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The healthcare industry's perceived need for physician alignment is largely an outgrowth of an increased focus on the quality of outcomes. Because physicians control the delivery, management, and utilization of clinical services, their organizational involvement is critical if hospitals are to achieve high-quality results. As hospitals have focused increasingly in improving the quality of outcomes, co-management arrangements have proliferated throughout the country. These arrangements, a direct outgrowth of pay-for-performance programs, are typically structured in two parts: a fixed fee for services rendered by the physicians and a variable fee based on the quality of the outcomes. Services provided by the physicians most often include time spent working on protocols and best practices to improve quality and efficiency of the service line. Common quality metrics include improving patient satisfaction and lowering infection rates.

These arrangements provide an avenue for hospitals to align with physicians without requiring the formation of a joint venture or employment arrangement. According to a PWC Physician Employment Survey, co-management currently employs 8 percent of physicians and 34 percent of physicians are interested in pursuing this type of arrangement over the next 2 years (From Courtship to Marriage: Why Health Reform Is Driving Physicians and Hospitals Closer Together, PWC Health Research Institute, 2011).

The healthcare industry's recent focus on quality of care stems from numerous initiatives by both government and commercial payers. One of the largest catalysts of pay-for-performance programs for hospitals was launched by the Centers for Medicare & Medicaid services (CMS) and Premier Inc. in 2003, the Hospital Quality Incentive Demonstration (HQID). The program gives hospitals financial incentives for quality, and it has raised overall quality by an average of 18.8 percent over its first four years, with total payments in excess of $48.6 million ("Medicare Demonstrations Show Paying for Quality Healthcare Pays Off," Department of Health and Human Services, CMS, Medicare News, Aug.17, 2009). Data show that the majority of hospitals in the HQID project-even those on the lower end of the scale-improved their quality of care across the board.

There is significant research showing pay-for-performance programs are effective at improving quality. As another example, a national program administered by the Robert Wood Johnson Foundation and California HealthCare Foundation that tested the use of financial incentives to improve the quality of health care found that financial incentives motivate change and that alignment with physicians is a critical activity for quality outcomes (Rewarding Results: Aligning Incentives with High-Quality Health Care, Robert Wood Johnson Foundation. June 27, 2008). Over the past eight years, industrywide initiatives have signaled a growth in pay-for-performance programs.

In addition to rewarding improved quality with financial incentives, some programs aim to reduce payment for poor quality. Medicare's national hospital value-based purchasing (VBP) program, which the agency will institute on Oct.1, 2012, is an example of such a program. Results of a recent survey suggest that this program may be financially detrimental to many hospitals if they do not start working on improving quality now. In a national analysis of hospital performance, Irving, Texas-based VHA Inc. estimated that a national median VBP score for hospitals is likely to be 53, which is far short of the scores of 70 and higher that hospitals will need to achieve to maximize payments from Medicare.

Hal Andrews, managing director and chief development officer at The Martin Companies, reports, "Seventy-five percent of hospitals face losses under the new VBP." Specifically, it is estimated that hospitals face an average VBP revenue risk of $888,812 in 2012 ("Medicare value-based purchasing: '75 percent of hospitals face losses'" FierceHealth Finance, June 30, 2010). Although it is not currently clear exactly how the VBP program will be structured, research indicates hospitals experiencing significant improvement or superior performance will be rewarded, and those who do not may experience reimbursement cuts.

In summary, pay-for-performance programs use quality measures to negotiate payment and select service providers. This trend has prompted healthcare organizations to seek to collaborate with physicians, because physicians are best equipped to understand and implement the best practices and protocols for achieving superior clinical outcomes. Research shows co-management arrangements are being developed nationwide, and at a rapid pace, to assist health systems in meeting these quality driven goals ("Co-Management Is a Hot New Trend in Physician Ventures, But Beware Starks Risks," Medicare Compliance, April 4, 2011). These arrangements are associated with both service lines of hospitals and outpatient departments (ambulatory surgery centers). Cardiology and orthopedic surgery are two specialties most commonly associated with these arrangements.

For more information, see Jen Johnson's "5 things You Should Know About Co-Management Arrangements," hfm, July 2011.


Publication Date: Friday, July 01, 2011

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