Hospital-physician acquisition of medical practices continues at a furious pace. Unfortunately, no one knows for certain whether physician employment by hospitals is the key to better or more cost-effective care. Moreover, the hospital or the physician in such a transaction may for any number of reasons decide later on that the relationship is less than desirable. Because no one can predict the future, it is generally advisable to include an unwind provision in the original practice purchase and employment agreement to allow the parties to unwind the transaction. Sometimes the unwind may be triggered or exercised upon failure to meet certain agreed-upon milestones (e.g., failure to hire another physician in the same specialty with a defined period of time), during a limited period (e.g., only during the third year of employment) or at any time during the term. The unwind clause should spell out the triggers as well as how it can be exercised and the details of how it will work to ensure a smooth transition back to private practice. Where the physician’s employment by the hospital was precipitated by the purchase of the physician’s practice assets, an unwind will usually involve the repurchase of those assets by the physician from the hospital. In this is the case, the unwind provision should address the valuation methodology to be used and the timeline for the repurchase. Finally, if the employment agreement includes a restrictive covenant, it will need to include a carve-out for the unwind. With even the best intentions on both sides of a transaction, there will be no guarantees of success. A well-thought-out unwind clause can be an important safety valve for both parties if the arrangement does not turn out as planned.
Curious what the future of medicine will look like? According to this recent article on CNBC.com, it appears that for many physicians it will involve a boss, a timeclock and a steady paycheck. Not surprisingly, as the legal and administrative burdens of running a private practice continue to increase, more and more seasoned physicians are making the leap to hospital employment. And, according to the CNBC article, it appears that a new generation of physicians is bypassing the private practice model altogether and heading right into hospital employment.
Unfortunately, in my experience, many hospitals are not prepared to accommodate physician employees on a large scale and often lack the expertise to manage physician practices efficiently. After all, hsopitals are in the business (often not-for-profit) of running hospitals, not doctors’ offices. As a result, hospital-owned physician practices can quickly become money-losing propositions. While some hospitals may be willing to subsidize physician practices for a period of time, in my experience, they may try to play “catch-up” in the contract renewal period – imposing unrealistic performance targets on physicians or tying compensation to expenses or other factors beyond physician control.
Hospital employment can be a long-term career option but physicians should understand that most initial hospital employment terms will be less than 5 years and are commonly only 3 years. It is critical therefore that when negotiating your initial hospital employment agreement, you try to build a framework for negotiation of renewal terms. This may involve caps or floors on compensation adjustments, realistic performance criteria and mechanisms to overcome negotiation impasses such as reliance on independent third party valuation experts.
As the implementation of the federal Affordable Care Act (ACA) continues in fits and starts, healthcare providers are scrambling to best position themselves to accommodate anticipated and developing payment models. Unfortunately no one really knows what these new payment models will look like or how they will ultimately work. It is apparent, however, that most of them (such as the accountable care organization model and bundled payment models) will require some level of increased clinical or legal integration between and among providers. Given the general state of confusion around payment reform, it is not surprising that many physicians and other providers are perplexed over how best to integrate. Despite the common thinking among many physicians, integration does not necessarily mean that all physicians must be employed by hospitals. In fact, there are a number of potential integration strategies worth evaluating before making the leap to hospital employment. Some of these models include the following:
1. Practice Lease. Under this model, a hospital or health system leases the entire medical practice including the space, equipment and personnel, and engages the physicians on an independent contractor basis to staff the leased office.
2. Clinical Co-Management. Under this model, a hospital or health system would engage the practice physicians to manage the clinical aspects of a department or service line of the hospital or system. In exchange for the management services, the physician may be paid through a fixed compensation component and perhaps some quality or performance component.
3. Professional Services Agreement. Under this model, a hospital or health system would lease the services of one or more of the physicians of a practice to see and treat hospital patients at the hospital or in hospital facilities. The hospital would pay the practice fair market value compensation and would be entitled to bill and collect payment for all services rendered by the physicians during the lease periods.
4. Medical Director Services. Under this model, a hospital or health system can engage practice physicians to serve as medical directors of a service line or department as a means of enhancing the delivery of care with close physician oversight and involvement. As with all of these arrangements, care must be taken to ensure that the services are necessary, commercially reasonable and actually performed.
5. Network Affiliation. Under this model, a medical practice or its individual physicians would sign participation agreements to participate in a hospital’s/system’s provider network (e.g., an accountable care organization). The participating network providers do not become employees of the hospital or network but merely agree to participate in the payment arrangements entered into by the network.
It goes without saying, of course, that all of these integration models are subject to much federal and state regulation and therefore must be carefully evaluated and structured to comply with applicable law. Nevertheless, it is important to know that a variety integration options exist for physicians who may wish to remain in private practice.
Earlier this month the closely watched case of U.S. ex rel Drakeford v Tuomey Healthcare System Inc. (675 F.3d 394 (4th Cir. 2012) concluded with a jury finding that the compensation paid to physicians under certain part-time employment agreements by Tuomey Healthcare System resulted in violations of both the federal False Claims Act and the federal Stark law.
The Stark law prohibits a physician from referring to an entity for Stark "designated health services" (including outpatient and inpatient hospital services) if the physician has an ownership or compensation relationship with that entity. While there is an exception to the Stark law prohibition for bona fide employment arrangements, one requirement of that exception is that the compensation paid must be consistent with fair market value.
Although Tuomey relied upon an expert assessment of the fair market value, the government’s expert disagreed and the jury obviously found the government’s case to be compelling.
Under the False Claims Act, Tuomey’s penalties could exceed $350 million. Although the Tuomey case is interesting for a number of reasons, perhaps the primary lesson to be learned is that a proper, defensible assessment of fair market value In hospital-physician arrangements–even W2 employment arrangements–is critical.
Adding an interesting wrinkle to an already complex environment, the Federal Trade Commission filed a suit this month to block an Idaho hospital from acquiring a physician practice. According to an article on thomsonreuters.com, the FTC and the IDAHO Attorney General have filed an antitrust complaint seeking to block St. Luke’s Health System’s acquisition of Saltzer Medical Group, a large multi-specialty practice. The FTC’s alleges that the acquisition would result in St. Luke’s having a 60% share of the local primary care market. This most recent foray into the physician/hospital acquisition arena suggests that a truly integrated delivery model may simply not be possible in some markets.
This week the Office of Inspector General of the Department of Health and Human Services published Advisory Opinion 12-15 in which it blessed an on-call compensation arrangement between a hospital and specialist physicians on its staff. In finding that it would not prosecute the arrangement, the OIG pointed to several "safeguards" which it felt would adequately protect against a violation of the anti-kickback statute. Among others, these included the following protections:
1. Based on an independent valuation, the per diem payment amounts were stipulated to be commercially reasonable, within the range of fair market value for actual and necessary services provided without regard to referrals or other business generated between the parties;
2. The hospital allocates funds for call coverage for each participating specialty and calculates the per diem annually, in advance, without regard to the individual Participating Physician’s referrals to the hospital;
3. Participating Physicians provide actual and necessary services, for which they are not otherwise compensated, including that Participating Physicians must respond within 30 minutes to a request from the hospital’s emergency department and, in some cases, must provide follow-up care.
4. The hospital offers the opportunity to participate in the arrangement to all specialists on its staff who are required by its bylaws to take unrestricted call and the method of scheduling on-call coverage is governed by a uniform equitable policy that does not take referrals into account.
Although an OIG Advisory Opinion may only be relied upon by the parties requesting it, this Advisory Opinion may provide useful guidance to hospitals and physicians in ensuring that their on-call arrangements are compliant.
The 7th Circuit Court of Appeals recently issued a decision of interest to physicians and teaching hospitals. It concerns the method of rotating teaching physicians between multiple surgeries and billing Medicare for those services.
The case involves so-called "qui tam" claims (essentially, a whistleblower case) against a teaching hospital, by which a successful claimant gets to keep a portion of the penalties recovered. Basically, the Medicare program pays teaching hospitals for work by residents that is supervised by teaching physicians. Here, however, a hospital was alleged to have made its teaching physicians simultaneously supervise multiple surgeries — and then submit fee-for-service bills to the Medicare program for certain unsupervised work.
After addressing legal issues concerning claimants’ right to sue when the facts were generally in the public domain by way of government reports (those reports were not specific to this hospital), the suit was allowed to continue for now.
Note to physicians: The Court emphasized that a teaching hospital does nothing wrong if the teaching physicians are "immediately available" during all parts of the surgeries even if making a circuit between multiple operating theaters. The breadth of that holding, and whether it would apply to other circumstances, is not clear. Nevertheless, hospitals who bill Medicare for activities supervised by teaching physicians, and the physicians themselves, must pay special attention to these activities to stay within the law.
There’s an interesting piece in the Miami Herald today regarding hospitals once again acquiring physician practices. The article raises some good questions regarding the motivations underlying this growing (recurring) trend and suggests that it might be more about control than preparing for a "reformed" health care system. The article also questions whether hospitals will be any more successful this go-round in managing the acquired practices than they were in previous attempts.
I frequently represent both hospitals and physicians in practice acquisition transactions. In my experience, only a handful of hospitals and health systems have a true plan for how they will integrate the practices they are acquiring in a manner that will improve the delivery of healthcare. To be sure, how best to integrate providers to improve care is not an easy question to answer. I find, however, that the "smart" hospitals and health systems are willing to acknowledge that physicians should be involved in the development process and that they (the hospitals) do not necessarily have all the answers for how best to accomplish that goal.
If you are considering selling your practice to a hospital, or you are a hospital looking to integrate the physicians in a thoughtful way, consider whether it makes sense to begin the process with a dialogue about where each party envisions the relationship to be several years in the future. If you can reach consensus on where you want to end up, you can then structure a transaction which is specifically designed to get you there.