Hospital-Physician Alignment: Current Intelligence and Pitfalls

 In Blog, Healthcare

This blog post is a summary of a recent Webinar jointly sponsored by the ABA Center for Professional Development and the ABA Health Law Section on Thursday, October 9, 2014.  Tracy Powell, a member of Sherrard and Roe, PLC, and Christi J. Braun, Special Deputy General Counsel and Senior Advisor UF Health Shands, Gainesville, Florida, were the panelists.

Relationships between hospitals and physicians continue to be topics of substantial discussion.   Unfortunately, they also are the subjects of investigations, litigation, and uncertainty.  The goal of our discussion was to focus on advanced concepts along with recent developments and responses of the participants in this arena to a number of challenges and opportunities.  We also delivered the message that when structuring new deals or revisiting old deals, it is important to understand and consider the positions taken by government regulators and prosecutors – even if these positions appear more aggressive than the underlying law or regulation in question – as the cost, expense, possible exposure, and negative publicity of an investigation, settlement or trial make arguing with the government untenable in many cases.

Activity and interest in hospital-physician integration continues at a brisk pace.  Whether the interest is in employment only, or in more advanced relationships such as co-management arrangements for hospital service lines, both panelists believed that activity would continue for the foreseeable future.  Activity in primary care is driven by the effects of health care reform and the Affordable Care Act, and high-end specialists are still sought for these and other reasons.  “Doctors without waiting rooms,” such as anesthesiologists, ER physicians, pathologists, etc., are the subjects of substantial interest and integration activity.  In particular, the pursuing parties are often private-equity or venture-capital backed parties rather than hospitals or other participants in the health care space.  Insurance companies are expanding their reach in many segments and becoming partners with or employers of physicians – giving rise to many questions, concerns, and substantial opportunities.

Deals that are closing today exhibit economic terms that are quite different from those that closed as little as 5 or 6 years ago.

Deals that are closing today exhibit economic terms that are quite different from those that closed as little as 5 or 6 years ago.  The post-closing time commitment of a typical integration deal is often shorter (3 years vs. 5 years), and the length (or generosity) of any guaranty of income is shorter.  Substantial portions of income are tied to wRVU productivity with more risk being borne by the physicians.  Compensation still generally includes non-wRVU income components such as administration, quality, call coverage, and outreach, but hospitals are more likely to offer such elements only when those elements can impact the bottom line at the hospital or otherwise aid the hospital in reaching a goal or its mission.

Co-management agreements continue to flourish, both as stand-alone arrangements for groups that remain independent and for employed physicians.  Co-management agreements can allow: (i) hospitals to have service lines that are better managed and deliver higher quality with better managed costs; (ii) disparate groups to work together; and (iii) physicians to have a sense of ownership in the hospital.  That said, a co-management arrangement is not a panacea, and such arrangements can raise regulatory concerns from the fraud and abuse / Stark perspective and under antitrust laws.

From the perspective of the attorney for any participant, there are many legal issues to consider.  The “corporate practice of medicine” laws of many states require the use of “captive” or “friendly” PCs to achieve physician integration, and such arrangements include additional risks and regulatory challenges.  Some physicians and practices are seeking to remain independent and trying to form “Super PCs,” and management services organizations (MSOs) are returning in various forms and with varying degrees of success.

Antitrust concerns from St. Luke’s case and recent legislative activity by some states heighten the need for careful consideration.  Debbie Feinstein, Director of FTC’s Bureau of Competition was recently interviewed by the AHLA Antitrust Practice Group, and her comments clearly indicate that the FTC is going to be more active in this arena.  Also, Connecticut recently passed a law that requires notification be given to the Connecticut Attorney General prior to closing of transactions that result in the change of business or corporate structure of medical practices.

Cases such as Tuomey, Halifax, St. Luke’s, and others demonstrate that a quality valuation is critical, and ‘shopping’ for an attractive valuation or law firm opinion is not a good idea.

Drivers on the physician side for alignment with hospitals are often based on fear, whether of the Affordable Care Act, Accountable Care Organizations, bundled payments, being “left out” of an increasingly integrated health care system, or rising costs and decreasing reimbursement.  Drivers for hospitals are often fear-based as well, including losing out to competition, losing referral sources or needed hospital service line physicians, the rising costs of call coverage, etc.

Cases such as Tuomey, Halifax, St. Luke’s, and others demonstrate that a quality valuation is critical, and “shopping” for an attractive valuation or law firm opinion is not a good idea.  Know your market to properly assess antitrust concerns.  Make sure you build the supporting facts and legal arguments before you close the deal. More importantly, however, physicians and hospitals also should consider the long term relationships involved and determine whether it is really worth it to pursue a transaction on the terms that truly make sense from financial, compliance and quality perspectives.

There were quite a few other take-aways from our panel, including: (i) after an acquisition closes, when evaluating the financial impact, be very careful in comparing financial outcomes on an “apples to apples” basis, and what is reported about “losing” money on physicians (losing money on practice acquisitions is an element of a recently unsealed Qui Tam case); (ii) you may need to look at older, closed deals and reconfigure some elements of a compensation plan, etc., to comply with new decisions, so make sure your agreements give you some leeway to do so; (iii) include the total benefit package into the compensation analysis; and (iv) when trying to get a deal done, identify leaders/champions on either side, understand that existing practice documents may not work well for a deal and may require adjustment prior to the parties moving deeply into the process, and put a strict nondisclosure arrangement in place with financial penalties to keep the chatter down.

In summary, the activity among physicians and hospitals is continuing and it appears that it will continue.  Sometimes, the reasons/drivers for the activity may not be 100% appropriate for reaching the best arrangement.  Give careful consideration before committing and, in particular, seek the guidance of counsel, accountants, and valuation professionals early in the process.  Many deals that are reached today will be subject to scrutiny and perhaps challenged in the future.  Documenting legitimate reasons for the deal and for the total compensation model should be an ongoing process, not an afterthought.  Remember that anything that is shared in writing – this includes email, texts, tweets, etc. – may look bad in 20/20 hindsight.

photo credit: naypong via

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