Physician-Hospital Collaboration Lessons Learned from the Past and the Influence of Healthcare Reform

1. Physician-Hospital Collaboration Lessons Learned from the Past and the Influence of Healthcare Reform Presented by: Deborah Holzmark, RN, MBA, CPHQ, MCS-P, CMPE dholzmark@dixon-hughes.com 828-775-3687

2. Objectives • Understand the key motivators that are driving the market • Understand the models in the latest wave of hospital acquisitions, employment and collaboration • Understand lessons learned- examples we have seen • Understand what Healthcare Reform could mean…

3. Motivators and Models

4. “The Wave” • Physician Motivators: • Money/Shrinking Margins/Decreasing Revenue • The Future of Healthcare • Generational/Lifestyle Issues • Hassle Factor • Collaborate to improve services across the continuum

5. “The Wave” • Hospital Motivators: • Extend sphere of influence • Meet demand for services • Offer convenience/quality • Improve access to care • Meet goals of Healthcare Reform • Collaborate to improve services across the continuum

6. “Portfolio Strategy” • Structural Relationships • Practice Acquisition • MSO Arrangement • Employment & Recruitment • Clinical Collaboration • Gainsharing • Pay-for-performance • E.H.R. & E-prescribing • Exclusive contracting • Joint Ventures • Equipment • ASCs

7. Practice Acquisition • Models • Provider Based • Free Standing • What is in it for the provider? • Concerns with autonomy, financial management • Regulatory limitations on purchase

8. Practice Acquisition:Provider Based Model • Hospital includes operating costs of practice in cost report • Typically higher payments for services • Must meet 8 criteria (Prog. Mem. A-96-7) • Location • Integral & substantial portion of provider • Included under hospital accreditation • Common ownership and control • Entity director is under direct supervision by hospital • Clinical services are integrated • Entity is held out to public as part of hospital • Entity and hospital are financially integrated

9. Practice Acquisition:Free Standing Model • Payments are made using Physician Fee Schedule • Hospital must establish a non-reimbursable cost center in cost report, excluding any costs associated with the practice, if hospital provides services to patients

10. MSO Arrangements • MSO- Freestanding corporation that is owned by hospital or joint physician-hospital ownership • Typically provides management services to practices • May employ the non-professional staff • May own assets • May provide billing and technology • May provide contracting – hot spot!

11. MSO Arrangement • MSO Arrangement could support other models of collaboration • IT/E.H.R • Clinical Research • HR Support • Quality Management and Reporting • What is in it for the provider? • Good: Economies of scale, delegation of HR issues • Concerns: Loss of control, financial management

12. Employment • Compensation models re-examined • What is in it for the provider? • Good: Just doing patient care, no worries • Concerns: Hospitals very volatile on this issue • Regulatory Implications • AntiKickback Statute • Stark II

13. What is Gain sharing? • Gain sharing arrangements are financial arrangements in which a hospital gives physicians a share of any reduction in the Hospital’s costs attributable in part to the physicians’ efforts • Incentive to reduce the use of specific devices or supplies • Incentive to use less costly devices or supplies • Use a standardized protocol to reduce costs • Promotes hospital cost reductions by aligning physician and hospital financial incentives • Hospitals are reimbursed a fixed fee by Medicare for inpatient services regardless of the actual cost of care (i.e. if they use more costly devices or supplies they are paid the same) • Physicians are reimbursed separately on a fee schedule

14. What is Gain sharing? • Generally gainsharing arrangements between hospitals and physicians are prohibited unless they are reviewed and approved by the Department of Health and Human Services (“HHS”) Office of the Inspector General (“OIG”) • Federal law prohibits hospitals from inducing doctors to reduce or limit services and items to Medicare and Medicaid beneficiaries • Federal law, and many state laws, also prohibit the payment of anything of value in exchange for referrals

15. Advisory Opinions • Must secure an Advisory Opinion from the OIG to have a gainsharing arrangement • Several gainsharing arrangements have received an approval from the OIG in recent years • These arrangements have some key elements that should guide future submissions • Advisory Opinion process can take up to two years to complete

16. Pay-For-Performance • Working together to meet payor requirements • Focus on sharing information across the continuum of care • Providing information for individual reporting needs • Leapfrog, Bridges to Excellence, Medicare • What is in it for providers? • Good: Continuous Quality Improvement • Concerns: Adequate compensation for work expenditure

17. Electronic Health Records & E-Prescribing • Working together to collaborate on E.H.R. and E-prescribing technologies in both inpatient and outpatient setting • What is in it for the provider? • Good: improve care through improved communication. Long term feed into Pay for Performance success • Concerns: Costs versus benefits

18. Electronic Health Records & E-Prescribing • “New” Anti-Kickback Statute and Stark II safe harbor/exception (8/8/06) • Stark • Hospitals may provide “software or information technology and training services” to a physician so long as the technology is used “predominantly to create, maintain, transmit or receive” EHRs. • Technology covered under the exception: • Software meeting certain conditions; • Interfaces and translation software; • Rights, licenses and intellectual property related to EHR software; • Connectivity services; • Clinical support and information services related to patient care; • Maintenance services; • Secure messaging; and • Training and support services. • HARDWARE IS NOT COVERED

19. EHR Stark Exception • Additional conditions: • Donated items cannot be the “equivalent” of items the physician already has; • The arrangement must be detailed in a written agreement; • The physician must pay 15% of the donor’s costs; • Hospital may not disable or limit interoperability functions that the technology may have; • Hospital may not limit the kinds of patients for whom the technology is used; • Donation must include an e-prescribing function.

20. Exclusive Contracting • Hospitalists • Anesthesia • Pathology • Other Specialties • What is in it for the provider? • Good: Security, autonomy • Concerns: Might be used against you!

21. Imaging Joint Ventures • CT • MRI • PET • Films • What is in it for the provider? • Good: Improved access, faster service, share in the money • Concerns: Long term viability, competition, new technologies

22. Imaging Joint Ventures Threshold Business Questions • What do we currently offer? • What could we offer? • Which of these are familiar to us? • Which of these benefit our patients? • Which of these make business sense? • Is there patient demand? How much? • What are the costs? • What are the realistic revenues? • How quickly/painlessly can you get out of business? • What is reimbursement like? Is it likely to change? Does it differ for public/private payors?

23. Imaging Joint VenturesThreshold Legal Issues • Anti-Kickback Statute • Stark I, II, and III • Medicare Reassignment Rules • Medicare Supervision Requirements for Technical Component Imaging Services • Medicare Supervision Credentialing Requirements for IDTFs • Tax Exempt Status • Antitrust Laws • Securities • State Kickback/Self-Referral Statutes • State CON Statutes • State Licensure Laws

24. ASCs Business Trends Seller’s market Percentage acquired Tightening of Management Fees What is in it for the provider? Good: Increase access, share in money Concerns: Control, management, risks

25. Anti-Kickback ASC Safe Harbor All four safe harbors require that the following Common Standards: Terms of offer must not be related to the previous or expected volume of referrals, services furnished, or the amount of business otherwise generated from that investor to the ASC. ASC or an investor must not loan funds to or guarantee a loan for an investor to use to obtain the investment interest. The amount of payment to an investor in return for the investment must be directly proportional to the amount of the capital investment. All ancillary services must be directly and integrally related to primary procedures performed at the ASC, and none may be separately billed. The ASC and physician investors must accept Medicare/Medicaid patients and not treat in a nondiscriminatory manner. Include Surgeon Investors Single Specialty Physician Investors Multi-Specialty Physician Investors Hospital-Physician Investors

26. Hospital-Physician ASC Safe Harbor Investors must be hospital and qualifying physicians or disinterested investors (no referrals, no provision of items or services to ASC, no employment relationship with ASC or any investor) Requirements: No inclusion of ASC costs on cost report/payment claims Hospital cannot be in a position to make/influence referrals to ASC or its investors Physician investor requirements: 1/3 of physician’s medical practice income from all sources for previous fiscal/12 month period must be derived from performance of Medicare list of ASC covered procedures 1/3 of procedures performed by each physician for previous fiscal/12 month period must be performed at ASC

27. “But Everybody Else is Doing It…”

28. Stark Law • Potential Compensation Exceptions: • Indirect compensation (42 CFR § 411.357(p)) • Personal services (42 CFR § 411.357(d)) • Space leases (42 CFR § 411.357(a)) • Equipment leases (42 CFR § 411.357(b)) • Fair market value (42 CFR § 411.357(l))

29. Stark Law: Exceptions • Common Requirements in Compensation Exceptions: • Written contract, signed by the parties • One agreement over the course of one year that covers all services • Arrangement is commercially reasonable and necessary for legitimate business purposes • Aggregate services do not exceed what is reasonable and necessary for legitimate business purposes • Amount of space leased is reasonable and used exclusively by the lessee (note: subleases are permitted if space is not shared with lessor) • Arrangement does not violate any law (including the anti-kickback law)

30. Stark Law: Exceptions • Common Requirements in Compensation Exceptions (cont’d): • Compensation is: • Fair market value • Set in advance • Unrelated to the volume or value of referrals generated between the parties • Unrelated to other business generated between the parties • Refer to special rules on compensation

31. Thinking Strategically

32. How Do You Create a Win - Win Situation for Both Parties? • By developing a road map to success called a “Strategic Plan” • Create a vision and follow it • Provide the direction and resources to get there • Set measurable goals and objectives

33. Strategic Direction • Vision – Preferred picture of the future • Mission – What you do and for whom you do it for • Goals – Broad aims • Impact objectives – Measurable outcomes • Impact strategies – How you will achieve the objectives

34. Developing a Physician StrategyKey Components and Considerations • Clear Vision, Mission, and Goals • Infrastructure/Legal Structure • Operational needs assessment • Information technology review and assessment • Human resource needs • Acquisition and other affiliation models • Compensation models • Space planning • Due Diligence

35. Financial DueDiligence

36. Initial Due Diligence Data Request • Historical Data (past 2 full fiscal years) • Financial P&L • Balance Sheet • Volumes by CPT Code and Charges • Volumes , Charges, and Payments by Payer • Number of total patient visits by provider (separate new vs. established patient visits) • Work RVU’s by provider

37. Initial Due Diligence Request • A list of the practice physicians and the dates each joined the practice • A list of all practice employees, titles, employment status (full-time, part-time or PRN), and pay rate (salary or hourly) • Evidence of current malpractice coverage, including coverage limits, term and rates and any issues/claims made

38. Initial Due Diligence Request • A copy of the building lease agreement(s) and/or any other terms of occupancy for the practice location(s) • Accounts receivable summary by payer by account age category • Copy of all practice fee schedule(s) by CPT code • Name of practice billing system

39. Initial Due Diligence Request • Copies of all operating and capital lease agreements • A copy of the current fixed asset listing • The type of CLIA certification, if applicable

40. Financial ProformaKey Components • Proforma Physician Compensation • Proforma Income Statement • Health System Malpractice Rates if self-funded or current rates • Staffing Expense/Reductions Projections • Volumes and Charges by CPT Code for Estimated Variances

41. Reimbursement Improvement Estimate • Total reimbursement of the health system • Total actual payments to the practice • Adjustments for modifiers or CPT codes with no rates • Revenue difference (dollars and percentage) • Calculate reimbursement rate for the practice

42. Side by Side Proforma • Goal • Model free-standing practice vs. integrated into the health system using 1-2 years of data • Add revenue and expenses associated with being part of the health system • Allows for you to understand the revenue available for the compensation plan • Allows you to understand AR management performance

43. Best Practices

44. What Are We Seeing? • Well planned ventures • Reactionary ventures • Runaway train ventures • Disaster recovery projects

45. Best Practices • Better Performing Hospital/Physician Relationship Components: • Decisions driven by written strategic plan • Slow, thoughtful process • Adequate due diligence on both sides • Aligned incentives, clear management agreements • Reliance on experts in legal and compensation • Implementation from a team approach addressing all areas BEFORE the start date • Ongoing, cooperative evaluation

46. Lessons Learned • Call Pay: Come one…. Come ALL! • We didn’t know this could happen so fast.. Yesterday just one provider, 41 more in three months? • Really, 2.5 Million in outstand AR because we never credentialed anyone? • So this FMV compensation thing is serious?

47. Healthcare Reform • (just a sampling): • Imaging caps /self referral notice • Small business tax credits • Grant program for Primary Care Residency Programs • Development of the Physician Compare Website • Elimination of pre-existing for children, extension of dependent coverage, no rescind coverage, elimination of lifetime limits • RAC expansion

48. Healthcare Reform • Just a sampling: • Primary care incentives • PQRI • Center for Medicare and Medicaid Innovation • CHIP ACO demonstration project • Medicare ACO program (shared savings) • Medical Home demonstration program • Hospital value based purchasing program • National Pilot Program on Payment Bundling

49. Healthcare Reform • Odds seem high that some ancillary services may not be as profitable as they once were • Odds seem high that the administrative burden of being a physician is going to get more significant • Odds are physicians are going to be at a higher risk of assessment/audit by outside entities • Odds are physician operating expenses are going to increase

50. Healthcare Reform • Physicians and Hospitals that embrace technology, concepts of medical home models, ACO models and joint payment models are going to be in the lead in this crazy race for reform • More physicians will consider hospital employment or collaboration • Hospitals will need physicians to help improve the quality of care now more than ever