Katie Collings RayFor hospitals and physicians alike, the concept of alignment can be intimidating. But in a market that is demanding better value, an increasing number of organizations are pursuing stronger affiliations to improve care coordination, enhance access, and ensure long-term financial viability. Physician employment has received much of the recent press, but it isn’t always an option. For organizations exploring alternate affiliation models, the professional services agreement (PSA) has gained prevalence as a mutually beneficial, high-integration alignment strategy. 

Katy ReedWhen is a PSA typically the most effective and/or only viable approach to alignment?

PSAs are often the preferred alignment option when:

  • Physicians wish to remain independent but recognize the benefits of increased hospital alignment
  • A physician group practices at several hospitals, and employment may provoke a competitive response
  • Physicians belong to a larger, multispecialty group that will remain intact
  • An intermediate step is needed to build trust prior to considering full employment
  • A hospital cannot employ physicians due to political or regulatory concerns

How does a PSA model operate?

Under a PSA, the physician or medical group is an independent entity that provides professional services in a clinic owned by a hospital (or foundation). The hospital typically retains all rights to the associated professional and technical fees from payers and, in exchange, delivers a PSA payment to the physician or group.

PSA Operating Model

If the hospital owns all associated revenue streams, it may have the option to bill for services as either “freestanding” or “provider-based.” The designation ultimately depends on the clinic’s setup, because a provider-based clinic must meet additional regulatory and operational requirements. Although establishing a provider-based clinic is often the preferred option among organizations due to typically more favorable reimbursement rates, some organizations are opting to operate as freestanding clinics in anticipation of reform-related reimbursement changes.

What is a typical PSA funds flow structure?

PSAs can use a variety of funds flow models, from fixed monthly payments to pure productivity-based plans. Typically, the hospital provides a payment to the group as a whole rather than to an individual physician. The group is therefore free to maintain its own income distribution plan, but it is important to ensure that the group’s overarching incentive structure is aligned with its individual compensation plan. Specifically, in anticipation of value-based payment methodologies, an increasing number of hospitals are incorporating service incentives related to quality, care coordination, and efficiency into their PSA funds flow structures, and these incentives should also tie to the group’s individual compensation plan. Additionally, any structure will have to comply with federal and local regulations by not inadvertently creating incentives to reduce patient care or correlating payments to hospital referrals. Regardless of these potential complexities, it is important to engage physicians in the development of the PSA funds flow structure and work toward physician consensus for any proposed incentives.

Properly structured, a PSA model enables hospitals and physicians to advance their program services and be more sustainable in an ever-challenging market.


Katie Collings Ray is a manager in the healthcare practice at ECG Management Consultants, Inc., Seattle. 

Katy Reed is a senior manager in the healthcare practice at ECG Management Consultants, Inc., Seattle 

Publication Date: Tuesday, December 10, 2013