future

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Affiliation Models
• Affiliation Agreements
• Partial Professional Service Agreements
• Professional Service Agreements
• Asset Purchase Agreements
• Medical Group Mergers

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Affiliation Agreements – What’s Involved?
• Clinic not ready yet for full integration but desires
closer ties with Hospital
• Often includes recruitment assistance, EMR,
medical directorships, joint venture on ancillaries
(e.g., imaging, ASCs), service-line co-
management
• Clinic may sell right of first refusal/first
negotiation
• Typically exclusive

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Affiliation Agreements – Potential Uses
• First step toward future collaboration
• Clinic interested in financial support but not
ready to merge with Hospital
• Clinic’s stability is important to the Hospital
• Desire that the Clinic remain independent
• Stark and anti-kickback laws pose challenges
(e.g., prohibition of physician ownership of
certain designated health services)

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Partial Professional Services Agreement –
What’s Involved?
• Hospital contracts for Clinic’s services for a
particular service line (e.g., hospitalist and ER
services; joint replacement program)
• Hospital pays Clinic for providing professional
services at fair market value
• Hospital bills third party payors for services
provided under agreement
• Clinic continues to bill payors for its other
services

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Partial Professional Services Agreement –
Potential Uses
• Hospital desires to expand services and Clinic is
reluctant to take financial risk
• Less costly for Clinic to provide professional
service than for Hospital to build its own
• Collaboration may lead to more integration down
the road
• Stark billing requirement that a group practice
bill 75% of its services in its own name may
pose challenges

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Professional Services Agreement – What’s
Involved?
• Clinic sells all of its operating assets to Hospital
• Clinic continues to employ physicians (may also
include mid-levels)
• Clinic staff typically become employees of
Hospital
• Hospital typically bills for all Clinic services as a
provider-based clinic
• Hospital pays Clinic for its services, typically on
a RVU basis plus benefits

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Professional Services Agreement – Potential
Uses
• Clinic physicians not ready to commit to
employment
• Open meeting laws and other public disclosure
requirements may discourage employment
• Clinic desires to avoid financial risk of payor
contracts and overhead costs
• Hospital and Clinic desire increased revenue
from provider-based billing
• Hospital seeks a closer (exclusive) relationship

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Professional Services Agreement – Potential
Uses (Cont’d.)
• Physician leadership in development
• Clinic desires to maintain own benefits, internal
compensation and shareholder decisions
• Renegotiation of compensation may pose
challenges down the road
• Allows a potential way to unwind relationship if
unsuccessful down the road

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Asset Purchase Agreements – What’s Involved?
• Like mergers of the past, Clinic sells all of its
assets to Hospital
• But unlike mergers of the past, physicians need
to play an active role in management of the new
organization and have compensation that is
aligned with system goals
• Part of the asset sales price (e.g., goodwill
portion) put into retention bonus

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Asset Purchase Agreements – What’s Involved
(Cont’d)
• Physicians may be employed by a new clinic
entity, with active involvement on a Clinic
Operations Committee
• Physicians paid per RVU with individual and
system bonuses
• Clinic physicians able to take a leadership role
• Difficulty in unwinding the affiliation may create
challenges down the road if relationship is
unsuccessful

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Medical Group Mergers - What’s Happening
• Full mergers increasingly popular among
specialty groups, where groups merge and
share a common bottom line
• Divisional mergers also popular, which allows
groups to merge, with separate profit centers,
followed by a full financial merger later

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Medical Group Mergers (Cont’d)
• Management Services Organizations, that
provide billing, collection, employee benefits and
other services to clinic owners of the MSO have
found limited success in some hospital-based
specialty groups (e.g., ER, anesthesiology,
radiology, pathology)
• Some medical communities exploring
“community partnerships” where a new entity is
formed to start discussions toward the “next
generation” of payor contracting (e.g., allocation
of payments for episodes of care)

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Medical Group Mergers (Cont’d)
• For profit management companies also play an
important role in some specialty groups (e.g.,
oncology, concierge care, pain management) by
providing access to capital

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Questions For Hospitals
Key Questions Hospitals Are/Should Be Asking Relative to
Physician Relationships:
• Will we have enough physicians (breadth and depth) to
support our community’s needs and our market strategies?
• Are our key physician groups willing and able to grow
organically or do they need financial assistance to do so?
• If financial support is required, what relationship models
will allow us to accomplish our mutual goals?
• Do we, the hospital, and our physician groups share a
common goal of local health care delivery or are we
vulnerable to “take over” by a larger system?
• Do we have positive/collaborative relationships with our
physicians?

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Questions For Physician Practices
Key Questions Physicians Are/Should Be Asking Relative to
Hospital Relationships:
• Do we have to do something right now? Is this the best
option for us currently?
• Is this the right hospital partner for us?
• What happens if the hospital or health system is taken over
by a larger health system?
• What relationship model will allow us to accomplish our
financial goals while maintaining as much autonomy as
possible?
• What would be the conditions for exiting this agreement if
need be?

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Thank you!
Curt Mayse, MBA, FACMPE

Physician Hospital Integration

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