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Innovative Strategies for Physician-Hospital Alignment

 |  By HealthLeaders Media Staff  
   August 11, 2008

Recent changes in the law have created considerable uncertainty about the future of physician-hospital joint ventures—particularly for imaging joint ventures, whole hospital joint ventures, ASC joint ventures, and "under arrangement" services in general.

Election-year talk of healthcare reform together with the recent economic slowdown has exacerbated these uncertainties. In 2008, providers continue to face changes in law, changes in reimbursement, and pressure from managed care. These market pressures will chill some joint venture activity and inevitably cause other joint ventures to unwind.

In addition to the impact of regulatory changes, political vagaries and economic uncertainties as mentioned above, some historical strategies for physician-hospital joint ventures are now demonstrating that either they cannot deliver the desired financial results or that operating tensions within the model itself require that they be unwound.

What alignment strategies work?

Although the current environment for joint ventures is uncertain, the economic pressure on healthcare providers to develop innovative strategies has arguably never been greater. To create alignment strategies that will not only survive but also succeed in this challenging environment, it is essential to understand what motivates providers and physicians.

Providers have traditionally sought joint ventures in order to:

  • Align the interests of the physicians with those of the health system—share the risk and costs
  • Enhance physician professional accountability and quality of care
  • Provide access to a new service or new technology
  • Access capital

Physicians have traditionally sought joint ventures in order to:

  • Align the interests of the hospital or health system with those of the physicians—share the risk and costs
  • Enhance physician autonomy and quality of care
  • Provide access to management services, group purchasing and IT services
  • Access capital

Despite multiple legal and market challenges to traditional joint ventures, providers and physicians will continue to demand alignment opportunities to generate revenue, to control costs, and to improve the quality of care delivery.

Equity models remain viable

In certain sectors, such as outpatient surgery, dialysis, cardiac cath labs, sleep centers, and cancer centers, equity models still remain a viable alignment strategy. In a typical equity model, a physician—who can use the facility as an extension of his or her practice—and a provider each own equity in a facility. The joint venture bills the provider for the facility fee or technical component and the physicians will bill for the professional fee. Usually the provider will furnish management services for a fair market value fee and a physician will serve as medical director for a fair market value fee.

Typical equity joint venture structure

The benefits of equity models in certain sectors include the safe harbor protection for certain types of joint ventures; for example, outpatient surgery centers under the federal Anti-Kickback Statute. In other sectors, even where Anti-Kickback Statute safe harbor protection is not explicitly granted, absent either legislative or regulatory changes, equity models will continue to be viable where the risks can be mitigated and sufficient safeguards against fraud, waste, and abuse can be established because of the sense of security physicians derive from ownership. Accordingly, equity models continue to be a preferred model among many physicians.

New focus on quality standards and governance

Although the equity model has been around for some time, the current trend is for joint ventures to focus on quality standards and governance rather than pure financial performance and the division of the resulting revenue. The increased scrutiny on quality standards is evidenced by an abundance of quality studies and reports, the adoption of MS-DRGs, reporting of underperforming hospitals, nursing homes, and physicians by Medicare, state and private agencies and payers, and the movement to value-based purchasing and pay-for-performance reimbursement by both government and non-government payers. These trends demonstrate that joint ventures that align interests to improve quality will be most successful.

With respect to governance, successful alignment will occur when the organizations have synergies and create a governance structure that will best neutralize inherent cultural differences. For example, a physician group may have strong preferences about the type of surgical supplies that a facility uses, but a provider may have a group purchasing arrangement that precludes it from acquiring the supplies preferred by the physicians. The successful joint venture will sensitively compromise and effectively address this tension by such measures as establishing an active physician committee to hear, manage, and resolve clinical and quality issues.

What new strategies can be pursued?

In the next year, the industry will experience the unraveling of relationships, such as "under arrangements" and some per-click leases. The unwinding of these arrangements combined with pressure for new models will create opportunity for existing arrangements to be re-examined and restructured to incorporate new quality and joint governance standards. Providers that move decisively now to unwind difficult joint ventures, yet deal with physicians fairly, will maximize the long-term benefits of preserving physician relationships.

The industry will likely experiment with many models in different contexts rather than looking to a small group of models that function in a "cookie cutter" fashion. The greatest and most effective joint venture activity will likely incorporate innovative strategies that further quality and governance goals. To the extent hospitals have looked at joint ventures for increased patient revenue, the new focus is to expand and improve quality of patient care. A current example is the OIG's approval in January 2008 of two gainsharing arrangements with physicians-one a group of anesthesiologists; the other cardiac surgeons. Although this model is not a "typical" gainsharing arrangement, most gainsharing arrangements exhibit the following characteristics:

  • Hospital-based physicians or physicians in hospital-controlled outpatient setting identify cost savings opportunities-for example, controls over use of disposable supplies.
  • Physicians share in percentage of cost reductions.
  • Specific performance and quality measures are implemented to protect clinical care and prevent inappropriate underutilization.

Some of the specific features of the approved arrangements include:

  • A limited number of specific cost-saving opportunities (to clarify the task undertaken and get buy-in)
  • Data gathering to benchmark cost, quality and utilization on a national basis (guessing and estimating are discouraged)
  • Physician and hospital joint review of less costly products and supplies that are considered for use (cooperative efforts to achieve patient quality goals are paramount)
  • Limitations on the dollars that reach the gain-sharing pool if utilization drops below established objective measures (in order to suppress any urge to skimp on supplies or products)

Each gainsharing arrangement would entail its own specific features, but all gainsharing arrangements should consider including these and other safeguard measures to ensure that innovative strategies further quality and governance goals instead of establishing structures that foster a "minimum necessary" approach. The discussions around formation should not center on whether the safeguards are sufficient to sanction the arrangement from a fraud, waste and abuse perspective, but whether the safeguards are sufficient to further quality and governance goals.

These gainsharing arrangements demonstrate complex and thoughtful structures that create incentives for physicians to control costs that benefit the provider, but include safeguards for preventing fraud, waste and abuse. Further, they should improve the quality of patient care.

The OIG's approvals of these gainsharing arrangements contrast markedly with the position first taken by the OIG in its Special Advisory Bulletin of July 1995. Although the OIG opinions address anesthesiologists and cardiac surgeons, there is no reason that gainsharing arrangements will be limited to these types of specialties. In fact, the future trend may be to implement gainsharing arrangements beyond these narrow (and other specifically approved) specialties and into other practice and business settings, perhaps even large multispecialty physician primary care groups.

In today's environment, healthcare providers must enter into new relationships cautiously, with a clear understanding of potential changes in law and predetermined exit strategies. Where is the good news in all of this? That the joint ventures crafted today will increasingly focus on quality of care and shared governance, which more closely align the interest of the provider, the physicians and patients. Sound advice for providers is to follow your facilities' and your physicians' needs, not necessarily the market.


Beth Conner Guest is a partner at Waller Lansden Dortch & Davis in Nashville and co-manages the firm's corporate and commercial transactions practice. She can be reached at Beth.Guest@wallerlaw.com.

James S. Mathis is senior regulatory counsel for Omnicare Inc., a provider of pharmaceutical care for the elderly. He can be reached at JamesSMathis@yahoo.com.


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