Physician/Hospital Integration – A History Lesson
Depending on how you measure it, physicians and hospitals are currently experiencing the third wave of hospital/physician integration since the 90’s. To borrow a quote from George Santayana “those who cannot remember the past, are condemned to repeat it.” The purpose of this article is to discuss some of the issues a physician or physician group should consider when evaluating whether to affiliate with a hospital or a heath system. For purposes of this article, the phrase “affiliate with a hospital or health system” includes all types of arrangements such as employment, lease arrangements, and asset sales to name a few.
Change is Here to Stay. The first wave of physicians affiliating with hospitals occurred in the 1990s and was fueled in part by the concern over the development of integrated delivery systems and their ability to conquer the dilemma posed by managed care and capitation (i.e., payment based on a per member per month basis). This was the era of “Health Care Reform.” Sound familiar? It is probably fair to say that these drivers never fully materialized. Years later another wave was sparked by concerns over reimbursement, job security and management concerns. Today it is the cost of electronic medical records, participating in accountable care organizations (ACO) and reimbursement changes that is driving hospital/physician integration. Given that hardly a day goes by when we do not hear about the spiraling cost of healthcare and the declining reimbursement prospects, what is on the horizon? You guessed it, more change.
The inevitable prospect of change in the healthcare sector does not mean that the players sit idle and do not try to anticipate where it will all shake out, rather, as history indicates, physicians and hospitals both start to take action. The lesson we learn from history, however, is that as physicians begin to take action, they should include in their analysis what will be best for them in the long term, knowing that even more change will almost always be lurking around the corner. Whether signing his or her first employment agreement with a medical group or spearheading the merger of two established medical groups into a “super group” or engaging in discussions with a hospital for the sale of his or her established medical practice; a physician should look down the road at least three to five years and recognize that he or she needs to build some flexibility into the equation.
When in the midst of decision-making or negotiations there are many variables that a physician should take into consideration. The following are a few factors that seem to be the most common:
Production, Production, Production. Over the waves of physician/hospital integration, hospitals and physicians have learned several lessons about aligning incentives. In the first integration wave, some physicians received long term contracts with little emphasis on maintaining a minimum level of production. Not surprisingly, many hospitals reportedly lost money in these arrangements because, among other things, the hospital’s and physician’s financial incentives for success were not aligned. While it may be true that if you have seen one compensation plan you have seen all compensation plans, it is probably fair to say that physician compensation these days is very much tied to physician revenue production. If a physician is a high producer, he or she will be rewarded for his or her efforts. If a physician is not a high producer, his or her compensation will reflect that as well. As such, we are seeing compensation based on Medicare work relative value units (work RVUs) becoming a more and more prominent feature in compensation plans.
When reviewing a compensation structure, a physician should evaluate the following:
· How much he or she would earn based on his or her historical production;
· What is the mechanism for changing the compensation structure?;
· Will the physician have any input into how the compensation structure is changed?;
· If a hospital offers the physician a guaranteed compensation for a set period of time, is the guarantee period long enough and is there an obligation to repay shortfalls?
In addition to basing compensation in large part on revenue production, many compensation plans also include incentive compensation based on reducing expenses or costs or attaining certain quality measures. While in theory, this concept seems logical and reasonable, the devil tends to be in the details in such arrangements. Most importantly, a physician should understand what control he or she actually has over costs and expenses and the physician should fully understand the details of the quality measures, including what value the measures will be benchmarked against.
Don’t Let the Door Hit You on the Way Out! Particularly as it relates to physician group practices, it has always been my view that once the egg is scrambled it is unlikely that a group practice can put itself back together again. In other words, if and when a physician group is purchased by a hospital or merges with another group, it is difficult to go back and put the pieces where they used to be. While most parties enter into employment or other similar arrangements intending for them to last for a long period of time and lead to great success for both parties; realistically, both parties need to have a safe and efficient exit strategy. Having a practical and realistic exit strategy is more important for physicians than hospitals, due to the difference in resources, both financial and workforce, between the two.
Come to Terms with the Facts: Many physicians enter these arrangements thinking that they have signed a long term contract and will be employed by or affiliated with the hospital for the remainder of their careers. This in fact may be the case, but more than likely it is not. For example, it is common for one section of physician employment or service agreements to specify that the term of the agreement is for three years; while another section might say that either party can terminate the agreement, at any time, without cause upon ninety days written notice. While most hospitals are looking for a
Long-term relationship, in the example provided above, the hospital has a legal right to end the relationship after ninety days, rather than three years!
Restrictive Covenants. A restrictive covenant, as the name suggests, restricts the area where a physician can set up shop. Usually, these restrictive covenants cover a specific geographic area (e.g., a 10 mile radius) for a specified period of time (e.g., 2 years). It is beyond the scope of this article to delve into the nuances and details surrounding restrictive covenants, but a few issues are worth mentioning. First, and most important, a physician should consider whether or not if the contract ends and the restrictive covenant kicks into place, will he or she have a place to practice? Does the restricted geographic area preclude practice around just one spot (e.g., the physician’s office or the hospital) or does the restricted geographic area include a radius around all of the offices associated with the hospital? The narrower the geographic area the better.
A physician should also consider under what circumstances the restriction would apply? For example, if a hospital decides to end the relationship with a physician, without cause, does the restrictive covenant apply? If the Hospital breaches the agreement with a physician does the restrictive covenant apply? Many agreements provide that under these circumstances the physician is free to practice anywhere, while others may allow the physician to return to private practice without any restrictions, so long as the physician does not affiliate with another hospital.
Hopefully, you can begin to see how careful consideration of these provisions will allow the physician an exit strategy in the event the relationship does not work out.
The health care sector is unique in that there are many complicated laws and regulations that the transactions and relationships described in this article must fit within. Such laws and regulations are both civil (hefty fines and penalties) and criminal (really not good). While this article has given a basic overview of the elementary factors a physician should consider when entering into an arrangement with a hospital, there are many more detailed factors that should be considered, particularly related to the complicated laws and regulations. There are many qualified health care attorneys that can offer assistance in helping a physician navigate through the deep troubled waters.
Randy S. Gerber regularly works with physicians and physician groups, hospitals and nursing homes in connection with their health law issues, general corporate, financing and business matters. In addition, Mr. Gerber has provided legal services to managed care organizations, home-health providers and durable medical equipment suppliers. He is a shareholder in the Health Law Practice Group and serves as the Managing Director of the St. Louis Region of Polsinelli Shughart. He can be reached at rgerber@polsinelli.com.