7 Key Components of Employee Leasing Arrangements

This content is sponsored by HealthCare Appraisers.

Leasing technical and administrative staff from a physician-owned entity can be a practical and economical alternative to employment for many hospitals and health systems. The resources and obligations associated with these arrangements can vary widely, as can the rationale supporting a hospital's decision to enter such arrangements. According to Fred Lara, partner at HealthCare Appraisers, some common scenarios where employee leases are used by hospitals include:

 

  • In connection with a broader management arrangement of an outpatient service-line (e.g., wound care, sleep center, ambulatory surgery center), a physician-owned management company provides the full and part-time staff required;
  • In connection with enhancing care to hospital's inpatients, an orthopedics practice provides full-time physician extenders to the hospital;
  • In connection with providing its patients with access to a specialized medical procedure, a physician-owned company provides a technologist to the hospital on an as-needed basis in connection with the provision of lithotripsy services;
  • In connection with improving community access to specialist services, a hospital provides part-time practice staff as part of a time-share lease of local medical office space to an out-of-town vascular surgeon that provides services for one half-day per week;
  • In connection with aligning with a cardiology practice through a series of transactions designed to provide "turn-key" access to practice's resources, a physician-owned company provides all non-physician staff to a hospital-owned physician practice entity.

Healthcare Appraisers has spent some time understanding how employee leasing arrangements are delivered by a variety market providers including staff leasing companies, employee leasing companies and professional employer organizations. Through their research, "we started to formulate a way we could look at these varied arrangements on a consistent basis. In doing so, we identified various factors that influence a fair market value markup applicable to the underlying staff costs associated with these arrangements," said Mr. Lara. The FMV markup, as might be expected by those familiar with basic valuation principles, is largely dependent on the resources and associated risk assumed by the employee lease provider.

While the underlying concept of an employee lease may be sound, Mr. Lara and Healthcare Appraisers have also noticed that "certain of the operational considerations that should influence value are not always thoroughly considered and memorialized in these arrangements," he said.

Some critical factors to consider in both structuring and valuing employee lease arrangements made with physician-owned entities, according to Healthcare Appraisers, are:

1. Recruitment responsibilities. Explicitly assign the responsibility of finding staff for positions, especially if the contracting relationship is a long-term one. Will the contractor replenish staff as necessary, or will the hospital facilitate this process? When the lease arrangement involves nurses or other clinical personnel, the hospital is often well equipped to facilitate this process. This is a key factor worth memorializing in the lease agreement.

2. Who will take the reins for credentialing and training? Those providers who assume more responsibility and deliver certified and trained staff resources will earn higher markups than their counterparts who shift such responsibility to the hospital.

3. Short term or long term? Is the arrangement filling a temporary need, or will it extend over years. Because of the underlying costs, temporary arrangements involving specialized staff that has been recruited by an employee lease company are eligible for higher markups than a longer term arrangements. If the arrangement has the potential to be long-term, the parties are best served structuring as such from the outset.

4. Full-time, part-time, as needed? Generally, it is easier for a contractor to provide full-time staff rather than part-time staff. Staff provided on a scheduled basis is easier for a contactor to provide than staff provided on an as needed basis. Therefore, markups associated with part-time as needed staff should not also be assigned to full-time scheduled staff.

5. Paid time off? This applies for both short-term and long-term arrangements. Whether it's as long as maternity leave or a brief as an unscheduled sick day, both circumstances may present under an employee lease. It's vital to provide for all eventualities; however, finding replacements for scheduled paid-time-off is much different from finding replacements for a sick day. Organizations should present their expectations for the process up front and know under which circumstances a replacement will be provided. The desired structure is typically driven by the operational need and the type of staff required (e.g., clinical staffing of a sleep lab may be more vital than administrative support to a practice)

6. Volume discount. Markups applicable to lease arrangements involving one full-time equivalent may not be appropriately applied to an arrangement involving 30 FTEs. Certain economies of scale are achievable with a greater number of FTEs, thereby compressing the associated markup.

7. Underlying compensation. It's not necessarily appropriate to use the same markup percentage for an employee receiving $30,000 of compensation and an employee receiving $200,000 of compensation, even if the level of organizational support services similar for the two employees. HealthCare Appraisers' research has determined that market providers typically acknowledge such variance in their markups.

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