Professional services agreements provide a form of close integration that many physicians and hospitals are considering as an employment alternative.
At a Glance
- Hospital executives should examine various forms of professional services agreements (PSAs), weigh pros and cons inherent in these arrangements, and understand appropriate uses of PSAs versus employment.
- For physicians, PSAs provide a way to more closely align with a health system without engaging in employment.
- Hospitals can realize financial benefits and greater stability from strengthened service lines, a growing patient and referral base, and potential to increase downstream revenue from ancillaries under PSAs.
The national healthcare landscape, including potential reforms to payment structures for medical services, has given rise to an increased focus on integration, which is quickly moving from the “strategy of the future” to the “strategy of the immediate.” Although alignment models range in structure, scope, and complexity, numerous physicians perceive “alignment” to be synonymous with employment. An alternative arrangement that allows physicians to achieve a high level of alignment with hospitals without engaging in employment is gaining in popularity: the professional services agreement (PSA).a
Quickly gaining momentum in the industry, PSAs provide a form of close integration that many physicians and hospitals are considering as an employment alternative. Under many PSAs, the hospital engages the physician to provide certain services through contractual agreements without ever making the physician a W-2-status employee. These arrangements can be mutually beneficial: Physicians benefit from the security and closer alignment with a health system provided by PSAs, and hospitals can realize financial benefits and greater stability from strengthened service lines, a growing patient and referral base, and potential to increase downstream revenue from ancillaries.
When considering pursuit of a PSA strategy, hospital executives should examine various forms of PSAs, weigh pros and cons inherent in these arrangements, and understand appropriate uses of PSAs versus employment.
PSA Models and Their Structures
A PSA between a hospital and a physician can take myriad forms, but all fall into four basic categories.
Traditional PSA. Under a traditional model PSA, the hospital contracts with the independent medical practice for professional services. Specifically, the physicians remain employees of the practice, keeping the practice entity intact, and the hospital contracts with the practice for the professional services rendered by its physicians. Although the physicians remain in their existing practice structure, their support staff become employed directly by the hospital.
Under this model, most of the operational and administrative duties become the responsibility of the hospital, as opposed to the practice. The resulting structure looks and feels like employment in that the practice gives up its “ownership” of all management and operations. Although the practice stays intact from the standpoint of the physician ownership of that professional entity, all other areas of the practice transition to the ownership and control of the hospital. The only remaining component of what was previously the practice is its professional members: the physicians and perhaps some or all of the nonphysician providers. The practice may retain ancillary services or sell or lease them to the hospital under this model.
Because the hospital oversees all billing, collections, and retention of professional fees generated for the services provided, the hospital pays the practice directly. Practices realize minimal overhead expenses in this model because such expenses are transitioned to the hospital.
This model is often attractive to physicians who are no longer interested in being responsible for the business aspects of medicine. For a hospital, this model is beneficial in that it “locks in” a close relationship with a practice. The hospital owns the infrastructure to support the practice on an ongoing basis, which makes an unwind-and-return-to-private-practice option more difficult and can make maintaining the PSA relationship or even a move to full employment even more attractive. This model also benefits hospitals that want greater involvement in the oversight and management of their aligned physician practices.
Global payment PSA. Under a global payment PSA model, the practice acts as an independent contractor to the hospital. The practice invoices the hospital for actual professional clinical services rendered. Thus, in essence, the hospital becomes the source of most of the revenue for the practice. (Other income, such as research fees, medical director fees, etc., is typically excluded.) The hospital pays the practice directly without making any withholdings. The physicians and all of their support staff remain employed by the practice, and as such, receive no employee benefits from the hospital.
Within the global payment PSA model, the practice’s compensation is typically based on productivity (often as measured by work-only relative value units [wRVUs]), and it generally includes remuneration for provider compensation and benefits as well as practice overhead.
Under this model, the practice entity remains largely intact. The staff remain employed directly by the practice, which allows physicians to better manage the people with whom they work closely. From the hospital perspective, this model is attractive in that it holds the practice accountable for managing its overhead; if expenses increase, the practice is at risk for the variance between the actual costs incurred and the global payment it receives from the hospital.
Practice management arrangement. A practice management arrangement (PMA) model is another type of PSA model. In this structure, the physicians (and possibly midlevel providers) are employed by the hospital, but the infrastructure of the former practice entity remains independent and under the control of the physicians. The physicians operate as managers providing management services, including all administrative services, space, equipment, and support staff. The hospital contracts with the practice entity for these services and pays a fair market value management fee.
In essence, the employment of the physicians is no different than any other employment structure between a physician group and hospital or health system; however, the relationship with the ongoing practice entity is a key differentiator between this PSA model and employment.
The benefit to this model for both the practice and hospital is that both entities are able to leverage an efficient administrative and support team for their mutual benefit. Many hospitals also see a benefit in this model in that the physicians are directly employed, which is a goal for many organizations.
Hybrid arrangements. Hybrid arrangements may include characteristics of any of the three categories or just a structural difference in any one component. For example, a hybrid PMA could include the hospital and the practice developing a jointly owned management company wherein the hospital buys an equity position in that entity (i.e., the formal management structure of the practice), and the practice and the hospital jointly manage, subject to a management contract and fair market value management fee.
The needs of hospitals and practices vary widely, especially as the healthcare industry undergoes multiple, rapid changes. As a result, although traditional PSAs and global payment PSAs have been more prevalent than the others in recent years, the PMA and hybrid structures have been increasing in popularity for functional and customization purposes.
Case Study: Global Payment PSA
ABC Physician Practice is a single-specialty orthopedic surgery physician group located in the Northwest. ABC comprises 11 physicians and three midlevel providers, who staff the practice’s three office locations throughout a major metropolitan area. ABC also performs services at Hospital D and Hospital E, which compete with one another in part of this market.
Based on current volume trends, ABC physicians need to continue to practice at both hospitals to support the entire provider base, so the practice wants to maintain its relationship with both hospitals. ABC physicians also want to achieve greater alignment, and they recognize that employment would require their practice to fracture and divide between the two hospitals. As a result, after analyzing its needs and goals, the practice identified the global payment PSA as its preferred alignment model. This model would allow the practice to remain whole, continue performing services at both hospitals, maintain existing infrastructure and management, and provide an incentive for both production (under a fee per wRVU) as well as quality (based on a management agreement executed concurrently with the PSA, which provides the potential for additional compensation based on quality indicators).
Ultimately, the practice approached both Hospital D and Hospital E regarding a potential global payment PSA transaction, and negotiated similar terms with each system. As a result, six physicians now practice exclusively at Hospital D, and the remaining five physicians practice solely at Hospital E, each under a global payment PSA.
Hospitals D and E collect all professional fees generated by the respective physicians for providing orthopedic surgery services at their facilities. In exchange, they each provide a global payment per wRVU to the ABC physician practice; this rate starts at $96 during the first year of the agreement and increases slightly to $97.92 in the second year and to $99.88 in the third year.
The global payment rate includes both the physicians’ compensation and benefits as well as the overhead of the practice. As a result, although there is a fixed rate per wRVU paid, the global payment is actually the sum of these two components. The global payment rate is based on ABC’s financial data and historical productivity levels.
Payment from both hospitals is pooled by ABC and distributed among all physicians based on the practice’s internal income distribution plan. In the first full year of implementation, the ABC physicians received an average of 12 percent greater compensation than the prior year (pre-PSA). Also, the practice—once in danger of fracturing—has remained united, and physicians are pleased with the efficiencies they have gained by working at only one facility. Although each hospital has retained nearly the same market share post-PSA, both facilities report greater surgical throughput as a result of having dedicated physicians working at their facility. In total, orthopedic volume has increased nearly 11 percent at Hospital D and greater than 8 percent at Hospital E in the first year of the PSA.
Case Study: Employment as an Option for Alignment
FGH Health System is a four-hospital system in the Northeast. The system has an existing employed physician network, with 215 physicians across a range of specialties. To support the needs of the community served by one of its hospitals, the health system was interested in aligning with JKL Physician Practice.
JKL comprises 17 physicians who staff the practice’s main office location and three satellite clinics. Sixty percent of JKL’s physicians are internal medicine specialists and 40 percent are family practice physicians. JKL has a long history of service to the community and accounts for the majority of primary care physician services in the area (including the rural areas to the south and east of the hospital’s primary service location).
Given its existing employed physician network, the health system considered employment the natural choice for an alignment model with the practice. FGH Health System’s goal was to fully align with the physician practice, creating a secure primary care base that would augment its employed physician network while at the same time continuing to support the local hospital in the community, which was competing with larger academic medical centers in the region.
Although the system considered a PSA, it opted for employment largely due to the need for a fully dedicated primary care base. The system recognized that it could incur a loss with this approach, but it was willing to assume this risk knowing the possible benefits, including a stable primary care base that could feed referrals to specialists throughout the system. From the practice’s perspective, employment was a desirable outcome because it would relieve the physicians from ongoing responsibilities associated with managing the practice and allow them to focus solely on medicine.
As this situation shows, PSAs, while an effective model for alignment, are not always the right choice for a physician practice. For some physician practices, employment is a more desirable option.
After employing JKL, FGH Health System realized an average loss of $93,000 per provider in the first year of implementation, despite market-based compensation that included a tie to actual production (as measured by wRVUs). Although the health system is working to minimize the recurring losses per provider, leaders are confident that this alignment strategy will result in dividends for their system in coming years.
Case Study: Traditional PSA
MNO Medicine, a 43-physician multispecialty practice in the Midwest, decided a hospital alignment strategy should be part of its strategic plan to support a successful future. Practice leaders investigated various alignment options and quickly deduced that limited and moderate forms of alignment were not of interest, and that a full form of alignment would best meet the practice’s goal of long-term, strategic partnership. However, they were not sure whether a PSA or employment approach would offer greater benefit.
For the MNO physicians, the ongoing responsibilities of managing a practice were becoming increasingly burdensome. In addition, the practice’s overhead had been steadily increasing (both in real-dollar terms and as a percentage of revenue), and leaders felt even greater administrative focus was necessary to better manage these rising costs. As a result, either the traditional PSA model or employment became the best possible options.
The practice struggled to make a decision because the primary care physicians were inclined to pursue employment, while the specialists favored a traditional PSA. Ultimately, MNO selected the traditional PSA structure, largely because it allowed the practice to continue distributing income based on its internal methodology. This option relieved leaders of the pressures of managing their practice, and allowed them to continue the group mentality that accompanies the traditional PSA model.
MNO ultimately pursued the traditional PSA with the sole hospital in its market, Hospital PQR. Under this model, each specialty within MNO received a different rate per wRVU. For example, in years 1-3, Hospital PQR paid specialists in internal medicine $47.64 per wRVU. Also, in contrast with the rate received by ABC Physician Practice (as shown in the exhibit above), MNO received fixed rates per wRVU for the first three years of the agreement.
After acquiring MNO, Hospital PQR decided to implement provider-based billing for professional services rendered in the practice. Although provider-based billing typically is not pursued under a global payment PSA structure due to compliance concerns, these concerns are relatively lower under a traditional PSA. (Specifically, the management control stipulation is seen by most legal counsels to be met under the structure of a traditional PSA, wherein this is not as easily evidenced under the global payment PSA.) As a result, Hospital PQR received about 9 percent more in payment for the applicable services than the MNO practice had historically received for these same services. The hospital also pursued hospital outpatient department (HOPD) rates for applicable ancillaries. The result of the switch was an increase of 17 percent for applicable services. When accounting for the utilization of provider-based billing, HOPD billing, and the hospital’s improved contracts with non-Medicare payers, the MNO practice’s revenue increased in each of the first two years postalignment by $4.7 million and $5.1 million, respectively.
Selecting the Appropriate Level of Alignment
Alignment options are many, ranging from limited forms, such as call compensation or medical directorships; to moderate forms, such as clinical co-management agreements and joint ventures; to full forms, such as PSAs and employment. Selecting the appropriate level of alignment is critical, as is identifying the right model to support it. When hospitals and physicians desire to align fully, recognizing that viable alternatives to employment exist and should be considered as part of the due diligence process, it will ultimately lead to more successful, lasting relationships.
J. Max Reiboldt, CPA, is president and CEO, Coker Group, Alpharetta, Ga., and a member of HFMA’s Florida Chapter (firstname.lastname@example.org).
Aimee Greeter, MPH, is senior manager, Coker Group, Alpharetta, Ga. (email@example.com).
Pros and Cons of PSAs
PSAs offer many potential benefits to both physicians and hospitals, but they are not without challenges.
Benefits. Although PSAs may be seen as more complex than straight employment, they offer great flexibility for both parties, which physicians often prefer (at least initially) when entering into full alignment arrangements. Moreover, despite the similarities between PSAs and employment, there are very specific differences that often make them preferable to physicians.
For example, a PSA offers physicians a means to maintain independence from the hospital by remaining employees of the practice or controlling the management infrastructure, making it easier for them to return to private practice if they choose to do so. Traditional and global payment PSAs, in particular, provide physicians with a level of independence and autonomy that most employment structures simply cannot provide. For example, physicians can keep their existing
benefit plans in place under these PSA models.
Of benefit to both parties is the fact that, despite being less stable than employment, PSAs offer a high level of stability relative to the hospital and physician relationship going forward. As such, PSAs can be viable segues to full employment, because many physicians need time to make certain that a hospital partner is the right long-term affiliate and these arrangements provide the parties with an opportunity to get to know one another.
Meanwhile, a management committee within the PSA structure can provide for many of the governance and decision-making processes desired under alignment. Typically, a management committee will jointly develop strategies and other day-to-day operative initiatives, such as budgets and areas of opportunity for growth and expansion.
For hospitals, the ability to expand the elements of clinical integration also clearly exists within the PSA models. Clinical integration is not only possible, but the strategies supporting development of an accountable care organization (ACO) can easily be put in place within the PSA models. Add to this the fact that PSAs offer an entry point to clinical integration, as medical groups tend to prefer hospital partners that are amenable to non-employment options offering a high level of integration.
In short, PSAs will support the establishment of fully aligned models and other important structures, such as patient-centered medical homes and, ultimately, ACOs. Global payment PSA and practice management arrangement PSA models, in particular, offer hospitals and health systems an opportunity for full integration with a physician practice while reducing the typical economic and financial risk of owning and managing a medical practice.
Other benefits of PSAs include the ability to increase revenue (within legal and ethical bounds) and better control costs. Under some PSA models, hospitals can strengthen specialty service lines, gain a larger patient and referral base, and increase downstream revenues from ancillaries. Indeed, PSAs present opportunities for both physicians and hospitals to expand services together without being completely bound to one another by employment.
There also is some flexibility in how PSAs are structured. Hybrid PSAs can be created to accommodate the specific needs of both the hospital and the practice. And lesser forms of alignment, often referred to as “wraparound agreements,” are easily structured within PSA models and are usually a viable complement to them.
Finally, it is easier for a hospital or health system to unwind and effectively disengage from the physicians in a PSA than it is if the physicians are under an employment contract, particularly if the contract contains a post-termination noncompete provision. Physicians can withdraw from a PSA agreement, but such agreements usually include provisions requiring high levels of commitment from a practice and limiting its ability to partner with someone else after termination of the agreement (e.g., return to private practice is typically the only “unwind” option available to physicians who were part of the PSA transaction).
Challenges. It is important to keep in mind the challenges that PSAs can sometimes present. Some PSA models can be difficult to unwind, for example, particularly a traditional PSA.
Legal challenges must be appropriately addressed, including those related to provider-based billing. For compliance with various regulations, employment can be seen as a cleaner option.
For hospitals, there is the risk that physicians participating in PSAs may fear that hospitals will view them as a second choice behind peer physicians who are directly employed by the same health system.
Selecting the appropriate model also can create sensitivities. For example, a practice management arrangement is best in a situation where a practice has especially adept management infrastructure and overall administrative skill. If these qualities are lacking, yet the practice is keenly interested in pursuing this model, frank discussions regarding administrative capabilities will need to occur.
Finally, renewal or extension terms of the PSA will likely require another round of negotiations, which can be difficult for both parties once they are so closely aligned.
a. Strictly speaking, a PSA is a legal document that formalizes many physician/health system relationships wherein " professional services" are rendered. As referenced within this article, however, PSA refers to a very specific alignment structure, analogous in many ways to employment.
Publication Date: Monday, April 01, 2013