6 High Risk Areas in Hospital/Physician Contracts

As hospitals continue to ramp up efforts to acquire and contract with physician practices, they must do so in a way that reflects not only good market strategy, but also protects future financial stability and regulatory compliance. Hospitals that are in an aggressive acquisition mode often point to the looming changes in reimbursement models that shift payments from fee-for-service to an outcomes-based model focused on episodes of care. Many hospitals feel that in order to stay competitive in this changing market , they need to align with physician practices, and do it expeditiously before competitors beat them to the punch. But at what cost?

Here are 6 areas hospitals should not overlook in the rush to bring valuable physician practices into their network.

1. Guaranteed Compensation

With long-term guaranteed compensation, where is the guarantee that the physician will continue to produce at the level you expect them to for the life of the contract? There’s always the risk that the physician simply slows down because he or she no longer carries the burden for supporting the practice. Guaranteed compensation generally should be limited to the early or start-up period of the contract (1-2 years) and then, once established, should include some at-risk element.

2. Long-Term Contracts

Contracts of 5-10 years carry a lot of risk factors, including unforeseeable market changes and possible demographic shifts in the community. Also, long-term contracts may face questions regarding commercial reasonableness. There may be changes and evolutions in technology that render services obsolete. A better idea that manages risks but rewards outcomes, is to provide a 1-3 year contract with a base rate of pay and bonus opportunities, coupled with periodic reviews of compensation relative to current FMV rates, market conditions, and physician productivity and services. 

3. Post-Contract Disconnect

Putting physicians on a Work Relative Value Unit (WRVU) model is very popular because it is a consistent benchmark. One danger is that WRVU compensation models with no hospital control on overhead management can result in high physician WRVUs, but reduced practice earnings because the infrastructure costs and physician compensation are escalating at a higher than expected rate. An example would be a physician adding mid-level staff post-acquisition in order to leverage more acute services and thus increasing WRVUs while simultaneously creating new (and possibly unplanned) practice overhead. Also, WRVU models without regular reviews of physician coding practices can be problematic. Gaming the WRVU output via coding manipulation is a real possibility that requires oversight. 

4. Compensation Models with No Connection to True FMV

Compensation models tied to fixed percentages are an example where problems can arise. This is especially true for professional service agreements where the bundle of services provided under each agreement may be materially different from agreement to agreement. Fair market value is very facts and circumstances-driven. One percentage may not fit all arrangements. It’s important for hospitals to look closely at where resulting total physician compensation ends up and determine whether the percentage used results in FMV for the specific services provided. It is also critical to understand where or how the percentage was determined. Data from unreliable sources can taint results. Bad data in, bad data out. 

5. Stacking Payments

A contract that pays a practice or a physician for call, medical directorships, and other services on top of clinical payments can be risky. Employed physicians compensated under certain types of incentive models are not subject to reimbursement exposure in the same way as an independent physician. For example, paying an employed physician for call may result in double payment and that could land you in regulatory danger of fines and penalties. The overriding issue here is duplicating payments for services.

6. Below Market Exchange Agreements

Below market exchange agreements in physician contracts provide regulators with an investigatory field day. For example, free or below market rent (particularly during a start-up phase) is seen from time to time in contracts in Medical Office Buildings (MOB) owned by the hospital. What often happens is that the rent is never adjusted or repaid resulting in excess compensation to physicians. If the rent is not FMV, then it could be deemed an inducement to refer to your hospital. Another example is contractual terms that include “wash out” payments. Simply put, this involves foregoing cash payments for an exchange of services. The rub happens when the services don’t actually “wash” and one side (usually the hospital) ends up on the short end of the stick. This could be problematic if deemed financially beneficial to the physicians. For this reason the services provided by each party should be evaluated for parity.

There are certainly other pitfalls. Part-time employment contracts can be a minefield. But the key take-a-way is that it is critical to look at physician contracts objectively and from a defensive point of view to make sure that they make good business sense for the hospital.

The point should be made that physician contracting should not be about “winning” physician alignment at any cost. Contracts should be fair to both parties. In an era where hospitals have to work more closely than ever with physicians on getting aligned with outcomes-based care, the contract process should be transparent and backed up by accurate data and should reflect regulatory compliance while also meeting the long-term strategic market needs of the hospital. Hospitals should know the minefields and craft contracts that foster a productive partnership with physicians, are issued in a compliant process with oversight, and make sense for the patient community and the bottom-line.

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