Do’s and Don’ts in Physician–Hospital Alignment, Part 2

As today’s healthcare climate evolves, physicians and hospitals continue to explore options for alignment between private practices and healthcare systems. Interest in alignment perseveres despite a challenging healthcare environment, and economic, leadership, and structural issues should all be explored with due diligence prior to agreeing on a final arrangement. In this article, the issues of governance and compensation plans are explored as key elements for hospitals and physicians to consider as they work toward developing successful alignment plans.

One of the major hurdles to overcome within any alignment structure is the definition and understanding of governance and leadership responsibilities. This can be divided into several components.

A major part of this discussion relates to operational decision-making. Often, when they align with hospitals, physicians are challenged to give up day-to-day decision-making responsibilities. In this instance, we are not considering clinical decision-making (discussed below), but the decisions that relate to the day-to-day management and operation of their businesses. In fact, in many instances physicians still do a better job of this than hospitals do, a premise that many hospitals are starting to concede. Thus, they are allowing physicians to have a great deal more input than they have had in the past. The structure of the alignment model will affect the ability for operational decision-making. A professional service agreement (PSA) model, for example, allows physicians to have much decision-making ability on day-to-day operations. The issues surrounding day-to-day decision-making often involve staff supervision, which physicians usually can handle best. Ultimately, however, the hospital, as the employer, must have control and overall responsibility.

Clinical decision-making is also an important part of the governance and leadership structure and definition. While physicians certainly are allowed to practice medicine as they choose (even under full employment models), certain clinical decision protocols must be considered. For example, when a practice becomes a part of a large hospital network, the implicit understanding and expectation is that they will primarily consider referring to other physicians within that aligned network, although they are not legally and contractually bound to do this. Other clinical decision-making should continue to rest with the physicians, though the utilization of ancillary services and rehabilitation should be directed toward the aligned hospital network. There is absolutely no re­­quirement under any aligned model (Tables 1-3) for hospitals to direct physicians on how best to practice medicine.

While there is much more decision-making allowance within the typical governance and leadership structures, ultimately the hospital (under a fully aligned model) should have certain reserve powers. These are usually “big picture” rights, entailing major decisions or expenditures. They could, however, be drilled down into detailed decisions, such as the hospital’s ultimate approval for any staff and for adding providers.

The purpose of the reserve powers is to provide the hospital with the ultimate check and balance, knowing that under a fully aligned model it is in control of most major decisions. Under a PSA model where the practice does retain its responsibility for managing the practice, ultimately certain decisions that rest with that management structure would still be those of the practice and not subject to the reserve powers.

Also, organizational chart protocols are a consideration of leadership and governance, as in the structure of the entity and how the management processes are carried out. Certain practices, for example, could be structured as a group practice subsidiary, or, if not officially and legally, this would be organized (at least in substance) as a stand-alone subset of the overall hospital’s employed physician network entity. Some hospitals will establish an institute model wherein the aligned practice(s) are separated into a major service line structure. Within that institute, there are individual governance, organizational, and operational understandings and protocols—again, within the definition of being a part of the overall hospital/health system organization.

Many decisions must be considered within the leadership and governance structure as the alignment process unfolds. We recommend that a checklist of all the key derivatives be considered.

Compensation Plan
Physician compensation is a major part of any transaction concerning physicians and hospitals. This does not have to be under an employment setting, though it is often the case. If not employment, one of the fuller forms of alignment (such as a PSA) is often applicable. As such, there are several model alternatives (Tables 1-3). These vary from heavily productivity-based incentive plan models to nonproductivity-based incentives. Often and ­particularly as accountable care and changing reimbursement paradigms start to apply in many instances, the compensation model is truly a hybrid (ie, a combination of several of these incentives, both productivity- and nonproductivity-based).

From the productivity side, the most prominent form of incentive is through a relative value unit (RVU) format. Often, RVUs are used because they are relatively easy to understand and they tend to be payer blind. Thus, physicians can work diligently within a practice and not worry about the actual reimbursement that is involved, as RVUs do not differen­tiate from one payer to another. Typically, their compensation plan involves being paid a certain amount per work RVU (wRVU), and as the RVUs accumulate, the total dollars of compensation do, as well. Other productivity-based models can be tied to encounters, charges, and actual payments. There is no particular right or wrong way; it requires a concerted effort of analysis and deliberation (even some negotiations) to determine the most acceptable structure.

Nonproductivity-based incentives are typically tied to patient satisfaction, quality outcomes, cost-savings, and overall conduct. These incentives can be structured in a variety of ways and can be set up so that (1) productivity thresholds must be met, and (2) a portion of what would oth­erwise be paid from the productiv­ity measurement would have to ­be earned through meeting certain ­nonproductivity-based performance thresholds. Thus, the models can have a wide range of variations, and, as long as genuine incentives to perform and meet the expectations of the criteria are present, the chances are good that the compensation model will be successful.

Many employed physicians ex­­pect a base or guaranteed rate of pay. This is negotiable but is often the case, at least for a limited period of time.

Ancillary services are also key to the compensation structure, if those services remain within the practice after alignment. If they do, the physician may be able to share in a portion of the profits from those ancillary services (just as they do today in private practice). If not, the ancillary services cannot be paid to the physicians and may be a reason why overall productivity and profit margins are less after the transaction. There are ways to mitigate this issue through calibrating an appropriate rate per wRVU that is still within legally permissible/fair market value parameters, but possibly better than the practice realizes in actuality prior to the alignment transaction.

Quality and shared savings incentives are increasingly popular as accountable care forms of reimbursement (ie, reimbursement that is not based strictly on productivity and a fee-for-service payment) gain ground. Realizing that it is impor­tant to measure overall performance based on the quality of the outcomes and the cost to incur the services, more compensation plans are mirroring these forms of reimbursement, which is certain to continue to be the case in the future.

Finally, here is a word of caution relative to the overall compliance standards that must be met whenever physicians are compensated by a hospital. The term fair market value is a readily used concept, which entails the determination that the rate of compensation is consistent with market standards and norms. This is often reviewed and opined upon by an expert independent party that is not directly involved in establishing the rates or the overall compensation plan. In addition, compensation must meet existing commercially reasonable standards within the particular area and specialty involved. Also, there are many compensation structures where multiple portals of pay are provided to the physicians. For example, perhaps the physician is employed and generates a compensation structure from that employment contract. In addition, he is subject to a medical directorship and is compensated. Perhaps the physician is also compensated for call responsibilities. All of these things must be considered within the compliance standard so this stacking concept does not ultimately result in a total pay package that is beyond the realm of reason (ie, that exceeds the test for fair market value/commercially reasonable rates). Thus, when the compensation plan is structured, it should be considered in totality, not just as stand-alone components.

Thus, there are numerous models to consider—no matter the alignment model. Even within a PSA structure (also referred to as employment “lite”), the payments can be varied and tied to certain levels of incentives. There are other forms of compensation, such as payment for malpractice premiums or tail premiums, sign-on and/or retention bonuses, and other forms of pay—all of which must be considered in the broad context of physician compensation. For models that do not entail employment or other forms of full alignment, the pay structure is frequently set with fewer incentives (though some incentives could be in place within these structures). Often, a guaranteed rate per hour is applied, but that payment must be consistent with the total amount of time worked and the value for that work per hour. Usually, this varies greatly from one specialty to another.

Table 1

Table 2

Table 3

Return to Compensation Plan

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