Co-management Arrangements: Rewarding Quality and Efficiency Can be a Win-Win

When physicians and other medical providers improve the efficiency and quality of their services, everyone benefits. So how can you ensure these benefits become tangible — and generate real incentives to encourage your practice to continue to improve over time?

One way is to use the system of clinical co-management to implement a rewards structure for participants. To make co-management work for your practice, you must understand its ins and outs.

Co-management arrangements

Co-management typically comes in two forms. In the first arrangement, a hospital contracts with a physician group or several groups to take responsibility for clinical and operational management of a hospital-related facility (such as a satellite primary care clinic) or service line (such as ophthalmology).

Any relationship with a hospital must achieve goals set by both the physicians and the hospital. If only one party benefits, the relationship will be short-lived. It’s also important for the hospital to realize that every action in pursuit of market share and mission fulfillment has an economic impact on its physicians.

In the second arrangement, a separate legal entity — owned by physicians or groups of physicians, or jointly by the physicians and the hospital — is created to provide some of the same services as the hospital itself provides.

Typically, the parties create a compensation agreement that involves a base payment commensurate with the fair market value of the management services provided, plus an incentive fee tied to efficiency and quality objectives. Both parties should seek independent valuations by experienced appraisers to determine the fair market value of the two compensation components.

Control issues

Co-management may be attractive to physicians who want to integrate more closely with a hospital while maintaining their independent practices and not becoming employees of the hospital. With such a close-knit working relationship, the parties must trust each other completely.

The hospital must accept that it will surrender some control over its operations. The physicians, in turn, must understand that they’ll take on substantial managerial and leadership responsibilities within the hospital.

In addition, governance of the separate organization or the operations management (whichever model is chosen) is critical to the success of the arrangement. If it’s a true partnership of physicians and hospital, granting substantial authority to the doctors, their participation should equal or exceed the hospital’s. This will likely present no problem with for-profit hospitals. Tax-exempt hospitals, however, may insist on 50-50 equity arrangements and reserve powers to protect their charitable missions.

Relevant laws

When a hospital and a group of independent physicians collaborate, a number of legal questions emerge. For example, the antikickback law may be violated if the co-management agreement induces physicians to refer patients to the hospital. The Stark law requires that compensation in agreements between a hospital and physicians not be tied to the value or volume of referrals for “designated services.”

A co-management arrangement can take advantage of several available Stark exceptions, however. Ask your CPA and a health care attorney for more information.

The Civil Monetary Penalty statute also must be considered. It prohibits a hospital from making payments to physicians as inducement to reduce or limit services. So, co-management deals should avoid incentive fees based on achieving cost reductions.

Last, 501(c)(3) hospitals can’t use a co-management arrangement to confer private inurement, private benefit or excess benefits to the physicians.

Best advice

Deciding whether a co-management arrangement is right for your practice and, if so, determining  the best co-management structure for your practice — and what the legal implications are — can be difficult. You’ll need the advice of knowledgeable professionals such as health care advisors and attorneys. But in the right circumstances, a co-management arrangement can be a win-win.

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