In a time of industry consolidation, the key to success is understanding and creating the right legal entity. Learn what options are available and how to more effectively succeed in these models.
Margin pressures, patient experience expectations, technology requirements and overhead, along with evolving healthcare policy, are driving simultaneous change throughout the industry. The drive and pressure to reduce costs and deliver value will intensify among industry stakeholders, resulting in new models of care, new partnerships, and new demands for each to clearly delineate the value they contribute. Along with cost pressures, competition from sources such as retail health, concierge medicine, and mobile technology are changing the healthcare market. One way many hospitals and health systems are keeping pace is to explore new partnerships or joint ventures.
When considering various partnerships, organizations must think carefully about their goals and desired outcome. For example, if an organization is seeking to maintain some element of independence, an affiliation around management services may be best. If an organization is simply seeking the ability to refer and leverage resources, a contractual partnership formation may be best. Or, if the deal involves purchase of asset/equity or change of governance, the structure would be ownership or employment via merger or acquisition.
The options for partnership can seem daunting. In the first of a two-part series, the following identifies some of the levels of partnership and defines what they are.
1) Affiliation through Management Services
As a lightweight affiliation, these programs provide support and managed services to physicians; typically in technology, training, revenue cycle, marketing programs and other administrative support services. The focus is on removing administrative burden and improving independent physician practice performance and satisfaction, while aligning goals between physicians, hospitals and/or health systems. Given the large costs and burdens associated to healthcare administrative overhead, these affiliations can provide real value to providers.
2) Partnership through Contractual Ventures
Most contractual ventures are entered into to improve efficiency, increase negotiating leverage, elevate service line performance and for provider organizations to participate in new alternative payment models like an Accountable Care Organization (ACO). Ventures can range from programs such as pay-for-performance initiatives to comprehensive management services organizations and traditionally have been focused initiatives, with a term of two or three years. An overview of some of the more common options follows:
i) Clinical Integration (CI) Program
CI programs are specific legal arrangements defining collaboration between independent and employed physicians and hospitals to increase quality and efficiency of patient care and allow for joint contracting with health plans. Besides extensive direct physician employment, a CI program is the most effective way to create the management, incentives, care coordination and infrastructure for health systems to improve quality and efficiency. CI programs need to aggregate and benchmark data for the entire network, with the aim of negotiating favorable risk-based or shared savings performance contracts with plans.
ii) Co-management Agreement
A co-management agreement involves a contractual agreement between a hospital and management services company (typically a new company) or a group of individual physicians intended to elevate hospital service line performance. The physicians agree to perform clinical and management services with specific improvement targets in exchange for a predetermined fee. The co-management agreement typically requires the medical group to enhance or expand the service line, improve operations and, most importantly, align the goals of the physicians and the hospital around delivering high quality health care. The agreement also generally requires physician participation in operational roles, such as developing clinical protocols and case management services, establishing annual budgets and measuring physician and staff satisfaction.
iii) Management Services Organization (MSO)
Under an MSO, a new division or company is formed for the purpose of managing a defined set of activities for the members of their medical staff. MSOs have gained popularity, especially for clinical technology and revenue cycle management, where infrastructure investments can be spread across a larger physician base. By aggregating volume, MSOs obtain economies of scale to obtain preferred pricing on everything from medical supplies to healthcare insurance. These agreements usually include higher service-level standards for key financial, service and quality factors.
iv) Physician-Hospital Organization (PHO)
A PHO is a legal entity formed by a hospital and one or more physicians or physician groups to further mutual goals, including negotiating and obtaining contracts with insurance plans and employers. The PHO serves as a collective negotiating and contracting unit. In most PHOs, a payer submits fee schedules to an agent or third party, who transmits this schedule to the network physicians. Each physician can decide individually to accept or reject that fee schedule. PHOs may also own, operate or subcontract Management Service Organizations (MSOs), health plans or providers and a PHO can manage risk. It is typically owned and governed jointly by a hospital and shareholder physicians.
v) Professional Services Arrangement (PSA)
A PSA is financial relationship between a physician practice and a hospital where the practice remains autonomous but the physicians are compensated by the hospital at a fair market value for their services. The practice staff and, often, some administrative activities are managed by the hospital. It is the most common direct contractual arrangement between hospitals and hospital-based physicians or physician groups for professional services provided by the physicians. Physicians like that PSA’s provide a high level of self-governance, decision making and compensation distribution. PSAs can also reduce administrative burdens associated with managing and operating a full-service physician practice. For hospitals, PSAs can be an effective first step to integration.
3) Merger through Ownership Stakes
When the deal involves a purchase of assets or a change of governance, organizations usually enter into equity deals. These can be either short or long-term arrangements and involve risk and upside sharing between a hospital or health system and one or more physician groups or individual physicians to form and operate a common organization. Typical facilities that enter these arrangements include imaging facilities, outpatient treatment and diagnostic facilities, ambulatory surgery centers, endoscopy centers and urgent care centers and revenues are typically distributed based upon the organization’s proportionate investments.
4) Acquisition and Employment
Finally, many hospitals and health systems are employing physicians. For these hospitals, the goals of employment are to secure physician loyalty, increase service volumes and achieve integrated, efficient and high-quality care across the care continuum under a value-based delivery model, such as an ACO. Due to the shift in value reimbursements, the volume of practice acquisition has increased significantly. Examples range from employment by independent foundations or joint ventures to direct employment by hospitals. For providers, balancing the loss of medical practice autonomy with increased access to shared services and resources, clinical integration, shifting reimbursement models and new patient panels are important considerations.
As healthcare organizations seek to partner, merge or form some other type of legal entity, knowing the different types of entities and pursuing the one that makes the most sense for your organization is critical to the success of your new venture. The second of a two-part series will explore how to create more effective partnerships, when each relationship makes sense, and what you should watch out for in exploring a partnership.
About the Authors:
Matt Henry and Dan Avery are principal consultants with Point B, a management consulting firm. Matt Henry is a leader in Point B’s national healthcare practice and Dan Avery leads Point B’s Merger and Acquisition practice.
The views, opinions and positions expressed within these guest posts are those of the author alone and do not represent those of Becker's Hospital Review/Becker's Healthcare. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.