Hospital Service Line Co-Management Arrangements: Achieving Efficiency and Quality through Hospital/Physician Alignment

Hospital/physician alignment strategies that foster cooperation and shared goals between hospitals and their medical staffs offer significant opportunities for efficiency and quality improvements.

As payers focus attention on accessibility, quality, and efficiency of medical care and delivery systems, within a framework that promotes accountability and outcomes-based measurement, service line management and co-management arrangements are expanding in scope and popularity.

The Structure of Co-Management Arrangements1

By way of background, co-management arrangements are pay-for-performance oriented programs whereby hospitals engage physicians to manage and improve specific hospital-owned service lines (e.g., cardiovascular, orthopedics, etc.). The primary purpose of these arrangements is to align physician and hospital objectives while recognizing and appropriately rewarding participating physicians for their efforts in managing and improving quality and efficiency.

The core elements of these arrangements, according to Ann S. Brandt, PhD, a Partner at HealthCare Appraisers, are built on the belief that well-defined operational goals can be most effectively achieved when physicians and hospitals work collaboratively. Therefore, these incentive-based co-manaAnn Brandtgement programs are designed with specific objectives and clearly defined performance-based metrics.

Typically, service line management arrangements include:

•    A Base Fee that is a fixed payment, typically paid monthly, that provides compensation for the day-to-day time and effort of the participating physicians in overseeing, managing and improving the service line(s); and
•    An Incentive Fee that can be paid in whole or in part to the extent that pre-determined quality, efficiency and cost-savings objectives are met.

The Determination of Fair Market Value

The increasing popularity of co-management arrangements, coupled with the unique dynamics of each individual hospital, has led to greater variation in their structure and application. As such, these arrangements are being implemented for a broad variety of service lines (and in some instance, across entire hospitals and multi-hospital systems); and therefore; they may represent only one of several arrangements between the hospital(s) and the physicians. Therefore, according to Dr. Brandt, these arrangements must be established with some consideration to tracking the actual performance of the included co-management tasks and incentives. Dr. Brandt also states that the determination of the fair market value of compensation for the co-management arrangement must consider and address the totality of the arrangement, including but not limited to the following:

1) Other arrangements the hospital may have with the physician(s);
2) The methodology used to track and compensate for the achievement of the day-to-day management tasks; and
3) The scope and breadth of the service lines being managed.

"Within our valuation framework, we consider management-related tasks as well as performance-based incentives," says Dr. Brandt. In terms of identifying which performance-based incentives to include in the arrangement, Dr. Brandt says, "We believe that each hospital or health system is in the best position to determine which quality, efficiency and cost-savings goals are most important to their operation on an annual basis."

In December 2012, the U.S. Department of Health & Human Services, Office of Inspector General released Advisory Opinion 12-22 addressing a proposed co-management arrangement in which the co-management entity would be responsible for managing the cath lab service line at a hospital and would receive compensation for both (i) day-to-day management services, including the services of a designated medical director, and (ii) the achievement of quarterly incentive goals. The OIG noted that the proposed arrangement would not satisfy AKS safe harbor requirements for personal services and management contracts because the total of payments were not set in advance and could implicate payment for referrals. However, the first reason OIG cited for not seeking sanctions was that the hospital certified that compensation was being made at fair market value for the services provided under the arrangement. The OIG took into consideration that a determination of fair market value was made by an independent, third party and that a substantial 'basket' of services was to be performed.

"In the last paraJamie McIntyregraph of the Opinion, there is a key takeaway — that the arrangement in practice has to comport with how it was papered and characterized to the OIG," says Jamie McIntyre, JD, Senior Associate at HealthCare Appraisers. "The arrangement and the Opinion are founded on certain key assumptions; for instance, the scope and extent of services to be provided. The Advisory Opinion makes pretty clear that there has to be follow through on those assumptions. When the hospital administers the arrangement, and especially when it's time to make or reconcile payments, it's critical that the hospital has kept track of whether the services were actually performed.

"In the context of an FMV analysis performed in connection with this type of arrangement, where presumably there is both a quality and an administrative aspect, you need to make sure that the representations the FMV opinion is based on — whether it's a certain number of hours performed, services provided, quality incentives or goals — actually materialize. If this isn't the case, and the full payment is disbursed, you might be in an overpayment situation." There must be evidence of follow-through with these requirements and there is no better way to show you are comported than robust documentation.

"We have been asked to look at these arrangements in retrospect to determine whether the documentation of actual services performed marries up to the scope of services that was anticipated when the arrangement was valued and when the fees were set. Our concern is that although the services may have been performed, many hospitals are not keeping a sufficient level of documentation. It might seem like a significant undertaking to develop tracking mechanisms, but in order to administer a compliant arrangement, this tracking component is absolutely essential. If that's not happening," says Ms. McIntyre, "We think that this really becomes the Achilles heel of the arrangement."

Crafting the arrangement

When developing performance incentives, Dr. Brandt suggests establishing tiered payment thresholds such that the physicians are paid a larger percentage of the eligible dollars where higher threshold goals are achieved. For example, the contract could be set with payment levels so the physicians receive 50 percent if they achieve "X" during the applicable measurement period, 75 percent when they achieve "Y" and 100 percent for achieving "Z."

"Since quality and performance incentives are often modeled on nationally-recognized benchmarks, and the hospital is familiar with how to track that data, we tend to find that these are measured and tracked more frequently than the base management tasks that are also an integral part of the arrangement," Dr. Brandt says. "The base management tasks are a key element in the overall management of the service line(s); therefore, those tasks that the hospital indicates will be performed, must be performed and tracked."

According to Ms. McIntyre, the arrangement must also take into account that performance improvement metrics will need to be reassessed annually to determine if performance-based targets need to be readjusted. "In some cases, particularly in quality incentives, there might be significant room for improvement at the outset — maybe the hospital is at 80 percent performance on the SCIP measures and in the first year they want to perform at 88 percent. There is still room for improvement if they meet that 88 percent goal," says Ms. McIntyre. "The hospital may opt to keep incentivizing SCIP performance in the second year, but increase the goal to 90 percent."

These types of tiered performance thresholds also work with efficiency or cost savings incentives. For example, when a 2 percent savings is achieved, the managers receive "X," when 3 percent is achieved they receive "Y," and so on.

"We have also seen programs seek to achieve certificate of excellence status or accreditation in specific subspecialties," says Ms. McIntyre. "The hospital may elect to set up goals that are oriented around achieving those certifications. In this scenario, the incentive would focus on 'milestone' achievements — for instance, the gathering of documentation and quality stats required for an initial application might occur in the first quarter, then submission of the application to the hospital board for approval, then submission of the hospital-approved application to the accreditation agency, etc., might be incentivized as they happen. The important thing to remember is that you have to substantiate why these milestone payments are made, and keep in mind that whatever the goals are, the efforts of the managers should be ongoing over the full term of the agreement in order to support the annual fee."

When performing analyses, "we tend to give hospitals a certain degree of latitude in the development of their incentives, but we remain focused on ensuring that there will be improvement, and that the physicians are compensated based on such improvement," says Dr. Brandt. "In my opinion, one of the biggest hurdles is setting measurable goals that can actually be tracked and documented."

Developing and tracking progress

"The tracking of both base management tasks and performance improvement targets is a fundamental requirement of these types of arrangements," says Dr. Brandt. "These are not passive arrangements; therefore, activities and performance outcomes need to be tracked and documented."

Documentation and progress tracking are often performed within a committee structure. "Hospitals generally establish several physician committees, which are assigned responsibility for performing and tracking certain base management tasks and/or performance improvement initiatives," says Ms. McIntyre. "Minutes of these meetings can serve as documentation of task progress and completion.

"With regard to the underlying base management tasks, a critical element in establishing a tracking mechanism is determining how each task operationalizes so the hospital and participating physicians will know exactly what needs to be done. The operational definition of a certain task — for example, ensuring staff and physician utilization of the hospital’s electronic record system — can vary depending upon the size of the hospital, the state of the hospital's EHR implementation and other operational factors. Clarifying expectations prior to implementing the arrangement, and providing ongoing opportunities for dialogue between the management physicians and the hospital regarding deliverables are critical to the success of the arrangement. These ongoing discussions can be very helpful in terms of identifying deficiencies or achievements on a monthly, quarterly or semi-annual basis. The tracking of established goals and objectives is also going to make the process of setting or revising go-forward expectations much simpler when an arrangement comes due for renewal by ensuring that everyone is already on the same page."

Re-evaluate when necessary

At the end of each year, it is advisable to evaluate and update goals and objectives to further advance the arrangement's purpose. When it's time to renew the arrangement, take special consideration to adjust expectations according to past experience and future potential.

"When renewing a co-management arrangement, it may not be appropriate for the terms of the agreement to stay entirely the same," says Ms. McIntyre. "The parties might find that they were too ambitious at the outset and realize at the end of the first term that the scope of the arrangement needs to be scaled back. Likewise, the success of the arrangement in the first term may dictate an expansion in the breadth of responsibilities delegated to the managers in future terms."

1. For ease in interpretation, the balance of the article primarily relies upon the term “co-management” arrangements. However, in practical application, it is common to refer to these arrangements as co-management only when there is a joint venture entity created in partnership between the physicians and the hospital. If the management company is purely driven by physicians, then the more common nomenclature would be \service line “management” arrangements.

More Articles on Hospital/Physician Relations:
What Healthcare Providers Need to Know About Medicare Physician Performance Assessment
6 Things Hospitals Can Offer to Attract, Retain Top Physicians
Physician Practice Management—A New Chapter


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