01 Dec 2016

All Co-Management Arrangements are Not Created Equal: Understanding True Value-Drivers

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All Co-Management Arrangements are Not Created Equal: Understanding True Value-Drivers

By Nicole Montanaro
HFMA Advisor


The trend towards improved quality and transparency in healthcare is shifting hospitals’ critical success factors from financial performance to efficiency and quality performance that are on par with national and industry standards. In order effectively to elevate performance and keep up with these standards, many hospitals and health systems are involving physicians by integrating them into governance and leadership positions.

It has become abundantly clear that healthcare payment is making the shift from volume to value. As a result, physicians’ participation is vital for hospitals and health systems to achieve performance outcomes related to quality.

Introduction to Co-Management Arrangements

The quintessential co-management arrangement is a strategic agreement between a hospital and a group of physicians in order to align the physicians with the hospital for the physicians’ provision of improved quality and efficiency performance in exchange for compensation payable by the hospital. These arrangements can range in scope from a specific service line to an entire hospital or even multiple hospitals within a health system. They are most commonly seen for service lines such as orthopedic surgery and cardiology, but can be customized for nearly any service line or hospital program, from obstetrics/gynecology to neurosurgery to wound care.

There are two primary arrangement types. The first is the direct contract co-management model, in which the physicians can be individually engaged or engaged as a group. The other co-management model is the limited liability company (“LLC”) model. In the LLC model, instead of the hospital contracting directly with the physicians, the hospital contracts with a management company, the LLC, which has been formed for the purpose of co-managing the subject service line. This LLC can be owned wholly by the physicians or jointly by the physicians and the hospital.

Whether engaged directly or through a management company, the services provided by the physicians and the accompanying fee structure in co-management arrangements are relatively consistent throughout the market. Services can be categorized into two buckets:

  1. Hourly Based
  2. Performance-based

The hourly-based services are administrative in nature, such as as clinical management, program development, committee meeting attendance, etc. The performance-based services are clinical in nature and are provided via the achievement of certain pre-determined quality outcomes related to the performance of the subject service line. The fee structure corresponds with the services provided and is typically comprised of the following components:

  1. A fixed fee, and
  2. A variable fee

The fixed fee is usually an hourly rate payable to the physicians for their time spent performing the hourly-based duties described above. The variable fee is at-risk compensation payable to the physicians based on their achievement of certain service line performance thresholds, as described above. The atrisk compensation amount is variable in that, based on the service line performance, the physicians may receive any compensation amount from $0 up to a maximum incentive compensation amount typically determined by a third-party valuation firm. The following discusses the importance of setting compensation amounts that are consistent with Fair Market Value (FMV).

The Need for Fair Market Value

According to the Internal Revenue Service (“IRS”) Revenue Ruling 59-60, FMV is defined as: FMV, in effect, is the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.

As it relates to the healthcare industry, and physician compensation arrangements in particular, federally mandated fraud and abuse legislation consider FMV the standard of value for physician arrangements. Therefore, the documentation and analytical process associated with an FMV opinion are crucial to have on record if an arrangement or facility is audited by government authorities. Specifically, since Medicare, Medicaid, or any other government program funding could trigger a review of transactions between referring parties (such as hospitals and physicians), legislation such as the anti-kickback statute, which prohibits compensation in exchange for patient referrals, and the Stark self-referral law, which limits certain physician referrals, guide healthcare’s legal and regulatory environment. The anti-kickback statute is a criminal offense, with some intent or some level of knowledge of wrongdoing, while the Stark self-referral law is a civil offense punishable by monetary fines. As a high-level overview, this legislation seeks to prevent payments to physicians based on the volume or value of referrals.

Click here to view the full article on co-management arrangements.

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