John N. Fink
Darin E. Libby

To meet the challenges of accountable care, hospitals must engage physicians in a shared effort to decrease costs and improve quality. If employing physicians is not financially practical, hospitals should consider alternative alignment strategies.

At a Glance

Three models for hospital-physician alignment may offer hospitals for which large-scale physician employment is not practical the best means to prepare for payment changes under accountable care:

  • Comanagement arrangements
  • Clinical joint ventures
  • Professional services agreements with performance incentives

For many U.S. hospitals, large-scale physician employment is not financially realistic, and the pursuit of a clinically integrated organization capable of joint contracting may not be welcomed by the hospital's physician community at this time. However, the principles of accountable care will continue to proliferate across the nation's healthcare system, and these organizations will still need to address the risk of reduced payment by finding ways to decrease costs and improve quality.

Hospitals may find the answer in one of three models for alignment with physicians: comanagement arrangements, clinical joint ventures, and shared physician leadership structures.

Outsourcing Service Line Management to Physicians

Comanagement arrangements have increasingly gained the attention of healthcare providers as a potential alignment option because of these arrangements' successful track record in engaging the physicians who directly affect the cost and quality of care delivered in a hospital.

Historically, hospitals have relied on medical directors and administrative influence to align physicians' inpatient operations. In many environments, however, this approach has elicited only limited physician participation in hospital management and high variability of physician practice patterns.

By outsourcing the management of the service line to a comanagement company, a hospital can align with a broad base of independent physicians to drive service line success. The comanagement model uses a company, jointly owned by the hospital and physicians, to manage the day-to-day operations and participate in long-term planning for a specific clinical service line. Although there are no requirements for ownership and the management company may in some instances be wholly owned by physicians, most hospitals seek participation and ownership in the company to ensure another level of alignment.

Financial alignment occurs through the compensation paid to the management company for delivering services, which typically includes a base amount plus a variable amount tied to the performance of predetermined incentives. With a portion of the payments contingent upon the achievement of specific quality and efficiency measures, the participating physicians are more committed to making clinical and operational changes that improve hospital performance, even if such decisions are counter to their personal interest. To ensure continued improvement in quality, measures should be refined annually, and compensation can be based on the outcomes.

Beyond the monetary "carrot" of the financial incentives, the comanagement arrangement creates shared organizational decision making through a joint governance and ownership structure. The governance of the management company is typically structured with physician investors and the hospital each holding a portion of the governing power. Ownership can be split equally or with majority ownership held by either the hospital or physicians. Whatever the balance of ownership, the comanagement arrangement creates a formal structure to bring the hospital and physicians together to make operational decisions and assume joint accountability of the service line's performance. The exhibit below illustrates an example of the comanagement structure.

Exhibit 1


Although complex, comanagement agreements are emerging as alignment structures for physicians who want to remain independent but still partner with a hospital for mutual benefit in the new healthcare environment.

In general, to enhance coordination throughout the continuum of care, it's best to have the management company assume responsibility for the entire service line-inpatient and outpatient.

Management company responsibilities may include:

  • Development of the service line strategic plan and operating and capital budgets
  • Management oversight of the staffing, equipment, and supply/purchasing plans
  • Negotiation of the service arrangements, including hospital-based services (e.g., anesthesiology, radiology, and pathology)
  • Development of care protocols and quality management
  • Case management, including discharge planning
  • Creation of improvement policies and marketing strategies

Organization 1: Neurosurgery Comanagement

Organization 1 is a multihospital health system that has an employed primary care group but has elected not to employ specialists because of the strong independent culture of the community's physicians. Instead, Organization 1 has pursued a range of nonemployed alignment structures to link specialists to the hospitals, including a comanagement arrangement with a group of neurosurgeons. This arrangement was formed to engage a group of highly independent surgeons in advancing several of the health system's clinical and operational initiatives. Following is an overview of the arrangement.

Ownership/operating agreement. The management company is a joint venture LLC owned by the health system and the participating surgeons. Two classes of membership interest were issued to maintain health system ownership at 50 percent as new physicians join the initiative, with half of all shares allocated equally among the two classes (e.g., Class A and Class B). The health system retains all Class A shares, and the physician investors take ownership of all Class B shares. As new physician investors seek to participate in the venture, these individuals will acquire Class B shares. This approach may dilute the percentage ownership of existing physician owners, but it maintains the health system's 50 percent position.

Management services agreement (MSA). The management company contracts with Organization 1 to provide management services to the hospitals and is compensated through a base fee and incentive bonus.

Governance. The governance structure of the management company is composed of a board of managers comprising equal numbers of members representing the health system and physicians. The board's responsibility is to ensure that the company delivers the management services to the health system by securing subcontracts with physician leaders and other administrative personnel.

Management services. The management services, as defined in the MSA, are the services for which the hospital will compensate the management company with a base fee. These services are provided by the medical directors, other administrators, and designated committees.

Base compensation. The base compensation is the predetermined fee provided to the management company for contracted services. This fee is set as an hourly rate for committee involvement and medical directorship time, as well as funds to cover other administrative personnel.

Incentive payments. The incentive bonus is a predetermined amount contingent upon the level of achievement on key performance metrics outlined in the MSA. Net of expenses, this bonus represents extra earnings to the company to be returned as equity based on ownership percentage. The exhibit below illustrates an example of performance metrics and an approach to structuring the incentive bonus.

Exhibit 2


Organization 1 adopted the comanagement model based on the premise that if the neurosurgeons had a financial and operational interest in enhancing service line operations, the health system's performance improvements would accelerate and better prepare the parties for value-based purchasing programs. This objective has been realized by structuring the management fee with 50 percent of the payment based on achieving a mix of performance incentives that have successfully motivated the physicians to:

  • Enhance the clinical quality of the service line
  • Improve operational performance (e.g., by reducing costs through standardization and eliminating unnecessary processes)
  • Develop and comply with evidence-based clinical protocols to improve quality and reduce readmissions
  • Facilitate the development of new service line opportunities
  • Assume joint accountability of service line performance

Aligning Incentives Through Joint Ownership

Hospital-physician joint ventures are designed around everything from real estate to diagnostic imaging to cancer therapy to virtually any out-patient service.a Many hospitals that aspire to take leading roles in accountable care organizations (ACOs) need to enhance their presence throughout the communities they intend to serve. Joint ventures with physicians are an ideal method of extending the reach of the hospital into the community.

Perhaps the most popular outpatient service in which hospitals and physicians partner through a joint venture is the ambulatory surgery center (ASC). Historically, hospitals have typically pursued ASC joint ventures in an attempt to either regain the volume lost when surgeons have established their own center or to proactively avoid the loss of volume by establishing a center with surgeons. In today's world of accountable care, ASC joint ventures provide a means for hospitals to achieve the triple aim of improving the experience of care and the health of populations and reducing per capita costs of health care.

Many hospitals have successfully achieved greater patient convenience, higher patient satisfaction, and lower costs through ASCs while maintaining or even improving outcomes. The equity position of physician investors encourages physician participation in efforts to reduce variation, standardize processes, and reduce costs. Because they have a lower-cost structure, ASCs provide a preferred outpatient surgical environment for an ACO.

Organization 2: Orthopedic ASC

Organization 2 is a community hospital that has partnered with physicians through a variety of arrangements. Joint ventures with physicians have helped Organization 2 to transition from an inpatient service provider to a community-focused organization providing the full spectrum of inpatient and outpatient services. Perhaps its most successful arrangement with physicians is a joint venture with orthopedic surgeons.

Organization 2 developed an ASC joint venture with nine orthopedic surgeons in 1999. The ASC consisted of two operating rooms, and the hospital maintained a 50 percent ownership position. By 2005, the number of physician investors grew to 18, and the organization developed a new ASC with five operating rooms. Today, Organization 2 maintains 51 percent ownership in a joint venture with 34 orthopedic surgeons. The joint venture owns two ASCs with nine operating rooms and two procedure rooms. The two ASCs generate total annual revenue of more than $30 million and an operating margin of nearly 40 percent.

The joint venture provided the foundation for a relationship built on trust and aligned incentives. By offering physicians an opportunity to gain an equity position in the joint venture, and by capitalizing on the excellent reputation it had developed for orthopedic services, the hospital was able to attract the best orthopedic surgeons in the area and significantly expand its orthopedic service line. The orthopedic surgeons consider the hospital to be their partner not only in the ASC but also for inpatient services. As a result, the surgeons take active roles in leading quality, standardization, and cost reduction initiatives both at the ASCs and in the hospital's orthopedic center of excellence.

Coordinating Care Through Hospital-Based Specialists

Success under value-based programs will require that hospitals engage hospital-based physicians to drive operational changes that will demonstrate higher-quality care at lowest costs. With the rapid rise of hospitalist medicine, hospitals are increasingly looking to these physicians to identify and implement clinical and operational improvements.

In recent years, we have seen the expansion of existing hospitalist arrangements and the exploration of specialty hospitalist programs (e.g.,surgical hospitalist). In many specialties, physicians are increasingly refusing to take call, and many hospitals are refusing to pay specialists high levels of compensation for beeper call. These issues, along with recent experience demonstrating that hospitals can improve care by making key specialists available on site, have resulted in the proliferation of specialty hospitalist programs.

Unfortunately, because hospital-based specialists rarely collect enough from professional services to cover provider costs, these physicians require financial support from the hospital, either through employment or a professional services agreement (PSA). Without any financial support, the hospitalist physicians' interest will run counter to that of the hospital. Because the physicians are almost always paid on a per-encounter basis, they take on larger patient loads and increase work hours to earn market levels. Doing so leaves the hospitalist physician little time to focus on clinical improvement initiatives and patient flow; the result is longer lengths of stay and higher costs of care for the hospital.

Exhibit 3


As hospitals are allocating more resources to align hospital-based physicians, these organizations are seeking quantifiable improvements in cost and quality to justify the investment. One of the best mechanisms to drive improvements may be to implement a PSA model that incorporates "stretch" performance incentives. The basic structure of the PSA model is illustrated in the exhibit above.

Exhibit 4


This model has the following key features:

  • The hospital contracts with a medical group that may be either an existing group or a new group that is formed under a single tax ID through the consolidation of existing practices.
  • Physicians may become either employees (W2) or contracted agents (1099) of the new group.
  • A formal governance structure for physician shareholders and employees governs compensation, strategic direction, and financial investment decisions.
  • The medical group is paid for services through the PSA, which compensates physicians at market-competitive levels using an array of funding options.
  • The PSA may encompass both fixed and variable compensating elements.

The PSA model allows the specialist to focus his or her time on inpatient services when covering the program instead of trying to balance an elective private practice while on call. The outcome is that the hospital-based physicians are able to  respond  to patient care needs in a more timely manner, focus on inpatient operational and clinical improvements, and elevate the support offered to other medical staff members.

Organization 3: Surgical Hospitalist PSA

Organization 3 is a community hospital with a strongly independent medical staff composed of smaller, single-specialty medical groups. The hospital was required to pay for call coverage to ensure specialty coverage of critical physician services. Hospital leadership realized that simply paying for call coverage did not translate into alignment of the specialists with the hospital's initiatives to reduce the direct cost of care and engage physicians to lead quality improvement initiatives.

The hospital, in collaboration with a number of general surgeons, agreed to change the call coverage relationship and structure a surgical hospitalist program. Several alignment structures were considered, but ultimately the parties determined that the PSA model offered the best balance of alignment and medical group autonomy.

Because the hospital was requiring a minimum level of coverage, the PSA payment was structured primarily as a base payment per FTE. However, to ensure an adequate return on this investment, Organization 3 believed it was imperative to incorporate performance-based incentives into the PSA. The physicians and hospital worked together to identify goals, tying financial rewards to the achievement of performance levels above the current state. The incentive payments during the first term represented 20 percent of expected payment. The balance of performance incentives tying financial rewards to achievement of performance levels, and the percentage of total incentives represented by each, were as follows:

  • Quality-30 percent
  • Operational excellence-40 percent
  • Patient satisfaction-30 percent

Exhibit 5


Since starting the program in July 2009, Organization 3 has realized a significant decrease in length of stay (LOS) and direct costs for the higher-volume general surgery cases performed by the surgical hospitalists. The exhibit above displays the decreases in LOS and direct cost per case that were realized after two years of operating the program.

The success of its surgical hospitalist program prompted Organization 3 to developed similar arrangements with a number of other specialists to align specialists with inpatient performance.

Creating Alignment While Remaining Independent

The financial health of a hospital is contingent upon its level of engagement with physicians to reduce costs and increase value by delivering high-quality services. To engage physicians to the extent necessary, the hospital must create and maintain effective physician alignment models, modify its organizational structure to incorporate physicians, and ensure that the organization is not confined within the hospital walls. Almost all of the high-impact changes a hospital can make require the active participation of medical staff. The most successful hospitals and health systems will be those whose physicians and management are working toward similar goals and assuming the risk and reward for performance. Structures that serve as an alternative to direct employment may offer the best means to achieving the necessary alignment and integration.

John N. Fink is a senior manager, ECG Management Consultants, Inc., San Diego, Calif., and a member of HFMA's San Diego Imperial Chapter (

Darin E. Libby is a principal, ECG Management Consultants, Inc., San Diego, Calif. (


a. The healthcare reform law prohibits physician ownership in hospitals not certified as Medicare providers after Dec. 31, 2010

Publication Date: Wednesday, August 01, 2012

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