December 24, 2008
Physician Alignment Strategies
The current economic crisis may well accelerate a trend toward physician alignment. Financial pressures on physicians are likely to increase, and physicians may be willing to trade an entrepreneurial mode for financial security.
At the same time, however, hospitals are facing losses on investments, increasing bad debt and charity care expenses, and lower volumes that are reducing profitability. Increased borrowing costs may also make some alignment strategies, such as joint ventures, less attractive today.
In the December 2008 issue of hfm magazine, Daniel M. Grauman and John M. Harris of DGA Partners explore three compensation-based physician alignment strategies that remain broadly attractive in the current economic climate. Their article, excerpted in this HFMA Wants You to Know, suggests that hospital and health system leaders look to physician employment, income guarantees, and professional services agreements (PSAs) to help achieve their strategic and operational goals.
Physician Employment
Employing physicians is perhaps the most appealing strategy, as it provides the closest ties to the healthcare organization and is most likely to result in desired physician behavior. Employment can secure a hospital's referral base or protect it from erosion, as employed physicians will typically use the employing hospital's facilities.
Employment offers several other benefits. It helps to protect a hospital's ancillary services revenues from outside competition. It allows hospitals to require on-call coverage outside of office hours as part of the employment agreement, and also allows easy integration of physicians within a hospital's quality initiatives and electronic medical record (EMR) systems.
Physician employment will require significant up-front investments by the hospital, but this short-term expense should be weighed against the long-term benefits of employment. Compensation agreements must be carefully structured to provide incentives for volume and for clinical practices that maximize revenue and reduce expenses. Physicians appreciate practice settings that reward them as if they were in private practice, and payment on a net practice income basis has become an increasingly popular option.
Income Guarantees
Some markets may not be ready for physician employment, or physician groups on the medical staff may object to the approach. In this situation, an income guarantee incentive for physician groups to add new physicians may be a good alternative.
A downside of income guarantees is that their impact may fade once the guarantee period ends. Hospitals also have no way of guaranteeing referral patterns. But income guarantees are another way to make physicians feel connected to the hospital. This may make them think twice before creating a competing ancillary service, and may also make them more amenable to participating in quality-of-care or EMR initiatives. On-call coverage can also be made part of the guarantee.
Hospitals must be careful to avoid running afoul of regulations when structuring income guarantees. It will be necessary to demonstrate community need, for example, and under no circumstances should it appear that the guarantee provides incentives to induce additional referral volume. The hospital should also understand the practice's compensation design so that the structure of the income guarantee for a new physician transitions smoothly into the practice's compensation plan when the guarantee ends.
Professional Services Agreements
PSAs, such as medical directorships, are a second alternative to employment of physicians. These agreements are an especially effective strategy to develop clinical programs in targeted service lines with physicians already on the medical staff.
Like income guarantees, PSAs offer a way to increase physicians' sense of connection with a hospital. PSAs that involve department leadership and teaching can secure physician participation in hospital quality-of-care initiatives, particularly if involvement in the development and enforcement of clinical guidelines are defined responsibilities of the positions.
PSAs can create regulatory issues. There is more concern with PSAs about a hospital appearing to be paying for referrals in violation of Stark and Medicare anti-kickback provisions. Hospitals must be able to demonstrate to regulators that medical directorships and other roles covered by PSAs are providing concrete value. Hospitals should pay close attention to fair market value (FMV) compensation requirements, and should consider obtaining an external FMV opinion. The ability to demonstrate that physicians are being fairly compensated for roles that provide concrete value will also demonstrate to other physicians that a PSA is not the equivalent of a union no-show job.
Every hospital's situation is unique, and there is no single optimal physician alignment strategy. Many hospitals may need to combine the strategies described above, and consider others, to meet their needs. By understanding the strategic, financial, and regulatory implications of each strategy, a hospital can use these strategies for maximum benefit.