United States: Co-Management Arrangements: Rewarding Quality And Efficiency Can Be A Win-Win

Last Updated: November 6 2017
Article by Jason Flahive

In the pay-for-outcomes healthcare world that the industry is moving toward, there is an increasing emphasis on the quality of care. One way for physicians and other medical providers to improve the efficiency and quality of their services is to use the system of clinical co-management to implement a rewards structure for participants. This article describes co-management arrangements and discusses their control issues, legal implications and how they can be beneficial to everyone involved.

Everyone benefits when physicians and other medical providers improve the efficiency and quality of their services. So, how can you ensure that these benefits become tangible and generate real incentives to encourage your practice to continue to improve over time? One method is to use a clinical co-management system to implement a rewards structure for participants. However, in order to make a co-management arrangement work for your practice, you must first understand its ins and outs.

Co-Management Arrangements

Co-management arrangements are most commonly set up through a management company—organized as a separate legal entity, usually an LLC—owned solely by physicians or jointly by the physicians and the hospital.

Under a co-management arrangement, a hospital coordinates with the LLC to take responsibility for clinical and operational management of hospital-related facilities and service lines, such as surgical centers or satellite primary care clinics, with the goal of improving efficiency and quality of care.

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

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 appealing to physicians who want to closely integrate with a hospital, while simultaneously maintaining their independent practice and not becoming employees of the hospital. With such a close-knit working relationship, the parties must trust each other completely.

Furthermore, the hospital must accept that it will surrender some control over its operations, whereas the physicians must understand that they will take on substantial managerial and leadership responsibilities within the hospital.

In addition, governance by the management company is critical to the success of the arrangement. If it is a true partnership of physicians and hospitals, the management company's participation should equal or exceed that of the hospital. This should not be an issue with for-profit hospitals. However, tax-exempt hospitals may insist on 50-50 equity arrangements and reserve powers to protect their charitable missions.

Proceed With Caution

When a hospital and a group of independent physicians collaborate, a number of legal questions emerge. For example, the Anti-Kickback Statute 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 should not be tied to the value or volume of referrals for designated services. However, a co-management arrangement may be able to take advantage of several available Stark exceptions.

Furthermore, the Civil Monetary Penalties Law must also be considered. This law prohibits a hospital from making payments to physicians as inducement to reduce or limit services. Consequently, co-management deals should avoid incentive fees based on achieving cost reductions.

Lastly, 501(c)(3) hospitals cannot 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 can be difficult. You will need the advice of knowledgeable professionals, such as health care advisors and attorneys. In the right circumstances, a co-management arrangement can be a win-win.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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