Structuring the Practice-Hospital Alignment – Innovative Approaches

1. Structuring the Practice-Hospital Alignment – Innovative Approaches Steven J. Morris MD JD FACP Atlanta Gastroenterology Associates, LLC October, 2013

2. Colonoscopy - Diagnostic Cost Per Procedure – Greater SF Bay Area MSA Diagnostic Colonoscopy Providers

3. Colonoscopy in the SF Bay Area* * Safeway Health 2011

4. Cost Comparison: high to low • Hernia Repair: $3500:16,700 4:1 • Gallbladder: $4200:21,500 5:1 • Cardiac Cath: $3500:25,000 7:1 • Arthroscopy: $3400:32,000 9:1 • Colonoscopy: $887:8600 10:1

5. Non Profit Hospitals ** Brill, Steven Time Magazine 3/4/2013

6. Hospital Physician Alignment • Traditional Relationship • Hospital Based Service Agreements • Professional Service Agreements • Employment

7. Hospital Based Service Agreements • Co-management service agreements between health systems and physician groups • Variety of services: • Medical director services • Strategic planning • Human resource duties • Scheduling and staffing

8. Legal Considerations: service agreements • Stark Law • Structure to meet FMV or Personal Service exceptions • Anti-Kickback Statutes (AKS) • Never tie compensation to volume/value • False Claims Act • CMS requirements • Tax Exempt status

9. Hospital Employment • National trend towards hospital employment • Reasons: Scarcity of Primary Care Physicians Mantra of “work-life” balance Quality Initiatives Pay-for Performance, PQRI Healthcare Reform Accountable Care Act

10. Hospital Employment • Direct Hospital Employment • Simplest model if no state statutory prohibitions • Foundation Model • States with corporate practice of medicine laws • Hospital controls board and obtains tax exempt status • Physician leasing model • Subsidiary/Affiliated Entity Models • Transitional models

11. Professional Service Agreeement • Employment Lite • Independent Contractor Agreement - usually with a group • Physicians remain within their corporate structure • Physicians reassign their right to payment to the hospitals • Hospital bills all payers for their services

12. Employment v PSA Employment PSA • W2 Employee • More favorable reimbursement • Less Overhead • No Complex Regulation • Lifestyle • Safer Legal Model • Fear • Remain Independent • Maintain group dynamics • Easier to unwind • Avoid employment stigma • Collaboration with hospital on quality and other initiatives

13. PSA Basic Scenarios • Global Payment PSA • Hospital K with practice for global payment rate • Practice Management Arrangements • Hospital employs physicians • Practice entity is retained and enters into another K with hospital for management services • Traditional PSA • Hospital K with physicians via practice • Hospital employs the practice staff • Hybrid Arrangements

14. Compensation • Parties calculate wRVU based compensation and conversion factor • Combination of historical productivity and payer mix • Length of conversion factor • Length of agreement/renewal • Usually all parties do separate valuations and negotiate the final number

15. 2012 MGMA Annual Report Source: MGMA Physician Compensation and Production Survey: 2012 Report Based on 2011 Data.  Used with permission from the Medical Group Management Association, 104 Inverness Terrace East, Englewood, Colorado, 80112.  www.mgma.com.

16. Applicable Healthcare Laws • Stark Law • Anti-kickback Statute • IRS Rules on Employment/Independent contractor • 501(c) (3) principles • Antitrust • Monopolization • Concerted Action

17. Process – Your Group • Evaluate your group • Size • Geography • Community • Goals of Transaction • Stabilization • Future Growth • Bundling • ASC’s; Pathology; Imaging

18. Process- Your Group • What strengths does your group have • Size, geography, quality initiatives, service lines, centers of excellence • What can you add to your partner? • What needs do you have: ? EMR ? Capital • Transaction timing • Earnings and growth • New ASC’s • Market place consolidation: early movers do better!!

19. Do’s and Don’t’s • Yes: • Combine PSA with other transactions • Use PSA as an employment segue • Use PSA to adapt to a changing marketplace • No • Unrealistic compensation expectations • Unwillingness to truly “partner” • Strategic planning • Increase market share • Quality initiatives • Align hospital and practice goals

20. Process - Hospital Partner • Vision • Open to PSA v Employment Model • Alignment • Geography • Inpatient v Outpatient • Size and Financial Strength • Bigger not always better • Local v National

21. Hybrid Agreement • ‘Crossing the Rubicon’ • Maintain employees, office space, EMR, Equipment • Five Year Term with Renewal • Reevaluate wRVU • Bilateral renewal options • Bundled Sales • Pathology • Research division • Existing ASC’s • Coverage Agreements • Hospitals • Geographic regions

22. Hybrid Agreements • Service Lines • Governance • Committees : Practice, Ancillaries • Composition • Dispute resolution • Growth • Practice – organic, acquisition • Research • ASC

23. Summary • Advantages • Accounts Receivable • Growth • Financial & Strategic Partner • Maintain Independence • Disadvantages • Complex regulatory environment • Financial risk mitigated but still present • “Backlash” • Obligations of partnership