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Hospital-Physician Alignment Options in a Rapidly Changing Environment

July 1, 2016

Healthcare Resources Group

Healthcare reform has significantly changed the healthcare industry over the last several years, creating new reimbursement and care delivery models. As the competition for talent, technology, specialties and patients increases, many hospitals have aligned with physician groups as a way to streamline costs while increasing the breadth and quality of their services.

Hospital-physician alignment encourages providers to treat a patient’s entire episode of care, from the patient’s first visit to completion of the course of treatment, driving out unnecessary tests and expenses along the way. By reducing cost and increasing efficiency, providers hope to improve patient experience and population health as well as reduce per capita cost of care, fulfilling the Institute for Healthcare Improvement (IHI) Triple Aim Initiative. Providers also hope this enables them to serve more patients and retain enough margin to support continuing operations.

While an increasing number of physician groups have already aligned with hospitals, there are still opportunities for alignment in the marketplace. As hospitals are competing head-to-head with one another for the same patients, many are looking to strengthen their positions by developing subspecialty services such as surgery programs and other preventive care programs.

Overcoming history

The current day consolidation is not the first time hospitals and physicians have tried to align. In the 1990s, in response to more aggressive managed care and capitated reimbursements, the healthcare industry attempted to align incentives through hospital employment of physicians.  These partnerships were often unsuccessful due to large hospital losses on physician employment arrangements.

Because of the rocky history with hospital-physician integration, alignment arrangements, practice integration or employee absorption can be touchy issues. Parties can be skeptical, so navigating alignment conversations requires careful negotiation and compromise. Having several conversations prior to discussing the actual logistics of an alignment arrangement will help build trust between the parties before moving forward.

New structures

There are many different types of alignment models with scaled levels of integration. For example, a medical directorship agreement does not require a significant level of integration between the hospital and physician, but a co-management agreement requires greater trust and integration among the parties. Once the hospital-physician alignment arrangement enters the bundled payment or ACO level, providers are much more integrated and closely aligned.

The list below outlines various alignment structures from least to most integrated.

  • Medical Directorships and Call Coverage Stipends: As the lowest risk options during early alignment, these compensation structures may help begin the transition for incoming physicians or practice groups who must also assume additional hospital-related responsibilities like call coverage.
  • Management Services: This structure covers such variables as developing clinical pathways and protocols, revenue cycle, HR, and IT and can be hospital-owned, a joint venture or owned by the physician practice. It also provides compensation to the physicians for time invested outside of direct patient care.
  • Clinical Co-management/Service-line Management: These two structure compensate physicians for administrative services in addition to providing incentives for meeting established metrics. Metrics may include patient care, patient experience, improved quality and improved financial performance.
  • Institute Development: While very similar to co-management and service-line management arrangements, institutes differ in that they are more formal. Institutes are designed to include a variety of providers who participate in the delivery of patient care for a specific service line. They also tend to focus on delivery of care across multiple facilities.
  • Employment Lite/Professional Service Agreements: The practice remains private in this lite version of conventional employment, but the hospital owns its receivables, providing payments to the practice on a work relative value unit (wRVU) basis.
  • Traditional Employment: In this model, the physicians and their employees become employed by the hospital.
  • Bundled Payments: Bundled payment initiatives may be formed regardless of the provider’s employment status with the hospital or health system. The Center for Medicare and Medicaid Services (CMS) is beginning to evaluate providing a single payment for services to a single entity and allowing that entity to distribute the reimbursement based on internally developed criteria. These payments are generally for the entire episode of care. Bundled payment arrangements work best after providers throughout the continuum of care have started working together in the previously mentioned structures.
  • Accountable Care Organizations (ACOs): These organizations are being formed by providers to span across the full continuum of patient care. ACO development is designed to integrate providers, enabling them to work together to improve patient care and divide reimbursement equitably. Short of full employment, this is the most integrated model seen in healthcare today. The full continuum of care includes: initial patient visits, outpatient testing and diagnostics, inpatient and outpatient hospital care, and post-acute and rehabilitation services. ACOs are encouraged and rewarded by CMS.

After initial conversations lead to a more detailed discussion of hospital-physician alignment options, it is crucial to go slow and be thoughtful. Not every relationship works out, so it is critical to plan and establish long- and short-term goals. Creating an affiliation structure that brings both parties together in a non-threatening arrangement is the first priority. The initial contract for these alignments is typically three to five years, and most renewals are also three to five years. In these arrangements, hospitals do have an advantage at contract renewal, particularly when there is a non-compete agreement in place. As the relationship grows, the affiliation can be reevaluated and may include tighter alignment alternatives that benefit both parties.

The Future

Market forces are driving these alignment options; until the market changes – and rather drastically – these models are likely here to stay. Given the new reimbursement and care delivery models, hospital-physician alignment is one of the primary means by which medical providers are staying competitive. It’s important for providers to figure out the best alignment option for them to maintain the viability of their practices in this environment of consolidation.


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