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LAW ELEVATED — Service line co-management arrangements on the rise

PrintPrintAs hospitals continue to seek ways to enhance patient care, improve operational efficiencies and reduce costs, service line co-management arrangements have regained traction as a popular and productive method of clinical integration. Service line co-management arrangements pose significant benefits for hospitals and physicians alike by aligning clinical and financial interests.

Although the charge of hospitals acquiring physician practices appears to have slowed over the last 12 months, the healthcare field has seen a renewed interest in contractual integration models between hospitals and physicians.

Overview of Service Line Co-Management Arrangements

Service line co-management arrangements are a model of clinical integration between physicians and hospitals in which physician members of a hospital’s medical staff oversee and manage day-to-day operations of a hospital department or service line (e.g., cardiology, radiology, etc.). These arrangements are separate from, and may incorporate certain aspects of, an on-call or medical director arrangement.

Under a service line co-management arrangement, the hospital and participating physicians collaborate to design strategies and establish goals to enhance a service line’s quality of care and operational efficiencies while decreasing the service line’s overall costs. The model further unites hospitals and physicians with respect to service line improvements and provides financial incentives for physicians to satisfy pre-established performance metrics.

Commitments & Compensation:  What does a Co-Management Arrangement Involve?

Structure Co-management arrangements can take several forms, ranging from a direct contract to a hospital-physician joint venture.  While the contract model is the simplest to implement, alternate co-management models generally require the formation of a new legal entity as the management company.

Written Agreement Regardless of their structure, all co-management arrangements require a written agreement that specifies each party’s responsibilities and the mechanics of integration, governance and compensation. Key contract terms include: (1) a thorough description of services the physicians will perform; (2) careful attention to each party’s rights, duties, and authority to make service line decisions; (3) designation of performance metrics to measure improvements in quality of patient care and operational efficiencies; and (4) compensation terms (as further described below).

Compensation  Physician compensation under a co-management arrangement typically has two elements:  (1) Fixed Compensation. Physicians are paid a pre-established flat rate for their daily work in overseeing and managing the service line; and (2) Variable / Incentive Compensation. Physicians typically receive incentive payments for achieving designated performance metrics (incentive payments can be paid in whole or in part to the extent that such performance metrics are satisfied).  All compensation must be consistent with fair market value (“FMV”) and cannot take into account or vary with the volume or value of referrals or other business generated between the parties.

Services Service line co-management arrangements may cover a broad array of services, including inpatient, outpatient, ancillary and/or multi-site services. Examples of management duties may include managing staff, developing and implementing policies and procedures, overseeing research activities and monitoring and providing recommendations on annual budgets, among many others.

Performance Metrics The hospital and physicians collaborate to develop specific service line performance metrics that will be used to measure improvement. Performance targets are used to calculate incentive compensation and are typically subject to change annually. Examples of service line performance metrics may include, without limitation, on-time starts, completion of pre-operative evaluation / exams and cost reductions.

Legal, Regulatory and Other Considerations for Developing Co-Management Arrangements  

The Federal Anti-kickback Statute (“AKS”) Co-management arrangements should comply to the greatest extent possible with an applicable AKS safe harbor and guidance issued by the Office of Inspector General.

The Federal Civil Money Penalty Statute  Co-management arrangements should implement safeguards in accordance with applicable OIG Advisory Opinions.

The Federal Stark Law Co-management arrangements must be structured to comply with an applicable exception to the federal Stark Law (if it applies). This might be a reason to consider a joint venture or separate management company, rather than an agreement directly between the hospital and physician group.

HIPAA Ensure the arrangement complies with applicable HIPAA requirements, including execution of a Business Associate Agreement, when appropriate and necessary.

Medical Director / Service Line Administrator Eliminate any overlap between the co-management arrangement and any pre-existing medical director or service line administrator. If the medical director or service line administrator is retained to perform administrative services, he or she should generally receive compensation through the co-management arrangement.

Periodic Review Review the co-management arrangement on a periodic basis (e.g., annually) to ensure that all duties and performance metrics are appropriate. Compensation should be adjusted accordingly to remain consistent with FMV.

FMV Considerations Consider engaging an independent valuation firm to provide an FMV appraisal to support and place parameters around the compensation terms.

While service line co-management arrangements are not new, they seem to be making a comeback since they present significant potential benefits for both hospitals and physicians. A key to successfully implementing co-management arrangements is advance business planning and careful legal construction. Determining the optimal structure and performance metrics for effective co-management arrangements requires a careful review of the facts and circumstances specific to a hospital and its participating physicians, as well as an in-depth legal analysis to ensure compliance.

» Mara Dowd and Scott Shanker


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