The New Healthcare Marketplace: Hospital Physician Reform ...improve the delivery of health care services, patient health outcomes, and population health." ... (Marketing) Function

The New Healthcare Marketplace: Hospital‐Physician Business Models and Healthcare Reform Legislation

October 19, 2010

Winston & Strawn LLP © 2010© Copyright 2010. Alvarez & Marsal Holdings, LLC. All Rights Reserved.

Today’s Webinar PresentersToday s Webinar Presenters

Lars EnstromManaging DirectorAlvarez & Marsal

Marion Goldberg, Esq.Health Care PartnerWinston & Strawn LLP

Healthcare Industry Group, [email protected]

[email protected]

David Dahlquist, Esq.Francis LaMorte, M.D.,

DirectorWinston & Strawn LLP

[email protected] & Marsal

Healthcare Industry Group, [email protected]


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Webinar AgendaWebinar Agenda

Healthcare Reform and Accountable Care Healthcare Reform and Accountable Care Organizations (ACO)

Partnering with Physician Organizations: Goals and Partnering with Physician Organizations: Goals and Challenges

Impact of ARC (Architecture Routines Culture) on Impact of ARC (Architecture, Routines, Culture) on Physician Practice Models

Physician Business Models: Models, Design Physician Business Models: Models, Design Components, and Value Creation


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Healthcare Reform Is HereHealthcare Reform Is Here

The Patient Protection and Affordable Care Act The Patient Protection and Affordable Care Act (Public Law No. 111‐148)

"Title III – Improving the Quality and Efficiency of Health Care"

"Linking Payment to Quality Outcomes"

"The Secretary shall establish a national strategy to The Secretary…shall establish a national strategy to improve the delivery of health care services, patient health outcomes, and population health."


p p

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The Patient Protection and Affordable C A tCare Act

Medicare Shared Savings Program (S ti 3022) Medicare Shared Savings Program (Section 3022)

"Not later than January 1, 2012, the Secretary shall establish a shared savings program…that promotes accountability for a patient population and coordinates items and services under parts A and Bcoordinates items and services under parts A and B, and encourages investment in infrastructure and redesigned care processes for high quality and g p g q yefficient service delivery."


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"groups of providers of services and suppliers meeting criteria specified by the Secretary may work together to manage and coordinate care for Medicare fee for service beneficiaries through anMedicare fee‐for‐service beneficiaries through an accountable care organization" or "ACO."

"ACO th t t lit f t d d "ACOs that meet quality performance standards established by the Secretary are eligible to receive payments for shared savings."


payments for shared savings.

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"Eligible ACOs" include:

"(A) ACO professionals in group practice arrangements."

"(B) Networks of individual practices or ACO professionals."

"(C) Partnerships or joint venture arrangements between hospitals and ACO professionals."

"(D) Hospitals employing ACO professionals."

"(E) Such other groups of providers of services and suppliers as the Secretar determines appropriate "


Secretary determines appropriate."

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Physician Business Organizations:D i C tDesign Components

ARC represents the design components of Architecture ARC represents the design components of Architecture, Routines, and Culture

Culture is the dominating influence on healthcare organizational design

Understanding the difference between physician and hospital cultures is essential to the creation of a successful physiciancultures is essential to the creation of a successful physician‐hospital enterprise


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ARC of Physician Entity Drives ValueARC of Physician Entity Drives Value

Clinically

Physician Integration Continuum

Employment• Employment• Independent

C

Purchase• Asset Purchase• Non-Competes• Employment

Joint Venture• PHO/IPA/PO• MSO/PSO• Surgery, Urgent &

Imaging Centers• Hospital Syndication

& Ownership• Patient Centered

yIntegrated IDS• Clinically Integrated

PHO/IPA/PO• Contractual and/or

Ownership Stake• Asset Purchase &

Employment/Medical Group Foundation Value

Cooperation• Medical Directorships• On-Call Coverage

Contractors • Patient Centered Medical Home

• Accountable Care Organization

• Joint Ventures• Accountable Care

Organization

ARC determines ability of physician group to coordinate care, improve quality,

Value Creation

reduce costs, control operations, reduce risk, and access capital

ARC determines suitability of a physician group as potential partner, regardless of the form of business organization


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Organizational ARC: CulturePh i i C lt d V l S tPhysician Culture and Value System

Physician training is The physician value system Physician training is deeply rooted in a professional culture:

p y yreflects the professional culture:

Holds individuals accountable for t Based on autonomy

Values the individual

Distributes accountability

outcomes

Rewards goal‐directed physician behavior

Distributes accountability and rewards on an individual level

Streamlined decision‐making

Encourages individual decisions


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Organizational ARC: CultureH it l C lt d V l S tHospital Culture and Value System

Hospitals operate in a The hospital value system Hospitals operate in a

culture of affiliation:

Based on interdependence

p yreflects a corporate culture:

Holds group processes and li i t bl f

Values shared success

Distributes accountability d d h d

policies accountable for outcomes

Rewards hospital and rewards on a shared basis

Ability to act collectively

padministrators who are team players and mission‐directed

E ll b iy y

favors proactive response to change

Encourages collaboration


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Organizational ARC: ArchitectureTh C t f Fi St tThree Components of Firm Structure

Association of subunits

Governance and reporting relationships p g p

Compensation policies Compensation policies


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Organizational ARC: Architecture A i ti f S b itAssociation of Subunits

Functional (management role) CEO Functional (management role) CEO

Senior Manager Senior Manager

Di i i l ( i li k )

Function (Finance)

Function (HR)

Function (Marketing)

Function (Purchasing)

Divisional (service line or market)CEO

S i Li S i LiService Line

Finance Operations

Service Line

Finance Operations


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Organizational ARC: ArchitectureG d R tiGovernance and Reporting

Physicians practice Hospitals have governance Physicians practice democratic majority rule:

Limited governance

p gstructure: board and committees

Reflects interdependence, h d d i i ki dstructure with control

concentrated to leaders

Flat management

shared decision‐making, and group accountability

Leader can adopt consultative Flat management architecture: limited authority and reporting

pdecision‐making process

Engagement in time‐consuming b ildi ( i i Tendency to make

individual decisionsconsensus‐building (mission‐oriented)


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Organizational ARC: Architecture C ti P liCompensation Policy

Physician groups are Hospitals have traditional y g p“Professional Service Firms”

Compensation may be b d i di id l f

pcompensation systems

Compensation is process‐b d d t i t dbased on individual factors

Partnership agreement dictates compensation

based and team‐oriented

May use indirect indicator of unit performance, e.g., patient dictates compensation p , g , psatisfaction, supervisor assessments


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Organizational ARC: RoutinesOrganizational ARC: Routines

Physicians Hospital employees Physicians

Interface with many venues

Have practice autonomy

Hospital employees

Typically work in one venue

Use standardized routines to p ythat favors individual practice styles

Sh i f ti

facilitate interface with functions of other units

Ob bli i f Share information across organizational boundaries

Engage in trade associations

Observe obligations of business confidentiality

May be unionizedg g May be unionized


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CLE Presentation CodeCLE Presentation Code


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ARC and Form of Organization:i lImpact on Operational Management

Business Attribute

Solo Practice

Group Practice IPA Physician

PartnershipMSO

EmployeePPMC

Foundation orHospital-OwnedMedical Group

PhysicianEmployment

Model

Manage expenses Moderate Weak Weak Moderate Strong Moderate Moderate

Product control•Utilization•Quality•Liability

Low potential Low potential Moderate High potential Moderatepotential

Moderate potential High potential

Scalability Minimal Limited to local area

Moderate in region High High

Related to hospital system potential

High


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ARC and Form of Organization:h l hImpact on the Balance Sheet

Business Attribute Solo Practice

Group Practice IPA Physician

PartnershipMSO

EmployeePPMC

Foundation orHospital-OwnedMedical Group

Physician Employment

Model

Valuation basis Minimal Asset-basedNoneMay be used to create JV

Large group:•Equity based •MSO cash flow•Comparables

Cash flowComparables Contractual No ownership

PC LP or LLC: relates Ownershipstructure PC

PCLarge group LLC or occasional S corp

None

o C e atesto need for equal share and exit strategy

Privately held Hospital None

Governance A tFlat management Sh d b d ith Moderate to low High potential

Sh d b d i

•ProfessionallymanagedG b

Moderate to low. C itt

Shared governance h it lGovernance Autonomous Shadow board with

large groups Limited control Shadow board in small firms

•Governance by private/public investors

Committee representation

or hospital-dependent

Access to capital

Small business loan Small business loan Hospital partner LOC

AR financing

LOC AR financingGreater potential for

•Tax-exempt•Grants

Provided by hospital employer


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large firm

Management Service Organization (MSO)(MSO)

Features: Pros and Cons: Features:

MSO acquires tangible assets

Selling practice is independent

Pros and Cons:

Physician group does not need to manage the business sideg p p

MSO leases assets to selling practice

Allows dual (functional and divisional) structure to achieve economies of scale

MSO provides management and administrative services

economies of scale

Tax‐exempt status may not be likely

Selling physicians remain at risk for reimbursement of professional services


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professional services

Foundation ModelFoundation Model


Physician group sells complete practice

Pros and Cons:

Physician group does not need to acquire capital assets

Physicians contract with the foundation to provide services

F d ti t l

Allows dual (functional and divisional) structure to achieve economies of scale Foundation controls

reimbursement

An affiliate of a hospital or

economies of scale

Tax‐exempt status may not be likelyp

medical center

Physicians provide their own b fi

Selling physicians remain at risk for reimbursement of professional services


benefits

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professional services

Hospital‐Owned Medical GroupHospital Owned Medical Group


Foundation entity in health care system acquires group

Pros and Cons:

Potential to use tax‐exempt bond proceeds

Employment agreements with the selling physicians

Affiliate purchasing the

Acquirer is responsible for billing and collection for professional services Affiliate purchasing the

medical practice may qualify for tax‐exempt status

professional services, physician compensation, and benefits


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Management Service OrganizationManagement Service Organization

Reimbursement to Group

Physician LLC or LP MSOp

after payment to MSO for leasing & services

Tax exempt pass through

Wages and year-end distribution to partners as “additional compensation”

Payment to intermediary MSO

Tax-exempt pass-through

Group PracticePC

Group Practice

Group Practice

Payers

P.C. P.C.P.C.


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Medical groups bill payers for professional services

Foundation ModelFoundation Model

Hospital S tTax exempt status if foundation

Foundation

SystemTax-exempt status if foundation and hospital jointly provide a system of care

Foundation pays the independent physicians for professional services rendered

Payment to foundation as owner of the practices

Group PracticePC

Group Practice

Group Practice

Payers

P.C. P.C.P.C.


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Physician Hospital Joint VenturePhysician Hospital Joint Venture

Hospital System

Group Practice

Group Practice

Group Practice


SystemP.C. P.C.P.C.

Joint Venture LLC PayersPayer reimburses JV


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JV bill payers for technical services

Challenges in Partnering or Acquiring Ph i i P tiPhysician Practices

Complications related to stock versus asset purchase Complications related to stock versus asset purchase

Potential for double taxation to shareholder with sale of corporate assets

Neglecting to use negotiated compensation in valuation

Failing to use after‐tax figures for discounted cash flow

i i i i d ill Protection against investment in goodwill

Tax‐exempt purchaser fails to use same valuation methods for its acquisitionsits acquisitions

Need to consider "Stark Law" limitations in compensation

Regulatory risk is a consideration for all models


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ARC and Form of Organization:I t Ri k M tImpact on Risk Management

Risk considerations in all models: Antitrust

Stark law

Anti‐kickback

IRS (tax‐exempt status)

State regulators (CON, insurance)

Tort liability


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ACOs and Clinical IntegrationACOs and Clinical Integration

"An ACO shall meet the following requirements:" An ACO shall meet the following requirements:

"(A) The ACO shall be willing to become accountable for the quality, cost, and overall care of the…beneficiaries assigned to it."g

"(B) The ACO shall enter into an agreement with the Secretary to participate in the program for not less than a 3‐year period."

"(C) The ACO shall have a formal legal structure that would allow the organization to receive and distribute payments for share savings…."

"(D) The ACO shall include primary care ACO professionals "(D) The ACO shall include primary care ACO professionals….

"(G) The ACO shall define processes to promote evidence‐based medicine and patient engagement, report on quality and cost measures, and coordinate

"


care...."

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ACOs and Clinical Integrationg

Clinical IntegrationClinical Integration

1996 Department of Justice and Federal Trade Commission Statements of Antitrust Enforcement Policy in Health Care

"[A]n active and ongoing program to evaluate and g g p gmodify practice patterns by the network's physician participants and create a high degree of

d d d hinterdependence and cooperation among the physicians to control costs and ensure quality."

Winston & Strawn LLP © 2010© Copyright 2010. Alvarez & Marsal Holdings, LLC. All Rights Reserved.(29)

Clinical Integration

Clinical integration programs often include:Clinical integration programs often include: Integration and delivery of patient care in a coordinated

fashion

Clinical resource management program, including the sharing of clinical information to improve outcomes and decrease resourcesresources

Non‐exclusive participation by members

Electronic medical records

Clinical practice guidelines and performance goals

Winston & Strawn LLP © 2010© Copyright 2010. Alvarez & Marsal Holdings, LLC. All Rights Reserved.(30)

SummarySummary

Healthcare reform is here Healthcare reform is here

Provider partnerships are likely to occur

Clinical integration and ACOs are likely to grow

Impact of ARC (Architecture, Routines, Culture) may dictate form of business model

Success depends on design of model and dedication of parties involved


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Contact InformationContact Information

Lars EnstromManaging DirectorAlvarez & Marsal

Marion Goldberg, Esq.Partner

Wi t & St LLPHealthcare Industry Group(212) 763-9542

[email protected]

Winston & Strawn LLP(202) 282-5788

[email protected]

Francis LaMorte, M.D.,Director

Alvarez & MarsalDavid Dahlquist, Esq.

Winston & Strawn LLPAlvarez & MarsalHealthcare Industry Group

(347) 891-0116 [email protected]

s o & S a(312) 558-5660

[email protected]


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Thank You.


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The New Healthcare Marketplace: Hospital Physician Reform ...improve the delivery of health care services, patient health outcomes, and population health." ... (Marketing) Function

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