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When Hospital employment Is Not an Option

February 2013, Vol 3, No 1

Payers, just like the rest of us, do not want to pay more than they have to for anything. Over the years, payers have used countless strategies to reduce their costs. Some have worked, some have not. The most successful efforts include Medicare’s 2005 shift in drug reimbursement methodology from average wholesale price (AWP) to average sales price (ASP).

At the time, the Office of Inspector General (OIG) estimated that the median price difference between ASP and AWP was 49%.1 In 2006, the Medicare Payment Advisory Commission issued a report noting that Medicare expenditures for Part B drugs declined 14% between 2004 and 2005.2 Like Mary’s little lamb, wherever Medicare went, the others surely followed. Today, in our experience, the majority of nonfederal contracts for infusion drugs are based on ASP.

In another now-familiar tactic, payers set the rules on the “appropriate” use of various drugs based on US Food and Drug Administration labeling or on published materials, such as guidelines from the National Comprehensive Cancer Network. One result of these strategies is the rapidly rising trend of free-standing oncology practices aligning in some manner with hospitals.

The next generation of tactics is now emerging, and it includes a variety of payment methodologies that would replace fee-for-service, or buy and bill, approaches, such as bundled payment packages and case rates, pay for quality, and shared-savings arrangements. As with any change in healthcare, this new generation will take time to fully replace the historical status quo. Furthermore, many of today’s options for physician-hospital alignments will likely continue to be valid in the evolving new world. Therefore, it is neither too early nor a waste of time to forge relationships now.

Presently, there are almost innumerable ways for practices to align with hospitals. And, arguably, employment is the simplest. But for many, employment is simply not an option. Some states—California, Colorado, Illinois, Iowa, New Jersey, New York, Ohio, and Texas—have laws regarding the corporate practice of medicine that limit or prevent such employment. Just as important, however, are valid physician concerns about becoming employed by a hospital. These concerns include a loss of control over operations and staff, compensation, job security, and performance expectations.

When employment is not an option, there are still many other possibilities that can include a variety of complicated agreements for things such as new management companies; new joint ventures for real estate, facilities, and/or equipment ownership; management services agreements; and professional services agreements. Regardless of the components of the new alignment, the means of compensating physicians must be clearly defined in a manner that is compliant with all applicable laws, and the details must be very carefully articulated if the alignment is to be successful for all parties.

The categories of detail to address include control, performance expectations, compensation or revenue distribution, and the methodology for establishing each.

Control

Whether the new model will be a management services agreement, a professional services agreement, or a comanagement agreement, many things have to be controlled. One of the most important is staff. Physicians are generally accustomed to making staffing decisions—what roles need to be filled, how many staff members are needed for each role, and, of course, who should be hired (or fired). When the model calls for using hospital-employed staff, these issues can become prickly, because the hospital will likely have policies and procedures that do not allow for quick decisions and actions. Furthermore, hospitals are often under pressure to keep the total complement of full-time equivalents at a given level despite what may seem to be a clear—or even dire—need for additional staff.

In addition, when staff will transition from being employed by the practice to being employed by the institution, advance negotiation is required around the issues of pay scale, benefits packages, bonus op­­portunities, and seniority.

The control of basic operations can be another sticking point that must be very specifically addressed before finalizing the deal. This is not only so that the physicians (and transferring staff) remain satisfied with daily work life, but also because when the new agreement holds the physicians accountable in one manner or another for operational efficiency, there must be an appropriate latitude of power. For example, if an infusion suite is to run on time with maximum throughput, then lab and pharmacy turnaround times must be swift. If the physicians do not have the influence necessary to ensure quick service, they will not be able to meet the expectations around patient wait times and satisfaction. Interdepartmental influence is even more critical in comanagement agreements that include performance measures that can only be accomplished with the cooperation of others.

In most cases, nonemployment agreements offer greater flexibility to modify institutional policies than straight employment, because any variance can be attributed to a contract rather than being an exception to the rule.

The list of operational control items to work out in advance also should include scheduling parameters, staff training and credentialing, patient registration processes, clinical documentation requirements, charge capture/entry details, nursing roles beyond face time with patients (eg, calling in prescriptions), attendance at internal and external meetings, and—perhaps the most difficult of all—information technology, from scheduling systems and order entry to electronic medical records.

All of these factors make the issue of control important, as well as complicated. The ultimate challenge in terms of control, however, is the simple issue of trust. Can both parties become comfortable with ceding control to the other?

Performance Expectations

Under any type of arrangement, there needs to be a very clear delineation of expectations from all parties. These expectations often include productivity expectations (such as when there is a professional services agreement), as well as managerial expectations and good citizenship expectations.

Clinical productivity is often a difficult nut to crack. There are numerous physician production surveys available for use in determining baseline and bonus goals using work relative value units (RVUs) and various types of encounters. In general, we prefer to use work RVUs, although those present some challenges, particularly for medical oncology. Most benchmark data include the work RVUs associated not only with physician evaluation and management services, but also the work RVUs associated with the administration of chemotherapy. Most hospitals do not have a dependable mechanism for tracking the infusion work RVUs for physicians, because most infusion suites treat patients for many physicians, not just for the medical oncologists. Therefore, one needs to adjust the benchmark figures in some manner. Whether using work RVUs or encounters, all parties need to be comfortable with the methodology for establishing targets and goals, as well as with the methodology for assigning financial value to the metric(s). That methodology should be transparent to all—data sources, selection of percentiles, and so forth—and the agreement should address the frequency of revision.

Managerial expectations can vary as widely as one’s imagination, on everything from staffing and operational management to budgetary responsibility and the implementation of quality initiatives. The scope is generally narrower with simple management agreements to run a specific department or service, and far more broad in comanagement agreements that strive to impact the entire performance of a service line. Comanagement agreements certainly require a far more significant time commitment for physicians than simple management agreements, but the former also offer physicians greater financial opportunity, as discussed below.

Typical management responsibilities center around managing the infusion suite or the radiation department, taking on the full role and expectations that a hospital-employed manager or director would perform. This includes not just giving direction but actually performing the required tasks to run the department.

Perhaps the single greatest obstacle for physicians who take on managerial responsibilities is their ability to make things happen within the structure and infrastructure of the institution. Perhaps the greatest obstacle for institutions is developing whatever is necessary to allow physicians to succeed.

Compensation or Revenue Distribution

Compensation for clinical pro­duction under a professional ser­vices agreement is relatively straightforward when it is structured as a set dollar amount for physician-performed services (see work RVUs above) compared with compensation for management responsibilities. In most simple management services agreements, compensation is based on fair market value for a physician’s time.

There also can be performance bonuses available, but, again, these must be at fair market value. An institution is not permitted to pay physicians in any manner that is tied to the services ordered by those physicians, whether by volume or by revenue. In the simplest of terms, compensation for management services will be compensated similarly to what the hospital would pay directly employed staff to perform the same duties.

In comanagement agreements, there is typically a fixed payment for management responsibilities (often approximately 20%-25% of the total potential compensation to participating physicians), and there are performance bonuses for achieving specified results. Those results must be very clearly articulated (Table), and they must be completely measurable to determine the degree to which they were achieved. There are almost countless opinions regarding the total pool of dollars available, and, to date, there have been no major audits around this (although we expect that sooner or later the OIG or the US General Accountability Office will take on this issue). The OIG has, however, released an “advisory opinion” addressing the terms of a comanagement agreement between a cardiology group and a hospital, which is a must-read for anyone considering this model.3

When the alignment model in­cludes jointly owned business entities, such as management services organizations, the laws and regulations are well established and, essentially, these require the distribution of revenue to owners in direct proportion to the ownership share that each holds. Furthermore, the ownership share must be related to the proportion of total investment in the business entity. These agreements require a thorough review by a qualified attorney to ensure that there are no breaches of the various antikickback and self-referral regulations.

References

1. US Department of Health and Human Services, Office of Inspector General. Medicaid Drug Price Comparison, Average Sales Price to Average Wholesale Price. Publication OEI-03-05-00200. Washington, DC: US Dept of Health and Human Services; 2005:ii. 2. Medicare Payment Advisory Commission. Report to the Congress: Effects of Medicare Payment Changes in Oncology Services. Washington, DC: Medicare Payment Advisory Commission; 2006:10. 3. US Department of Health and Human Services, Office of Inspector General. OIG Advisory Opinion 12-22. Issued December 31, 2012; posted January 7, 2013. https://oig.hhs.gov/fraud/docs/advisoryopinions/2012/AdvOpn12-22.pdf. Accessed January 29, 2013.