AAOS Now

Published 2/1/2015
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James M. Daniel Jr, JD, MBA; Michelle E. Calloway, JD, CHC, CHCP; John Cherf, MD, MPH, MBA

The Benefits of Comanagement for the Orthopaedic Surgeon

James M. Daniel Jr, JD, MBA; Michelle E. Calloway, JD, CHC, CHCP; and John Cherf, MD, MPH, MBA

As new payment models evolve, providers must focus on improved quality and efficiency to remain financially stable. In this environment, comanagement has emerged as a popular alignment option. Hospitals and physicians recognize that mutually advantageous alignment better equips them to respond to competition, reimbursement reductions, and regulatory restrictions while enhancing clinical quality and efficiency.

Generally speaking, “comanagement” is a formal contract between physicians and a hospital to jointly manage a specific service line. Comanagement agreements contain performance-based incentives to encourage participating physicians to actively partner with the hospital to improve quality, efficiency, and leadership.

This structure fosters physician alignment with hospital goals while enabling physicians to maintain their independence. Recent trends suggest that the focus on clinical quality and efficiency will increase the number of comanagement agreements, especially among cardiovascular, orthopaedic, neurologic, and oncologic programs.

Benefits of comanagement
Comanagement benefits physicians by developing or strengthening a service line to enhance opportunities, encourage higher levels of patient satisfaction, and provide better patient care outcomes. Through comanagement, physicians can also be fairly compensated for their efforts and expertise in improving the environment of care while maintaining their independence.

Comanagement also benefits the hospital, enabling it to achieve tangible benefits in quality, efficiency, and cost reduction. It assists hospitals in developing cost-effective, collaborative care without increasing physician employment. It fosters the development of tools and mechanisms to increase services and improve quality and patient satisfaction. Finally, the hospital receives direct input from physicians regarding service line strategy offerings to improve hospital operations.

Contracting models
Comanagement arrangements may use either direct or indirect contracts between physicians and hospitals. Under a direct contract, the hospital contracts directly with the physicians or their practice group (
Fig. 1). This model is prevalent with small programs and service lines and usually involves a single specialty group.

Indirect contracts typically entail formation of a joint venture owned either by participating physicians and medical groups or by the hospital and one or more physician group(s) (Fig. 2). The hospital directly contracts with the joint venture, creating an indirect payment structure with the physicians.

The joint venture model is more prevalent in situations involving multiple physician groups and specialties. It is often used when capital must be raised to purchase equipment, hire staff, or pay legal and consulting fees.

A comanagement arrangement should be open to, and preferably include, all relevant physicians practicing within the designated scope of services at the hospital. This helps avoid any appearance of favorable treatment based on referral volume, which could raise legal concerns, and makes it easier to achieve outcomes over an entire department.

Payment models
The goal of the comanagement model is to design an arrangement that recognizes and appropriately rewards physician participation in managing, developing, and improving quality and efficiency across the service line. When correctly structured, it allows hospitals and health systems to legally pay physicians for these activities.

A typical comanagement arrangement has two main components—a base (“fixed”) fee and an incentive (“at risk”) fee. The split between the base and incentive fees generally ranges from 30 percent/70 percent to 60 percent/40 percent, respectively.

The base is a fixed annual fee consistent with the fair market value of the time and efforts participating physicians put into the development, management, and oversight process. The incentive fee is a series of predetermined payment amounts contingent on achievement of specified, mutually agreed-upon, objectively measured program development, quality improvement, and efficiency goals. If the incentive goals are not met, physicians are not entitled to full payment and appropriate adjustments must be made. Table 1 shows a proposed breakdown in the incentive component of a comanagement agreement with a 45/55 split (45 percent of the physician’s fee is fixed; 55 percent of the fee depends on the achievement of specific goals).

Comanagement objectives often change over time. Although payment must be established in advance, incentive-based compensation metrics and thresholds can be reviewed and updated on an annual basis to respond to achievement of previously defined goals and newly identified areas for improvement. The scope of the incentives and the particular performance goals are based on the individual characteristics of the particular service line and opportunities for improvement.

The establishment of “stretch targets” needed to achieve desired outcomes should be considered. The goal is to demonstrate improvements measured against historical performance or national benchmarks. Generally, metrics should not be linked directly to length of stay, readmissions, or the volume or value of referrals to the hospital.

Comanagement in orthopaedics
Orthopaedic services cross both inpatient and outpatient settings. An orthopaedic comanagement program can bring services together to a single point of access for patients while maintaining a continuum of care that enhances the patient experience.

For an orthopaedic service line, inpatient satisfaction scores for doctor communication, appropriate implant/technology utilization, surgical site infection rates, and operating room turn-around time may become potential quality improvement performance metrics.

Three-party approach
In this approach, the three parties typically include the following:

  • a consultant/physician leader
  • a third-party fair market value appraiser
  • an attorney

The consultant/physician leader engages physicians and management to determine the direction of the program and to identify markets, technologies, and service opportunities.

An experienced healthcare valuation firm can offer guidance on appropriate incentive-based metrics and formulas and provide a fair market value analysis. Valuation may be accomplished in several ways; appraisers often take into account market and cost approaches, including market amounts paid in pay-for-performance models, the cost of the inputs, the size of the service line, and the financial opportunity for both the health system and the physicians. Regardless of the method used, the arrangement must be commercially reasonable.

Legal counsel may help determine the appropriate structure of the arrangement, set up the joint venture, draft the necessary contracts, and ensure compliance with fraud and abuse laws. Experienced legal counsel is important to ensure that the arrangement does not induce the reduction or limitation of services to Medicare beneficiaries (an improper payment under the Civil Monetary Penalty law) or generate prohibited remuneration under the Anti-Kickback Statute.

Value-based purchasing
Value-based purchasing, a mandatory program that compares hospital performance against external achievement and internal performance, is one of the factors fostering comanagement arrangements. Under comanagement programs, physicians may participate in value-based purchasing programs to help drive quality performance and maintain Medicare reimbursement. The comanagement model, although not required, is particularly helpful in the development of bundled payment arrangements because it aligns physicians and hospitals to enhance service delivery.

Performance demands are increasing. In 2014, hospitals could lose 1.5 percent of Medicare payments under value-based purchasing, up to 3 percent for 30-day readmissions, and as much as 1 percent for hospital-acquired conditions. These reimbursement cuts may prompt hospitals to engage physicians in comanagement arrangements that benefit both.

Cost, timeline, opportunity
Comanagement agreements are an ideal alignment model for musculoskeletal providers, offering an excellent return on investment. Typical development costs for a single service line comanagement program range from $100,000 to $150,000. Programs can be developed in 3 to 6 months if both parties are committed to the task.

The potential financial opportunity for both the base and incentive compensation is typically between 2 percent and 3 percent of the hospital’s annual service line revenue. Comanagement is an excellent opportunity for orthopaedic surgeons as the profession transitions from being proceduralists to musculoskeletal care managers.

James M. Daniel Jr, JD, MBA, and Michelle E. Calloway, JD, CHC, CHCP, are attorneys with the firm of Hancock, Daniel, Johnson & Nagle, PC, in Glen Allen, Va. John Cherf, MD, MPH, MBA, chairs the AAOS Practice Management Committee and is president of OrthoIndex, LLC.

Editor’s Note: The information contained in this article is intended for general information purposes and should not be considered legal advice. Individuals who need legal advice should contact a duly licensed professional.