May 23, 2007

1. Association of Washington Public Hospital DistrictsCEOs and Administrators RetreatPRIMARY CARE DEVELOPMENT INNON-URBAN MARKETS May 23, 2007 Lori K. Nomura Kevin M. Kennedy, Principal

2. Agenda • Background • Organizational Models • Other Support Structures • Financial Analysis • Which Model is Best for You?

3. Background

4. Background Physician Shortages Changes in physician supply and demand patterns in recent years are driving nationwide shortages in many specialties. • Physician Supply • Stagnant medical school admissions. • Decreasing physician work effort. • Increasing number of part-time physicians. Top Five Searches by Volume in 2004–20051 Number of Physician Searches Conducted • Physician Demand • Growing aging population. • Technological advances. • Prevalence of chronic diseases. 1 Merritt, Hawkins & Associates (MHA), 2005 Review of Physician Recruitment Incentives. NOTE: Based on 1,743 physician search and consulting assignments that MHA represented from April 1, 2004, to March 31, 2005. Implication Physician recruitment will become more competitive as physician shortages increase.

5. Background Subspecialization With PCP reimbursement rates flat and compensation nearly half that of many medical subspecialties, medical students are increasingly choosing to specialize. Specialty Certification Plans of Graduating Medical Students2 Median Physician Compensation1 1 MGMA Physician Compensation and Production Survey: 2006 Report Based on 2005 Data, national data. 2 Source:Association of American Medical Colleges, AAMC Data Book, January 2005. Implication Physician specialization will increase the shortage of PCPs.

6. Background Mounting Financial Pressures Due to rising practice costs and declining reimbursement, physicians have had to dramatically increase their productivity to maintain the same level of compensation. Moreover, PCP compensation has barely kept up with inflation, averaging only a 2.6% increase per year. Median PCP Production and Income Median Specialist Production and Income 1995–2005 Percentage Increase: 72% 1995–2005 Percentage Increase: 66% 1995–2005 Percentage Increase: 26% 1995–2005 Percentage Increase: 47% Compound Annual Growth Rate: 2.6% Compound Annual Growth Rate: 4.7% Source:MGMA Physician Compensation and Production Survey for the years1995–2005. NOTE: Primary physician compensation has been growing at the same rate as the Consumer Price Index, which rose 27% from 1994–2004. Implication Physicians are likely to be drawn to regions with higher reimbursement rates.

7. Background Critical Questions • Is your medical staff willing and able to recruit: • To replenish itself from turnover and retirement? • To meet community needs? • To support your programmatic and service goals? • Do the economics of your area (payor mix, patient demand, overhead factors) support market levels of physician compensation? • If the answers to the above are uncertain, what can the hospital do to ensure an adequate supply of physician manpower?

8. Organizational Models

9. Organizational ModelsIndependent Practice Characteristics • Physicians are independent and typically apply for hospital privileges. • Hospital may provide limited financial or operational support subject to significant regulatory constraints. • Physicians are responsible for managing their own practices. Medical Staff Credentialing Physician Practices Hospital Hospital Privileges Payors • Contracting • Group Governance • Physician Compensation • Clinical Coordination • Facilities • Billing • Staffing and Management

10. Organizational ModelsIndependent Practice – Model Arrangements

11. Organizational ModelsIntegrated Medical Group Characteristics Similar to the clinic-without-walls model, except: • The group incorporates common policies and procedures across all sites of practice. • The group centralizes most administrative functions. • Group expenses are typically shared among group physicians. • Compensation plan is based on factors that stress group success. Medical Group • Group Governance • Physician Compensation (Group-Based) • Common Practice Clinical/Administrative Oversight Common Practice Policies and Procedures

12. Organizational ModelsIntegrated Medical Group – Model Arrangements

13. Organizational Models Rural Health Clinics Hospital-Based Independent Characteristics • Rural Health Clinics (RHCs) can be independent or hospital-based. • RHCs were established to stabilize access to outpatient primary care in underserved rural areas and encourage the use of physicians, physician assistants (PAs), nurse practitioners (NPs), and certified nurse-midwives. • Under the program, the U.S. Centers for Medicare & Medicaid Services (CMS) designates private and nonprofit clinics meeting certain conditions for certification as RHCs. • RHCs are eligible for enhanced Medicare and Medicaid reimbursement (cost-based payment per visit). • CMS contracts with the Washington State Department of Health Facility Services Licensing to survey clinics to determine whether they meet federal requirements. • Requirements include location, organizational affiliation and governance, staffing requirements, medical direction, and provision of required services (including some emergency care). - OR - Physician Practices Hospital • Contracting • Billing • Staffing and Management • Facilities • Contracting • Group Governance • Physician Compensation • Clinical Coordination • Facilities • Billing • Staffing and Management Payors (cost-based payment per visit)

14. Organizational Models Rural Health Clinics – Model Arrangements Source: Washington State Department of Health, Office of Community and Rural Health, 2006. Development of an RHC from start to finish typically takes about 1 year.

15. Organizational Models Provider-Based Clinic Independent Provider-Based Clinic Hospital-Employed Provider-Based Clinic Characteristics • Changing from an office-based practice to a provider-based practice may yield financial advantages. • It is important that hospital and physician organizations jointly consider the impact of all factors, including the effect on patients, organizational requirements, and operational requirements. • CMS has defined strict requirements for qualification as a provider-based practice. These requirements outline: • Licensure. • Ownership and control. • Administration and supervision. • Financial integration. • Facility location. • Additional licensure/accreditation requirements of provider-based sites. • Joint Commission on the Accreditation of Healthcare Organizations (JCAHO). • State licensure requirements. - OR - Medical Group Hospital Hospital Clinic Clinic Professional and Technical Fees Payors Professional Fees Technical Fees Payors

16. Organizational Models Provider-Based Clinic – Model Arrangements

17. Organizational Models FQHC Community Board Characteristics • FQHCs are similar to RHCs but have additional requirements: • Must provide dental services. • Certain proportion of care must be administered by midlevel providers. • Must have a community board. • FQHCs are “safety net” providers, such as community health centers, public housing centers, and outpatient health programs. • The main purpose of the FQHC is to enhance the provision of primary care services in underserved urban and rural communities. • Medicare pays FQHCs an all-inclusive, per-visit amount based on reasonable costs with some exceptions. Rates vary depending on actual costs, but have been observed to range from $60 to $150 per visit. FQHC Payors

18. Organizational Models FQHC – Model Arrangements

19. Other Support Structures

20. Other Support StructuresMSO Management Services Characteristics • Physicians would be independent but contract for office management services. • Physicians would pay the MSO a fee for selected services. • Existing hard assets may be repurchased by physicians. • Physicians would own accounts receivable (A/R) and patient charts. • Hospital creates an MSO, which could be a function of the hospital, a subsidiary, or a separate legal entity. • The MSO provides administrative and practice management services to area physicians, such as billing and staffing support (current clinic staff might be transitioned to MSO employment under this arrangement). • Physicians pay the MSO an overhead fee for services provided at fair market rates. • The MSO model can create economies of scale for multiple physician groups and allows physicians to focus on the clinical aspects of their practices. MSO Physician Practices Hospital • Billing • Staffing and Management • Practice Consulting • Contracting • Group Governance • Physician Compensation • Clinical Coordination • Facilities Payors

21. Other Support Structures MSO – Model Arrangements

22. Other Support StructuresISO ISO Support ISO Characteristics • Physicians remain independent from the hospital but contract for information services. • Contracted services typically include: • Hardware. • Software. • EMR. • Patient accounting. • Information services training and support. • Physicians pay the hospital a fee for information services. • Physicians own and operate their group(s). Physician Practices Hospital • Information Services Platform/Staff • Electronic Medical Record (EMR) Implementation • Physician System Support • Contracting • Group Governance • Physician Compensation • Clinical Coordination • Facilities Payors

23. Other Support StructuresISO – Model Arrangements

24. Other Support StructuresPSA Clinical Services Characteristics • Under the PSA model, a group of physicians is linked to the hospital through a PSA. • Physicians are relieved of all nonclinical responsibilities. • The PSA model offers many of the benefits of employment with more physician control over compensation and governance. • The hospital employs all staff, owns payor contracts and hard assets, and provides all support services. • The hospital makes periodic payments to the group, based on the terms negotiated in the PSA. • Physicians maintain their group structure and internal compensation distribution plan. PSA Medical Group Hospital Administrative Services and Aggregate Compensation • Group Governance • Physician Compensation • Clinical Coordination • Contracting • Billing • Staffing and Management • Facilities Payors

25. Other Support Structures PSA – Model Arrangements

26. Other Support StructuresPhysician Employment Practice Purchase Price Clinical Services and Input Hospital Existing Physician Practices Physician Compensation and Management Services Characteristics • Hospitalpurchases existing practices at fair market value and employs the physicians. Office staff are also typically employed by Hospital. • A compensation plan is developed for the physicians that is productivity-based, but may also involve a base salary component. • Physicians collaborate with Hospitaladministrators to set strategic and operational goals and to provide input regarding day-to-day operations.

27. Other Support Structures Physician Employment – Model Arrangements

28. Financial Analysis

29. Financial Analysis • The organizational models vary significantly in their revenue and expense characteristics. • Each model has unique reimbursement features for Medicare and Medicaid. For FQHC and RHCs, the reimbursement rate is based on detailed cost information submitted as part of your application. • Although the reimbursement is often considerably higher than a freestanding, independent clinic, it is important to note that expenses are often also higher due to operating restrictions, including: • Mandated services (such as dental) or staffing patterns (midlevel providers). • Integration with hospital and hospital cost structure (provider-based). • YMMV – do the math!

30. Financial AnalysisReimbursement Characteristics The table below illustrates the flow of revenues and practice expenses for the various clinic models. 40 – 50% higher than freestanding Total Revenue −Practice Expense = Funds Available for Physician Compensation and Benefits

31. Financial AnalysisProfitability In this analysis, the projected profitability was greatest for the provider-based and the FQHC models. Estimated NOTE: Totals may not be exact due to rounding.

32. Which Model is Best for You?

33. Things to Consider • Hospital or Physician ownership? • Strongest financial return? • Location? • Rural • HPSA • MUA/MUP • Productivity standards? • Hospital licensure requirements? • Service requirements/limitations?

34. Summary of Clinic Organization Models