Issues & Cautions Associated with Medical Practice Affiliations with Hospitals & Alternatives

1. Issues & Cautions Associated with Medical Practice Affiliations with Hospitals & Alternatives New Jersey Medical Group Management Association Practice Management Conference April 18, 2013 Taj Mahal Hotel and Casino, Atlantic City, New Jersey Peter Greenbaum, Esq. Wilentz, Goldman & Spitzer 90 Woodbridge Center Drive Woodbridge, New Jersey 07095 (732) 855-6426 pgreenbaum@wilentz.com Michael F. Schaff, Esq. Wilentz, Goldman & Spitzer 90 Woodbridge Center Drive Woodbridge, New Jersey 07095 (732) 855-6047 mschaff@wilentz.com

2. Overview of Presentation General Trends • Continued Erosion of “Traditional” Medical Staff-Hospital Dynamics • Mega Trends Overview of Affiliation Models • Direct Employment • Physician Subsidy • Physician Enterprise Model • Professional Services Agreement Model

3. Overview of Presentation Discussion of Issues and Cautions of Professional Service Model • Group Considerations • Integration Considerations • Sale or Lease of Assets • wRVU • Budget • Term and Termination • Unwinding • Restrictive Covenant • Information Technology Issues • Operational Considerations Questions and Answers

4. Continued Erosion of “Traditional” Medical Staff—Hospital Dynamics Overview of Traditional Medical Staff Structures & Relationships Approval of MS Bylaws & Regulations The Medical Staff Hospital Board • Elected Officers & Committees • President • Vice President • Secretary/Treasurer • Dept. Chairs & Section Chiefs • Other Elected MS Reps. • Medical Staff Committees CEO & Executive Leadership Team Medical Staff/Hospital Interaction & Support for Shared Mission & Vision Pressures to Integrate Pressures to Integrate SL Admin./Mgr. PT Med. Directors Other S.L./Dept. Admin./Managers Individual Members of the Medical Staff All Other Support Members/Units 4 Patients/Payers

5. Mega Trends Affecting Physician-Hospital Relationships 1. Increasing, Shared Economic Pressures from “Eroding” Payer Mix • Declining income • Accountable Care • Pressures/insecurity resulting from “reform” driven by CMS for cost control, efficiency and “quality” • Continuing pressures from payers for P4P, “full networks” and clinical efficiencies

6. Mega Trends Affecting Physician-Hospital Relationships 1. Increasing, Shared Economic Pressures from “Eroding” Payer Mix(continued): • Increasing needs/demands from physicians/practices for income support (e.g., joint ventures regarding ancillary services, requests/demands for “call coverage” payments, Medical Directorship stipends, etc.) • Competition between physicians and hospitals for ancillary revenue streams • Misalignment of physician and hospital reimbursement methodologies, e.g., physician fee-for-service versus hospital-per-case

7. Mega Trends Affecting Physician-Hospital Relationships 2. Increasing Operational / Infrastructure Expenses further eroding “bottom line” margins • High capital costs • Shared disappointments regarding initial EMR and related IT integration initiatives • Reimbursement reductions for failure to implement EHR in hospitals

8. Mega Trends Affecting Physician-Hospital Relationships • 3. The Changing Profile of “New” Physicians & Allied Health Providers • Aging medical staffs • Risk-adverse residents/fellows and new practitioners • Increasing competition for physician talent – particularly for hospital-based specialties • Economics and lifestyle issues • Erosion of medical staff allegiance - particularly among PCPs • Limitations of compensation plans to drive desired behaviors • Emergence of the physician generation gap • Existing and impending physician shortages

9. Affiliation Models Hospitals/Systems Continue to Re-assess the Necessity of Utilizing a Broad Range ofAffiliation Options with Physicians to Advance Their Shared Missions/Visions Prediction: Increasing Utilization, Sophistication & Complexity of Affiliation Models/Relationships Integration and Complexity Increases 9

10. Model 9A: Direct Employment Employment Agreement Independent Physician Group Payers Independent Physician Group System/Hospital Employment Agreement

11. Model 9A: Direct Employment Key Provisions: • Physicians employed directly through the Hospital via a formal individual employment agreement. • The Hospital, as employer, is responsible for the physician’s practice requirements including operations, finances and governance. • A standard employment agreement exists establishing compensation, benefits and services to be provided by the physician.

12. Model 9A: Direct Employment Key Provisions (continued): • Physician salary must be based on Fair Market Value (FMV) compensation, often calculated on a productivity basis such as work RVU, percentage of collections or net revenue basis. • The physician assigns his or her professional fees to the Hospital. Level of Integration

13. Model 9B: Physician Subsidiary with Parent Tax-exempt Parent Employment Agreement Independent Physician Group Board of Directors Hospital Physician Physician Services Independent Physician Group Hospital Employment Agreement Payers

14. Model 9B: Physician Subsidiary with Parent Key Provisions: • Hospital Parent entity controls both Hospital and Physician Services Organization. • Physicians employed through a subsidiary of the Hospital Parent via a formal individual employment agreement. • Physicians share governance responsibilities with Hospital in the Physician Services Organization. • The Hospital, as the owner, is responsible for the physician’s practice requirements including operations, finances and governance.

15. Model 9B: Physician Subsidiary with Parent Key Provisions (continued): • A standard employment agreement exists establishing compensation, benefits and services to be provided by the physician. • Physician salary must be based on Fair Market Value (FMV) compensation, typically based on a wRVU basis. • The physician assigns his or her professional fees to the Physician Services entity. Level of Integration

16. Model 9C: Physician EnterpriseModel (PEM) Board of Directors Physician Services Physicians Hospital Pod Pod Pod Physician Practice Physician Practice Physician Practice Physicians as Practice Owners Practice Support Agreement Payer $ Hospital Payers Physicians as Employees

17. Model 9C: Physician EnterpriseModel (PEM) Key Provisions: • The Physician Enterprise is separate from, but owned by, Hospital. • Physicians are employees of the Physician Enterprise, but retain ownership of their practice. • Physicians continue to manage their practice through the Physician Enterprise. • The incentive to maintain effective physician practice management is preserved.

18. Model 9C: Physician EnterpriseModel (PEM) Key Provisions (continued): • The Practice Entity provides a turn-key package of services, i.e., non-physician support staff, facilities, equipment, and access to records for the Physician Enterprise through an MSO agreement. Level of Integration

19. Model 9D: Professional Services Agreement Model (PSA) Asset Purchase Agreement/Lease Agreement Independent Physician Group Formal Professional Services Agreement and Management Services Agreement Hospital

20. Model 9D: Professional Services Agreement Model Key Provisions: • Physicians retain their Group as a Professional Corporation (PC), which employs, compensates and governs the physicians. • The Hospital either directly, or through wholly-owned subsidiary, purchases or leases the PC assets, which must be based on Fair Market Value (FMV) analyses, and converts to a hospital based facility. • The Hospital purchases physician professional services from the Group through a Professional Services Agreement (PSA) and pays based on wRVUs.

21. Model 9D: Professional Services Agreement Model Key Provisions: • The Group typically continues to employ and compensate all non-physician/provider support staff and administrative staff, who are leased to the hospital. • The Hospital reimburses the Group for all operating expenses via an agreed upon annual budget structure. • Typically, the hospital negotiates all payer contracts and bills/collects for all services. • Both parties execute a multi-year Professional Services Agreement (PSA) and Management Services Agreement (MSA) summarizing the key terms/conditions of the relationship to ensure continuous service delivery by individual practice specialties. Level of Integration

22. Discussion of Ten Issues and Cautionsof Professional Service Model • Group Considerations • Integration Considerations • Sale or Lease of Assets • wRVU • Budget • Term and Termination • Unwinding • Restrictive Covenant • Information Technology Issues • Operational Considerations

23. 1. Group Considerations Pros • More consistent cash flow • Access to Hospital resources

24. 1. Group Considerations Cons • Loss of autonomy • Financial autonomy • Compliance with Hospital billing policies • Budgetary oversight • Operational autonomy • Long lead time to go-live date • Pre-contract and contract negotiations • Post-execution activities including credentialing and IT • Go live • Start-up costs • Affects retirement

25. 2. Integration Considerations • Pre-affiliation training of staff • Information Technology integration • Hospital and Group IT systems to be linked • How will pre-affiliation accounts receivable be collected • Staff will have been assigned/leased to Hospital • Computer/billing system will have been leased or sold • Request use of staff to assist and use of computers/billing system

26. 2. Integration Considerations • Leases • Identify leases including office lease and equipment leases • Will be assigned to Hospital • Space construction/renovations

27. 3. Sale or Lease of Assets • Will Group Sell or Lease the hard assets and medical records • Must be Fair Market Value • Sale • Immediate cash flow to practice • Must “reacquire” (and pay) for assets on unwinding • Hospital bankruptcy considerations • Capital gains taxes • Lease • No “large” up front payment • Monthly cash flow to practice • Easier on unwinding, as no assets to “reacquire”

28. 3. Sale or Lease of Assets • Components of Lease • Identify assets including Hard assets and Medial records • Identify lease payment • Maintenance costs should tie back to budget • Components of Sale • Identify assets to be sold • Identify purchase price • Does bulk sale apply • Are any assets leased or subject to a lien (e.g., equipment lease or line of credit)

29. 4. Financial ConsiderationswRVU Component Establishment of wRVU conversion factor • Must be Fair Market Value • Often comprised of • Base amount • Benefit amount • Quality Incentive Amount • Credit given for • Physician-owner production • Physician-associate production • Physician Assistant and Nurse Practitioner production • “incident to” billing

30. 4. Financial ConsiderationswRVU Component Establishment of wRVU conversion factor • Is the wRVU amount fixed or subject to adjustment • Hospital will often request that it can review wRVU conversion factor to confirm it is in the XXth percentile/Fair Market Value • If it is subject to adjustment, Group must consider • Review only after specified period • Collars on the downward adjustment • Termination if wRVU conversion factor is adjusted (without restrictive covenant)

31. 4. Financial ConsiderationswRVU Component Establishment of wRVU conversion factor • Group should consider CPI adjustment • wRVU benchmark tied to Centers for Medicare & Medicaid Services published rates • Is the rate schedule tied/fixed to schedule in effect on commencement or to each newly published rate schedule

32. 4. Financial ConsiderationswRVU Component When is the wRVU consideration paid • In arrears • Creates cash flow issues for Group • Estimated monthly payments with quarterly/annual/periodic true-ups • Gives Group consistent cash flow • If the true-up period is not frequent, again creates cash flow issues for Group

33. 4. Financial ConsiderationswRVU Component • On Review/Off Review • Some systems will initially pay on a monthly estimate (percentage of historical wRVUs) • Done until “off review” • Once “off review”, then reconciliation done • Logistical concerns • Hospital determines whether “off review” criteria has been satisfied • Some physicians on review while others off • Some services on review while others off

34. 4. Financial ConsiderationswRVU Component • Additional financial considerations • Group is responsible for determining the compensation, benefits, vacation, sick, and personal leave of Physicians • Group is responsible for withholdings, payment of unemployment and other payroll taxes • Must make sure these additional financial elements are factored into the wRVU amount

35. 4. Financial ConsiderationswRVU Component • How is aggregate consideration allocated internally among Group physicians • Based on relative productivity (wRVU or other) • Other allocation as determined by Group • Group should receive monthly reports showing each professional’s gross billings, net collections, productivity and wRVU amounts • If agreements are with a Hospital subsidiary, consider requesting a corporate guaranty from Hospital

36. 5. Financial ConsiderationsBudget Component • Overhead of Group is reimbursed by Hospital • Make sure all expenditures are accounted for • Personnel Salaries • Office Manager, Receptionists, Admin, Techs • Billing Personnel • Must determine if positions will be eliminated and/or moved to Hospital payroll • Associates, Physician Assistants and Nurse Practitioners • If wRVU credit is given, will the costs be reimbursed • Fringe Benefits • Health insurance, 401k, continuing education, subscriptions, etc. • Payroll taxes

37. 5. Financial ConsiderationsBudget Component • Expenditures (continued) • Equipment Costs • Leases • Service contracts • Repairs and maintenance • Supplies (medical and non-medical) • Medical waste disposal • Rent • Utilities • Professional fees (legal, accounting and payroll) • Other • Make sure accountant’s input is obtained

38. 5. Financial ConsiderationsBudget Component • All leased items will be subject to a mutually agreed annual budget • Initial budget typically set forth in documents, and subsequent budgets are to be agreed on annually • Have detailed line item initial budget so annual budgets thereafter have template to use

39. 5. Financial ConsiderationsBudget Component • Need default if subsequent budget is not agreed to • Use of budget for the prior year, with possible adjustments: • Delete one-time capital expenditures during previous year • Add expected capital expenditures for upcoming year • Include items which are readily determinable (e.g., expenses subject to written agreements, etc.) • Adjustments to take into account increases or decreases to compensation and benefits for all non-physician personnel • Other expense items to be increased by fixed percent or CPI

40. 5. Financial ConsiderationsBudget Component • When is it paid • Prior to month (e.g., in advance) • In arrears (will create cash flow issues) • When is it reconciled • Monthly, quarterly or annually (the longer the reconciliation period, the more cash flow issues to Group) • How strict is the budget process • If Group exceeds line item, is Group responsible for excess • Consider pre-approved variance

41. 5. Financial ConsiderationsBudget Component • Management Fee • Must be commercially reasonable and FMV • When is it paid • If agreements are with a Hospital subsidiary, consider requesting a corporate guaranty from the Hospital

42. 6. Term and Termination Term • Term is typically three to five years • What is the renewal process • Evergreen or automatic termination • Should have specified period prior to expiration to discuss renewal

43. 6. Term and Termination Termination • Typical Hospital-side triggers include: • Group default (notice and cure period) • Loss of physician’s license, exclusion from payors, failure to qualify for malpractice • Should be a reasonable number of physicians before termination • Group bankruptcy

44. 6. Term and Termination Termination • Typical Group-side triggers include: • Hospital default • Loss of Hospital’s license and exclusion from payors • Hospital bankruptcy • Change in wRVU factor • If agreements are with a Hospital subsidiary, triggers must extend to Hospital

45. 6. Term and Termination Termination • Without Cause • Is this acceptable to Group • Consider prohibition in early years • Consider termination payment • Mutual Triggers • Change of Hospital structure/control • Regulatory issues • Hospital tax-exempt issues

46. 7. Unwinding Group to “reacquire” the practice on unwinding • Ability to purchase hard assets and patient charts • All or select assets and charts • Newly acquired assets which are used at office • What is the price • Hard assets are typically at the Fair Market Value • Charts are typically at the initially agreed-upon price

47. 7. Unwinding • Re-assignment of office lease and applicable equipment leases • Transition of information technology systems (including billing, collecting and EMR systems) • Will an EMR license be necessary • Electronic data to be transferred to Group • Development of transition plan so minimal disruption

48. 7. Unwinding • De Minimus Billing during affiliation • In a minimum amount necessary to remain credentialed in each third party payor program • Any amounts collected would be remitted to Hospital • Allows Group to remain credentialed and thus immediately bill on unwinding

49. 8. Restrictive Covenant • Prohibits affiliation with another Hospital system • Typically one to two years • Typically does not restrict re-engagement of private practice • Should not apply on certain termination triggers, including by Hospital without cause, by Group for cause, regulatory issues and Hospital tax-exempt issues • Should not apply if Hospital does not give a fair renewal offer • Carve out larger medical groups and specific systems, if applicable

50. 8. Restrictive Covenant • Mutual non-solicitation of employees • Carve-out pre-affiliation employees that were moved to Hospital payroll • Restrictive Covenant should only apply to Owners (not to associates and other clinical personnel)