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Hospital-Physician Alignment

published in McAfee & Taft Healthcare Industry Legal Update | March 1, 2015

By Michael E. Joseph and Elizabeth L. Dalton

Hospital-physician alignment involves the effective coordination between physicians and hospitals in order to accomplish and prioritize patient care and financial goals. Those goals may relate to better patient-centered care, reduced costs of care, effective communication, interconnected information management systems, improved resource availability, efficiency in hospital operations, data analysis and compilation, better reimbursement, enhanced market position, or other matters.

Historically, hospitals and physicians often experienced adversarial relationships and distrust, in part because of approaches to providing quality care, different reimbursement methodologies, competition, control issues, and a host of other factors. Minimal physician participation in management decision-making at hospitals often resulted in strained and unsupportive working relationships. Hospitals and physicians were dependent on one another, but they operated independently.

Beginning in the 1990s, hospitals began employing physicians and acquiring physician practices, typically to gain leverage in negotiations with payers and to improve hospital revenues by capturing referrals. Many of these early attempts at integration were eventually unraveled as differing reimbursement mechanisms did not foster alignment. However, the precipitous move during the past decade from volume-driven care to other payment arrangements has required hospitals and health system leaders to re-evaluate their strategies with physicians.

The Patient Protection and Affordable Care Act brought about significant changes in health care delivery. It provides a major shift from traditional fee-for-service payment arrangements to value-based, efficiency-based, and performance-based payment arrangements. It also places an emphasis on patient-centered care coordinated by all healthcare providers, particularly with the creation of Accountable Care Organizations, patient-centered medical homes, and clinically integrated care models. Facing increased competition and continuing uncertainty about future reimbursement, hospitals have developed and implemented strategies for close alignment and strong relationships with physicians in order to meet market demands concerning quality, service, efficiency and price.

Physicians are interested in aligning with hospitals and health systems for a variety of reasons. Physician practices are facing enormous financial pressures in conducting medical practice operations, including increasing costs of new technology, malpractice insurance, employee wages and benefits, rent, and other overhead expenses Regulatory issues, such as requirements for reimbursement, electronic health records incentive programs, and security of protected health information, have grown increasingly complex, rendering compliance overly burdensome for all but the largest physician practices. Hospital alignment relieves physicians of many management and administrative responsibilities, leaving more time to spend with patients.

Alignment with hospitals also presents physicians better work life and retirement planning options. Physicians gain access to some of the latest technologies with limited financial risk and somewhat more predictable compensation structures.

Likewise, hospitals and health systems are interested in aligning with physicians for a number of reasons. Alignment enables better coordination over the entire spectrum of patient care needs. Those patient care needs are changing, too. With decreased utilization of inpatient beds and increased focus on ambulatory care, hospitals are more dependent than ever on physicians for referrals and business. Integration allows a hospital to maintain a committed group of physicians and to generally capture their business. Engaging physicians in management and planning enables hospitals to develop quality and safety standards, manage utilization and acquisition of equipment, supplies and other resources, and enhance coordination of care.

Health plans are keenly interested in contracting with healthcare providers who collaborate to improve patient outcomes, promote efficient operations, and effectively control costs. An integrated system has a competitive advantage of providing services not offered by others and enhances the ability of hospitals and physicians to participate in health plans and in narrow networks, direct contracting arrangements with employers, and alternative forms of arrangements with payers. Physicians who do not align themselves with a hospital may find their business dwindles as previous referral sources change referral patterns and bargaining power with health plans erodes.

Hospitals and health systems should evaluate the range of physician alignment strategies and develop a plan. Typically, the focus is physician employment. Other alternatives range from loose affiliations to financial integration. Common strategies include joint ventures, co-management arrangements, gainsharing, professional services agreements, medical director agreements, and physician representation on boards and committees. Hospitals and physicians may jointly contract to form accountable care organizations or clinically integrated networks. They may engage in direct contracting with payers or agree to provide certain services for bundled payments.

Alignment is not without risks. The parties must take into account legal compliance issues, including the Stark law, the Medicare anti-kickback statute, and antitrust, tax, and other regulatory requirements. Cultural differences may be overwhelming. Physicians who are used to owning their own practices may chafe under the direction of hospital leadership. Hospitals that do not manage alignment well may discover that their physicians flee to better managed systems or retire earlier than anticipated. Downward pressures on reimbursement may lead to disputes regarding allocation of ever scarcer dollars.

When contemplating alignment options, hospitals and physicians should jointly develop a vision, identify major goals and obstacles, evaluate expected benefits and burdens, and determine how or even whether a proposed arrangement or structure furthers their stated goals. Ultimately, the alignment must make sense, or it will fail.

If you have any questions about this alert or if we can assist you, please contact one of the lawyers in our Healthcare Industry Practice Group.

This alert has been provided for clients and friends of McAfee & Taft A Professional Corporation. It does not provide legal advice, and is not intended to create a lawyer-client relationship. Readers should not act upon information in this alert without seeking professional counsel.

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