Building a Co-Management Agreement: Legal and Valuation Issues

In a session at the Becker's Hospital Review Annual Meeting on May 17 in Chicago, Scott Safriet of HealthCare Appraisers and Amber McGraw Walsh, partner with McGuireWoods, discussed legal and valuation issues affecting co-management agreements.

Mr. Safriet said service line co-management relationships are generally on the rise, as hospitals look for ever-increasing and innovative ways to partner with physicians and physicians look for alignment possibilities outside hospital employment. The purpose of these arrangements is to recognize and appropriately reward participants for developing, managing and improving the quality and efficiency of a hospital service line.

Possible co-management models
These arrangements can take a multitude of arrangements, Mr. Safriet says. In the first model (direct contract model), the hospital owns the service line and contracts with a management company to provide non-clinical managerial and administrative services. In the direct contract model, the physician group represents the management company. In this model, the hospital wants to be intimately involved, but the governance committee must function in a purely oversight capacity for legal reasons. In some cases, the hospital will be on the governance committee and will complete tasks assigned to the management company, creating an inherent over-compensation bias for the management company.

The second model is a joint venture model, in which the hospital enters a co-management agreement with a joint venture company. In this model, work effort needs to match money flow but not necessarily ownership percentage, Mr. Safriet said.

Compensation considerations
In the typical service line arrangement, there are two distinguishing monetary features: the base fee and the bonus fee. The fixed annual base fee is consistent with the fair market value of the time and efforts of the participating physicians and includes compensation for service line development, management and oversight. There is also a bonus fee, or a series of predetermined payments that are contingent on the achievement of specified, mutually agreed upon targets.

Key legal issues

The anti-kickback statute
This statute prevents the knowing and willful offer, solicitation, payment or receipt of anything of value intended to induce the referral of an individual for which a service may be made by Medicare or Medicaid. The key term here is "knowing and willful," and there are several safe harbors that protect providers from violating the statute. These safe harbors include ensuring that compensation paid to physician groups for management or personal services is fair market value and that "aggregate compensation" is set in advance.

Civil monetary penalties statute
This statute prohibits a hospital from knowingly making a payment (whether directly or indirectly) to a physician as an inducement to reduce or limit services to a Medicare or Medicaid beneficiary. Co-management agreements and structures that incentivize behavior to reduce costs could run afoul of the CMP, according to Ms. Walsh.

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