Understanding Physician Co-Management Arrangements

In the new healthcare transactions book, "Doctor Deals," Nicholas A. Newsad and Kyle Tormoehlen of Healthcare Transaction advisors provide insight into one of the more recent types of arrangements by which hospitals seek to win patronage of physicians: the development of a "co-management" arrangement.

I recently spoke with Newsad for a primer on these arrangements.

Martin Merritt: What is a physician co-management arrangement and why are we hearing so much about them?

Nicholas A. Newsad: These are contractual arrangements whereby hospitals are engaging groups of independent and employed physicians to manage the quality aspects of one or more hospital service lines, such as cardiovascular services or orthopedics.

Co-management is very effective due to its versatility. These arrangements are extremely adaptable to a wide variety of hospital service lines, as well as the specific goals of different groups of physicians.

HHS' Office of the Inspector General (OIG) reviewed a cardiology co-management agreement and issued OIG Advisory Opinion No. 12-22 on January 7, 2013.  This has promoted the use of co-management agreements.

MM: How are co-management arrangements structured?

NN: Generally, they are being structured as contractual agreements between a hospital and a separate management company. The management company may be wholly owned by physicians, or the management company may be co-owned by physicians and the hospital itself.

The duties of the co-management company include base duties, for which compensation is fixed, as well as incentive performance targets, for which compensation is tied to results. We usually see at least 30 percent of the total co-management fees attributed to incentive compensation and the achievement of performance targets.

The management services are provided by the physician owners of the management company. For example, for an orthopedic co-management arrangement, we would expect there to be a physician manager for each subspecialty, including ortho-spine, sports medicine, hand surgery, foot and ankle surgery, rehabilitation, and hip and knee replacement.

MM:  Can you explain what works about these agreements in the real world?

NN: Co-management is an effective way to empower physicians with the means to improve hospital operations. If there are willing parties to such an arrangement, then it is merely a matter of developing consensus on the objectives, structure, and the terms of the agreement.

A grassroots approach to developing these arrangements starts with face-to-face meetings with each physician that practices within the service area. Group consensus is most effectively developed by soliciting input from each and every prospective physician participant.

We have observed that the development of the co-management contract can be expedited when independent counsel is engaged. While using hospital's counsel may save the parties money, it can cause conflicts because counsel is not only drafting the agreement, but they are also representing the hospital. Engaging independent counsel removes this conflict.

Lastly, we've found that the terms of the co-management agreement should be negotiated by a small group of physicians that are empowered to speak for the entire specialty group. If the larger group of physicians doesn't select their representatives on the initial steering committee, then the negotiated agreement terms may be rejected by the larger group.

MM: What else should physicians know about co-management agreements?

NN: Co-management is extremely adaptable to specific hospital service lines, goals, and unique situations. The performance targets can focus on clinical, operational, or strategic goals.

We have observed nearly 70 different performance metricslevied on providers through Medicare's accountable care organizations, the Hospital Readmission Reduction Program, the Hospital Value-Based Purchasing Program, and the Bundled Payment for Care Improvement Initiative. Payers United, Wellpoint, and Aetna are also following suit.

Co-management arrangements are an ideal mechanism for aligning the interests of physicians and hospitals in this new environment of value-based reimbursement.