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7 Things Hospitals Should Know About Professional Services Agreements

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Nary has a day gone by for hospital executives when they have not thought about how to improve their physician alignment strategies. The upcoming decades of healthcare will require hospitals and physicians to work together seamlessly. For many physicians, this may require losing some medical independence, and for many hospitals, this may involve a greater financial requirement.

While hospital employment of physicians is clearly more of a reality than a trend to muse about — more than 20 percent of the active physician workforce is an employee of a hospital, according to the American Hospital Association Hospital Statistics 2012 Edition — it may not be the answer for every organization or physician. Alignment between hospitals and physicians can still be achieved without true employment through a variety of strategies, including co-management agreements, medical directorships and joint ventures. One strategy has been gaining momentum and is working its way to the forefront: professional services agreements.

1. Basic tenets of PSAs. A recent whitepaper from the Coker Group described PSAs as "employment lite" because they "serve as an alternative to the primary structure considered under full integration — employment."

PSAs, in a nutshell, are a form of alignment between hospitals and physicians that falls just short of full employment. "It's used as 'employment lite' because the physician is not directly employed and still maintains some semblance of control," says Bart Walker, JD, associate at McGuireWoods.

PSAs should not be confused with clinical co-managements, directorships or other professional arrangements — they are their own beast, and they generally fall into four models, according to the Coker Group.

•    Traditional PSA. A hospital contracts with physicians for certain, outlined professional services, and the hospital directly employs the group staff and takes care of the administrative costs.

•    Global payment PSA. A hospital contracts with a physician practice at a global payment rate, which includes physician compensation and all administrative expenses, but the practice keeps all management responsibilities.

•    Practice management arrangement. Although the hospital employs the physicians, the practice structure is retained, and the practice contracts with the hospital for management services. The practice still employs the administrative staff and provides their services in a separate agreement.

•    Hybrid arrangements. Less common among the options, hybrid arrangements involve various scenarios where hospitals and physicians mix and match contracts for both professional and administrative services.

PSAs could be the right course of action for some hospitals and physicians, according to the whitepaper, because it gives the two groups a cushion to see if they could work as long-term professional partners. In addition, PSAs could lead to easy segues into full employment or enable physicians to transition back into full-fledged private practice.

2. Fair market value. Once hospitals familiarize themselves with the different PSA options, Mr. Walker says the most important component of any deal is fair market value. Regardless of the type of contract or model of productivity, hospitals are required to compensate physicians appropriately for the services actually provided but in a way that is different from full employment.

At the end of the day, some type of productivity metric or work relative value unit per procedure will be used for compensation measures. Amber McGraw Walsh, JD, partner at McGuireWoods, says impartial valuation is essential to maintain fair market value. "Unequivocally, because fair market value is so important, it is really strongly recommended there be an independent, third-party valuation," Ms. Walsh says. "It's almost a must in this situation."

3. Compliance with Stark Law. Between the new regulations of the Patient Protection and Affordable Care Act and older healthcare regulations that span decades, it can sometimes be difficult for both hospitals and physicians to monitor all areas of legal compliance. The Stark Law is no exception, as the possibility of physician benefits from self-referrals for Medicare and Medicaid patients must be rooted out of any PSA.

Ms. Walsh says fair market value is a critical piece of meeting all regulatory and Stark requirements of PSAs, and hospitals and physicians should also be cognizant of all other elements of the available Stark Law exceptions. The available exceptions are those for personal services, physicians practicing in rural areas and possibly the fair market value exception. All elements of at least one exception must be met in order to ensure Stark compliance.

4. Compliance with federal Anti-Kickback Statute. Similar to the Stark Law, physicians and hospitals cannot violate the stipulations surrounding the federal Anti-Kickback Statute. Hospitals and physicians should determine with their legal teams whether they fall under certain safe harbors, such as the personal services/management safe harbor or medically underserved areas. PSAs need to be crafted in a way to ensure there is no direct or indirect kickback from the referrals to the hospital of Medicare and Medicaid patients.

"It's important to structure PSAs in consideration of the intent of a party to provide good patient care to a section of the hospital where the need is not being fulfilled — and not to [just] generate referrals for hospitals," Ms. Walsh says.

5. Consideration of state law. The Stark Law and Anti-Kickback Statute cover federal regulatory issues, but Mr. Walker and Ms. Walsh emphasized the buck does not stop there for PSAs. When creating the right "employment lite" contract, hospitals and physicians must confirm they are also in compliance with any state laws that involve physician employment (such as the corporate practice of medicine laws in states like California) or hospital-physician referrals. "Some states have their own modifications in some instances that are stricter than Stark and the Anti-Kickback Statute," Ms. Walsh says. "Understand and be compliant with state laws as well."

6. Periodic review of the relationship. Just like regular, full-time employees, hospitals should not rest on their laurels when it comes to their PSAs. There should be consistent review to make sure the agreements are still being met on both sides, that the right amount of work is being completed and that the physicians are still a good match for the hospital and its service lines. Periodic review of PSAs also gives the reassurance that all parties are still meeting the requirements of federal and state healthcare laws.

"It's critical — because there is ongoing compliance with Stark, Anti-Kickback and state laws — to ensure you are doing periodic reviews of the relationship to ensure services are being provided, that services are still needed, and that parties are operating within compliance of the agreement," Ms. Walsh says. "If there has been a change in agreement or compensation has changed, then you need to reassess if you should continue the relationship."

Mr. Walker adds that PSAs should be updated, for example, if a hospital acquires an ambulatory surgery center and converts it into a hospital outpatient department. This will help assure compliance with provider-based status rules and evolving restrictions on physician compensation relationships.

7. Documentation of all aspects of relationship. As an offshoot to periodic reviews of PSAs, Ms. Walsh says every component of the PSA must be recorded and documented to ensure both parties are doing what is expected of them. For example, are physicians turning in documented hours of the services they are providing? Having electronic and hard copies of this information is a legal no-brainer for both hospitals and physicians, especially in today's intense regulatory environment, she says.

More Articles on Professional Service Agreements:

4 Tips on Reducing the Frustrations of the FMV Process for Physician Service Agreements

Webinar Discusses Hospital-Physician Affiliation Trends and Best Practices

5 Tips for Aligning Physicians Through Contracts

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