Physician Payment and Reimbursement

Contracting With Physicians to Tackle Pervasive Challenges

August 15, 2017 6:42 am

One Midwest health system with a clinically integrated network achieved $11 million in savings in the first year of implementing a hospital efficiency improvement contract with physicians.

Many hospitals and health systems already engage specific specialties, such as cardiology, neurology, or orthopedics, in co-management agreements to improve clinical or financial outcomes in particular departments. Despite these efforts, intractable problems like unnecessary readmissions and wasted blood products frequently continue to pervade multiple departments in organizations. For these widespread issues, hospital efficiency improvement programs (HEIPs) can be more inclusive and collaborative options than co-management agreements for aligning physician incentives in clinically integrated networks (CINs).

Defining Variance Versus Opportunity

Historically, CFOs and other finance leaders have set quality and efficiency goals by departments or by projects. But HEIPs allow organizations to address issues holistically across service lines by providing all inpatient-focused specialties with financial rewards if they achieve specific outcomes. Such programs also support hospital or health system alignment strategies with both employed and independent physicians by reinforcing CIN infrastructures and offering incentives to clinicians to help support organizational change.

Hospital Efficiency Improvement Program Business Case Example

Although co-management agreements can be effective at improving clinical and financial outcomes, they are often designed for single specialties or departments. With HEIPs, hospitals and health systems can tackle enterprisewide problems, such as sepsis and blood product utilization, that are often difficult to solve with quick solutions. HEIPs also allow physicians to collaborate on managing conditions like osteoarthritis or heart failure that stretch across the full continuum of care, from outpatient to inpatient services.

And compared with smaller-scale co-management arrangements, HEIPs, which promote quality improvement and efficiency across multiple services lines, often present a greater financial proposition to the hospital. Case in point: One Midwest health system with a CIN achieved $11 million in savings in the first year of implementing an HEIP contract.

How HEIPs Work

The essential undertaking in implementing an HEIP is to identify opportunities within the inpatient setting where, by virtue of the efforts of physicians working collaboratively across service lines, the hospital will stand to reduce or stabilize costs and to establish goals around these opportunities for improving clinical and financial outcomes through various process activities. These opportunities and performance measures will be memorialized in a written agreement between the hospital and the entity that represents the physician group, such as a CIN, accountable care organization, physician-hospital organization, or other physician enterprise.

These agreements detail specific initiatives, identify the physicians participating in the various initiatives, set the specific duties and obligations of the physicians, and the compensation available to the CIN for their success in meeting specified targets. For example, a hospital may include a blood utilization initiative in its HEIP with a CIN, setting a goal for physician adherence to guidelines for ordering blood products and hemoglobin indications. A blood utilization committee with members from the hospital and CIN would define the initiative and set the performance targets, with payouts to the CIN based on the CIN’s performance relative to such targets.

Compensation under a HEIP is to be calculated and paid to the CIN on predetermined intervals (i.e., quarterly, semiannually, or annually). Once received by the CIN, payments may be distributed to physicians, who may be pooled within certain initiatives, in accordance with detailed distribution methodologies, which may account for the efforts of physicians at both individual and group levels.

Distributions may also entail per capita payments, individual and group incentive benchmark payments, and/or payments based on time spent in activities. Maximum and minimum payment amounts are set in advance, and payments need to be structured in a manner that complies with applicable fraud and abuse standards. A portion of the compensation paid to a CIN through the HEIP should be retained by the CIN to advance its own infrastructure and boost its internal capabilities.

Hospital Efficiency Improvement Program Distribution

Examples of HEIP Initiatives

HEIP initiatives may take the form of the following scenarios:

  • Pharmaceutical utilization programs that incentivize physicians to switch to generic drugs and optimize therapeutic substitutions
  • Programs to improve physician documentation of congestive heart failure and chronic obstructive pulmonary disease (COPD) cases, compared with national benchmarks
  • Radiology utilization programs to eliminate orders for high-cost imaging on the last two days of inpatient stays
  • Readmissions reduction programs that target frequent utilizers with patient education and a focus on improving transitions of care
  • Programs to improve scores in publicly reported programs, such as hospital value-based purchasing programs or hospital-acquired condition reduction programs

Key Considerations

The following are suggestions for CFOs who want to engage physicians in HEIPs.

Conduct third-party, fair market value analyses.  Arrangements involving compensation from hospitals to physicians, even if made indirectly through a CIN, may implicate the Stark Law, the Anti-Kickback Statute, and the Civil Monetary Penalties (CMP) law. Accordingly, fair market value analyses are essential.

Fair market value analyses typically involve a two-tiered approach. The first tier involves analyzing HEIP payments from hospitals or health systems to the CIN or other physician enterprise. The second tier involves reviewing the downstream payments from the CIN or physician enterprise to individual physician groups.

Physician networks that also participate in the Medicare Shared Savings Program (MSSP) as an accountable care organizations should also consider the application of waivers under the MSSP, which may provide additional flexibility and protection that would not be available outside the MSSP. For example, a hospital may help contribute towards the network’s information technology capabilities in furtherance of the network’s Triple Aim purpose under the MSSP, which may also help the network optimize its performance under the HEIP.

Engage legal counsel in creating contracts. Aside from fair market value considerations that arise under the Stark Law and the Anti-Kickback Statute, consideration should be given to the potential application of the CMP. In particular, the CMP can be implicated in gainsharing arrangements.

Thanks to the Medicare Access and CHIP Reauthorization Act (MACRA) of 2015, organizations may have more leeway to incentivize physicians for improving quality and efficiency in hospitals. Specifically, MACRA modified language within the CMP to prohibit incentives that induce the reduction of medically necessary services, effectively acknowledging that paying for reductions in wasteful or duplicative spending that does not adversely impact patient care can be appropriate in some circumstances. While this change gives physicians and hospitals more protection as they embrace efficiencies required under value-based care, hospitals should still be careful around the design of certain initiatives, such as length of stay, to avoid application of CMPs.

Other HEIP regulatory considerations that can arise under fraud and abuse laws and standards applicable to tax-exempt organizations may exist and are beyond the scope of this article. The bottom line: CFOs should work with their legal counsel to ensure that HEIPs are compliant with state and federal laws and that the contract not only supports the HEIP quality and efficiency objectives, but also is structured in a manner that does not put the hospital, the CIN, or physicians at risk under such laws.

It also is important that HEIP payment methodologies balance care reduction metrics with quality metrics, as the ultimate goal is to improve patient care. For example, supply utilization metrics can be balanced by infection rate metrics to help ensure physicians select the most clinically appropriate equipment—not simply items associated with the largest gainsharing payouts.

Make sure you are not compensating physicians more than once for the same activity. CFOs need to understand how their organizations define various improvement initiatives and how they allocate physicians’ financial opportunities. To do this, CFOs and their legal teams should audit and review contracts for employment, medical directorships, co-management, call coverage, and bundled payments to identify quality and efficiency initiatives that physicians are already working towards. Such contracts will need to be carved out of HEIP initiatives to avoid duplicative payments for overlapping initiatives (i.e., double dipping).

Start small. Ideally, financial and clinical leaders should choose three to eight efficiency improvement activities when they first develop contracts, and then add more initiatives over time. Leaders should select concrete initiatives based on historical data, national standards, and clinical literature. They also should provide clear documentation of the recommended improvement steps for selected initiatives.

Multi-hospital systems might choose sets of shared as well as hospital-specific initiatives. For example, health system leaders might choose three or four activities for every hospital, while hospital leaders might choose three or four for their own institutions. This allows leaders to address macro issues within health systems and micro issues within hospitals.

Monitor contracts over time. Analytics tools can help leaders assess physicians’ performance and adjust targets as needed. They also can help improve transparency and present credible evidence that the activities are not causing adverse effects on patient care.

When an HEIP Is Not the Best Option

HEIPs require significant infrastructure to be successful. That is why they might not be the best options when opportunities are too small or short-lived to warrant the investment. In particular, HEIPs may not be practical if organizations lack expertise in IT or analytics, which are required to assess potential opportunities and monitor performance. HEIPs also would not be good fits if organizations primarily want to improve financial metrics that do not hinge on physician involvement.

If hospitals and health systems do engage physicians in an HEIP contract, CFOs and other leaders will need to review their existing co-management agreements and determine if they should be terminated and moved under HEIP umbrellas. This may slow down implementation but ultimately may create more alignment between hospitals or health systems and physician entities.

Jim Daniel, JD, MBA, is a director at the law firm HDJN, Richmond, Va., and is a member of HFMA’s Virginia-Washington D.C. Chapter.

Dennis Weaver, MD, MBA, is the chief medical officer and executive vice president of Advisory Board’s consulting division, Nashville, Tenn.

This article is based in part on a presentation at ACHE’s 2017 Congress on Healthcare Leadership in Chicago.

Discussion Starters:

Forum members: What do you think? Please share your thoughts in the comments section below.

  • Which initiatives are best supported by a hospital efficiency improvement program?
  • What are some of the regulatory considerations associated with a hospital efficiency improvement program?
  • What other strategies can help improve collaboration and cooperation across service lines?


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