5 Things You Should Know About Co-Management Arrangements

Published by Healthcare Financial Management Association

Hospitals today are increasingly turning to co-management agreements as tools for physician alignment. These arrangements, a direct outgrowth of pay-for-performance programs, are typically structured in two parts: a fixed fee for services rendered by the physicians and a variable fee based on the quality of the outcomes. Services provided by the physicians most often include time spent working on protocols and best practices to improve quality and efficiency of the service line. Common quality metrics include improving patient satisfaction and lowering infection rates.

When implementing a physician integration strategy, healthcare leaders should be mindful of federal regulations mandating that payments to physicians be set at fair market value (FMV). Healthcare fraud and abuse laws have identified FMV as the standard of value for determining compensation between a physician and hospital in order to prevent overpayment to a physician based on the value or volume of referrals. As a result, if an agreement between a physician and healthcare organization is audited by federal or state healthcare authorities, the analytical process and documentation to justify the payment is FMV will be essential in defending the compensation level. Co-management agreements are no exception. Failure to set payments under these arrangements at FMV could result in criminal and/or civil penalties. Regulatory authorities may subject not only the payments, but also the structure and terms of the arrangement to close scrutiny.

Determining the appropriate structure and FMV for the fees associated with co-management agreements can be challenging for two reasons. First, co-management arrangements are relatively new and the structures continue to evolve. Second, there is very little regulatory guidance on how these agreements should be structured and valued. Discussions among healthcare leaders, attorneys, consultants, and valuation firms when developing these arrangements tend to focus on five topic areas:

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