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James Pizzo
Todd Fitz

Current physician-integration strategies can be categorized into four basic groupings: customer service programs, contractual ventures, joint ventures/other ownership options, and employment. Each of these options has materially different financial attributes, control attributes, timing requirements, and typical results. Some options represent long-term strategies, while others represent transitional strategies to build momentum or foundational skills required to compete on value.

Customer Service Programs

Customer service programs provide support and services to physicians in a variety of ways, including technology (e.g., electronic medical records (EMRs), common communication platforms, scheduling systems, and call centers), group pricing for medical malpractice insurance, training support, physician concierges, continuing medical education, comarketing, and other services that make it easier for physicians to practice within the hospital or health system. The objective of these strategies is to improve independent physician performance and satisfaction, while aligning physician goals with hospital and health system goals. Generally, these strategies improve functional capabilities, require a low level of capital commitment, and do not require a significant change in culture and commitment. The downside is that the strategies do not bind the physicians to the organization and are successful only if the physicians are satisfied with the programs.

Contractual Ventures

Contractual ventures involve one or a series of contracts with individual physicians or physician groups either to purchase services from them or to provide services to them. Most contractual ventures are of medium duration (three to five years) and are directed at improving efficiency, coverage, or sharing of performance-based incentives without an ownership stake. Examples include clinical integration (CI) programs, professional service agreements (PSAs), comanagement agreements, and management services organizations (MSOs).

CI programs. CI programs involve a set of contractual agreements between a health system and physicians to improve quality, access, service, and efficiency performance measures, allowing the health system to share financial incentives with the participating physicians for achieving specified metrics. Due to regulatory requirements, these agreements cannot be exclusive, and participation is at the discretion of the participating physicians and contingent upon compliance with the guidelines set forth in the CI program requirements.

PSAs. PSAs are the most common contractual arrangements between hospitals and hospital-based physicians or physician groups for professional services. These ventures are aimed at securing specialty or geographic coverage for physician services. Most current PSAs use quality and access performance thresholds and other metrics that align physician performance to hospital/health system objectives.

Comanagement agreements. A comanagement agreement involves a contract between a hospital and physician practice or physician management company. The practice or company agrees to perform clinical and management services with specific improvement targets in exchange for a predetermined fee. The performance metrics used should be reevaluated annually, and the rule of diminishing returns will be observed as performance levels approach long-term goals. Comanagement is a relatively quick and proven method for hospital-physician collaboration, but such arrangements have been drawing increased regulatory scrutiny, so counsel is needed to ensure full legal and regulatory compliance. These agreements also are falling out of favor because of their short-term nature and the considerable effort required to renegotiate them.

MSOs. An MSO is a company or operating division that sells practice support services on a contractual basis to independent physician practices. Typical services include billing services, EMR platforms, accounting services, and any other shared services that are not a core patient contact activity. Typically these agreements have bidirectional service-level agreements with required performance metrics for each of the parties. HIPAA and antitrust requirements mandate strict data partition and privacy standards. MSO services can provide the foundation for data-sharing opportunities, accelerating the collaboration that will be required to compete based on value.

Other forms of contract-based integration options include physician hospital organizations (PHOs), physician recruitment programs, real estate/equipment leases, and medical directorships.

Joint Venture/Ownership-Based Arrangements

A joint venture or ownership-based arrangements involves the purchase of a common ownership interest in a business venture by a health system and a physician or physician group. The parties agree to form and operate a common enterprise and share both risks and benefits. Historically, these ventures have involved ambulatory surgery centers, imaging facilities, urgent care centers, cath labs, GI labs, and other outpatient facilities. The ventures are capital intensive and take a fair amount of time to negotiate and build out. If set up correctly with the proper buy/sell and resyndication provisions, the arrangements allow for operation as long as the services are needed and priced competitively. Properly set up, they also typically enjoy a cost advantage over facilities run by health systems, ensuring that the venture will play a continuing role in a value-based environment.

However, in certain markets, many of these ventures are under severe payment pressure from commercial payers, and to a lesser extent, governmental payers. As payment and margins have declined in these markets, many physician investors have chosen to sell their ownership interest back to the health systems, converting their practices to hospital-owned. This conversion of the physicians to hospital-owned status can still offer a health system an opportunity if it provides a lower-cost environment for the services or if duplicative assets can be taken out of service, making remaining operations more efficient.

Physician Employment/Practice Acquisition

Physician employment or practice acquisition may take many different forms, including direct employment by a hospital, a wholly owned tax-exempt subsidiary, a wholly owned taxable entity, an independent or joint-ventured entity, and an independent, financially aligned foundation.

Current approaches to practice acquisition are more straightforward than arrangements consummated during the 1990s. Asset-purchase agreements are the dominant structure due to tax implications and liability issues (medical malpractice and federal billing). Physician's advisers are still requesting the transactions to be equity purchases; however, equity deals are rare due to the factors mentioned previously. Regardless of the purchase structure, clinical and financial incentives must be aligned as part of the transaction structure if it is to achieve meaningful integration and alignment.

For more information, see James Pizzo and Todd Fitz's "Are Your Physician-Integration Strategies Sustainable?", hfm, November, 2012 


Publication Date: Thursday, November 01, 2012

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