John C. Erickson III

Experienced community physicians often have ownership interests in businesses in addition to their medical practices. The physicians are typically active participants (rather than merely passive investors) in medically-related businesses. A physician considering hospital employment should consider the potential effect on these types of investments.

The first consideration is whether the potential employer will permit the physician to continue to own/participate in outside medically-related businesses. This typically depends on the nature of the investment activity. If the investment is in a business that competes with the hospital or its affiliates, then the hospital will likely prohibit that investment.

For example, if a physician is an investor in an ambulatory surgical center (ASC), then the employing hospital will very likely require the physician to divest that interest. A physician’s ownership might be at risk from the ASC’s perspective for a related reason. For example, if a hospital requires the physician to refer all cases to hospital facilities, then the physician will likely be deemed a “passive” owner of the ASC. The ASC’s governing rules might require the physician to redeem his/her ownership interest if the physician is no longer an active user of the ASC.

Hospitals typically do not restrict an employed physician’s ownership/participation in businesses that do not compete with the hospital. For example, many physicians own medical office buildings or other medically-related real estate. Some physicians own interests in non-acute health care businesses such as vein centers. Hospitals almost always permit these types of non-competitive interests to continue.

A clinical research business can go either way. If research is part of the hospital’s mission, then it will likely seek a way to integrate the physician’s clinical research business. If not, then the physician is typically permitted to operate the research business independently.

If a hospital requires divestiture of an interest, then the hospital will typically seek to purchase the physician’s interest at fair market value. That might not be practical if, for example, the other investors are physicians who are not affiliated with the hospital. It is also possible that the hospital might offer to enter into a joint venture arrangement related to the outside interest.

A hospital typically will not require a physician to divest ownership in a healthcare manufacturer, supplier, or service company. If the hospital or its affiliates purchase those products or services, then the hospital will carefully review its procurement arrangements for conflicts of interest, commercial terms, and related concerns.

If a physician maintains “outside” ownership interests during employment, then - regardless of the nature of those interests - the employment agreement will typically seek to assure that the outside activities do not interfere with the physician’s ability to perform employment services.

A physician should inventory his/her ownership interests, understand the hospital’s probable position regarding each, determine the economic effect of various options, and then determine the physician’s optimal arrangement (retain all, sell some, other). Understanding this will permit the physician to negotiate with knowledge of the effect of the various probable future arrangements/restrictions. This will assist the physician to assess his/her current arrangements and future employment on an “apples to apples” basis.

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A physician considering hospital employment should also consider the effect on their healthcare business interests outside of their practice.

Hospital Employment and Physicians’ ‘Outside’ Business Interests

A physician who considers hospital employment (including employment by a hospital-affiliated group) must weigh many pros and cons. The potential effect on referrals – both to and from the physician – is one major consideration. A prior article suggested how to assess and possibly mitigate 

the negative effect on upstream referrals

. This article covers the other side of the coin: changes a physician might encounter on her or his ability to refer patients.

Understanding why referrals from a physician might be affected requires an understanding of why hospitals hire physicians in the first place. A primary reason hospitals hire and integrate community physicians is to develop the hospitals’ internal expertise and range of continuum of care. Hospitals seek to develop a strong internal network of primary-care and specialist physicians and related inpatient and outpatient facilities. Hospitals often use physician-assisted management and a unified electronic system to tie it all together.

This objective is both patient-centered and economically rational. A hospital that attracts and retains patients from their initial PCP office visit forward and is able to control the care throughout will almost always be in a better position than otherwise.

Physician referrals are obviously an integral part of retaining patients in a hospital’s continuum of care. If hospital-employed physicians generally refer patients outside of the “system” for consults and procedures, then the hospital will not achieve its primary objectives.

Hospitals approach this issue in one of two ways.

Some hospitals include terms in physician employment agreements that require the physicians to refer within the hospital system unless (i) the patient expresses a preference for a different provider, practitioner, or supplier; (ii) the patient’s insurer determines the provider, practitioner, or supplier; or (iii) the physician believes that the referral is not in the patient’s best medical interests. A hospital that includes this type of contractual restriction must determine that it is reasonably necessary to effectuate the legitimate business purposes of the arrangement with the physician. The Stark Law specifically permits a hospital to impose these referral restrictions, subject to these exceptions/conditions. Consistent with the patient-centered objective related to hiring physicians in the first place, hospitals often determine that retaining patients in its network through this type of restriction leads to better coordination of care, better outcomes, and increased ability to lower risk through a unified, controlled network.

Alternatively, some hospitals do not include any contractual referral restrictions. These hospitals either rely on their quality to drive referrals, simply do not “believe in” referral restrictions, or are unable to include them because of historical physician objections. These hospitals typically have open medical staffs and/or strength in their market. They typically elect to build “destination” programs and rely on the market’s acknowledgment of their superior quality.

A community physician’s gut reaction to a contractual referral restriction will likely be negative. Experience indicates, however, that the restrictions should not be of great concern. On the one hand, a physician that considers hospital employment should believe in and promote that hospital’s network. If a physician is not willing to make downstream referrals within a hospital’s network, then that physician probably should not pursue employment with that hospital - regardless of whether there is a contractual restriction. On the other hand, the Stark Law-required exception regarding a patient’s best medical interests provides a physician wide latitude to refer outside the system. Once again, however, a physician probably should not accept employment with a contractual referral restriction based on the (undisclosed) assumption that she or he will likely refer outside the system on this basis.

The typical and best practice is to address this issue directly during the employment negotiations. If the physician does not already have a predictable referral pattern, then the hospital should ask if the physician would feel comfortable referring patients within the system for typical types of consults or procedures. If the answer is “no,” then this should lead to a discussion of potential physician misperceptions or of specific actions to improve the hospital network’s quality. In any event, a physician should assess hospital employment based on the assumption that the physician will refer to that hospital whenever appropriate.

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A community physician’s gut reaction to a contractual referral restriction will likely be negative … but the restrictions should not be of great concern.

Hospital Employment May Mean New Referral Restrictions for Physicians

A prior article discussed how hospital employment might 

adversely affect a physician’s future patient volume

• The hospital might bill the physician’s patients a clinic/facility fee related to office visits; 
• The hospital might bill current in-office ancillary services as hospital-based services; and
• A specialist might lose referrals that used to come from physicians affiliated with a competing hospital

This article discusses the third potential cause - and how to handle it.

If there are at least two quality hospitals in a community, then it is common for a specialist in private practice to “split” time/referrals between those hospitals. Unless those hospitals employ a sufficient number of physicians of the particular specialty, the “independent” specialist will likely receive referrals from physicians associated with both hospitals.

If the specialist becomes a hospital or hospital group practice employee, then two factors might cause a decrease in referrals to the specialist.

First, physicians who are employed by the “competing” hospital(s) might cease or reduce referring to the specialist. This might be caused by (legal) contractual referral restrictions in the referring physician’s employment agreement. It might also be caused by the employed physician’s loyalty to their hospital and a desire not to advance the cause of a competitor.

Second, community physicians might cease or reduce referrals to the now-employed specialist because the specialist is now likely obligated to perform all procedures for/at the employing hospital. A community physician might have an affinity for a hospital at which the specialist formerly performed procedures - maybe for reasons of quality, proximity, or both. Some independent physicians might direct their referrals to other physicians of the specialty who remain independent. Therefore, a specialist’s employment might cause some referrals to be impractical or just plain undesirable.

A specialist who is considering employment should carefully consider whether he might be subject to reduced referrals for any of the reasons above - and how/whether the lost referrals can be replaced. The first order of business is to project future workload and compensation accurately. This is especially true if the specialist is paid in some degree based on personal productivity. Will past productivity predict future productivity? If a specialist is part of a multi-specialty group that might become employed and pool/share compensation, then these questions should be considered for all types of specialists in the group.

A physician should analyze current referral patterns and referring physician affiliations/dispositions. If a significant portion of current referrals are from physicians affiliated with a hospital that competes with the specialist’s potential employer, then - absent unusual circumstances - the specialist should assume that her productivity will decrease significantly. Many factors will affect the rate at which the specialist might expect to replace that lost productivity. Mitigating factors are whether the employing hospital has excess work and/or a “captive” group of potential referring physicians. Even if they project a near-term referral-related decline in productivity, many physicians project they will rebuild their referral network within three years or so.

A physician who predicts employment/transition-related referral “attrition” should seek contractual protection. A compensation guarantee - a fixed minimum compensation regardless of productivity - is typically not the answer. “Guarantees” (correctly) conjure bad memories for hospital executives who lived through the 1990’s wave of integration and breakups.

Many hospitals are, however, receptive to including terms to identify and compensate for specific transition-related productivity “attrition.” The logic is that the physician should not be penalized for this type of reduction in productivity that is beyond his control.

The methods to deal with transition-related attrition vary. One reasonable method is to identify physicians who have ceased or significantly reduced referrals. Lost productivity (usually measured in wRVUs) can usually be estimated by identifying the typical number of patients each former referred used to refer annually, the procedures performed for the typical referred patient, and the wRVUs associated with those procedures. A small, impartial committee can be used for these assessments. The hospital then credits the physician for the compensation that would have been earned for those “lost” wRVUs.

As always, it is important to look at potential employment from all angles to avoid undesirable surprises.

If the specialist becomes a hospital or hospital group practice employee, then two factors might cause a decrease in referrals.

Will Hospital Employment Mean a Drop in Referrals for Physicians?

Shifting from private practice to hospital employment might adversely affect a physician’s future patient or services volume from three distinct causes:

• The hospital might bill the physician’s patients a clinic/facility fee related to office visits 
• The hospital might bill current in-office ancillary services as hospital-based services
• A specialist might lose referrals that used to come from physicians affiliated with a competing hospital

This article discusses the first two potential causes.

Physicians who become hospital/hospital practice employees - and their patients - might be in for an unpleasant billing-related surprise. A hospital might relocate employed physicians to a hospital-operated clinic or might obtain provider-based status for the physicians’ legacy office locations. In either case, the hospital may bill a separate facility fee for routine office visits. This means that a patient could visit his/her private physician one week and pay a single professional fee and then visit that now-hospital-employed physician the next week in the same office and receive a bill for a professional fee 

If hospital does not properly disclose the separate clinic fee, then it could violate specific disclosure requirements in the provider-based rules.

The potential patient reaction to significantly-higher charges for the “same” services can be just as damaging. A recent article, 

“Outpatient sticker shock: $538 for a 3-minute treatment,”

 provides an extreme example of patient “dissatisfaction” regarding unanticipated facility fees. After receiving a $318 bill for a facility fee for an office visit that involved wart removal, a patient’s mother filed a class action lawsuit alleging that local non-profit hospitals engage in “deceptive practices” by charging undisclosed facility fees related to acquired physician practices.

An employed physician paid on a productivity basis is at risk that the facility fees will reduce patient volume and, therefore, physician compensation.



Ancillary Services Billed at Hospital Rates

Even if a hospital does not bill a clinic fee, it might convert certain office-based ancillary procedures to hospital procedures. If a hospital is able to convert a portion of a private office location into a “provider-based” location, then the hospital may bill at hospital rates procedures that the practice formerly billed as in-office procedures. For some procedures, such as cardiovascular diagnostic imaging, hospital-based reimbursement is significantly higher than office-based reimbursement.

The potential surprise for patients is not that they are receiving a bill for the procedures - it is the amount of that bill. Hospital billing for formerly-office-based procedures might adversely affect patients in two ways. First, the co-insurance they will owe on an allowable charge will be higher if that allowable charge is higher. Second, commercial plans typically have separate deductibles and co-insurance percentages for physician services and hospital services. Therefore, a commercial patient who might have owed co-insurance at the physician rate (or even just an office visit co-pay) might instead owe the entirety of the allowable charge for the same procedure billed as a hospital-based procedure.

Higher patient out-of-pocket costs can cause patients to decline ancillary services or to obtain them elsewhere. This could affect employed physicians by decreasing their patient base and by reducing the volume of professional services. Fewer diagnostic imaging studies means fewer interpretations, which means lower productivity.

The point of this article is not that facility fees are necessarily “bad” for patients. Near-term higher costs are an integral part of the reimbursement incentives the government and commercial payers are offering to encourage integration.

The message is that physicians contemplating hospital employment should ask whether the hospital intends to “split bill” by charging a clinic/facility fee for office visits or “provider-base” the ancillary services currently provided in the physician’s office. The answer will likely depend on the nature of the local market. If it is an open issue, then a physician should nearly always seek to obtain agreement that the hospital will not bill a clinic fee. If a clinic fee or provider-based ancillary services are inevitable, then the physician should model the likely adverse effect on patient volume and the physician’s compensation and, if possible, negotiate to mitigate those effects.

Here are two potential issues that might adversely affect a physicians’ future patient or services volume by becoming employed by a hospital.

Hospital Clinic/Technical Fees Can Affect Employed Physician Compensation

 described clinical co-management agreements - arrangements in which hospitals tap physicians to manage hospital service lines. This article discusses co-management entities, how physicians participate, and related fees.

There are several ways physicians are organized to provide clinical co-management services, including:

• Clinical Institutes
• Joint Ventures
• Direct Arrangements with Independent Groups

Clinical institutes are designed to become integral parts of future ACOs. In this model, a hospital forms an “institute” (e.g., 

 Gastroenterology Institute) that usually employs some physicians on a full-time basis. The institute also might offer “membership” to physicians in independent practices. Membership criteria attempt to ensure that independent physician members are sufficiently connected to the hospital to assist to manage on of its service lines.

It is less common for hospitals and physicians to form co-management joint ventures. These JVs are owned by hospitals and independent (or, less frequently, hospital-employed) physicians and exist solely to perform a co-management agreement. Some of the physician owners provide medical director services for the hospital. All physician owners and the hospital assist the JV to perform the broader co-management services. JVs distribute earnings to the physicians and hospital based on their relative ownership.

A third type of arrangement is a direct agreement between a hospital and an independent group. This allows a hospital to associate with, and benefit from the management skills of, an independent group without incurring the costs or mutual risks of employment. If a hospital engages more than one independent group to manage a single service line, then the groups often form a joint venture to organize their resources.

Fees for co-management services are evolving.

Co-management services used to be generally administrative in nature. As a result, the fees were usually determined on a dollars-per-hour basis for those oversight services.

Today’s co-management arrangements seek to elevate service line quality and efficiency by taking full advantage of physicians’ unique skills and position in the hospital environment. Physician buy-in and direct leadership combine to drive beneficial changes that hospitals cannot effect without them. As a result, modern service line management agreements typically involve two distinct types of services.

First, there are the medical directorship services that are necessary to run any quality service line. A hospital typically pays the co-manager a per-hour fee for these services.

Second, the agreements often state a set of specific measurable annual quality and efficiency objectives (e.g., reduce the re-admission rate for 

 percent). The manager earns a fee/bonus for each objective it achieves. The fee for each objective is “at risk” because the manager receives nothing if it is not achieved (or a lesser amount for partial success). Properly structured, this type of arrangement can align hospital-physician incentives to achieve the “Holy Grail” of improving patient outcomes with greater efficiency/lower cost.

Co-management arrangements will continue to gain momentum if they achieve the lofty goals that currently seem reachable (and as long ACOs remain on the horizon).

Here are some details on clinical co-management entities, how physicians participate, and related compensation.

Clinical Co-Management Models and Compensation

Hospitals are integrating with physicians in ways other than, and in addition to, employment. A “co-management” arrangement is a form of integration that does not require employment and that can be used to further integration with employed physicians.

A co-management arrangement arises when a hospital engages physicians to assist the hospital to manage some of its business. A typical arrangement involves the engagement of specialists to “co-manage” a hospital’s related service line. For example, a hospital might engage gastroenterologists to assist the hospital to manage its entire digestive disease service line.

The management services that physicians provide do not typically duplicate services that the hospital’s existing staff provides. Instead, the management services often concern high-level matters that are directly within physicians’ expertise. For example, a co-management arrangement will nearly always involve/incorporate all of the medical directorship duties/positions that individual physicians would otherwise provide. Other typical responsibilities include managing operating room or cath lab scheduling, developing specialty-specific protocols for admitted patients, and establishing specific inpatient and outpatient quality and efficiency objectives and implementing plans to achieve them.

The “co-” portion of “co-management” recognizes that at some level the management is a joint effort between the hospital and the physicians. There are several areas of potential connection. First, hospital representatives nearly always participate in the management decision-making process. The legal entity that provides the co-management services typically has an executive board, quality committee, and operations committee. Hospital representatives would participate (in a minority role) on each. Second, changes in hospital practices that result from the management services are nearly always subject to a hospital-established budget and other hospital-governed financial parameters. This control arises in part because of rules that require tax-exempt entities to control their operations. Third, sometimes (though not often) a hospital is a member of a joint venture with physicians that provides the management services.

Co-management arrangements can benefit physicians by permitting them to integrate with their preferred hospital to improve that hospital’s quality and efficiency in the specific areas that matter to the physicians. Another potential benefit of these arrangements is that they do not necessarily require the physicians to be employed by the hospitals. As a result, some independent physician groups view co-management as a means to test drive whether working with a hospital is to their liking.

From the hospital perspective, service line management by a select group of dedicated independent community physicians could be, in theory, as effective as management by hospital-employed physicians. The difficult part can be to determine what standards should apply to determine when a physician is sufficiently “dedicated” to that hospital’s operations to permit that physician to participate in its management. Because management opportunities involve compensation, a physician’s level of referrals to the hospital is not a prudent measure of “dedication.” Physicians that a hospital employs full time are always considered sufficiently dedicated to participate in co-management arrangements.

My next article will address some of the ways that co-management entities are structured, how physician members are selected, and some of the typical methods that hospitals use to determine the compensation to pay for co-management services.

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Hospitals are integrating with physicians in ways other than, and in addition to, employment.