Developing integrated delivery systems: an era of change in hospital-physician relationships - Health Law

Today's rapidly changing and highly competitive health care environment demands that providers find creative approaches to reducing costs and developing efficiencies within the bounds of changing legal requirements. This article analyzes some of the approaches being taken by physicians and hospitals in the development of integrated delivery systems. "Health Law" is a regular feature of Physician Executive contributed by Epstein, Becker, and Green. Mark Lutes of the firm's Washington, D.C., office serves as editor for the column.

The 1990s have become a time of change in physician-hospital relationships. There is tension between the forces of the marketplace and the regulatory environment. There is an ongoing effort by payers to reduce or at least contain the costs of health care. These efforts demand new efficiencies, new sources of capital, cooperation, a reduction in the medical arms race, and reduction of excess capacity on the part of providers. However, many federal and state regulatory agencies appear to find special fault with the collaborative and cooperative arrangements that might bring about the necessary efficiencies. Fraud and abuse, tax, and antitrust concerns are very significant in connection with arrangements among providers, particularly transactions between hospitals and physicians. This article examines the range of options available to physicians and hospitals in their efforts to integrate health care services and some of the legal ramifications of those options.

Structural Option #1 (Figure 1, page 19)

This option constitutes the traditional, minimally integrated model. It represents an array of possible programs, but relatively little true integration. While this approach has been extremely successful for some physicians and hospitals, in many settings it is now being viewed as not comprehensive enough. Examples of practice enhancements include loans, income guarantees, office and equipment leasing, relocation assistance, malpractice insurance assistance, payment for continuing education programs, referral services, and marketing. Examples of management and administrative services include billing and collection, strategic planning, office staff training, maintenance of patient records, recruiting, utilization management, and investment services. The kinds of services physicians may be hired by the hospital to provide include medical director, utilization management services, and other consulting services.

The strategic concern with this approach is that it is piecemeal and therefore may not be effective. It can be too uncoordinated to create lasting integration. Also, there often is political sensitivity as to which physician receives what benefits.

From a legal standpoint, enhancements that "go too far" may be viewed as illegal inducements to physicians to refer patients to the hospital under the federal antikickback law or evidence of private inurement from a federal tax standpoint. Because there is so little integration under this model, any benefits flowing between physicians and hospitals must be structured and reviewed very carefully in light of the safe harbor regulations, IRS announcements, and other legal guidelines. Moreover, joint ventures under this model tend to be sporadic and decentralized--a lab here and am MRI there. Joint ventures have been the principal focus of Office of Inspector General (OIG) of the Department of Health and Human Services and Internal Revenue Service (IRS) investigations. The Stark antikickback legislation also focused on joint ventures.

Structural Option #2 (Figure 2, right)

The major difference with this model is that the hospital operates its physician recruitment and retention programs and joint ventures through a wholly owned subsidiary, which may be a for-profit or a not-for-profit corporation depending on its purpose and activities. Such a structure may have significant management benefits in centralizing hospital/physician activities in a single entity. However, it does not solve any fraud and abuse or tax problems--enforcement agencies will, for the most part, attribute the subsidiary's activities to the hospital, unless the subsidiary has its own income sources and is operated entirely separately.

Structural Option #3 (Figure 3, right)

This is the basic structure of a so-called physician-hospital organization (PHO). Generally, PHOs are identified with managed care--either as contracting or ownership vehicles to offer health maintenance organizations (HMOs) and/or preferred provider organizations (PPOs). Increasingly, PHOs are becoming involved in a broader array of activities, often serving as clearinghouses for joint ventures of all kinds. Some, but not all of a hospital's medical staff may participate in particular joint ventures, often structured as limited partnerships. PHOs may also serve as the catalyst for the hospital to move into the medical group practice development arena.

From a legal standpoint, this structure may have some fraud and abuse and tax concerns. However, the focus of the enforcement agencies clearly has been less intense in the managed care area. New safe harbors regarding managed care are expected any day, but, if they are like the prior safe harbors, they will not be especially helpful to providers involved in PHOs. In fact, they may serve to create greater legal concern over managed care joint ventures.

Another major legal concern involves ownership, control, and governance issues at joint venture level; that is, how will ultimate control and decision making authority be allocated among the hospital, physicians, and community members. In addition, antitrust issues are significant if physicians are on the board of the PHO and the PHO is involved in managed care network activity, especially the development of fee schedules. There also will be securities law issues if the PHO is a for-profit company offering stock to physicians.

A number of PHOs have begun initially as discussion groups. There is minimal capitalization and little actual business activity. Such PHOs serve an educational function and as a basis to discuss future strategic directions. They may or may not develop into real business organizations.

Structural Option #4 (Figure 4, below)

With this option, the hospital and its physicians begin to move into the area of physician practice development. This may be accomplished directly by the hospital or through a subsidiary or a PHO. The principal purpose may be to establish strategically located practice sites away from the hospital, to maintain important practices upon the death or departure of a key physician, to broaden the hospital's reach into the community, and/or to improve and maintain relations with various physician groups. The clinics or practices may be start-ups or acquisitions. Acquisitions may involve taking on only the non-clinical aspects of the practices or, where corporte practice and other legal considerations permit, acquiring the entire practice. In this model, the strategy is not necessarily to develop a large, affiliated medical group--it may be more to preserve certain existing practices, to develop a better primary care base, or to penetrate new markets.

Fraud and abuse and tax issues remain critical, particularly where practices are purchased from nonretiring physicians. The OIG has identified practice purchases as an area of abuse. The safe harbor for practice purchases does not currently protect hospitals at all. The safe harbor for physician-physician purchases only covers purchases from retiring or departing physicians.

Care must be taken to assess the politics and economics of developing satellite practices. Some hospitals have spent a lot of money and not created the desired relationships. Also, once the hospital starts purchasing certain physician practices, it may be difficult to say no to other physician who want to sell their practices.

Structural Option #5

There are three variations on this option, which constitutes the most integrated end of the spectrum of options. Here, the hospital is seeking to build, acquire, or affiliate with a medical group. Depending on the specifics in a given community, the hospital may seek to ally itself with an existing multispecialty group or work with physicians to develop one by start-up, acquisition, or facilitating the coming together of existing smaller practices. Often, this hospital-affiliated medical group is also combined with an existing or acquired managed care system, thus creating a Kaiser-type organization.

In Option 5A (figure 5, page 21), often referred to as the medical service organization (MSO) model, the hospital essentially relates to the medical group by contract. The hospital and medical group remain separate entities, with the hospital providing significant practice enhancements and management services to the group. In many ways, this is similar to Option 1, except with one large group rather than many small ones. The group, once established, may or may not be interested in acquiring others, but it will naturally seek to grow strategically with the hospital's assistance. The group likely provides all or almost all of the hospital's administrative and teaching needs. Given their overall level of cooperation, the hospital and the medical group are in a good position to contract effectively with third-party payers.

An important variation of this option is to create a structure allowing some or all of the physicians to be co-owners of the medical group management or services company (i.e., a PHO owns the company).

In Option 5B (figure 6, page 21), often referred to as the foundation model, the hospital, in a joint venture with physicians or by itself, actually builds or acquires a medical group clinical facility and owns and operates it. This facility, generally tax exempt, then contracts with a medical group to provide clinical services. Option 5B is tantamount to owning a multispecialty group but contracting with the practicing physicians rather than employing them. This structure is usually found in states with strong prohibitions on the corporate practice of medicine, such as California.

A potential downside is that once the hospital purchases or develops all the hard assets of a multispecialty practice, it can be left with an entity of dubious value if the medical group becomes disgruntled with the arrangement and ceases to provide services. (This obviously is less likely to be the case if a PHO buys or develops the practice.) Such a result is also a concern under Option 5A, but, at least in that case, the hospital has not invested so heavily in practice assets. Hospitals seek protection through strong language in management contracts, including noncompete clauses, to try to ensure the desired integration over time. Hospitals generally have found it best to ensure significant physician governance participation at the clinic or foundation level to help ensure high medical quality and good cooperation between the hospital and the clinic.

In Option 5C (figure 7, above), the hospital and the multispecialty group formally merge and affiliate into a single health care system. This is truly total integration. Physicians may share in governance at the parent company level. The parent company may be the sole member of the clinic or foundation, but physicians generally sit on the board of the clinic and often are the majority. Several large medical groups and hospitals have come together this way in recent years. The structure may include a research foundation. One benefit of the structure is increased access to tax-exempt funding. Potentially, such an integrated entity is a very powerful force in the marketplace.

Another principal benefit of a more fully integrated structure is that the fraud and abuse and tax risks may be reduced or eliminated, because a single entity is involved rather than multiple entities in a position to refer to each other. Where physicians are employed by a clinic entity that is a corporate component of a physician-hospital system, concerns under the antikickback law are clearly eliminated. Review of state corporate practice, certification of need, and licensure requirements is essential, however. Where corporate practice prohibitions eliminate Option 5C as a possibility, Options 5A and 5B are the preferred alternatives. Moreover, there may be an issue as to whether the clinic and the hospital will be treated as independent entities for Medicare reimbursement purposes. This issue should be viewed carefully for the financial implications and addressed accordingly.

There are numerous variations to the basic options discussed above, and additional legal complexities that will arise in their implementation. As pressures to integrate increase, however, resolving the implementation issues will become increasingly necessary and important.

COPYRIGHT 1992 American College of Physician Executives
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