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AAOS Now

Published 7/1/2015
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Jennie McKee

Weighing the Pros and Cons of Hospital Affiliation

Expert explores various affiliation models

Orthopaedic groups and hospitals are under significant pressure to manage costs, maintain quality, reduce hospital readmissions, implement electronic health records systems, and meet many other challenges.

According to Jeff Boomershine, CPA, “in the last few years, there has been a frenzy of hospitals and physicians trying to figure out ways to work together” to address these issues.

“Everybody knows that large health systems are acquiring primary care practices,” said Mr. Boomershine, noting that the systems have also been affiliating with specialists, such as cardiologists and orthopaedic surgeons.

The relationship between a practice and hospital may vary greatly under different affiliation models, depending on factors such as the goals and capabilities of the participating physician groups and the hospitals and/or health systems.

Mr. Boomershine, of Indianapolis-based Somerset CPAs and Advisors, described different types of hospital affiliation models during the 2015 annual conference of the American Association of Orthopaedic Executives (AAOE). He has been a healthcare consultant for 19 years and formerly served as chief financial officer of two medical groups.

Comanagement agreements
Orthopaedists interested in some form of affiliation with a hospital might consider a comanagement agreement, sometimes known as a service line agreement.

“Generally speaking, the industry considers a comanagement agreement to be one involving management services, which is jointly owned by the practice and the hospital, from an equity perspective,” he said. “So, the hospital is a partner in the management service itself, rather than just having a contractual management agreement.”

A comanagement model, he explained, most often involves the hospital, the physician group, and a dedicated limited liability holding company (LLC). The holding company holds the services agreement with the hospital. This agreement stipulates that the practice provide contracted management services to the hospital in exchange for some type of compensation, such as a monthly management fee with performance measures attached to it related to quality, operations, and cost management.

To succeed with a comanagement agreement, the practice must have a good dialogue with the hospital. The practice should also be aware of the hospital’s and hospital system’s issues, as well as physicians’ concerns, which typically involve inpatient matters, said Mr. Boomershine.

He advised practices to hold regular, meaningful meetings with the hospital and involve the appropriate level of hospital leadership.

“If physicians are involved in the management of the service line—similar to making hiring and firing decisions regarding staff members in a surgery center, for instance—decisions can be made more quickly and alleviate physicians’ frustrations,” he said.

One variation on a comanagement model involves multiple groups that remain separate for a reason.

“If groups can’t get along, the service line steering committee or management oversight committee in which the hospital participates will have oversight of two separate management agreements,” said Mr. Boomershine. “I really don’t like this model at all because it increases administrative issues and adds complexity. It allows the two groups to stay too separate, which can create problems in coordinating how the service lines run.”

In another comanagement model, the hospital is a participant in the dedicated LLC.

“Often, these will be set up as 50/50 ownership between the hospital and one or several groups,” he said. “There are variations in how this can be structured to balance ownership. This type of agreement adds a little more complexity regarding regulatory issues. It also reduces the economics and flexibility slightly, because everything—economics and management decisions, as well as the service line—has to go through the hospital as well.”

One good outcome of comanagement agreements is more effective interactions between the physicians and the hospitals. This model “really beefs up the quality of the information that is being provided to the physicians, but it does take some time for that to happen,” said Mr. Boomershine.

PSAs, Reverse MSOs
Mr. Boomershine described several forms of professional services agreements, or PSAs, including one in which the physician group sells its physical practice assets to the hospital.

“But in this model, the physicians don’t necessarily want to be employed yet—they prefer to maintain their autonomy,” he said. “The physicians keep the professional corporation alive and are, in essence, leasing assets to the enterprise. There is a single PSA between the group and the enterprise, rather than individual agreements.”

PSAs can be very detailed as far as specifying how much ability the hospital might have to individually select physicians to participate in them.

“Generally, you want to avoid the hospital selecting physicians to participate in the PSA as much as possible,” he said. “The physician group needs to have that level of governance.”

The PSA fee is structured in such a way that physician compensation and benefits are paid through the PSA, making it possible to maintain fairly richly defined benefit and retirement plans, according to Mr. Boomershire.

“The flip side of a PSA arrangement is sometimes referred to as the reverse management services organization, or MSO,” he said. Normally, an MSO is owned by a physician group, physician hospital joint venture, or physicians and investors.

“In a reverse MSO, the physician group wants to stay intact for the purposes of providing the management, billing, coding, and collecting services for that group of physicians. But the physicians actually do want to move over and become employed by the physician enterprise at the hospital,” he said.

In this model, he explained, the physician practice is kept alive and the physicians lease their services over to the physician enterprise. The physicians, however, have not moved over to the employment model.

Full hospital employment
“Many stories I have heard from physicians who have transitioned to full employment revolve around frustrations over staffing levels, frustrations over space and utilization as the hospital tries to cut back on operating expenses, and physicians losing offices and sharing cubicles with two other people—the types of things that affect their day-to-day lives and can really impact productivity and their professional lives in general,” said Mr. Boomershine. “A full employment model generally provides less control on the physician side, as far as operations, but can provide a higher degree of comfort for those who do not wish to be involved in day-to-day operations, such as oversight of coding and collecting in the revenue cycle.”

Currently, said Mr. Boomershine, “in orthopaedics, we are not seeing a rush over to hospital systems, for either full employment or PSAs, but there have been a few very significant PSAs created in the last year. More commonly, what we’re seeing is that the orthopaedic groups with generally robust ancillary services through magnetic resonance imaging (MRI), ambulatory surgical centers (ASCs), or other revenue streams outside of professional services often have a difficult time replicating that degree of income within a hospital model.”

When an orthopaedic practice transitions to a hospital-employed model, the practice is often not able to keep an MRI in that practice, said Mr. Boomershine. Similarly, the hospital will often want the practice to divest of ASC ownership.

“Some of the negotiations I have seen for hospital-affiliated models have involved orthopaedic surgeons who have gotten into heated discussions about continued participation in the ASCs as hospital-employed physicians, especially if it’s in a market where the hospital feels the physicians would be working with a partner that is not in the hospital’s family of corporate entities,” he said.

Regardless of the type of affiliation model an orthopaedic practice chooses to pursue, summed up Mr. Boomershine, the emphasis on managing clinical and interdisciplinary issues, as well as risks and costs, will increase as part of the effort to improve quality in the U.S. healthcare system.

Jennie McKee is a senior science writer for AAOS Now. She can be reached at mckee@aaos.org

Editor’s note: This article provides general information only and is not to be considered legal advice. For specific questions or advice, consult a qualified professional.