Hospital-Physician Co-Management Agreements: How to Avoid a Major Pitfall

While co-management agreements between physicians and hospitals are usually successful, hospitals should be on the lookout for one major pitfall.

As hospitals and physicians begin to look for ways to more closely align and work together, an increasingly trendy alignment model to consider is the co-management agreement.

"It's become quite popular," says Heather Delgado, a partner in Barnes & Thornburg's Healthcare practice. Ms. Delgado has worked on several co-management agreements in the last four years, an uptick compared to years past.

One reason the model has spread throughout the nation recently is because reimbursement is changing. With many hospitals and health systems now getting reimbursed based on the value or quality of care they provide, they are increasingly looking for ways to get physicians involved in quality improvement efforts. Service line quality improvement is one of the main tenets of a co-management agreement, as the hospital generally pays incentives to the physicians for meeting certain quality metrics.

To form a co-management agreement, typically the physicians will form a limited liability company, and the LLC contracts with the hospital to manage certain clinical departments — Co-management agreements are commonly found in service lines like orthopedics, cardiology and oncology. The hospital will pay the LLC physicians a base fee for managing the service line, and will it offer an incentive bonus based on patient satisfaction and quality metrics that both groups agreed upon.

"The hospital is trying to gain efficiency of care…and the physicians are getting paid to help with a certain service line and meet quality measures," says Ms. Delgado. "[Physicians] have a vested interest in making sure the service line at the hospital is performing very well. It helps both parties."

The pitfall

While hospitals that enter into co-management agreements with physicians need to take Stark and Anti-Kickback laws into account, there is one less-obvious problem that can greatly impact the success of a co-management agreement. "One of the key components from a regulatory perspective is that all physicians who are members of the management company [or LLC] are active participants," Ms. Delgado says.

This can cause anger amongst the physicians, as hospitals generally pay the group a lump sum and physicians in the LLC divide it amongst themselves. If some member physicians did not contribute as much as others, but still expect an equal share, that can cause trouble. "When you don't have active participation, it makes people upset and fighting starts," she says, which can ultimately lead to the failure of the co-management agreement.

The solution

There are two main steps involved parties can take to avoid this problem, according to Ms. Delgado.

One way to address this pitfall before it happens is to have the physicians work participation language into the LLC contract. The language should define what the group believes it takes to be an "active participant." For example, the physicians may decide that members need to attend eight out of 10 LLC board meetings in order to be considered an active member, and that can be included in the agreement.

Beyond including participation language in the agreement itself, everyone involved needs to be aware of what is required of them in order to make a co-management agreement work. The hospital should explicitly lay out what the arrangement is trying to achieve and the duties everyone needs to perform. "Everyone's expectations should be put out up front so there are no surprises as to who should be doing what," Ms. Delgado says.

Though this problem has arisen in some co-management agreements that Ms. Delgado has seen, it is not widespread in all co-management agreements and the model has still proved to be a successful venture for many hospitals. "To be honest, most of the co-management agreements I've worked on between hospitals and physicians, they've been working very well," she says. "You just have to be careful."

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