Jen Johnson, CFA, is the managing director for VMG Health, overseeing the company's valuation of professional service arrangements.
Q: What can we, as physician-owners of an ambulatory surgery center, be paid for under a co-management arrangement?
Jen Johnson: It's heavily dependent on the services the physicians are providing, which can vary significantly. There is almost always a fixed fee and a variable fee. The majority of the time we're seeing physicians being paid for spending time participating on quality committees in order to establish best practices and protocols which will, in turn, improve the quality of care. This payment is typically in the form of an hourly rate, sometimes applied to estimated annual hours and converted into a stipend.
Variable fee based on quality outcomes
The second fee we see is a variable fee based on quality outcomes. So it's the question of, "Did it really work?" If it did work, then they're eligible for a quality payment in addition to the fixed fee. We see this fee as a pay-for-performance type incentive.
Call coverage fee
Sometimes we see physicians also being paid for call coverage under a co-management arrangement. These fees may be part of the fixed fee or be at risk based on quality outcomes. So the agreement will say [physicians] will be paid X amount per day for call coverage, or up to Y amount per day, if they improve quality. We have seen hospitals do this in order to put some of the fixed fee at risk based on quality outcomes.
Base management fee
The third part that is sometimes in the fixed fee — not often but it happens — is a fee for non-physician personnel. If there's a physician group that's really robust, has administrative infrastructure and has truly been managing the facility in the past, so they have HR, IT, marketing, all typical management services, then a co-management agreement may have a piece we call a base management fee.
This fee does not typically reflect physician time, it's non-physician personnel who are contracted under the practice and are providing typical outpatient management services. There are many legal nuances to providing non-physician personnel. For instance, if the facility will be hospital-based, then the practice may not employ all the staff. It's sticky.
Regardless, you're always going to get your hourly payments for participating on the quality committee, sometimes call coverage will be thrown in there, sometimes non-physician personnel management services and always the variable fee based on quality outcomes.
Benchmarking critical
There are some studies that show paying for quality doesn't work. A lot of them say it does work. The issue is that certain arrangements in the market right now have a variable fee that is not measuring or monitoring subjective benchmarks. In a compliant variable fee model, you're going to want to see, for example, the historical performance of patient satisfaction, you're going to want to understand the national average and top decile performance for patient satisfaction.
If you have those three data points outlined, you can then identify if the practice improved [the patient satisfaction metric] quite a bit, so it earns a little bit of a variable fee. Alternatively, if the practice actually hits top decile performance, the maximum variable fee would be warranted. That's based on real market data and actual performance. Even CMS pays maximum reimbursement for top decile performance under one of their P4P programs called HQID. From a P4P program standpoint, top decile is the benchmark people are looking to get to where a physician could say, "That's where I warrant the maximum variable fee." Benchmarking is the key. OIG and CMS have both provided guidance stating you need to benchmark to credible evidence.
There's also some metrics people need to be aware of that most counsel are going to avoid being put in a co-management arrangement. This includes such metrics as average length of stay because of its ability to impair patient care. Certain metrics associated with utilization could raise red flags as well because it is prohibited to consider the volume of referrals (potential Stark Act violations).
Not-for-profit hospital partner is a challenge
There are some additional complicating factors when there's a not-for-profit entity involved, [the IRS-established] Revenue Procedure 97-13 may be applicable. This would require the variable fee not exceed the fixed fee. Therefore, the variable fee based on quality outcomes may need to be capped at the fixed fee so there's a limitation on compensation.
Cost savings/gainsharing an additional challenge
Metrics both counsel and we as a valuation firm encourage clients to be careful of is cost-savings or gainsharing metrics. We know we're going to see those in accountable care organizations if they ever come about. But when it comes to valuing and monitoring these metrics, there's a whole different set of criteria that needs to be considered, which complicates it. There are several OIG opinions on gainsharing arrangements. They stipulate that if you're going to pay physicians for something like this, whatever cost you are targeting needs to be identified up front and it needs to be monitored throughout the year. There's a lot of additional administrative work that goes along with those types of metrics. In fact, some counsel would suggest if you're going to include this type of metric, it should be in a separate agreement completely due to additional regulatory guidance and the nuances of monitoring these metrics.
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