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Physician‐Health System Integration Models

Health care reform, in one form or another, is here to stay.  The pressures on physicians and health systems to work together are strong, and will remain so regardless of what SCOTUS does with the Affordable Care Act.

Three basic integration models for physicians and health systems:

  • Physicians can become employed by health systems (including possibility of selling their practice)
  • Physicians and health systems can enter into professional service and co‐management agreements
  • Physicians and health systems can enter into joint ventures

Employment by Health Systems

  • Physicians seek security – to control costs, to adopt technological advances, to attract and retain qualified employees, and to maximize commercial managed care reimbursement
  • Health systems seek patients and leverage – to reduce competition with physician ventures, to prepare for Medicare payment reforms, bundled payments, and ACOs, and to better address preventable hospital readmissions
  • Both seek to improve access to care (including having quality primary care physicians and specialists available), to increase quality, to reduce costs, and to remain competitive

Professional Service and Co‐Management Agreements

Professional service and co‐management agreements are an alternative to physicians being employed by health systems.

These arrangements promote the alignment of the business interests of a health system with physicians, provide new revenue opportunities for both, provide the health system with specialist physicians while reducing its employee costs, and allow the physicians to retain their practice independence.

  • In a Professional Service Agreement, a health system owns and operates a clinic and contracts with an independent physician group to provide specified clinical services. The health system pays the physicians agreed upon compensation and bills and collects for their services.
  • In a Co-Management Agreement, a health system and a group of physicians who are members of the medical staff form a management company which is jointly owned which manages one or more service lines offered by the health system. The management company is paid for its management services (with incentives for patient satisfaction, reducing readmissions, etc.).

Health System‐Physician Joint Ventures

Joint venture activities typically include surgery centers and diagnostic imaging centers (may also include MSOs, ACOs, and PHOs, discussed later).

Joint ventures present opportunities and benefits for the health system and the physicians:

  • Physicians gain brand strength and access to capital and clinical resources
  • Health systems gain physician allies and support, additional service lines, and improved brand strength

Hurdles to All Physician-Health System Business Arrangements

  • Complying with the regulatory requirements – including Stark, anti‐kickback, antitrust, and income tax laws if the health system is a nonprofit
  • Balancing physician expectations regarding the value of their practices and their services vs. fair market value considerations
  • The parties must deal with each other at arm’s length, and the transaction must comply with fair market value considerations
  • Negotiating the legal and business provisions
    • Compensation (base and productivity) and benefits, if applicable
    • Services to be provided and location(s)
    • Staff, facilities, and resources
    • Determining who reports to whom
    • Hiring and firing staff/clinic employees
    • Adding/contracting with additional physicians
    • Termination and restrictive covenants
    • Unwind and but-sell considerations
    • Ownership percentages & sharing revenues and expenses
    • Control and decision making
    • Investors and capital requirements
    • Reimbursement from payers and indigent care
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