Innovation at the Intersection of Academic and Private Practice Models

1. Innovation at the Intersection of Academic and Private Practice Models Mr. Clayton A. Tellers Mr. Gregory P. Silva ECG Management Consultants, Inc. October 7, 2013

2. Learning Objectives • Identify the market forces causing academic and community practices to intersect. • Explore effective organizational models for aligning the interests of these two practice types. • Develop and implement effective compensation plans to align incentives and drive change. 785\90\222124(pptx)-E2

3. Typical Situation Unfolding Nationally What are the implications of UH’s acquisition of ABC Cardiology, and how will this acquisition impact UH’s long-standing relationship with its clinical faculty? • Health system has multi-state presence. • System’s flagship hospital (UH) serves as primary teaching hospital for affiliated university and Faculty Group Practice (FGP). • UH has long-standing relationship with FGP, but has an open medical staff. University Hospital ABC Cardiology FGP University Hospital 1 2 Acquisition/Employment Affiliation Agreement • Well-established, private cardiology practice (ABC Cardiology) has presence at UH and competitor system. • Facing declining reimbursement, ABC Cardiology seeks to align with hospital partner. • As a defensive measure, UH employs ABC Cardiology. 785\90\222124(pptx)-E2

4. Three Questions for Today  $ Drivers/ Implications Compensation Organizational Structures What’s driving this intersection, and what are the organizational implications? How do we equitably and effectively compensate faculty/physicians for their unique contributions? How do we effectively organize and align the two practice types? 785\90\222124(pptx)-E2

5. Key Drivers and Implications • Intersection of academic and community practices is not new (“town vs. gown”). • The convergence has intensified in recent years as market consolidates. • Lines between clinical faculty and community providers continue to blur in teaching hospitals with open medical staff. • Not expected to slow down anytime soon. • Creates challenges/opportunities for alignment at multiple levels of the organization. Drivers/ Implications What’s driving this intersection, and what are the organizational implications? 785\90\222124(pptx)-E2

6. Hospital-to-Hospital Integration “New Laws and Rising Costs Create a Surge of Supersizing Hospitals” - August 12, 2013 Announced Hospital Transaction Deals 2008–2012 Source: Irving Levin Associates, Inc. The Health Care Services Acquisition Report, Nineteenth Addition 2013. 785\90\222124(pptx)-E2

7. Academic Systems Also Are Active Recent years have witnessed a number of notable examples of AMCs being involved in large-scale transactions. 785\90\222124(pptx)-E2

8. Hospitals and Physician Integration “Hospitals Are Going On a Doctor Buying Binge . . . ” - May 15, 2013 Percentage of U.S. Physician Practices Owned by Physicians and Hospitals, 2003–2011 Source: Medical Group Management Association (MGMA)Physician Compensation and Production Survey, 2003-2011. 785\90\222124(pptx)-E2

9. Pace of Employment Is Aggressive Nationally Organization A (Four-Hospital System) Organization C(Five-Hospital System) WA PA CO Organization B(11-Hospital System) Organization D(11-Hospital System) FL Source: ECG client case study examples. 785\90\222124(pptx)-E2

10. Breaking News Breaking News: Community teams with Cleveland Clinic to buy Ohio system “Under the pending deal in Ohio, the companies would form a new limited-liability company to buy 474-bed Akron General Medical Center, 38-bed Edwin Shaw Rehabilitation Hospital . . . And 25-bed Lodi (Ohio) Community Hospital” August 22, 2013 785\90\222124(pptx)-E2

11. What’s Driving This Consolidation? Innovative Payment and Delivery Models New payment and delivery models that put reimbursement at risk and emphasize volume over value are driving hospitals and physicians to collaborate to provide more coordinated and efficient care. Provider Economics Reimbursement increases have not kept pace with the cost increases for either physicians or hospitals. Certain specialties (e.g., cardiology) have seen dramatic cuts in professional fee reimbursement. Physician Supply and Demand Projected shortages in certain physician specialties are causing hospitals to employ physicians in order to ensure necessary services. Access to Capital The need to access capital for investments in IT and infrastructure is driving independent hospitals and physicianpractices to merge with larger systems. For-Profit and Private Equity The last several years have seen significant M&A among large, for-profit systems, including those backed by private equity. Though not often discussed, raw emotion and anxiety over the direction of healthcare also are significant contributors to current activity in the market. 785\90\222124(pptx)-E2

12. Moving From Volume to Value Shared Savings/Risk Fee-For-Service (FFS) Value-Based FFS Engaged Patient Efficiently Managed Episodes of Care Profitable Ancillaries Continuum of Care Multidisciplinary Care Teams Specialists Cost of Care Reduction Episodic Payment Margin Expansion Price Escalation 785\90\222124(pptx)-E2

13. Reimbursement Not Keeping Pace With Costs Historical Hospital Reimbursements as a Percentage of Costs Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2011, for community hospitals. Includes Medicaid and Medicare disproportionate share (DSH) payments. 785\90\222124(pptx)-E2

14. Physician Demand Is Outpacing Supply Projected Physician Supply and Demand – Active Physician FTEs(in thousands) Projected physician shortages are driving competition for available physician talent. Source: AAMC Center for Workforce Studies,June 2010 Analysis. 785\90\222124(pptx)-E2

15. Medical School Enrollment Is Not Keeping Pace First-Year Physician Enrollment Per 100,000 Population Source: AMA Physician Characteristics and Distribution in the U.S., 2008 Edition, Tables 6.16 and 6.17. 785\90\222124(pptx)-E2

16. Resulting Convergence Overall Market Consolidation Faculty Clinically Integrated Network Development Service Line Development Community Physicians AMC Cost Pressure/ Infrastructure Consolidation 785\90\222124(pptx)-E2

17. Five Opportunities to Align/Integrate 1 1 Corporate/ Organizational Structure * 2 Governance 3 Leadership Structure 4 4 * Business Policies (e.g., compensation) 5 Operations and Infrastructure 785\90\222124(pptx)-E2

18. Organizational Structures • The organization of physicians within a system trumps size/scale. • Many physician organizations (POs) have an identity crisis today – MSO or integrated multispeciality group? • FGPs continue to integrate. • Hospital-owned medical groups are being forced to do the same. • The real complexity is introduced when you have both. • Single- or multiple-PO strategy? Organizational Structures How do we effectively organize and align the two practice types? 785\90\222124(pptx)-E2

19. Very Different Environments/Origins FGP Example Private Community Practice Corp. Structure Independent, private practice. University-affiliated FGP (501(c)(3)). Mission Patient care, teaching, research. Patient care. • Hierarchical. • Subject to approval from chair, president, and/or dean. • Streamlined. • Subject to majority shareholder vote. Decision Making Revenue • Professional fees only. • Reliant on hospital contracts. • Traditionally poor payor mix. • Ancillary services. • Clinics in more affluent areas. Compensation • Productivity-based model. • “Eat what you kill.” • Primarily salary-based model. • Partially funded by university. Use of Extenders Nurse practitioners. Residents and fellows. 785\90\222124(pptx)-E2

20. FGP Integration Common Governance Dept. G Dept. A Dept. A Shared Governance and Services Dept. G Dept. F Dept. B Dept. F Dept. B Dept. C Dept. E Dept. D Dept. E Dept. C Centrally Controlled Policies and Finances Dept. D Integrated Model Multispecialty Model Department Model Federated Model Department A Department A Department B Department G Department B Limited Common Governance and Shared Services Department C Department F Department C Department D Department E Department E Department D Department F Department G Evolution of FGP Organization 785\90\222124(pptx)-E2

21. Notable Features Each PO has its own leadership and governance structure, with board of FGP dominated by chairs and mix of seats from key specialties, or big legacy practices on board of hospital-controlled medical group. Imperative that an influential committee or council be established to bridge the clinical faculty and community providers to align market strategy, finances, and operations. Furthermore, progressive systems will achieve alignment through service lines and centers of excellence that spans departments/specialties of the clinical faculty and community providers with linked financial incentives. Imperative that the health system works to build a single, cost-efficient practice management infrastructure. Option A – Collaborative Two-Entity Model University/ Medical School 2 Clinical Executive Council 1 Board Board FGP Medical Group • Typically a separate entity financially integrated with health system. • Not ideal but not uncommon for legacy practices to maintain some autonomy in early stage of integration. • Affiliated with the university. • Dual employment common. • Chairs accountable for academics and clinical. 3 Dept. Dept. Dept. Service Line Service Line Legacy Grp. Specialty Specialty 4 Single/Shared-Practice Management 785\90\222124(pptx)-E2

22. Option A – Potential Pros and Cons Pros Cons • Likely more attractive to physicians to maintain separate entities given cultural differences. • May be cleaner relationship with university/medical school with respect to an affiliated FGP. • Despite joint committee, two-entity model may not place the interests of the AMC/health system first – promotes a divide. • Not conducive to streamlined decision making, which is increasingly important in dynamic markets. • May hinder execution on common operating/business policies. 785\90\222124(pptx)-E2

23. Notable Features Single governance and leadership structure with mix of academic and community physician leaders. Academic division functions as business unit within POand may be organized as traditional departments/divisions. Community division home to employed, nonacademic physicians organized by specialty. Goal should be to “blur the lines” and promote service line structures that bridge academic and community providers. Single infrastructure for the single entity with opportunities for administrative and clinical cross-staffing. Option B – Single, Hybrid Physician Organization University/ Medical School Board 1 Physician Organization • Affiliated with the university. • Dual employment common for clinical faculty. • Hybrid model does not undermine chair’s responsibilities. • Common to have joint governance of hybrid by teaching hospital and medical school. • To access needed support and resources, prevailing model suggests financial integration within health system. 2 3 Academic Division Community Division Service Line Service Line 4 5 Single-Practice Management 785\90\222124(pptx)-E2

24. Option B – Potential Pros and Cons Pros Cons • Single, physician-driven organization has single point of accountability. • Respects difference between academic and community providers through business units but embraces all physicians under a single strategy. • Has streamlined governance structure and decision making. • “Forces” prioritization and efficient allocation of resources from top to bottom (ultimately a single budget). • Identification of single leadership structure can be politically difficult. • Potentially a market disadvantage in the near term as it is a progressive model (may not be attractive to recruits or possible acquisition targets). • Depending on orientation of AMC or health system, may camouflage the academic mission and become too clinically driven. 785\90\222124(pptx)-E2

25. Compensation • Finding parity in compensation for academic and non-academic physicians under the same roof is a central and sensitive issue. • Compensation should be equitable, but not necessarily equal. • Opportunity to align interests with respect to CFTE productivity. • Politically avoiding this issue can be costly in the long run.  $ Compensation How do we equitably and effectively compensate faculty/physicians for their unique contributions? 785\90\222124(pptx)-E2

26. How Do You Compensate These Two Physicians? Dr. Harris Employed Physician Cardiology Associates Dr. Jones Associate Professor University Cardiology 785\90\222124(pptx)-E2

27. Key Differences That May Impact Plan Design Academic Community • May be shareholder or employed by physician practice. • Compensation driven by practice performance. • Concurrent employment by practice plan and university. • University funds portion of salary. Employment and Funding Nonclinical Expectations • Physicians are clinically oriented. • May have additional administrative responsibilities. • Varies, but may include GME supervision, didactic teaching, research, and administration. Plan Structure • Salaries largely variable based on performance. • “Eat what you kill.” • Until recently, largely fixed salary. • More contemporary plans include incentive component or withhold. Practice Area • Typically do not have same community service obligation as academic faculty. • About 75% of AMCs are located in underserved communities. • Reflected in poor payor mix. • Generally less-generous benefit packages relative to academic faculty. • Historically more-generous benefit packages, particularly for practice plans associated with state institutions. Benefits 785\90\222124(pptx)-E2

28. Basic Decision Points Still Apply Basic decisions, such as how to balance productivity, service, and quality incentives, are necessary for any compensation plan. Decision Points Conceptual Model • Base or no base. • Salary targets. • Incentive mix between productivity, service, and quality. • Compensation at risk. • Parity within a specialty and/or across an entire group. • Balancing compensation levels for experience versus productivity and raw need. Productivity Threshold 115% of Target Upside Variable Compensation 100% of Target 40% Prod. 5% Service 5% Quality 50% Guaranteed 50% Variable Base Compensation Variable Plan Components NOTE: Figure not drawn to scale. Target Proposed Plan Potential Upside Under Proposed Plan 785\90\222124(pptx)-E2

29. Questions/Considerations When Designing a Hybrid Model • What are the underlying economics for each practice? Where are existing compensation and productivity levels relative to national benchmarks? • Is there alignment between clinical and academic effort and compensation funding for academic faculty? • How are clinical and nonclinical activities tracked, and what is their impact on compensation? • Are midlevel providers employed by the practice? If so, how are they utilized (i.e., as physician extenders, as billable providers)? • What is the impact of having learners (i.e., residents and fellows) present, and what are the implications for compensation plan design? • Is there a discrepancy in benefit plans between the two groups? • What is the current compensation plan structure and the physician’s willingness to move to a more innovative plan design? 785\90\222124(pptx)-E2

30. Compensation Yet to Merge Community Versus Clinical Faculty Median Compensation Trends Community Community Community Academic Academic Academic Total Compensation Survey Year Source: Based on the 2008–2012 MGMA Physician Compensation and Production Surveys, Table 1.1, and 2008–2012 MGMA Academic Practice Compensation and Production Surveysfor Faculty and Management, Table 2.1. 785\90\222124(pptx)-E2

31. Productivity Expectations Vary by Specialty WRVUs for Community and Academic Physicians by Specialty Community WRVUs 7,648 7,571 7,206 Academic WRVUs (Standardized) 6,880 6,799 5,923 4,705 4,695 Internal Medicine OB/GYN (General) General Surgery Cardiology: Noninvasive Source: Based on the MGMA Physician Compensation and Production Survey, 2013 Report Based on 2012 Data, Table 20.1; and the MGMA Academic Practice Compensation and Production Surveyfor Faculty and Management, 2013 Report Based on 2012 Data,Table 19.1. 785\90\222124(pptx)-E2

32. Defining Deployment and Expectations It is necessary to establish consistent definitions for deployment for the following items: Clinical GME Administration Research/ Other + + + + Administration Teaching GME Supervision • All billable physician activity. • Direct patient care. • Supervision of residents/fellows and/or clinical instruction. • Program director activities. • Associate program director activities. • Department chair activities. • Service chief activities. • Hospital/medical director activities. • Didactic teaching of students, residents, or fellows. • Student mentoring. • Unfunded research (protected time). • Grant/proposal writing. • Other professional development/scholarly activity (papers). 785\90\222124(pptx)-E2

33. Tracking Resident Activity • Medicare documentation requires that CPT code claims include a GC modifier to document when a teaching physician involves a resident in the provision of patient care. • An analysis of Medicare claims billed with the CPT modifier can provide valuable insight into the impact of having learners present for individual faculty/physicians. Illustrative Analysis of CPT Codes Billed With GC Modifier 785\90\222124(pptx)-E2

34. Moving From Volume to Value ... Slowly (continued) Illustrative Transition From Productivity-Centric Plan Years 5-Plus Years 3 to 5 Years 1 to 2 Current Plan • The plan is assumed at 100% production. • A major cultural shift is required in the transition. • Data collection and reporting is inadequate. • 100% production plan continues. • Performance measure data collected and tested. • Shadow reports created. • Work group created to identify nonproductivity metrics and tie them to compensation pools. • Production compensation reduced. • Funding established for nonproduction pools. • Nonproduction incentives grow every year and are continuously evaluated and improved. • Transition completed. • Potential combination of production, nonproduction, and guaranteed salary components. 785\90\222124(pptx)-E2

35. Reflecting on Today’s Learning Objectives • Identify the market forces causing academic and community practices to intersect. • Explore effective organizational models for aligning the interests of these two practice types. • Develop and implement effective compensation plans to align incentives and drive change. 785\90\222124(pptx)-E2

36. Mr. Clayton A. Tellers Principal Phone: 858-436-3220 E-Mail: ctellers@ecgmc.com Mr. Gregory P. Silva Manager Phone: 617-227-0100 E-Mail: gsilva@ecgmc.com 785\90\222124(pptx)-E2