Developing a Co-Management Agreement Between Your Business and a Hospital System

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When selling one’s urgent care or other healthcare business to a hospital or hospital health system, the selling physician may not always want to completely split from the business.  In this type of a situation, the development of a co-management agreement comes into play in order to keep the physician involved with the business involved in the transaction.  The development of a successful co-management agreement is a process that involves precise definition of duties and a keen legal eye to ensure no regulatory violations.  The Ambulatory M&A Advisor takes a look at the process of creating a co-management agreement, what roles each party plays, and what legal issues to address with legal counsel.

Robert Mosher, partner with Nossaman LLP explains that in a co-management agreement,  it is usually that the physician owners are engaged to provide certain management services to a business that they have sold; or sometimes it’s not a business that they have sold.  Sometimes it can be an existing business.

“When you say co-management, it means the owner may be more actively involved in management than might otherwise be the situation.  It is basically a management agreement that has to outline the services that are going to be provided and the compensation,” Mosher says.

Charles Oppenheim, partner at Hooper, Lundy and Buckman says that a clinical co-management agreement can also be used to describe an arrangement between a hospital and a medical group, where the medical group agrees to manage one of the hospital’s service lines.

Mosher says that the key to developing a successful co-management agreement would be a well defined description of the services to be provided and secondly, the compensation; which almost always has to be verified by an outside valuation firm as being fair market value for the services.  Mosher says that depending on whether one is trying to fit into the federal safe harbor, the compensation is typically a combination of an hourly and some form of a flat fee.

“There is also typically an incentive piece, which typically might make up to half of the total compensation.  The incentive piece is paid depending on the degree to which the group is able to achieve certain outcomes.  This is basically going to be based on quality, efficiency, sometimes employee satisfaction, etc,” Oppenheim adds.

According to Oppenheim compensation involved in a co-management agreement varies from deal to deal.

“The government has indicated that they are most comfortable having the doctors paid on a per capita basis.  So, if you have a group of ten doctors who are providing clinical co-management services, they would like to see the doctors get around ten percent each.  It is my perspective that I would typically pay out the performance incentive piece per capita because you don’t want to provide too powerful an incentive to any particular doctor.  On the base compensation, I think it is reasonable to pay some doctors more, who are putting in more hours of time,” Oppenheim says.

Adam Rogers, partner at DLA Piper adds that pay for performance, another compensation option in a co-management agreement, is not really based on productivity, but is based on pre-determined metrics, targets and benchmarks that are aimed at achieving the goal of the co-management arrangement in the first place.  These include efficiency and outcome metrics and goals, quality etc.

Mosher says that as far as involvement with the organization, like expansion for example, the party co-managing with the hospital typically would be involved with the business.  Mosher says that this involvement is why there is so much sensitivity around the compensation being within fair market value and that the services have to be actually needed.

“That is a basic element in any management agreement.  You cannot just be providing services in order to keep the doctors involved.  They need to be services that are actually needed for the successful operation of the business,” Mosher says.

Rogers says that in co-management agreements, duties can vary.  According to Rogers, as co-management implies, the agreement does not delegate everything to one party versus the other.

“The hospitals will be the operator in general and have all of the typical obligations of operating in compliance and providing for the effective operation of the business.  They will also have to make themselves available and work with the physician to develop appropriate policies and implementing them in a matter that allows the arrangement to meet their target objectives.  These objectives are typically improving outcome, improving efficiency, reducing waste,” Rogers says.

“Usually the responsibilities that would fall on the physicians would be of more of a clinical nature.  This involves developing and implementing appropriate protocol; whether it be efficiency of getting patients in and out the door, making sure that there is minimized repeat visits or the patient leaving and having to go to the ER due to worsening illness.”

Rogers says that in these agreements there is typically a set timeline between the parties.

“Typically you would have an agreement that is for a specified time.  Usually this is a timeline of at least one year so that the agreement can remain compliant and consistent with some of the regulatory exceptions or safe harbors.  Usually it is a minimum of a year, but it can often go beyond that,” Rogers says.

Both Mosher and Oppenheim say that the perception of the co-management agreement varies dependent on the way it is examined.

“I think like almost anything in the world you are going to have your supporters and detractors.  I think that they are generally perceived by a lot of people, as being a potentially attractive option for engaging a group of specialists to really help improve quality and efficiency.  Supporters will say that this is a great way to motivate doctors to go above and beyond the call of duty and getting engaged in trying to improve quality and efficiency,” Oppenheim says.

From Mosher’s point of view, co-management agreements are very sensitive in that there clearly is a risk of a government agency characterizing the compensation as being a reward for referrals.

“You just have to be very sensitive to try and structure an agreement that is not in any way a reward for referrals, but rather is a legitimate management arrangement.  It’s not something I would say is looked down upon, but it is clearly a danger area, if you will, when we are dealing with referring providers and a business,” Mosher says.

Oppenheim says that like any financial relationship with a physician, one has to make sure that the co-management agreement fits squarely within a Stark exception.

“You have to be mindful about fair market value compensation. It is typical that folks who do these will get an outside valuations expert to bless the compensation arrangement,” Oppenheim says, echoing Mosher’s thoughts on the subject.

“The other thing to be mindful of is the gain sharing issue.  When you are creating financial incentives for doctors to be cost effective and efficient, you need to be sure that you don’t cross the line and create an incentive for them to stint on care, or cherry pick patients who are healthier for referral to your hospital versus another hospital in an effort to perform higher and get more of the incentive compensation.  You have to look at your incentive notes very carefully to make sure that you are not incentivizing the wrong thing.  You may want to have an outside audit or check to make sure that the level of care is not decreasing.”

 

 

If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.

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