In the beginning, there were management service agreements (MSA) -- a hospital would appoint an individual physician to be medical director of cardiology, for example -- and they were pretty good. But these positions came without compensation, so right off the bat you were interfering with the physician's livelihood, and they also had no teeth: directors were reluctant to call colleagues on, say, inappropriate use of resources. So they weren't pushing the quality bar any higher.

After a while, hospitals started paying their medical directors fees, but they were too small to make a big difference. And as federal regulations tightened up, hospitals were required to get more specific about what they were asking those medical directors to do and how much time it took them to do it. Eventually some hospitals started adding some incentives to the base fee for the contract: Make sure our patients meet these core measures and there's extra money to be earned.

And thus MSAs begat co-management arrangements, in which some part of the physician's compensation is based on reaching performance targets that align hospital-physician interests in advancing certain strategic priorities of the organization. And lo, these were very good.

How It Works

Today, a growing number of hospitals are entering into co-management arrangements with groups of physicians, rather than individuals, to manage key service lines, typically top revenue generators like neurosurgery, cardiology, and orthopedics.

Mary Ann Crawford, PhD, RN, a principal with DMI Transitions, explains that contracts are usually for a single year and establish specific, measurable outcomes. These may be clinical, operational, and patient-service oriented -- e.g., reduced infection rates, implementation of clinical pathways, increased throughput, improvements in patient safety/satisfaction. Subsequent agreements must establish new targets, which might be further improvement on the same fronts or accomplishment of entirely new goals.

If the physicians are not all in the same professional practice corporation, they will typically form an LLC management company, which may take several different forms. It might consist of all physicians or of hospital and physician members, with every member paying an entry fee, much as with an equity investment. Often there is equal ownership.

The company is then engaged by the hospital to manage the service line, that is, to provide a comprehensive set of services based on a fixed fee set in advance, plus an incentive fee based upon achieving defined performance goals.

Crawford cites the example of a Michigan hospital which brought together a group of 28 surgeons in an LLC (in which the hospital is a member) to manage its outpatient surgery department. Before entering into this arrangement, the surgeons had been planning to start an ambulatory surgicenter on their own, despite the fact that there were already four ASCs in the market.

The first year, the physicians improved access and turnaround times, among other requirements of the contract. The second year's contract specified other targets, which the group also hit. In fact, they've had so much success together that the hospital and the LLC now are exploring the possibility of a joint venture business arrangement

Compensation

One challenge in setting up a co-management arrangement is demonstrating compliance with fair market value (FMV) regulations, which is important both legally and operationally. The idea is to reward results, not just time spent. So if the base management fee is to be reasonable, it must be based on defined work effort as well as FMV. But arriving at a fair valuation is not easy.

As explained by Brandt et al, cost and income approaches to valuation don't work well for several reasons. Regulations prohibit the consideration of volume, and it's impossible to determine the exact number of required work hours in advance. The invested capital required by a co-management entity is generally minimal, which means that analysis related to return on equity or on assets is not useful.

A market approach is a better idea. "Each arrangement is unique… [but] if the basket of services is broken down into specific tasks and objectives, [it] can then be compared to other arrangements (such as ASC management arrangements) that have similarly been broken down…*

What's in the Agreement?

Different hospitals require different things from physician groups, but here are some common requirements built into co-management contracts:

• Medical directorships
• Direct participation in development of clinical strategies, clinical care guidelines, and protocols
• Quality improvement services
• Co-management of staff, including in-service education
• Operations management
• Medical technology evaluation
• Vendor selection
• Drug formulary assessment and management
• Direct participation in development/implementation of business plans
• Direct participation in capital/operating budget formation and review
• Physician recruiting, mentoring, specialized training
• Referral source development and management
• Measurement of patient satisfaction
• Development of clinical outreach programs

Benefits All Around

Co-management arrangements, Crawford points out, come with a number of benefits. "Many times, physicians spend their energy complaining about a service line. If you can partner with them to fix it together, it changes the whole relationship. Once they sit down together at the table, they can address operational and clinical issues and decide 'these are the things we ought to monitor postoperatively… this is the way the patient ought to move through the continuum from physician's office into surgery… these are the standard care pathways we want to use.'"

Historically, says Crawford, conflict of interest might mean that one surgeon was not too concerned if another surgeon didn't treat patients according to best practice standards. "But when they're contracted with the hospital to manage orthopedic care in the emergency department (ED), for example, they're going to be doing case review. Unlike an individual practitioner, they're authorized -- and motivated -- to look at appropriateness of care."

This is all excellent practice for physicians and hospitals in working together to manage a complete continuum of care, as they will inevitably have to do in the future; just think about global payments. "Pay for performance is going to require a quality platform, so they might as well collaborate in creating one."

Hospitals (and patients) benefit from gaining substantial clinical and operational input from physicians without having to develop an elaborate gain-sharing model. For their part, physicians are able to have their say while remaining independent.

An Evolutionary Process

It all started with an ED call pay problem. Providence Hospital Northeast, in Columbia, SC, was close to losing coverage of one of its service lines when it formed separate co-management agreements with its orthopedic and neurosurgeons, says Ryan Hall, vice president and administrator. Doing so meant dealing with both legal and trust issues.

"We were able to combine arrangements so that the agreement covered unassigned call as well as co-management of the Orthopedic and Neurospine Institute. "We had attorneys help us draft the agreements and, in the meantime, we had several meetings with key stakeholders in those practices to determine their interest levels. There was some skepticism at first, because prior administrative staff here had not been very good at following through with physicians. Once they began to see what a real partnership could mean, we started to get engagement."

It's been an evolutionary process, says Hall. "We started with a simple spine program, then a sports health program, and then moved to a total joint program. Finally, we moved into the spine center model, with a more comprehensive treatment of spinal or back injuries.

"The first year, the agreement covered development of the institute; there were timelines, specific tasks assigned, and documentation of the progress being made. The second year was implementation, and now, in our third year, we're into growth of the programs and further advancement of quality, and measuring the results. We consistently change and remodel goals because we continue to make progress.

It's possible that the co-management arrangements will eventually be rolled into an ownership or acquisition phase, says Hall. "Obviously, there's no need to pay for call if we own the physician group."

More Reasons to Love the Co-Management Model

• It's acceptable legally, meeting all the restrictive covenants and regulations currently required.
• It's a quality- and performance-driven arrangement.
• It builds trust between physicians and hospital,as well as between physicians
• It delivers operational efficiencies, financial controls, and enhanced clinical quality to the hospital, while improving access for patients.
• It's reversible if it doesn't achieve the intended results.
• It doesn't require the hospital to use scarce capital to buy physician practices.
• It allows physicians to participate with minimal upfront investment.

Going Beyond the Standard

Providence Northeast's surgeons helped to develop some 40 measures that make up a monthly program dashboard. They didn't just want to take the standard stuff, Hall says. "We wanted to strive for a higher standard, and our surgeons helped us with this; they used their own professional academies to research appropriate criteria."

For example, they started researching how many bags of fluids are standard in an arthroscopic knee case, how many hours the case should take, how much blood loss is normal. "There aren't a whole lot of standards like this out there. So then we had to go back to the ground floor and just draw some lines in the sand, based on our performance, as a starting point. "

Surgeons from both groups sit together on an institute advisory board, where quality issues are discussed and debated monthly: How should they define start times in the OR - from the time the incision is made? When the patient is brought into the room? What type of implant device should be used for total shoulder replacement?

"And then they evaluate each other and other members of the entity," says Hall.

So have the quality gains translated into financial gains for the hospital? Hall says absolutely.

"Anytime you show a decreased LOS, even by a very small percentage, there are significant gains on the reimbursement side, especially now; we're ahead of the curve on pay for performance. Because we met the Leapfrog Group's standardized quality, safety, and resource utilization measures, we were actually able to gain incentives from the commercial payers."

Mary Ann Crawford and Ryan Hall can be reached at mac@dmitransitions.com  and ryan.hall@providencehospitals.com , respectively.

Publication Date: Wednesday, April 22, 2009