The past year has seen the formation of the first accountable care organizations under the provisions in the Accountable Care Act that allow hospitals and physicians to share cost-savings in caring for Medicare patients. In addition, many hospitals significantly have increased the number of employed physicians on their staff to improve the quality and reduce the cost of patient care.

But some hospitals are not prepared to establish an accountable care organization. Other hospitals either do not want to employ physicians directly or do not have the financial resources to acquire and operate medical practices. Moreover, although more physicians are electing to become employed by hospitals, many do not want to become employees of a hospital or other institutional provider; they would rather provide patient services through an independent, physician-owned practice. In addition, some physicians in the community are not interested in forming an ACO with the hospital.

Co-management Arrangements

A physician-hospital co-management arrangement is an alternative to an ACO or physician employment. It encourages physicians to work cooperatively with the hospital to improve quality and reduce the cost of hospital care.

Hospital administrators who want their physician staff members to actively manage one or more of the hospital's service lines can enter into a co-management arrangement with the physicians. A management company is formed for the purpose of managing one or more hospital services, with the objective of improving the quality and reducing the costs of particular hospital services.  The management company may be jointly owned by the hospital and physician members of the medical staff, or wholly owned by the physicians.

The management company and the hospital write up an agreement that outlines specific objectives and tasks as well as the compensation for providing the management services and for achieving specific objectives.

The management compensation often includes a fixed fee for general services and incentive fees for achieving specified benchmarks. For example, an agreement relating to the management of inpatient medical (nonsurgical) services might provide incentive fees for increasing patient satisfaction rates or for reducing readmissions for certain conditions. An agreement relating to the management of surgical services might provide incentive fees for beginning surgical cases on a timely basis, or for standardizing the use of certain implantable devices.

The fees received by the management company, after payment of operating expenses, generally are allocated and paid to the equity owners of the management company in accordance with their respective ownership interests. If structured properly, the co-management arrangement can provide strong financial incentives for physicians to improve the quality and efficiency of patient care.

Regulatory Concerns

Because physician-hospital co-management arrangements involve payment arrangements between a hospital and physicians who refer patients to the hospital, the arrangements must be evaluated to ensure they do not violate applicable health care statutes and regulations, including the Stark Law, the Antikickback Statute and the Civil Monetary Penalties Statute.

Stark Law. The Stark Law prohibits a physician from making referrals for certain designated health services payable by federal health care programs to an entity with which the referring physician (or an immediate family member) has a financial relationship, unless an exception applies. DHS, as defined in the Stark Law, includes inpatient and outpatient hospital services. The physicians who are members of the management company and who receive distributions from the management company have an indirect financial relationship with the hospital, which pays fees to the management company for the services provided by the management company. Thus, the compensation arrangement provided for in the management agreement must satisfy a Stark Law exception.

If the compensation that the hospital pays to the management company (and, ultimately, to its physician owners) reflects the fair market value of the services provided, and does not vary with, or otherwise reflect, the volume or value of referrals by the physicians to the hospital, the compensation arrangement should not be deemed to be in violation of the Stark Law.

If the management fee includes an incentive payment based on specified benchmarks, the hospital should hire a consultant to help structure the incentive fee arrangements. The consultant can ensure that the fees will be based entirely on the specified benchmarks rather than referral volume. The consultant also can monitor the operations of the management company to verify whether the stated benchmarks have been achieved.

Finally, an independent third party who is experienced in providing health care valuation services should review the compensation arrangement and confirm that the projected compensation amounts reflect the fair market value of the management services.

Antikickback Statute. The federal Antikickback Statute prohibits the payment or receipt, directly or indirectly, of remuneration in return for, or to induce, referrals for items or services reimbursable under most federal health care programs. Payment of management fees by a hospital to a management company, which is owned by members of the hospital's medical staff, could be a violation of the Antikickback Statute.

Physicians should be offered the opportunity to invest in the management company without regard to the volume of referrals they make. The management fees the hospital pays to the management company should reflect the fair market value of the management services provided. The dividend distributions paid by the management company to its physician owners should be proportional to their invested capital and not tied to the volume or value of referrals to the hospital. If these and certain other conditions are satisfied, the co-management arrangement should not be deemed to violate the Antikickback Statute.

Civil Monetary Penalties Statute. The Civil Monetary Penalties Statute prohibits a hospital from knowingly paying a physician, directly or indirectly, an incentive to limit services to patients who are entitled to benefits under federal health care programs.

Although the purpose of a co-management arrangement is to improve the quality and efficiency of patient care, the compensation paid by a hospital to a management company that is partially owned by physicians could violate the CMP by inducing the physicians to limit certain items or services to patients at the hospital in order to achieve efficiency benchmarks. The co-management arrangement must be structured to ensure that physicians do not improperly limit patient care to generate cost-savings or achieve other benchmarks.

Advisory Opinions

The Office of Inspector General has issued favorable advisory opinions on several proposed co-management arrangements, most recently on Dec. 31, 2012 (OIG Advisory Opinion 12-22). In that advisory opinion, the OIG approved a co-management arrangement in which a hospital paid a cardiology group to manage the hospital's cardiac catheterization laboratories. The advisory opinion identified a number of safeguards ensuring that the arrangement would not involve the payment of compensation to induce referrals, which would be in violation of the Antikickback Statute, and that the actions taken by the physicians would not result in an inappropriate reduction in patient care, which would be in violation of the CMP statute. This opinion provides a useful road map for hospitals and physicians wishing to structure a compliant co-management arrangement.

An Alternative to ACOs

A physician-hospital co-management arrangement lets a hospital provide financial incentives for physicians on the medical staff to help improve quality and reduce the cost of patient care. A co-management arrangement is an alternative to an ACO or direct employment of physicians. It appeals to hospital leaders who do not want to form an ACO or acquire and manage physician practices.

Because a co-management arrangement involves paying physicians who refer patients to the hospital, the arrangement must be structured properly to avoid violation of health care statutes and regulations. If a hospital ensures that the co-management arrangement is structured properly, the arrangement should prove to be beneficial for the hospital, the physicians and, most significantly, hospital patients who will receive higher-quality care.

Marshall R. Burack is a shareholder of Akerman Senterfitt and is a member of the firm's Health Care Practice Group. His law practice is based in the firm's Miami office.